SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended June 30, 2008
or
TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
_____________________
Commission
File number 001-31659
Berkshire
Income Realty, Inc.
Maryland
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|
32-0024337
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(State
or other jurisdiction of incorporation or organization)
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(I.
R. S. Employer Identification No.)
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One
Beacon Street, Boston, Massachusetts
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02108
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(Address
of principal executive offices)
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(Zip
Code)
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(617) 523-7722
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(Registrant’s
telephone number, including area code)
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Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90
days.
Yes x No
Indicate
by check mark whether the registrant is a large 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 Accelerated
Filer
Non-accelerated
Filer x(Do not check if a smaller reporting
company) Smaller
Reporting Company
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange
Act). Yes x No
There
were 1,406,196 shares of Class B common stock outstanding as of August 13,
2008.
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|
BERKSHIRE
INCOME REALTY, INC.
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TABLE
OF CONTENTS
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ITEM
NO.
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PAGE
NO.
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PART
I
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FINANCIAL
INFORMATION
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Item
1.
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CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED):
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Consolidated
Balance Sheets at June 30, 2008 and December 31, 2007
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3
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Consolidated
Statements of Operations for the three months and six months ended June
30, 2008 and 2007
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4
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Consolidated
Statement of Changes in Stockholders’ Equity for the six months ended June
30, 2008
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5
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Consolidated
Statements of Cash Flows for the six months ended June 30, 2008 and
2007
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6
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Notes
to Consolidated Financial Statements
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8
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Item
2.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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16
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Item
3.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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33
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Item
4.
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CONTROLS
AND PROCEDURES
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33
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PART
II
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OTHER
INFORMATION
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Item
1.
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LEGAL
PROCEEDINGS
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34
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Item
1 A.
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RISK
FACTORS
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34
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Item
2.
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UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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34
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Item
3.
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DEFAULTS
UPON SENIOR SECURITIES
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34
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Item
4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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34
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Item
5.
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OTHER
INFORMATION
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34
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Item
6.
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EXHIBITS
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35
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Part
I
FINANCIAL INFORMATION
Item
1.
|
CONSOLIDATED
FINANCIAL STATEMENTS
|
BERKSHIRE
INCOME REALTY, INC.
CONSOLIDATED
BALANCE SHEETS
(unaudited)
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|
June
30,
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|
December
31,
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2008
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|
2007
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ASSETS
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Multifamily
apartment communities, net of accumulated depreciation of $148,782,155 and
$144,240,061, respectively
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$ |
411,651,846 |
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$ |
464,265,061 |
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Cash
and cash equivalents
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|
27,200,612 |
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22,479,937 |
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Cash
restricted for tenant security deposits
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|
1,850,304 |
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1,953,503 |
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Replacement
reserve escrow
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|
5,356,598 |
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|
7,760,738 |
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Prepaid
expenses and other assets
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|
8,534,440 |
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|
11,026,329 |
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Investment
in Multifamily Limited Partnership
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|
15,244,626 |
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16,794,450 |
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Investment
in Mezzanine Loan Limited Liability Company
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|
861,091 |
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|
- |
|
Acquired
in place leases and tenant relationships, net of accumulated amortization
of $5,780,373 and $7,136,556, respectively
|
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|
84,521 |
|
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|
201,002 |
|
Deferred
expenses, net of accumulated amortization of $1,184,612 and $1,045,194,
respectively
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|
3,471,942 |
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|
3,581,610 |
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Total
assets
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$ |
474,255,980 |
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$ |
528,062,630 |
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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Liabilities:
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Mortgage
notes payable
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$ |
458,328,182 |
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$ |
506,903,882 |
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Due
to affiliates
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|
1,972,336 |
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1,952,547 |
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Dividend
and distributions payable
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|
1,837,607 |
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|
1,837,607 |
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Accrued
expenses and other liabilities
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|
9,670,113 |
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|
13,351,402 |
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Tenant
security deposits
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|
1,826,092 |
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1,955,389 |
|
Total
liabilities
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|
473,634,330 |
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|
526,000,827 |
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Commitments
and contingencies
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|
- |
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|
- |
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Minority
interest in properties
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|
- |
|
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|
- |
|
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Minority
common interest in Operating Partnership
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|
- |
|
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|
- |
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Stockholders’
equity:
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Series
A 9% Cumulative Redeemable Preferred Stock, no par value, $25 stated
value, 5,000,000 shares authorized, 2,978,110 shares issued and
outstanding at June 30, 2008 and December 31, 2007,
respectively
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|
70,210,830 |
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|
70,210,830 |
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Class
A common stock, $.01 par value, 5,000,000 shares authorized, 0 shares
issued and outstanding at June 30, 2008 and December 31, 2007,
respectively
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|
- |
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|
- |
|
Class
B common stock, $.01 par value, 5,000,000 shares authorized, 1,406,196
issued and outstanding at June 30, 2008 and December 31, 2007,
respectively
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|
14,062 |
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|
14,062 |
|
Excess
stock, $.01 par value, 15,000,000 shares authorized, 0 shares issued and
outstanding at June 30, 2008 and December 31, 2007,
respectively
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|
- |
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|
- |
|
Accumulated
deficit
|
|
|
(69,603,242 |
) |
|
|
(68,163,089 |
) |
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Total
stockholders’ equity
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|
621,650 |
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|
2,061,803 |
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Total
liabilities and stockholders’ equity
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$ |
474,255,980 |
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$ |
528,062,630 |
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The
accompanying notes are an integral part of these financial
statements.
BERKSHIRE
INCOME REALTY, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(unaudited)
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Three months
ended Six
months ended
June 30,
June 30,
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2008
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2007
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2008
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2007
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Revenue:
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Rental
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$ |
18,560,814 |
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$ |
17,694,549 |
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$ |
36,743,792 |
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$ |
34,581,496 |
|
Interest
|
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|
178,595 |
|
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|
216,445 |
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|
367,669 |
|
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|
412,837 |
|
Utility
reimbursement
|
|
|
422,643 |
|
|
|
386,548 |
|
|
|
811,454 |
|
|
|
557,802 |
|
Other
|
|
|
794,795 |
|
|
|
681,476 |
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|
1,512,645 |
|
|
|
1,310,795 |
|
Total
revenue
|
|
|
19,956,847 |
|
|
|
18,979,018 |
|
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|
39,435,560 |
|
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|
36,862,930 |
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|
Expenses:
|
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Operating
|
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|
4,609,946 |
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4,658,295 |
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|
9,948,376 |
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|
9,875,858 |
|
Maintenance
|
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|
1,578,183 |
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|
1,435,212 |
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|
2,797,550 |
|
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|
2,459,766 |
|
Real
estate taxes
|
|
|
2,034,535 |
|
|
|
1,805,007 |
|
|
|
3,972,751 |
|
|
|
3,483,248 |
|
General
and administrative
|
|
|
621,916 |
|
|
|
686,663 |
|
|
|
1,413,192 |
|
|
|
1,439,924 |
|
Management
fees
|
|
|
1,198,298 |
|
|
|
1,147,222 |
|
|
|
2,368,308 |
|
|
|
2,262,936 |
|
Depreciation
|
|
|
7,836,000 |
|
|
|
7,351,984 |
|
|
|
15,590,828 |
|
|
|
14,152,801 |
|
Interest
|
|
|
6,543,702 |
|
|
|
6,521,728 |
|
|
|
13,212,150 |
|
|
|
12,283,503 |
|
Amortization
of acquired in-place leases and tenant relationships
|
|
|
50,498 |
|
|
|
380,573 |
|
|
|
116,481 |
|
|
|
746,082 |
|
Total
expenses
|
|
|
24,473,078 |
|
|
|
23,986,684 |
|
|
|
49,419,636 |
|
|
|
46,704,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before minority interest in properties, equity in income (loss) of
Multifamily Limited Partnership and Mezzanine Loan Limited Liability
Company, minority common interest in Operating Partnership and income
(loss) from discontinued operations
|
|
|
(4,516,231 |
) |
|
|
(5,007,666 |
) |
|
|
(9,984,076 |
) |
|
|
(9,841,188 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in properties
|
|
|
(206,688 |
) |
|
|
(1,471,581 |
) |
|
|
(394,032 |
) |
|
|
(1,695,195 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in income (loss) of Multifamily Limited Partnership
|
|
|
(1,020,262 |
) |
|
|
(689,536 |
) |
|
|
(1,549,824 |
) |
|
|
(1,297,766 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in income (loss) of Mezzanine Loan Limited Liability
Company
|
|
|
6,091 |
|
|
|
- |
|
|
|
6,091 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
common interest in Operating Partnership
|
|
|
(10,737,100 |
) |
|
|
(976,100 |
) |
|
|
(11,713,200 |
) |
|
|
(1,952,200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from continuing operations
|
|
|
(16,474,190 |
) |
|
|
(8,144,883 |
) |
|
|
(23,635,041 |
) |
|
|
(14,786,349 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations
|
|
|
(918,674 |
) |
|
|
(857,893 |
) |
|
|
(1,199,814 |
) |
|
|
(1,124,622 |
) |
Gain
on disposition of real estate assets
|
|
|
27,031,898 |
|
|
|
32,122,606 |
|
|
|
27,031,898 |
|
|
|
32,122,606 |
|
Income
(loss) from discontinued operations
|
|
|
26,113,224 |
|
|
|
31,264,713 |
|
|
|
25,832,084 |
|
|
|
30,997,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
9,639,034 |
|
|
$ |
23,119,830 |
|
|
$ |
2,197,043 |
|
|
$ |
16,211,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Dividend
|
|
|
(1,675,197 |
) |
|
|
(1,675,198 |
) |
|
|
(3,350,396 |
) |
|
|
(3,350,398 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) available to common shareholders
|
|
$ |
7,963,837 |
|
|
$ |
21,444,632 |
|
|
$ |
(1,153,353 |
) |
|
$ |
12,861,237 |
|
Net
income (loss) from continuing operations per common share, basic and
diluted
|
|
$ |
(12.91 |
) |
|
$ |
(6.98 |
) |
|
$ |
(19.19 |
) |
|
$ |
(12.90 |
) |
Net
income (loss) from discontinued operations per common share, basic and
diluted
|
|
$ |
18.57 |
|
|
$ |
22.23 |
|
|
$ |
18.37 |
|
|
$ |
22.04 |
|
Net
income (loss) available to common shareholders, per common share, basic
and diluted
|
|
$ |
5.66 |
|
|
$ |
15.25 |
|
|
$ |
(0.82 |
) |
|
$ |
9.14 |
|
Weighted
average number of common shares outstanding, basic and
diluted
|
|
|
1,406,196 |
|
|
|
1,406,196 |
|
|
|
1,406,196 |
|
|
|
1,406,196 |
|
Dividend
declared per common share
|
|
$ |
0.20 |
|
|
$ |
0.03 |
|
|
$ |
0.20 |
|
|
$ |
0.03 |
|
The
accompanying notes are an integral part of these financial
statements.
BERKSHIRE
INCOME REALTY, INC.
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE
SIX MONTHS ENDED JUNE 30, 2008
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
Series
A Preferred Stock
|
|
|
Class
B Common Stock
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
|
2,978,110 |
|
|
$ |
70,210,830 |
|
|
|
1,406,196 |
|
|
$ |
14,062 |
|
|
$ |
(68,163,089 |
) |
|
$ |
2,061,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,197,043 |
|
|
|
2,197,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
to common shareholders
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(286,800 |
) |
|
|
(286,800 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
to preferred shareholders
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,350,396 |
) |
|
|
(3,350,396 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2008
|
|
|
2,978,110 |
|
|
$ |
70,210,830 |
|
|
|
1,406,196 |
|
|
$ |
14,062 |
|
|
$ |
(69,603,242 |
) |
|
$ |
621,650 |
|
The
accompanying notes are an integral part of these financial
statements.
BERKSHIRE
INCOME REALTY, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(unaudited)
|
|
For the six months ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
2,197,043 |
|
|
$ |
16,211,634 |
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Amortization
of deferred financing costs
|
|
|
276,664 |
|
|
|
223,583 |
|
Amortization
of acquired in-place leases and tenant relationships
|
|
|
116,481 |
|
|
|
751,811 |
|
Depreciation
|
|
|
16,573,233 |
|
|
|
16,078,805 |
|
Loss
on extinguishment of debt
|
|
|
- |
|
|
|
212,195 |
|
Minority
interest in properties
|
|
|
394,032 |
|
|
|
1,695,195 |
|
Equity
in loss of Multifamily Limited Partnership
|
|
|
1,549,824 |
|
|
|
1,297,766 |
|
Equity
in income of Mezzanine Loan Limited Liability Company
|
|
|
(6,091 |
) |
|
|
- |
|
Minority
common interest in Operating Partnership
|
|
|
11,713,200 |
|
|
|
1,952,200 |
|
Interest
earned on 1031 deposits
|
|
|
- |
|
|
|
(93,413 |
) |
Interest
earned on replacement reserve deposits
|
|
|
(45,999 |
) |
|
|
- |
|
Gain
on disposition of real estates related to fire
|
|
|
(129,146 |
) |
|
|
- |
|
Gain
on disposition of real estate assets
|
|
|
(27,031,898 |
) |
|
|
(32,149,782 |
) |
Write
off deferred financing costs
|
|
|
195,453 |
|
|
|
- |
|
Increase
(decrease) in cash attributable to changes in assets and
liabilities:
|
|
|
|
|
|
|
|
|
Tenant
security deposits, net
|
|
|
(26,098 |
) |
|
|
(208,041 |
) |
Prepaid
expenses and other assets
|
|
|
2,150,640 |
|
|
|
53,034 |
|
Due
to/from affiliates
|
|
|
19,789 |
|
|
|
585,911 |
|
Accrued
expenses and other liabilities
|
|
|
(3,439,257 |
) |
|
|
(305,846 |
) |
Net
cash provided by operating activities
|
|
|
4,507,870 |
|
|
|
6,305,052 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital
improvements
|
|
|
(10,330,729 |
) |
|
|
(7,879,733 |
) |
Acquisition
of multifamily apartment communities
|
|
|
- |
|
|
|
(45,009,930 |
) |
Proceeds
from sale of properties
|
|
|
41,643,556 |
|
|
|
44,816,664 |
|
Deposit
to qualified 1031 exchange intermediary
|
|
|
- |
|
|
|
(18,393,796 |
) |
Deposits
to replacement reserve escrow
|
|
|
(567,463 |
) |
|
|
(1,611,962 |
) |
Withdrawals
from replacement reserve escrow
|
|
|
3,286,158 |
|
|
|
- |
|
Investment
in Multifamily Limited Partnership
|
|
|
- |
|
|
|
(2,870,307 |
) |
Investment
in Mezzanine Loan Limited Liability Company
|
|
|
(855,000 |
) |
|
|
- |
|
Net
cash used in investing activities
|
|
|
33,176,522 |
|
|
|
(30,949,064 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings
from mortgage notes payable
|
|
|
- |
|
|
|
35,050,000 |
|
Principal
payments on mortgage notes payable
|
|
|
(10,764,800 |
) |
|
|
(1,785,588 |
) |
Prepayments
of mortgage notes payable
|
|
|
(6,433,293 |
) |
|
|
(25,057,822 |
) |
Borrowings
from revolving credit facility - affiliate
|
|
|
5,000,000 |
|
|
|
37,500,000 |
|
Principal
payments on revolving credit facility - affiliate
|
|
|
(5,000,000 |
) |
|
|
(20,000,000 |
) |
Good
faith deposits on mortgage notes payable
|
|
|
341,250 |
|
|
|
(953,300 |
) |
Deferred
financing costs
|
|
|
(362,446 |
) |
|
|
(363,206 |
) |
Distributions
to minority interest in properties
|
|
|
(394,032 |
) |
|
|
(1,695,195 |
) |
Distributions
on common operating partnership units
|
|
|
(12,000,000 |
) |
|
|
(2,000,000 |
) |
Distributions
to preferred shareholders
|
|
|
(3,350,396 |
) |
|
|
(3,350,398 |
) |
Net
cash provided by financing activities
|
|
|
(32,963,717 |
) |
|
|
17,344,491 |
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
4,720,675 |
|
|
|
(7,299,521 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
22,479,937 |
|
|
|
15,393,249 |
|
Cash
and cash equivalents at end of period
|
|
$ |
27,200,612 |
|
|
$ |
8,093,728 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
15,150,205 |
|
|
$ |
13,627,629 |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
BERKSHIRE
INCOME REALTY, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)
(unaudited)
|
|
For
the six months ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Supplemental
disclosure (continued):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
Capital
improvements included in accrued expenses and other
liabilities
|
|
$ |
219,227 |
|
|
$ |
151,435 |
|
Dividends
declared and payable to preferred shareholders
|
|
|
837,607 |
|
|
|
837,607 |
|
Dividends
and distributions declared and payable on common operating partnership
units and shares
|
|
|
1,000,000 |
|
|
|
- |
|
Mortgage
debt assumed by buyer
|
|
|
31,377,607 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of multifamily apartment communities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
purchased:
|
|
|
|
|
|
|
|
|
Multifamily
apartment communities
|
|
$ |
- |
|
|
$ |
(45,137,527 |
) |
Acquired
in-place leases
|
|
|
- |
|
|
|
(615,003 |
) |
Accrued
expenses
|
|
|
- |
|
|
|
559,090 |
|
Tenant
security deposit liability
|
|
|
- |
|
|
|
255,078 |
|
Prepaid
expenses
|
|
|
- |
|
|
|
(71,568 |
) |
Net
cash used for acquisition of Multifamily apartment
communities
|
|
$ |
- |
|
|
$ |
(45,009,930 |
) |
The
accompanying notes are an integral part of these financial
statements.
BERKSHIRE INCOME REALTY, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.
|
ORGANIZATION
AND BASIS OF PRESENTATION
|
Berkshire
Income Realty, Inc., (the “Company”), a Maryland corporation, was incorporated
on July 19, 2002 and 100 Class B common shares were issued upon
organization. The Company is in the business of acquiring, owning,
operating and rehabilitating multifamily apartment communities. As of
June 30, 2008, the Company owned, or had an interest in, 25 multifamily
apartment communities consisting of a total 6,945 apartment units.
Discussion
of acquisitions for the six months ended June 30, 2008
The
Company did not acquire any properties during the six month period ended June
30, 2008.
Discussion
of dispositions for the six months ended June 30, 2008
On April
28, 2008, the Company’s operating partnership, Berkshire Income Realty – OP,
L.P. (the “Operating Partnership”) completed the sale of 100% of its interest in
St. Marin/Karrington Apartments in Coppell, Texas. On May 6, 2008,
the Board of Directors (“Board”) authorized the general partner of the Operating
Partnership to distribute a portion of the proceeds from the sale of St.
Marin/Karrington to the common general and common limited partners as a special
distribution in the amount of $10,000,000, payable on May 15,
2008. On the same day, the Board also declared a common dividend of
$0.169960 per share on the Company’s Class B common stock payable concurrently
with the Operating Partnership distribution. The Company retained the balance of
the sale proceeds in its operating account for its operating use. The operating
results of St. Marin/Karrington have been presented in the consolidated
statement of operations as discontinued operations in accordance with FAS 144
“Accounting for the Impairment or Disposal of Long Lived Assets.”
On May
29, 2008, the Operating Partnership completed the sale of 100% of its interest
in Berkshire at Westchase Apartments in Houston, Texas. The proceeds
from the sale of Westchase were deposited in the Company’s operating account for
its operating use. The operating results of Berkshire at Westchase
have been presented in the consolidated statement of operations as discontinued
operations in accordance with FAS 144 “Accounting for the Impairment or Disposal
of Long Lived Assets.”
Recent
Accounting Pronouncements
In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157 “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157
provides guidance for, among other things, the definition of fair value and the
methods used to measure fair value. The provisions of SFAS No. 157 are effective
for fiscal years beginning after November 15, 2007. In February 2008, the FASB
deferred the effective date of SFAS No. 157 until January 1, 2009 for all
non-financial assets and non-financial liabilities except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis. The Company adopted SFAS No. 157 as of January 1,
2008. The Company has assessed the impact of SFAS No. 157 and has
determined that the adoption of SFAS No. 157 did not have a material impact on
the financial position or operating results of the Company.
In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159 “The Fair Value Option for Financial Assets and Financial Liabilities –
Including an amendment of FASB Statement No. 115” (“SFAS No.
159”). SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. The
provisions of SFAS No. 159 are effective for fiscal years beginning after
November 15, 2007. The Company adopted SFAS No. 159 as of January 1, 2008 and
has not opted to fair value any assets or liabilities as of June 30,
2008. The Company has assessed the impact of SFAS No. 159 and, based
on not fair valuing any assets or liabilities as of June 30, 2008, has
determined that the adoption of SFAS No. 159 did not have a material impact on
the financial position or operating results of the Company.
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141(R), Business
Combinations (“SFAS 141R”), which is intended to improve reporting by
creating greater consistency in the accounting and financial reporting of
business combinations. SFAS No. 141R establishes principles and
requirements for how the acquiring entity shall recognize and measure in its
financial statements the identifiable assets acquired, liabilities assumed, any
non-controlling interest in the acquired entity and goodwill acquired in a
business combination. This statement is effective for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008. The Company is assessing the potential impact that the adoption
of SFAS No. 141R may have on its financial position and results of
operations.
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, Noncontrolling Interests
in Consolidated Financial Statements – an amendment of ARB No. 51 (“SFAS
No. 160”), which is intended to improve the relevance, comparability, and
transparency of financial information provided to investors by establishing and
expanding accounting and reporting standards for minority interests in a
subsidiary. This statement is effective for fiscal years beginning on
or after December 15, 2008. The Company is currently assessing the
potential impact that the adoption of SFAS No. 160 may have on its financial
position and results of operations.
Unaudited
interim consolidated financial statements
The
accompanying interim consolidated financial statements of the Company are
unaudited; however, the consolidated financial statements have been prepared in
accordance with the accounting principles generally accepted in the United
States of America (“GAAP”) for interim financial information and in conjunction
with the rules and regulations of the Securities and Exchange Commission (the
“SEC”). Accordingly, certain disclosures accompanying annual financial
statements prepared in accordance with GAAP are omitted. In the opinion of
management, all adjustments (consisting solely of normal recurring matters)
necessary for a fair statement for the interim periods have been included. The
results of operations for the interim periods are not necessarily indicative of
the results to be obtained for other interim periods or for the full fiscal
year. The interim financial statements and notes thereto should be read in
conjunction with the Company’s financial statements and notes thereto included
in the Company’s Annual Report on Form 10-K for the year ended December 31,
2007.
Consolidated
statements of Comprehensive Income (Loss)
For the
six months ended June 30, 2008 and 2007, comprehensive loss equaled net
loss. Therefore, the Consolidated Statement of Comprehensive Income
and Loss required to be presented has been omitted from the consolidated
financial statements.
Reclassifications
Certain
prior period balances have been reclassified in order to conform to the current
period presentation.
2.
|
MULTIFAMILY
APARTMENT COMMUNITIES
|
The
following summarizes the carrying value of the Company’s multifamily apartment
communities:
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Land
|
|
$ |
57,025,800 |
|
|
$ |
63,636,289 |
|
Buildings,
improvements and personal property
|
|
|
503,408,201 |
|
|
|
544,868,833 |
|
|
|
|
|
|
|
|
|
|
Multifamily
apartment communities
|
|
|
560,434,001 |
|
|
|
608,505,122 |
|
Accumulated
depreciation
|
|
|
(148,782,155 |
) |
|
|
(144,240,061 |
) |
|
|
|
|
|
|
|
|
|
Multifamily
apartment communities, net
|
|
$ |
411,651,846 |
|
|
$ |
464,265,061 |
|
The
Company accounts for its acquisitions of investments in real estate in
accordance with Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations, which requires the fair value of the real estate acquired
to be allocated to the acquired tangible assets, consisting of land, building,
furniture, fixtures and equipment and identified intangible assets and
liabilities, consisting of the value of the above-market and below-market
leases, the value of in-place leases and the value of other tenant
relationships, based in each case on their fair values. The value of
in-place leases and tenant relationships are amortized over the specific
expiration dates of the in-place leases over a period of 12 months and the
tenant relationships are based on the straight-line method of amortization over
a 24-month period.
Discontinued
Operations
On May
30, 2007 and June 22, 2007 the Operating Partnership completed the sale of 100%
of the fee simple interest of the Trellis at Lee’s Mill (“Trellis”) and the
Dorsey’s Forge (“Dorsey’s) properties, respectively. The assets and
liabilities related to the sale of the properties were removed from the accounts
of the Company pursuant to the recording of the sale of the
property.
On April
28, 2008 and May 29, 2008 the Operating Partnership completed the sale of 100%
of the fee simple interest of the St. Marin/Karrington (“St. Marin”) and
Berkshire at Westchase (“Westchase”) properties, respectively. The
assets and liabilities related to the sale of the properties were removed from
the accounts of the Company pursuant to the recording of the sale of the
properties. The net proceeds from the sales of St. Marin and Westchase are in
the amount of $29,428,835 and $4,937,736, respectively.
The
results of operations for Trellis, Dorsey’s Forge, St. Marin/Karrington and
Berkshire at Westchase properties have been restated and are presented as
results from discontinued operations in the statement of operations for the
three and six months ended June 30, 2008 and 2007, respectively, pursuant to
FASB 144 – Accounting for the Impairment or Disposal of Long-Lived
Assets.
The
operating results of discontinued operations for the three and six months ended
June 30, 2008 and 2007 are presented in the following table.
|
|
Three months
ended
Six months ended
June
30,
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
|
|
$ |
787,632 |
|
|
$ |
2,931,643 |
|
|
$ |
2,849,494 |
|
|
$ |
5,966,265 |
|
Interest
|
|
|
- |
|
|
|
471 |
|
|
|
- |
|
|
|
1,467 |
|
Utility
reimbursement
|
|
|
50,663 |
|
|
|
62,430 |
|
|
|
96,425 |
|
|
|
116,404 |
|
Other
|
|
|
56,624 |
|
|
|
142,995 |
|
|
|
163,961 |
|
|
|
281,128 |
|
Total
revenue
|
|
|
894,919 |
|
|
|
3,137,539 |
|
|
|
3,109,880 |
|
|
|
6,365,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
232,612 |
|
|
|
727,169 |
|
|
|
720,872 |
|
|
|
1,531,377 |
|
Maintenance
|
|
|
62,162 |
|
|
|
290,518 |
|
|
|
147,906 |
|
|
|
531,215 |
|
Real
estate taxes
|
|
|
175,161 |
|
|
|
451,383 |
|
|
|
765,263 |
|
|
|
937,451 |
|
General
and administrative
|
|
|
36,395 |
|
|
|
72,592 |
|
|
|
102,356 |
|
|
|
141,476 |
|
Management
fees
|
|
|
35,608 |
|
|
|
125,499 |
|
|
|
121,646 |
|
|
|
251,925 |
|
Depreciation
|
|
|
280,033 |
|
|
|
948,033 |
|
|
|
982,405 |
|
|
|
1,926,004 |
|
Loss
on early extinguishment of debt
|
|
|
819,914 |
|
|
|
566,290 |
|
|
|
819,914 |
|
|
|
566,290 |
|
Interest
|
|
|
171,708 |
|
|
|
813,948 |
|
|
|
649,332 |
|
|
|
1,598,419 |
|
Amortization
of acquired in-place leases and tenant relationships
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,729 |
|
Total
expenses
|
|
|
1,813,593 |
|
|
|
3,995,432 |
|
|
|
4,309,694 |
|
|
|
7,489,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
$ |
(918,674 |
) |
|
$ |
(857,893 |
) |
|
$ |
(1,199,814 |
) |
|
$ |
(1,124,622 |
) |
3.
|
INVESTMENT
IN MULTIFAMILY LIMITED PARTNERSHIP
VENTURE
|
On August
12, 2005, the Company, together with affiliates and other unaffiliated parties,
entered into a subscription agreement to invest in the Berkshire Multifamily
Value Fund, L.P. (“BVF”), an affiliate of Berkshire Property Advisors, L.L.C.
(“Berkshire Advisor” or the “Advisor”). Under the terms of the agreement and the
related limited partnership agreement, the Company and its affiliates agreed to
invest up to $25,000,000, or approximately 7%, of the total capital of the
partnership. The Company’s final commitment under the subscription agreement
with BVF totals $23,400,000. BVF’s investment strategy is to acquire
middle-market properties where there is an opportunity to add value through
repositioning or rehabilitation. Under the terms of the BVF partnership
agreement, the Company’s ability to acquire additional properties is restricted
to the two following conditions: (1) the Company can invest up to $8,000,000 per
year in new properties from available cash or cash generated from the
refinancing of existing properties, for a period of up to thirty-nine months, at
which time such restriction will lapse, and (2) the Company is authorized to
sell existing properties and reinvest those proceeds through transactions
structured to comply with 1031 Exchanges under the Internal Revenue Code of
1986, as amended, (the “Tax Code”), without limit.
The
managing partner of BVF is an affiliate of the Company. The Company
has evaluated its investment in BVF and concluded that the investment, although
subject to the requirements of FIN 46R, will not require the Company to
consolidate the activity of BVF as the Company has determined that it is not the
primary beneficiary of the venture as defined in FIN 46R.
In
relation to its investment in BVF, the Company has elected to adopt a
three-month lag period in which it recognizes its share of the equity earnings
of BVF in arrears. The lag period is allowed under the provisions of
Accounting Principles Board Opinion No. 18 (as Amended) – The Equity Method of
Accounting for Investments in Common Stock Statement of Position 78-9 ( “APB
No.18”) and is necessary in order for the Company to consistently meet it
regulatory filing deadlines. As of June 30, 2008 and December 31,
2007, the Company has accounted for its share of the equity in BVF operating
activity through March 31, 2008 and September 30, 2007,
respectively.
There
were no capital calls during the six months ended June 30, 2008. The total
direct investment by the Company in BVF as of June 30, 2008 was $21,072,251, or
90.1% of the total committed capital amount of $23,400,000.
The
summarized statement of assets, liabilities and partners’ capital of BVF is as
follows:
ASSETS
|
|
March
31,
2008
|
|
|
September
30,
2007
|
|
|
|
|
|
|
|
|
Multifamily apartment communities, net
|
|
$ |
1,208,733,109 |
|
|
$ |
997,654,798 |
|
Cash and cash equivalents
|
|
|
6,044,515 |
|
|
|
6,649,923 |
|
Other assets
|
|
|
30,413,370 |
|
|
|
39,121,557 |
|
Total assets
|
|
$ |
1,245,190,994 |
|
|
$ |
1,043,426,278 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS’ CAPITAL
|
|
|
|
|
|
|
|
|
Mortgage notes payable
|
|
$ |
938,271,034 |
|
|
$ |
736,027,766 |
|
Revolving credit facility
|
|
|
43,900,000 |
|
|
|
69,000,000 |
|
Other liabilities
|
|
|
18,118,627 |
|
|
|
24,014,923 |
|
Minority interest
|
|
|
35,777,457 |
|
|
|
19,121,730 |
|
Partners’ capital
|
|
|
209,123,876 |
|
|
|
195,261,859 |
|
Total liabilities and partners’ capital
|
|
$ |
1,245,190,994 |
|
|
$ |
1,043,426,278 |
|
|
|
|
|
|
|
|
|
|
Company’s share of partners’ capital
|
|
$ |
14,640,231 |
|
|
$ |
13,669,787 |
|
Basis differential (1)
|
|
|
604,395 |
|
|
|
3,124,663 |
|
Carrying value of the Company’s investment in Multifamily Limited Partnership
|
|
$ |
15,244,626 |
|
|
$ |
16,794,450 |
|
(1) -
This amount represents the difference between the Company’s investment in BVF
and its share of the underlying equity in the net assets of BVF (adjusted to
conform with GAAP) including the timing of the lag period, as described
above. At March 31, 2008 and September 30, 2007, the differential
related mainly to the contribution of capital made by the Operating Partnership,
in the amount of $0 and $2,520,269, to BVF during the second quarter of 2008 and
the fourth quarter of 2007, respectively. Additionally, $583,240
represents the Company’s share of syndication costs incurred by BVF of which the
Company was not required to fund via a separate capital call.
The
summarized statement of operations of BVF for the three and six months ended
March 31, 2008 and 2007 is as follows:
|
|
Three months
ended
Six months ended
March
31,
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenue
|
|
$ |
33,855,674 |
|
|
$ |
19,775,271 |
|
|
$ |
62,515,121 |
|
|
$ |
37,177,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
(51,208,036 |
) |
|
|
(30,747,970 |
) |
|
|
(94,084,891 |
) |
|
|
(57,943,992 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
2,773,700 |
|
|
|
1,123,231 |
|
|
|
3,853,200 |
|
|
|
2,228,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of properties
|
|
|
5,054 |
|
|
|
- |
|
|
|
5,578,590 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to investment
|
|
$ |
(14,573,608 |
) |
|
$ |
(9,849,468 |
) |
|
$ |
(22,137,980 |
) |
|
$ |
(18,537,538 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in loss of Multifamily
Limited Partnership
|
|
$ |
(1,020,262 |
) |
|
$ |
(689,536 |
) |
|
$ |
(1,549,824 |
) |
|
$ |
(1,297,766 |
) |
4. INVESTMENT
IN MEZZANINE LOAN LIMITED LIABILITY COMPANY
On June
19, 2008, the Company through it wholly owned subsidiary BIR Blackrock, L.L.C.,
entered into a subscription agreement to invest in the Leggat McCall Hingham
Mezzanine Loan LLC, a Massachusetts Limited Liability Company (the “Mezzanine
Loan LLC”). Under the terms of the agreement, the Company agreed to
invest up to $1,425,000, or approximately 41%, of the total capital of the
investment in order to subscribe for 14.25 units. The Company has
funded $855,000, or 60% of its commitment as of June 30, 2008. During
the period ended June 30, 2008, the Company recorded $6,091 of equity in income
of the Mezzanine Loan. The carrying value of the Company’s investment
in the Mezzanine Loan was $861,091 at June 30, 2008.
The
Company has evaluated its investment in Mezzanine Loan LLC and concluded that
the investment, although subject to the requirements of FIN 46R, will not
require the Company to consolidate the activity of Mezzanine Loan LLC as the
Company has determined that it is not the primary beneficiary of the venture as
defined in FIN 46R. The Company will account for its investment in
Mezzanine Loan LLC under the equity method of accounting in accordance with the
provisions of paragraph 19 of APB No.18.
5. MORTGAGE
NOTES PAYABLE
On
January 25, 2008, the Company, through its wholly owned subsidiary BIR Arboretum
Development L.L.C., executed a fixed rate first mortgage note for $13,650,000,
which is collateralized by the related property. The proceeds of the
loan will be used to build a multifamily apartment community on a parcel of land
adjacent to the Arboretum Place Apartments, a multifamily apartment community
also owned by the Company. The interest rate on the note is fixed at 6.20% and
has a term of 7 years, including a 2 year construction period and 5 years of
permanent financing. The loan is a non-drawn mortgage note and was
granted with equity requirements that provide for the Company to make an equity
investment of $5,458,671, inclusive of land equity of $2,150,000, in the
project. As of June 30, 2008, there have been no advances on this
mortgage. The Company expects to begin drawing on this mortgage in
the third quarter of 2008.
6. REVOLVING
CREDIT FACILITY - AFFILIATE
On June
30, 2005, the Company obtained financing in the form of a revolving credit
facility. The revolving credit facility in the amount of $20,000,000 was
provided by an affiliate of the Company. The facility provides for interest on
borrowings at a rate of 5% above the 30 day LIBOR rate, as announced by
Reuter’s, and fees based on borrowings under the facility and various
operational and financial covenants, including a maximum leverage ratio and a
maximum debt service ratio. The agreement had a maturity date of December 31,
2006, with a one-time six-month extension available at the option of the
Company. The terms of the facility were agreed upon through negotiations and
were approved by the Audit Committee of the Board, which is comprised solely of
directors who are independent under applicable rules and regulations of the SEC
and the American Stock Exchange.
On
October 30, 2006, the Company exercised its contractual option to extend the
maturity date on the revolving credit facility available from the
affiliate. The Company sent notice to the affiliate of its intent,
pursuant to the credit agreement, to extend the maturity date of the revolving
credit facility by six months, until June 30, 2007.
On May
31, 2007, the Company executed an amendment to the agreement. The
amendment provides for an extension of the maturity date by replacing the
maturity date of June 30, 2007 with a 60-day notice of termination provision by
which the lender can affect a termination of the commitment under the Agreement
and render all outstanding amounts due and payable. The amendment
also adds a clean-up requirement to the Agreement, which requires the Company to
repay in full all outstanding loans and have no outstanding obligations under
the Agreement for a 14 consecutive day period during each 365-day
period. This requirement has been satisfied for the initial 365-day
period starting on June 1, 2007.
During
the six months ended June 30, 2008 and 2007, the Company borrowed $5,000,000 and
$37,500,000, respectively, under the facility related to the acquisition
activities of the Company and repaid advances of $5,000,000 and $20,000,000
during the same periods. There was $0 of borrowings outstanding
as of June 30, 2008 and December 31, 2007, respectively under the
facility. The Company incurred interest and fees of $22,488 and
$560,300 related to the facility during the six months ended June 30, 2008 and
2007, respectively.
7. STOCKHOLDERS’
EQUITY
On March
25, 2003, the Board declared a dividend at an annual rate of 9%, on the stated
liquidation preference of $25 per share of the outstanding Preferred Shares
which is payable quarterly in arrears, on February 15, May 15, August 15, and
November 15 of each year to shareholders of record in the amount of $0.5625 per
share per quarter. The first quarterly dividend paid on May 15, 2003
was prorated to reflect the issue date of the Preferred Shares. For
the six months ended June 30, 2008 and 2007, the Company’s aggregate dividends
on the Preferred Shares totaled $3,350,396 and $3,350,398, respectively, of
which $837,607 was payable and included on the balance sheet in Dividends and
Distributions Payable as of June 30, 2008 and December 31,
2007.
On
November 11, 2007, the Board authorized the general partner of the Operating
Partnership to distribute quarterly distributions of $1,000,000 each, in the
aggregate, from its operating cash flows to common general and common limited
partners, payable on February 15, 2008 and May 15, 2008. On the same day, the
Board also declared a common dividend of $0.016996 per share on the Company’s
Class B common stock payable concurrently with the Operating Partnership
distributions.
On May 6,
2008, the Board authorized the general partner of the Operating Partnership to
distribute quarterly distributions of $1,000,000 each, in the aggregate, from
its operating cash flows to common general and common limited partners, payable
on August 15, 2008 and November 15, 2008. On the same day, the Board also
declared a common dividend of $0.016996 per share on the Company’s Class B
common stock payable concurrently with the Operating Partnership
distributions.
On May 6,
2008, the Board authorized the general partner of the Operating Partnership to
distribute a special distribution of $10,000,000 from the proceeds of the sale
of St. Marin/Karrington to common general and common limited
partners, payable on May 15, 2008. On the same day, the Board also declared a
common dividend of $0.169960 per share on the Company’s Class B common stock
payable concurrently with the Operating Partnership distributions.
For the
six months ended June 30, 2008 and 2007, the Company’s aggregate distributions
and dividends to common general and common limited partners and Class B common
stockholders totaled $12,000,000 and $2,000,000, respectively, of which
$1,000,000 was payable and included on the balance sheet in Dividends and
Distributions Payable as of June 30, 2008 and December 31, 2007.
The
Company’s policy to provide for common distributions is based on available cash
and Board approval.
8. EARNINGS
PER SHARE
Net
income (loss) per common share, basic and diluted, is computed as net income
(loss) available to common shareholders divided by the weighted average number
of common shares outstanding during the applicable period, basic and
diluted.
The
reconciliation of the basic and diluted earnings per common share for the three
and six months ended June 30, 2008 and 2007 follows:
|
|
Three months ended
|
|
|
Six
months ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from continuing operations
|
|
$ |
(16,474,190 |
) |
|
$ |
(8,144,883 |
) |
|
$ |
(23,635,041 |
) |
|
$ |
(14,786,349 |
) |
Less:
Preferred dividends
|
|
|
(1,675,197 |
) |
|
|
(1,675,198 |
) |
|
|
(3,350,396 |
) |
|
|
(3,350,398 |
) |
Net
income (loss) from continuing operations available
to common shareholders
|
|
$ |
(18,149,387 |
) |
|
$ |
(9,820,081 |
) |
|
$ |
(26,985,437 |
) |
|
$ |
(18,136,747 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from discontinued operations
|
|
$ |
26,113,224 |
|
|
$ |
31,264,713 |
|
|
$ |
25,832,084 |
|
|
$ |
30,997,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) available to common shareholders
|
|
$ |
7,963,837 |
|
|
$ |
21,444,632 |
|
|
$ |
(1,153,353 |
) |
|
$ |
12,861,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding, basic and
diluted
|
|
|
1,406,196 |
|
|
|
1,406,196 |
|
|
|
1,406,196 |
|
|
|
1,406,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from continuing operations per common share available to
common shareholders, basic and diluted
|
|
$ |
(12.91 |
) |
|
$ |
(6.98 |
) |
|
$ |
(19.19 |
) |
|
$ |
(12.90 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from discontinued operations per common share available to
common shareholders, basic and diluted
|
|
$ |
18.57 |
|
|
$ |
22.23 |
|
|
$ |
18.37 |
|
|
$ |
22.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per common share available to common shareholders, basic and
diluted
|
|
$ |
5.66 |
|
|
$ |
15.25 |
|
|
$ |
(0.82 |
) |
|
$ |
9.14 |
|
For the
six months ended June 30, 2008 and 2007, the Company did not have any common
stock equivalents, therefore basic and dilutive earnings per share were the
same
9. COMMITMENTS
AND CONTINGENCIES
The
Company is party to certain legal actions arising in the ordinary course of its
business, such as those relating to tenant issues. All such proceedings taken
together are not expected to have a material adverse effect on the Company.
While the resolution of these matters cannot be predicted with certainty,
management believes that the final outcome of such legal proceedings and claims
will not have a material adverse effect on the Company’s liquidity, financial
position or results of operations.
10. RELATED
PARTY TRANSACTIONS
Amounts
accrued or paid to the Company’s affiliates are as follows:
|
|
Three months
ended
Six months ended
June
30,
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
management fees
|
|
$ |
815,545 |
|
|
$ |
854,361 |
|
|
$ |
1,653,233 |
|
|
$ |
1,678,141 |
|
Expense
reimbursements
|
|
|
48,975 |
|
|
|
62,739 |
|
|
|
97,950 |
|
|
|
125,478 |
|
Salary
reimbursements
|
|
|
2,187,625 |
|
|
|
2,267,783 |
|
|
|
4,570,924 |
|
|
|
4,800,110 |
|
Asset
management fees
|
|
|
418,361 |
|
|
|
418,359 |
|
|
|
836,721 |
|
|
|
836,720 |
|
Construction
management fees
|
|
|
125,131 |
|
|
|
254,405 |
|
|
|
219,005 |
|
|
|
316,663 |
|
Development
fees
|
|
|
127,000 |
|
|
|
100,000 |
|
|
|
254,000 |
|
|
|
200,000 |
|
Acquisition
fees
|
|
|
- |
|
|
|
242,250 |
|
|
|
- |
|
|
|
447,250 |
|
Interest
on revolving credit facility
|
|
|
22,488 |
|
|
|
331,100 |
|
|
|
22,488 |
|
|
|
560,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
3,745,125 |
|
|
$ |
4,530,997 |
|
|
$ |
7,654,321 |
|
|
$ |
8,964,662 |
|
Amounts
due to affiliates of $3,104,706 and $2,891,791 are included in Due to affiliates
at June 30, 2008 and December 31, 2007, respectively, in the accompanying
Consolidated Balance Sheets.
Amounts
due from affiliates of $1,132,370 and $939,244 are included in Due to affiliates
at June 30, 2008 and December 31, 2007, respectively, in the accompanying
Consolidated Balance Sheets.
Amounts
due to affiliates of $1,972,336 and $1,952,547 at June 30, 2008 and December 31,
2007, respectively, represent intercompany development fees and related party
reimbursements.
The
Company pays property management fees to an affiliate for property management
services. The fees are payable at a rate of 4% of gross
income.
The
Company pays asset management fees to an affiliate for asset management
services. These fees are payable quarterly, in arrears, and may be
paid only after all distributions currently payable on the Company’s Preferred
Shares have been paid. Effective April 4, 2003, under the advisory
services agreement, the Company will pay Berkshire Advisor an annual asset
management fee equal to 0.40%, up to a maximum of $1,600,000 in any calendar
year, as per an amendment to the management agreement, of the purchase price of
real estate properties owned by the Company, as adjusted from time to time to
reflect the then current fair market value of the properties. The
purchase price is defined as the capitalized basis of an asset under GAAP,
including renovation or new construction costs, costs of acquisition or other
items paid or received that would be considered an adjustment to
basis. Annual asset management fees earned by the affiliate in excess
of the $1,600,000 maximum payable by the Company represent fees incurred and
paid by the minority partners in the properties. The Company also
reimburses affiliates for certain expenses incurred in connection with the
operation of the properties, including administrative expenses and salary
reimbursements.
The
Company pays acquisition fees to an affiliate for acquisition
services. These fees are payable upon the closing of an acquisition
of real property. The fee is equal to 1% of the purchase price of any
new property acquired directly and indirectly by the Company. The
purchase price is defined as the capitalized basis of an asset under GAAP,
including renovations or new construction costs, cost of acquisition or other
items paid or received that would be considered an adjustment to
basis. The purchase price does not include acquisition fees and
capital costs of a recurring nature.
The
Company pays a construction management fee to an affiliate, Berkshire Advisor,
for services related to the management and oversight of renovation and
rehabilitation projects at its properties. The Company paid or
accrued $219,005 and $316,663 in construction management fees for the six months
ended June 30, 2008 and 2007, respectively. The fees are capitalized
as part of the project cost in the year they are incurred.
The
Company pays development fees to an affiliate for property development
services. As of June 30, 2008, the Company has one property under
development and has incurred fees totaling $254,000 and $200,000 in the six
month period ended June 30, 2008 and 2007, respectively. The fees, of
which all are related to the development phase as the project is currently under
construction, are based on the project’s development/construction
costs. As of June 30, 2008, $0 has been paid to the affiliate and
$254,000 remained payable.
During
the six months ended June 30, 2008 and 2007, the Company borrowed $5,000,000 and
$37,500,000 respectively, related to the acquisition activities of the Company
and repaid advances of $5,000,000 and $20,000,000 respectively, during the same
periods. There was $0 of borrowings outstanding as of June 30,
2008 and December 31, 2007, respectively. The Company incurred
interest and fees of $22,488 and $560,300 related to the facility during the six
months ended June 30, 2008 and 2007, respectively.
11. LEGAL
PROCEEDINGS
The
Company is currently party to a legal proceeding initiated by a seller/developer
from whom the Company acquired a property in 2005. The dispute
involves the interpretation of certain provisions of the purchase and sales
agreement related to post acquisition construction
activities. Specifically, the purchase and sales agreement provided
that if certain conditions were met, the seller/developer would develop a vacant
parcel of land contiguous to the acquired property with 18 new residential
apartment units (the “New Units”) for the benefit of the Company at an
agreed-upon price. The purchase and sales agreement also provided the
opportunity for the seller/developer to build a limited number of garages (the
“Garages”) for the existing apartment units for the benefit of the Company at an
agreed-upon price.
In 2006,
the Company accrued $190,000 with respect to the New Units matter based on a
settlement offer extended to the plaintiff, which was not accepted at that
time. On November 9, 2007, the judge issued a summary judgment
against the Company with respect to the construction of the New
Units. On February 13, 2008, the court entered judgment related to
the New Units on the seller/developer’s behalf awarding them a judgment in the
amount of $774,292 for costs and damages. The Company believes that
there are reasonable grounds for appeal of this ruling and is pursuing an appeal
of the judgment awarded by the court.
As of
June 30, 2008 and December 31, 2007, respectively, the Company did not increase
its accrual of $190,000 related to the New Units matter as it is moving forward
with an appeal of the judgment awarded by the court. Based on the
court’s award of damages in the amount of $774,292, if the appeal were to be
unsuccessful, the Company would record an additional cost of $584,292 related to
the New Units matter, the amount in excess of the $190,000 accrued as of June
30, 2008.
The
Company settled the matter related to the Garages and has executed a contract
with the seller/developer for the construction of 48 Garages at an aggregate
cost of $740,000. As of June 30, 2008, the garage construction
project is scheduled to begin in the third quarter of 2008.
The
Company and our properties are not subject to any other material pending legal
proceedings and we are not aware of any such proceedings contemplated by
governmental authorities.
12. SUBSEQUENT
EVENTS
On August
11, 2008, the operating partnership, through its subsidiaries, BIR Executive GP,
L.L.C. and BIR Executive LP, L.L.C., simultaneously entered into
agreements to purchase 100% of the partnership interests of Executive House
Associates, a limited partnership, which is the owner of Executive House
Apartments, a 302 unit high rise apartment building located in Philadelphia,
Pennsylvania. The Sellers were unaffiliated third
parties. The purchase price for the partnership interests is
approximately $19,328,000 in cash plus the assumption of approximately
$30,672,000 of outstanding mortgage debt secured by the property, and is subject
to normal operating prorations as provided for in the purchase and sale
agreements. The acquisition of the partnership interests is intended
to be the qualified replacement property in connection with the sale of
properties identified for replacement pursuant to a transaction structured to
comply with the requirements of a reverse 1031 Exchange under the Tax
Code. As required by the tax code, a qualified 1031 Exchange
intermediary was retained to execute the Executive House acquisition and
relinquished properties transactions.
Item 2
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF BERKSHIRE INCOME REALTY, INC
|
You
should read the following discussion in conjunction with Berkshire Income
Realty, Inc’s (the “Company”) consolidated financial statements and their
related notes and other financial information included in this report. For
further information please refer to the Company’s consolidated financial
statements and footnotes thereto included in the Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 2007.
Forward
Looking Statements
Certain
statements contained in this report, including information with respect to our
future business plans, constitute “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). For this purpose, any statements contained herein that are not
statements of historical fact may be deemed to be forward-looking statements,
subject to a number of risks and uncertainties that could cause actual results
to differ significantly from those described in this report. These
forward-looking statements include statements regarding, among other things, our
business strategy and operations, future expansion plans, future prospects,
financial position, anticipated revenues or losses and projected costs, and
objectives of management. Without limiting the foregoing, the words
“may,” “will,” “should,” “could,” “expects,” “plans,” “anticipates,” “believes,”
“estimates,” “predicts,” “potential” or “continue” or the negative of such terms
and other comparable terminology are intended to identify forward-looking
statements. There are a number of important factors that could cause
our results to differ materially from those indicated by such forward-looking
statements. These factors include, but are not limited to, changes in
economic conditions generally and the real estate and bond markets specifically,
legislative/regulatory changes (including changes to laws governing the taxation
of real estate investment trusts (“REITs”)), possible sales of assets, the
acquisition restrictions placed on the Company by its investment in Berkshire
Multifamily Value Fund, LP, (“BVF” or the “Fund”), the acquisition
restrictions placed on the Company by an affiliated entity Berkshire Multifamily
Value Fund II, LP, (“BVF II” or “Fund II”), availability of capital, interest
rates and interest rate spreads, changes in accounting principles generally
accepted in the United States of America (“GAAP”) and policies and guidelines
applicable to REITs, those factors set forth in Part I, Item 1A “Risk
Factors” of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2007 filed with the SEC and other risks and uncertainties as may be
detailed from time to time in our public announcements and our reports filed
with the Securities and Exchange Commission (the “SEC”).
The
foregoing risks are not exhaustive. Other sections of this report may
include additional factors that could adversely affect our business and
financial performance. Moreover, we operate in a competitive and
rapidly changing environment. New risk factors emerge from time to
time and it is not possible for management to predict all such risks factors,
nor can it assess the impact of all such risk factors on our business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking
statements. Given these risks and uncertainties, undue reliance
should not be placed on forward-looking statements as a prediction of actual
results.
As used
herein, the terms “we”, “us” or the “Company” refer to Berkshire Income Realty,
Inc. (the “Company”), a Maryland corporation, incorporated on July 19,
2002. The Company is in the business of acquiring, owning, operating
and renovating multifamily apartment communities. Berkshire Property
Advisors, L.L.C. (“Berkshire Advisor” or “Advisor”) is an affiliated entity we
have contracted with to make decisions relating to the day-to-day management and
operation of our business, subject to the Company’s Board of Directors’
(“Board”) oversight. Refer to Item 13 – Certain Relationships and
Related Transactions and Director Independence and Notes to the
Consolidated Financial Statements, Note 13 –Related Party Transactions
of the Company’s Annual Report on Form 10-K for the year ended December
31, 2007 filed with the Securities and Exchange Commission for additional
information about the Advisor.
Overview
The
Company is engaged primarily in the ownership, acquisition, operation and
rehabilitation of multifamily apartment communities in the Baltimore/Washington
D.C., Southeast, Southwest, Northwest and Midwest areas of the United States. We
conduct substantially all of our business and own, either directly or through
subsidiaries, substantially all of our assets through Berkshire Income Realty –
OP, L.P. (the “Operating Partnership”), a Delaware limited partnership. The
Company’s wholly owned subsidiary, BIR GP, L.L.C., a Delaware limited liability
company, is the sole general partner of the Operating Partnership. As
of August 14, 2007, the Company is the owner of 100% of the preferred limited
partner units of the Operating Partnership, whose terms mirror the terms of the
Company’s Series A 9% Cumulative Redeemable Preferred Stock and, through BIR GP,
L.L.C., owns 100% of the general partner interest of the Operating Partnership,
which represents approximately 2.39% of the common economic interest of the
Operating Partnership.
Our
general and limited partner interests in the Operating Partnership entitle us to
share in cash distributions from, and in the profits and losses of, the
Operating Partnership in proportion to our percentage interest therein. The
other partners of the Operating Partnership are affiliates who contributed their
direct or indirect interests in certain properties to the Operating Partnership
in exchange for common units of limited partnership interest in the Operating
Partnership.
Our
highlights of the six months ended June 30, 2008 included the
following:
•
|
On
January 25, 2008, the Company closed on $13,650,000 of fixed rate mortgage
debt on the development project of Arboretum Land. The proceeds
of the borrowing will be used to build multifamily buildings on a parcel
of pre-purchased land adjacent to the Arboretum Place
Apartments. The loan will be a non-drawn mortgage note with a
fixed interest rate of 6.20% and a term of 7 years. This loan
was granted with equity requirements that the Company would provide an
equity investment for the project in the amount of
$5,458,671. The amount of $5,458,671 represented by the Land
and improvements are $2,150,000 and $3,308,671 respectively.
|
•
|
On
February 13, 2008, the Company had a Judgment ordered against it by the
court in a legal proceeding initiated by a seller/developer from whom the
Company acquired a property in 2005. The Judgment was for
$774,292 and represented costs and damages in the case. The
Company has appealed the Judgment. If the appeal were to be
unsuccessful, the Company would record an additional cost of $584,292
related to the Judgment, the amount in excess of the $190,000 accrued as
of June 30, 2008. A second part of the proceeding related to
the construction of garages on the property was dismissed and the Company
has executed a contract for the construction of 48 garages at a cost of
$740,000. The garage construction project is moving forward and
construction is scheduled to begin in the third quarter of
2008.
|
•
|
On
April 10, 2008, the Company paid off the outstanding mortgage balance on
the Briarwood property in the amount of $8,600,333 on its maturity
date. $5,000,000 of the payment was funded from a draw on the
revolving credit facility and $3,600,333 of the payment was funded from
available operating capital.
|
•
|
On
April 28, 2008, the Operating Partnership completed the sale of 100% of
its interest in St. Marin/Karrington Apartments in Coppell,
Texas. On May 6, 2008, the Board authorized the general partner
of the Operating Partnership to distribute a portion of the proceeds from
the sale of St. Marin/Karrington to the common general and common limited
partners as a special distribution in the amount of $10,000,000, payable
on May 15, 2008. On the same day, the Board also declared a
common dividend of $0.169960 per share on the Company’s Class B common
stock payable concurrently with the Operating Partnership distribution.
The company retained the balance of the proceeds in its operating account
for its operating use. The operating results of St. Marin/Karrington have
been presented in the consolidated statement of operations as discontinued
operations in accordance with FAS 144 “Accounting for the Impairment or
Disposal of Long Lived Assets.”
|
•
|
On
May 29, 2008, the Operating Partnership completed the sale of 100% of its
interest in Berkshire at Westchase Apartments in Houston,
Texas. The proceeds fro the sale of Berkshire at Westchase were
deposited in the Company’s operating account for its operating
use. The operating results of Berkshire at Westchase have been
presented in the consolidated statement of operations as discontinued
operations in accordance with FAS 144 “Accounting for the Impairment or
Disposal of long lived Assets.”
|
•
|
On
June 19, 2008, the Company through its wholly owned subsidiary BIR
Blackrock, L.L.C., entered into a subscription agreement to invest in the
Leggat McCall Hingham Mezzanine Loan LLC, a Massachusetts Limited
Liability Company. Under the terms of the agreement, the
Company agreed to invest up to $1,425,000, or approximately 41%, of the
total capital of the investment in order to subscribe for 14.25
units. The Company has funded $855,000 or 60%, of its
commitment as of June 30, 2008.
|
General
The
Company detailed a number of significant trends and specific factors affecting
the real estate industry in general and the Company’s business in particular in
Part II, Item 7 - “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” of our Annual Report on Form 10-K for the year ended
December 31, 2007. The Company believes those trends and factors continue to be
relevant to the Company’s performance and financial condition.
Recent
Accounting Pronouncements
In
September 2006, the Statement of Financial Accounting Standards issued SFAS No.
157 “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157
provides guidance for, among other things, the definition of fair value and the
methods used to measure fair value. The provisions of SFAS No. 157 are effective
for fiscal years beginning after November 15, 2007. In February 2008, the FASB
deferred the effective date of SFAS No. 157 until January 1, 2009 for all
non-financial assets and non-financial liabilities except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis. The Company adopted SFAS No. 157 as of January 1,
2008. The Company has assessed the impact of SFAS No. 157 and has
determined that the adoption of SFAS No. 157 did not have a material impact on
the financial position or operating results of the Company.
In
February 2007, the Statement of Financial Accounting Standards issued SFAS No.
159 “The Fair Value Option for Financial Assets and Financial Liabilities –
Including an amendment of FASB Statement No. 115” (“SFAS No.
159”). SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. The
provisions of SFAS No. 159 are effective for fiscal years beginning after
November 15, 2007. The Company adopted SFAS No. 159 as of January 1, 2008 and
has not opted to fair value any assets or liabilities as of march 31,
2008. The Company has assessed the impact of SFAS No. 159 and, based
on not fair valuing any assets or liabilities as of March 31, 2008, has
determined that the adoption of SFAS No. 159 did not have a material impact on
the financial position or operating results of the Company.
In
December 2007, the Statement of Financial Accounting Standards issued SFAS No.
141(R), Business
Combinations (“SFAS 141R”), which is intended to improve reporting by
creating greater consistency in the accounting and financial reporting of
business combinations. SFAS No. 141R establishes principles and
requirements for how the acquiring entity shall recognize and measure in its
financial statements the identifiable assets acquired, liabilities assumed, any
non-controlling interest in the acquired entity and goodwill acquired in a
business combination. This statement is effective for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008. The Company is assessing the potential impact that the adoption
of SFAS No. 141R may have on its financial position and results of
operations.
In
December 2007, the Statement of Financial Accounting Standards issued SFAS No.
160, Noncontrolling Interests
in Consolidated Financial Statements – an amendment of ARB No. 51 (“SFAS
No. 160”), which is intended to improve the relevance, comparability, and
transparency of financial information provided to investors by establishing and
expanding accounting and reporting standards for minority interests in a
subsidiary. This statement is effective for fiscal years beginning on
or after December 15, 2008. The Company is currently assessing the
potential impact that the adoption of SFAS No. 160 may have on its financial
position and results of operations.
Liquidity
and Capital Resources
Cash
and Cash Flows
As of
June 30, 2008 and December 31, 2007, the Company had $27,200,612 and $22,479,937
of cash and cash equivalents, respectively. Cash provided and used by
the Company for the three and six month periods ended June 30, 2008 and 2007 are
as follows:
|
Three months
ended
Six months ended
June
30,
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
provided by operating activities
|
|
$ |
6,626,684 |
|
|
$ |
4,868,327 |
|
|
$ |
4,507,870 |
|
|
|
6,305,052 |
|
Cash
provided by (used) in investing activities
|
|
|
37,987,587 |
|
|
|
(6,781,192 |
) |
|
|
33,176,522 |
|
|
|
(30,949,064 |
) |
Cash
provided by (used) in financing activities
|
|
|
(28,878,728 |
) |
|
|
(6,406,020 |
) |
|
|
(32,963,717 |
) |
|
|
17,344,491 |
|
During
the six months ended June 30, 2008, cash increased by $4,507,870. The main
component of the overall increase was $33,176,522 provided by investing
activities and $4,015,340 used in the operating activities of the
Company. Cash provided by the investing activities was mainly from
the sale of the St. Marin and Westchase properties which provided a total of
$41,643,556, which was partially offset by $9,838,199 used to fund capital
improvements at properties throughout the Company’s portfolio. The
increases were partially offset by $32,963,717 used in the financing activities
of the Company, including principal payments on mortgages of $10,764,800,
prepayments of mortgages of $6,433,293, regular quarterly distributions to
common shareholders of $2,000,000, quarterly distributions to preferred
shareholders of $3,350,396 and a special distribution to common shareholders of
$10,000,000.
The
Company’s principal liquidity demands are expected to be distributions to our
preferred and common shareholders and Operating Partnership unitholders, capital
improvements, rehabilitation projects and repairs and maintenance for the
properties, acquisition of additional properties within the investment
restrictions placed on it by BVF, and debt repayment and investment in the
affiliated BVF. (See footnote 3 to the consolidated financial statements in Part
I, Item I herein for additional information).
The
Company intends to meet its short-term liquidity requirements through net cash
flows provided by operating activities, cash distributions from its investments,
including the Company’s investments in the Multifamily Venture, and advances
from the revolving credit facility. The Company considers its ability to
generate cash to be adequate to meet all operating requirements and make
distributions to its stockholders in accordance with the provisions of the
Internal Revenue Code of 1986, as amended, applicable to REITs. Funds
required to make distributions to our preferred and common shareholders and
Operating Partnership unitholders that are not provided by operating activities
will be supplemented by property debt financing and refinancing
activities.
The
Company intends to meet its long-term liquidity requirements through property
debt financing and refinancing. The Company may seek to expand its
purchasing power through the use of venture relationships with other
companies.
As of
June 30, 2008, the Company has obtained fixed interest rate mortgage financing
on all of the properties in the portfolio including a fixed rate construction to
permanent mortgage on the Arboretum Land Development project, a parcel of vacant
land adjacent to the Arboretum Place Apartments that is currently under
development and is anticipated to be complete in early 2009.
The
Company has a $20,000,000 revolving credit facility in place with an affiliate
of the Company. As of June 30, 2008, the Company did not have any
borrowings outstanding on the revolving credit facility.
Capital
Expenditures
The
Company incurred $2,030,302 and $1,583,341 in recurring capital expenditures
during the six months ended June 30, 2008 and 2007, respectively. Recurring
capital expenditures typically include items such as appliances, carpeting,
flooring, HVAC equipment, kitchen and bath cabinets, site improvements and
various exterior building improvements.
The
Company incurred $8,300,427 and $6,296,392 in renovation-related capital
expenditures during the six months ended June 30, 2008 and 2007, respectively.
Renovation related capital expenditures generally include capital expenditures
of a significant non-recurring nature, including construction management fees
payable to an affiliate of the Company, where the Company expects to see a
financial return on the expenditure or where the Company believes the
expenditure preserves the status of a property within its
sub-market.
In
January 2004, the Company authorized the renovation of 252 apartment units at
its Berkshires of Columbia (formerly Hannibal Grove) property (“Columbia”) to
provide for in-unit washer and dryer hookups. The total cost of the project was
estimated to be approximately $1,455,000, or $5,775 per apartment
unit. The Company believes the renovations are necessary to maintain
the property’s competitiveness in its sub-market and that the property will also
achieve significant growth in rental rates as a result of the
renovations. In September 2005, in addition to the washer and dryer
program, the Company approved, after a successful trial project on a limited
number of units, the interior renovation of all 252 units at Columbia, including
the in-unit washer and dryer hookups in units not yet converted, at an
anticipated total cost of $5,292,000, or $21,000 per unit. As of June
30, 2008, all of 252 apartment units at Columbia have been renovated and
leased.
In
December 2006, the Company, as part of the decision to acquire the Standard at
Lenox Park property, approved a rehabilitation project at the 375-unit property
of approximately $5,000,000 for interior and exterior
improvements. As of June 30, 2008, the exterior improvements have
been completed and the interior portion of the project, which includes
rehabilitation of the kitchens, bathrooms, lighting and fixtures, was 85%
complete as 327 of the 375 units had been completed, of which 313 units, or 99%,
of those completed units have been leased. Project costs to date
approximate $4,250,000 of the total estimated costs of $5,108,000.
In
December 2007, the Company authorized the renovation of the Hampton House
property, a 222 unit high-rise building. Approximately $6,126,000 has been
budgeted for 2008 for interior and exterior improvements. Exterior
improvements include replacement of windows, sliding doors and balcony railings
and interior improvements include updates to apartment units including
rehabilitation of the kitchens, bathrooms, lighting and fixtures and updates to
common areas and systems, including the lobby, hallways and updates to the
buildings central systems. As of June 30, 2008, both the interior and
exterior improvements have begun and are in the early stages of
completion.
The
Company owns two parcels of vacant land. One parcel is the Arboretum Land which
is contiguous to an existing property owned by the Company and the other is also
a parcel contiguous with an existing property owned by the Company. A
decision to move forward with the development of the Arboretum Land, which is
contiguous with the Arboretum Place Apartments, has been made by the
Company. Development plans were approved and as of November 1, 2007,
the Company commenced construction on the development of the vacant
land. The development plans include the construction of five
buildings, containing 143 units, and a clubhouse. The project cost is
estimated at $17,000,000 and is expected to be completed in early
2009. As of June 30, 2008, project costs to date approximate
$4,081,000. The development plans include the construction of five buildings,
containing 143 units, and a clubhouse. Interest costs are capitalized
on development projects until construction is substantially
complete. There was $107,721 and $0 of interest capitalized in the
six months ended June 30, 2008 and 2007, respectively.
Pursuant
to terms of the mortgage debt on certain properties in the Company’s portfolio,
lenders require the Company to fund repair or replacement escrow
accounts. The funds in the escrow accounts are disbursed to the
Company upon completion of the required repairs or renovations
activities. The Company is required to provide to the lender
documentation evidencing the completion of the repairs, and in some cases, are
subject to inspection by the lender.
The
Company’s capital budgets for 2008 anticipate spending approximately $32,935,000
for ongoing rehabilitation, including the Hampton House project and development
of current portfolio properties, including the Arboretum Land development
project during the year. As of June 30, 2008, the Company has not
committed to any new significant rehabilitation projects.
Discussion
of acquisitions for the six months ended June 30, 2008
The
Company did not acquire any properties during the six month period ended June
30, 2008.
Discussion
of dispositions for the six months ended June 30, 2008
On April
28, 2008, the Operating Partnership completed the sale of 100% of its interest
in St. Marin/Karrington Apartments in Coppell, Texas. On May 6, 2008,
the Board authorized the general partner of the Operating Partnership to
distribute a portion of the proceeds from the sale of St. Marin/Karrington to
the common general and common limited partners as a special distribution in the
amount of $10,000,000, payable on May 15, 2008. On the same day, the
Board also declared a common dividend of $0.169960 per share on the Company’s
Class B common stock payable concurrently with the Operating Partnership
distribution. The company retained the balance of the proceeds in its operating
account for its operating use. The operating results of St. Marin/Karrington
have been presented in the consolidated statement of operations as discontinued
operations in accordance with FAS 144 “Accounting for the Impairment or Disposal
of Long Lived Assets.”
On May
29, 2008, the Operating Partnership completed the sale of 100% of its interest
in Berkshire at Westchase Apartments in Houston, Texas. The proceeds
from the sale of Westchase was deposited in the Company’s operating account for
its operating use. The operating results of Berkshire at Westchase
have been presented in the consolidated statement of operations as discontinued
operations in accordance with FAS 144 “Accounting for the Impairment or Disposal
of Long Lived Assets.”
The gain
from the sale of St. Marin/Karrington and Berkshire at Westchase is reflected,
on a combined basis, as gain on disposition on real estate assets in the
discontinued operations section of the Consolidated Statements of
Operations.
Declaration
of Dividends and Distributions
On March
25, 2003, the Board declared a dividend at an annual rate of 9% on the stated
liquidation preference of $25 per share of the outstanding Preferred Shares
which is payable quarterly in arrears, on February 15, May 15, August 15, and
November 15 of each year to shareholders of record in the amount of $0.5625 per
share, per quarter. For the six months ended June 30, 2008 and 2007,
the Company’s aggregate dividends totaled $3,350,396 and $3,350,398,
respectively, of which $1,837,607 was payable and included on the balance sheet
in Dividends and Distributions Payable as of June 30, 2008 and June 30,
2007.
On
November 11, 2007, the Board authorized the general partner of the Operating
Partnership to distribute quarterly distributions of $1,000,000 each, in the
aggregate, from its operating cash flows to common general and common limited
partners, payable on February 15, 2008 and May 15, 2008. On the same day, the
Board also declared a common dividend of $0.016996 per share on the Company’s
Class B common stock payable concurrently with the Operating Partnership
distributions.
On May 6,
2008, the Board authorized the general partner of the Operating Partnership to
distribute quarterly distributions of $1,000,000 each, in the aggregate, from
its operating cash flows to common general and common limited partners, payable
on August 15, 2008 and November 15, 2008. On the same day, the Board also
declared a common dividend of $0.016996 per share on the Company’s Class B
common stock payable concurrently with the Operating Partnership
distributions.
On May 6,
2008, the Board authorized the general partner of the Operating Partnership to
distribute a special distribution of $10,000,000 from the proceeds of the sale
of St. Marin/Karrington to common general and common limited partners, payable
on May 15, 2008. On the same day, the Board also declared a common dividend of
$0.169960 per share on the Company’s Class B common stock payable concurrently
with the Operating Partnership distributions.
For the
six months ended June 30, 2008 and 2007, the Company’s aggregate distributions
and dividends to common general and common limited partners and Class B common
stockholders totaled $12,000,000 and $2,000,000, respectively, of which
$1,000,000 was payable and included on the balance sheet in Dividends and
Distributions Payable as of June 30, 2008 and December 31, 2007.
The
Company’s policy to provide for common distributions is based on available cash
and Board approval.
Results
of Operations and Financial Condition
During
the six months ended June 30, 2008, the Company’s portfolio (the “Total Property
Portfolio”), which consists of all properties acquired or placed in service and
owned through June 30, 2008, was reduced due to sales of two properties-St.
Marin/Karrington and Berkshire at Westchase. As a result of changes
in property holdings in the Total Property Portfolio over the six-month period
ended June 30, 2008, the consolidated financial statements show changes in
revenue and expenses from period to period. The Company does not believe that
its period-to-period financial data are comparable. Therefore, the comparison of
operating results for the six months ended June 30, 2008 and 2007 reflects the
changes attributable to the properties owned by the Company throughout each
period presented (the “Same Property Portfolio”).
“Net
Operating Income” (“NOI”) falls within the definition of a “non-GAAP financial
measure” as stated in Item 10(e) of Regulation S-K promulgated by the SEC and
should not be considered as an alternative to net income (loss), the most
directly comparable financial measure of our performance calculated and
presented in accordance with GAAP. The Company believes NOI is a
measure of operating results that is useful to investors to analyze the
performance of a real estate company because it provides a direct measure of the
operating results of the Company’s multifamily apartment communities. The
Company also believes it is a useful measure to facilitate the comparison of
operating performance among competitors. The calculation of NOI
requires classification of income statement items between operating and
non-operating expenses, where operating items include only those items of
revenue and expense which are directly relate to the income producing activities
of the properties. We believe that to achieve a more complete
understanding of the Company’s performance, NOI should be compared with our
reported net income (loss). Management uses NOI to evaluate the
operating results of properties without reflecting the effect of capital
decisions such as the issuance of mortgage debt and investments in capital
items, in turn these capital decisions have an impact on interest expense and
depreciation and amortization.
The most
directly comparable financial measure of our NOI, calculated and presented in
accordance with GAAP, is net income (loss), shown on the consolidated statement
of operations. For the three month period ended June 30, 2008 and
2007, net income (loss) was $9,639,034 and $23,119,830,
respectively. For the six month period ended June 30, 2008 and 2007,
the net income (loss) was $2,197,043 and $16,211,635, respectively. A
reconciliation of our NOI to net loss for the three and six month period ended
June 30, 2008 and 2007 are presented as part of the following table on pages 23
and 27.
Comparison
of the three months ended June 30, 2008 to the three months ended June 30,
2007.
The
tables below reflects selected operating information for the Same Property
Portfolio. The Same Property Portfolio consists of the 23 properties
acquired or placed in service on or prior to January 1, 2007 and owned through
June 30, 2008.
|
|
Same
Property Portfolio
|
|
|
|
Three
months ended June 30,
|
|
|
|
|
|
|
|
|
|
Increase
/
|
|
|
%
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
Change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
|
|
$ |
17,580,332 |
|
|
$ |
16,939,190 |
|
|
$ |
641,142 |
|
|
|
3.78
|
% |
Interest,
utility reimbursement and other
|
|
|
1,055,636 |
|
|
|
1,029,103 |
|
|
|
26,533 |
|
|
|
2.58
|
% |
Total
revenue
|
|
|
18,635,968 |
|
|
|
17,968,293 |
|
|
|
667,675 |
|
|
|
3.72
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
4,174,265 |
|
|
|
4,303,420 |
|
|
|
(129,155 |
) |
|
|
(3.00 |
)% |
Maintenance
|
|
|
1,476,845 |
|
|
|
1,381,766 |
|
|
|
95,079 |
|
|
|
6.88
|
% |
Real
estate taxes
|
|
|
1,785,993 |
|
|
|
1,741,532 |
|
|
|
44,461 |
|
|
|
2.55
|
% |
General
and administrative
|
|
|
298,057 |
|
|
|
362,983 |
|
|
|
(64,926 |
) |
|
|
(17.89 |
)% |
Management
fees
|
|
|
734,093 |
|
|
|
701,349 |
|
|
|
32,744 |
|
|
|
4.67
|
% |
Total
operating expenses
|
|
|
8,469,253 |
|
|
|
8,491,050 |
|
|
|
(21,797 |
) |
|
|
(0.26 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Operating Income
|
|
|
10,166,715 |
|
|
|
9,477,243 |
|
|
|
689,472 |
|
|
|
7.28
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
7,241,790 |
|
|
|
7,016,800 |
|
|
|
224,990 |
|
|
|
3.21
|
% |
Interest
|
|
|
5,958,041 |
|
|
|
5,975,439 |
|
|
|
(17,398 |
) |
|
|
(0.29 |
)% |
Amortization
of acquired in-place leases and tenant relationships
|
|
|
29,686 |
|
|
|
191,361 |
|
|
|
(161,675 |
) |
|
|
(84.49 |
)% |
Total
non-operating expenses
|
|
|
13,229,517 |
|
|
|
13,183,600 |
|
|
|
45,917 |
|
|
|
0.35
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before minority interest in properties, equity in income (loss) of
Multifamily Limited Partnership and Mezzanine Loan Limited Liability
Company, minority common interest in Operating Partnership and income
(loss) from discontinued operations
|
|
|
(3,062,802 |
) |
|
|
(3,706,357 |
) |
|
|
643,555 |
|
|
|
(17.36 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in properties
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in income (loss) of Multifamily Limited
Partnership
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in income (loss) of Mezzanine Loan Limited
Liability Company
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
common interest in Operating Partnership
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on fire damage of real estate assets
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(3,062,802 |
) |
|
$ |
(3,706,357 |
) |
|
$ |
643,555 |
|
|
|
(17.36 |
)
% |
|
|
Total
Property Portfolio
|
|
|
|
Three
months ended June 30,
|
|
|
|
|
|
|
|
|
|
Increase
/
|
|
|
%
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
Change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
|
|
$ |
18,560,814 |
|
|
$ |
17,694,549 |
|
|
$ |
866,265 |
|
|
|
4.90
|
% |
Interest,
utility reimbursement and other
|
|
|
1,396,033 |
|
|
|
1,284,469 |
|
|
|
111,564 |
|
|
|
8.69
|
% |
Total
revenue
|
|
|
19,956,847 |
|
|
|
18,979,018 |
|
|
|
977,829 |
|
|
|
5.15
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
4,609,946 |
|
|
|
4,658,295 |
|
|
|
(48,349 |
) |
|
|
(1.04 |
)% |
Maintenance
|
|
|
1,578,183 |
|
|
|
1,435,212 |
|
|
|
142,971 |
|
|
|
9.96
|
% |
Real
estate taxes
|
|
|
2,034,535 |
|
|
|
1,805,007 |
|
|
|
229,528 |
|
|
|
12.72
|
% |
General
and administrative
|
|
|
621,916 |
|
|
|
686,663 |
|
|
|
(64,747 |
) |
|
|
(9.43 |
)% |
Management
fees
|
|
|
1,198,298 |
|
|
|
1,147,222 |
|
|
|
51,076 |
|
|
|
4.45
|
% |
Total
operating expenses
|
|
|
10,042,878 |
|
|
|
9,732,399 |
|
|
|
310,479 |
|
|
|
3.19
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Operating Income
|
|
|
9,913,969 |
|
|
|
9,246,619 |
|
|
|
667,350 |
|
|
|
7.22
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
7,836,000 |
|
|
|
7,351,984 |
|
|
|
484,016 |
|
|
|
6.58
|
% |
Interest
|
|
|
6,543,702 |
|
|
|
6,521,728 |
|
|
|
21,974 |
|
|
|
0.34
|
% |
Amortization
of acquired in-place leases and tenant relationships
|
|
|
50,498 |
|
|
|
380,573 |
|
|
|
(330,075 |
) |
|
|
(86.73 |
)% |
Total
non-operating expenses
|
|
|
14,430,200 |
|
|
|
14,254,285 |
|
|
|
175,915 |
|
|
|
1.23
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before minority interest in properties, equity in income (loss) of
Multifamily Limited Partnership and Mezzanine Loan Limited Liability
Company, minority common interest in Operating Partnership and income
(loss) from discontinued operations
|
|
|
(4,516,231 |
) |
|
|
(5,007,666 |
) |
|
|
491,435 |
|
|
|
(9.81 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in properties
|
|
|
(206,688 |
) |
|
|
(1,471,581 |
) |
|
|
1,264,893 |
|
|
|
(85.95 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in income (loss) of Multifamily Limited
Partnership
|
|
|
(1,020,262 |
) |
|
|
(689,536 |
) |
|
|
(330,726 |
) |
|
|
47.96
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in income (loss) of Mezzanine Loan Limited
Liability Company
|
|
|
6,091 |
|
|
|
- |
|
|
|
6,091 |
|
|
|
100.00
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
common interest in Operating Partnership
|
|
|
(10,737,100 |
) |
|
|
(976,100 |
) |
|
|
(9,761,000 |
) |
|
|
1,000.00
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations
|
|
|
26,113,224 |
|
|
|
31,264,713 |
|
|
|
(5,151,489 |
) |
|
|
(16.48 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
9,639,034 |
|
|
$ |
23,119,830 |
|
|
$ |
(13,480,796 |
) |
|
|
(58.31 |
)% |
Comparison
of the three months ended June 30, 2008 to the three months ended June 30,
2007.
(Same
Property Portfolio)
Revenue
Rental
Revenue
Rental
revenue of the Same Property Portfolio increased for the three-month period
ended June 30, 2008 in comparison to the similar period of 2007. The majority of
the increase is attributable mainly to properties that have completed major
renovations in 2007 and are leasing the newly renovated units at premium rent
levels and with rising the occupancy levels at the properties following the
completion of the rehabilitation projects. Properties experiencing
increased post rehabilitation rent levels include the Berkshire of Columbia in
Maryland and the Berkshire on Brompton in Texas. Market conditions
remain favorable in the majority of the sub-markets in which the Company owns
and operates apartments. The Company continues to benefit from
property rehabilitation projects at various properties in the Same Property
Portfolio where successful projects improve the consumer appeal and historically
have yielded increased rental revenues as rehabilitated units become available
for occupancy at the incrementally higher rental rates than the
pre-rehabilitation levels.
Interest,
utility reimbursement and other revenue
Same
Property Portfolio interest, utility reimbursement and other revenues increased
for the three-month period ended June 30, 2008 as compared to the three-month
period ended June 30, 2007. Utility reimbursements increased, mainly
due to successful increases in usage of bill back programs, which recover the
cost of utilities from tenants for their units, period over period and were
partially offset by decreases in interest income. Miscellaneous revenues
increased due to revenues from the fees charged to tenants and potential
tenants, including late fees, valet trash and other similar revenue
items
Operating
Expenses
Operating
Overall
operating expenses decreased slightly in the quarter ended June 30, 2008 as
compared to the same period of 2007. The Company continues to realize
savings from improved premiums levels when it renewed its property insurance
coverage for the portfolio for the policy period as of May 1, 2007 when it was
able to achieve modest cost reductions in premiums for its property insurance
coverage. Further insurance cost reductions were achieved in
2008. Other decreases in expenses included payroll and related
benefits, due to position vacancies at various properties and benefit related
cost reductions. The savings were partially offset by increases in
some utilities, including gas and water and sewer, advertising publications and
rubbish removal. The Seasons of Laurel property has historically
contributed significantly to the Company’s overall utility expense as the
electricity charges at the property have been paid by the Company and were not
billed directly to tenants for usage of their apartment unit. The
Company has undertaken a project to modify the utility infrastructure to allow
for direct billing of electric costs by individual apartment
unit. The project is progressing and the changes to the
infrastructure are expected to be complete in the third quarter of 2008 with the
related direct billing to be implemented to all units by the end of
2008. The Company has started to see a reduction in utility expense
at Season’s and expects the reduction to continue thru the end of the
year.
Maintenance
Maintenance
expense increased in the three-months ended June 30, 2008 as compared to the
same period of 2007 and is due mainly to higher operating costs in recurring,
non-recurring and painting maintenance activities, including normal maintenance
activities including interior cleaning and janitorial services, interior
painting as well as exterior activities such as landscaping, snow removal and
pool services. As it historically has operated it’s properties,
Management continues to employ a proactive maintenance rehabilitation strategy
at its multifamily apartment communities within its Same Store portfolio and
considers it an effective program that contributes to preserving, and in some
cases increasing, its occupancy levels through improved consumer appeal of the
apartment communities.
Real
Estate Taxes
Real
estate taxes increased for the three-months ended June 30, 2008 from the
comparable period of 2007. The increase is due mainly to savings realized in the
prior comparative period due to a rebate of taxes for a prior period at one of
the properties. Additionally, the Company continues to see a trend of
escalation in assessed property valuations for properties in the Same Property
Portfolio. The Company scrutinizes the assessed values of its
properties and avails itself of arbitration or similar forums made available by
the taxing authority for increases in assessed value that it considers to be
unreasonable. The Company has been successful in achieving tax abatements for
certain of its properties based on challenges made to the assessed values. The
Company anticipates a continued upward trend in real estate tax expense as local
and state taxing agencies continue to place significant reliance on property tax
revenue.
General
and Administrative
General
and administrative expenses decreased in the three-month period ended June 30,
2008 compared to 2007. The overall decrease is due mainly to normal
operating expense fluctuations experienced throughout the properties of the Same
Property Portfolio including decreases in legal fees related to ongoing property
related issues and projects at certain properties in the portfolio as well as
legal fees related to tenant issues including those related to rent collection
at various properties in the portfolio.
Management
Fees
Management
fees of the Same Property Portfolio increased in the three-month period ended
June 30, 2008 compared to the same period of 2007 based on a proportionate
increased level of revenues in the comparative
periods. Property management fees are assessed on the revenue
stream of the properties managed by an affiliate of the Company.
Non
Operating Expenses
Depreciation
Depreciation
expense of the Same Property Portfolio increased for the three-months ended June
30, 2008 as compared to the same period of the prior year. The increased expense
is related to the additions to the basis of fixed assets in the portfolio driven
by substantial rehabilitation projects ongoing at the Seasons of Laurel,
Hannibal Grove, Standard of Lenox and the Hampton House properties and to a
lesser degree, normal recurring capital spending activities over the remaining
properties in the Same Property Portfolio.
Interest
Interest
expense for the three-months ended June 30, 2008 decreased slightly over the
comparable period of 2007. The majority of the decrease is attributable to the
pay off of the Briarwood loan balance of $8,600,333 at maturity in April
2008.
Amortization
of acquired in-place leases and tenant relationships
Amortization
of acquired in-place-leases and tenant relationships decreased significantly in
the three-months ended June 30, 2008 as compared to the same period of
2007. The decrease is related mainly to the completion of
amortization of the acquired-in-place lease intangible assets booked at
acquisition and amortized over a 12 month period which did not extend into the
twelve-months period ended June 30, 2008.
Comparison
of the three months ended June 30, 2008 to the three months ended June 30,
2007. (Total Property Portfolio).
In
general, increases in revenues, operating expenses, non-operating expenses and
the related losses of the Total Property Portfolio for the three months ended
June 30, 2008 as compared to the three months ended June 30, 2007 are due mainly
to increases in net operating income of the properties across the portfolio
including properties acquired in 2007 for which operating results are not
comparative between the two reporting periods, which were offset in part by
increased interest costs due to increased number of properties owned by the
Company in the comparative periods presented and to the increase in the level of
mortgage debt outstanding during the comparative periods.
Comparison
of the six months ended June 30, 2008 to the six months ended June 30,
2007.
|
|
Same
Property Portfolio
|
|
|
|
Six
months ended June 30,
|
|
|
|
|
|
|
|
|
|
Increase
/
|
|
|
%
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
Change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
|
|
$ |
34,712,404 |
|
|
$ |
33,634,757 |
|
|
$ |
1,077,647 |
|
|
|
3.20
|
% |
Interest,
utility reimbursement and other
|
|
|
2,058,091 |
|
|
|
1,825,491 |
|
|
|
232,600 |
|
|
|
12.74
|
% |
Total
revenue
|
|
|
36,770,495 |
|
|
|
35,460,248 |
|
|
|
1,310,247 |
|
|
|
3.69
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
9,053,061 |
|
|
|
9,235,989 |
|
|
|
(182,928 |
) |
|
|
(1.98 |
)% |
Maintenance
|
|
|
2,623,732 |
|
|
|
2,400,710 |
|
|
|
223,022 |
|
|
|
9.29
|
% |
Real
estate taxes
|
|
|
3,600,304 |
|
|
|
3,392,687 |
|
|
|
207,617 |
|
|
|
6.12
|
% |
General
and administrative
|
|
|
472,997 |
|
|
|
687,845 |
|
|
|
(214,848 |
) |
|
|
(31.23 |
)% |
Management
fees
|
|
|
1,438,038 |
|
|
|
1,390,587 |
|
|
|
47,451 |
|
|
|
3.41
|
% |
Total
operating expenses
|
|
|
17,188,132 |
|
|
|
17,107,818 |
|
|
|
80,314 |
|
|
|
0.47
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Operating Income
|
|
|
19,582,363 |
|
|
|
18,352,430 |
|
|
|
1,229,933 |
|
|
|
6.70
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
14,427,026 |
|
|
|
13,738,596 |
|
|
|
688,430 |
|
|
|
5.01
|
% |
Interest
|
|
|
12,042,841 |
|
|
|
11,506,374 |
|
|
|
536,467 |
|
|
|
4.66
|
% |
Amortization
of acquired in-place leases and tenant relationships
|
|
|
59,071 |
|
|
|
500,977 |
|
|
|
(441,906 |
) |
|
|
(88.21 |
)% |
Total
non-operating expenses
|
|
|
26,528,938 |
|
|
|
25,745,947 |
|
|
|
782,991 |
|
|
|
3.04
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before minority interest in properties, equity in income (loss) of
Multifamily Limited Partnership and Mezzanine Loan Limited Liability
Company, minority common interest in Operating Partnership and income
(loss) from discontinued operations
|
|
|
(6,946,575 |
) |
|
|
(7,393,517 |
) |
|
|
446,942 |
|
|
|
(6.05 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in properties
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in income (loss) of Multifamily Limited Partnership
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in income (loss) of Mezzanine Loan Limited Liability Company
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
common interest in Operating Partnership
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on fire damage of real estate assets
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(6,946,575 |
) |
|
$ |
(7,393,517 |
) |
|
$ |
446,942 |
|
|
|
(6.05 |
)
% |
|
|
Total
Property Portfolio
|
|
|
|
Six
months ended June 30,
|
|
|
|
|
|
|
|
|
|
Increase
/
|
|
|
%
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
Change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
|
|
$ |
36,743,792 |
|
|
$ |
34,581,496 |
|
|
$ |
2,162,296 |
|
|
|
6.25
|
% |
Interest,
utility reimbursement and other
|
|
|
2,691,768 |
|
|
|
2,281,434 |
|
|
|
410,334 |
|
|
|
17.99
|
% |
Total
revenue
|
|
|
39,435,560 |
|
|
|
36,862,930 |
|
|
|
2,572,630 |
|
|
|
6.98
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
9,948,376 |
|
|
|
9,875,858 |
|
|
|
72,518 |
|
|
|
0.73
|
% |
Maintenance
|
|
|
2,797,550 |
|
|
|
2,459,766 |
|
|
|
337,784 |
|
|
|
13.73
|
% |
Real
estate taxes
|
|
|
3,972,751 |
|
|
|
3,483,248 |
|
|
|
489,503 |
|
|
|
14.05
|
% |
General
and administrative
|
|
|
1,413,192 |
|
|
|
1,439,924 |
|
|
|
(26,732 |
) |
|
|
(1.86 |
)
% |
Management
fees
|
|
|
2,368,308 |
|
|
|
2,262,936 |
|
|
|
105,372 |
|
|
|
4.66
|
% |
Total
operating expenses
|
|
|
20,500,177 |
|
|
|
19,521,732 |
|
|
|
978,445 |
|
|
|
5.01
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Operating Income
|
|
|
18,935,383 |
|
|
|
17,341,198 |
|
|
|
1,594,185 |
|
|
|
9.19
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
15,590,828 |
|
|
|
14,152,801 |
|
|
|
1,438,027 |
|
|
|
10.16
|
% |
Interest
|
|
|
13,212,150 |
|
|
|
12,283,503 |
|
|
|
928,647 |
|
|
|
7.56
|
% |
Amortization
of acquired in-place leases and tenant relationships
|
|
|
116,481 |
|
|
|
746,082 |
|
|
|
(629,601 |
) |
|
|
(84.39 |
)
% |
Total
non-operating expenses
|
|
|
28,919,459 |
|
|
|
27,182,386 |
|
|
|
1,737,073 |
|
|
|
6.39
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before minority interest in properties, equity in income (loss) of
Multifamily Limited Partnership and Mezzanine Loan Limited Liability
Company, minority common interest in Operating Partnership and income
(loss) from discontinued operations
|
|
|
(9,984,076 |
) |
|
|
(9,841,188 |
) |
|
|
(142,888 |
) |
|
|
1.45
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in properties
|
|
|
(394,032 |
) |
|
|
(1,695,195 |
) |
|
|
1,301,163 |
|
|
|
(76.76 |
)
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in income (loss) of Multifamily Limited Partnership
|
|
|
(1,549,824 |
) |
|
|
(1,297,766 |
) |
|
|
(252,058 |
) |
|
|
19.42
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in income (loss) of Mezzanine Loan Limited Liability Company
|
|
|
6,091 |
|
|
|
- |
|
|
|
6,091 |
|
|
|
100.00
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
common interest in Operating Partnership
|
|
|
(11,713,200 |
) |
|
|
(1,952,200 |
) |
|
|
(9,761,000 |
) |
|
|
500.00
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations
|
|
|
25,832,084 |
|
|
|
30,997,984 |
|
|
|
(5,165,900 |
) |
|
|
(16.67 |
)
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
2,197,043 |
|
|
$ |
16,211,635 |
|
|
$ |
(14,014,592 |
) |
|
|
(86.45 |
)
% |
Comparison
of the six months ended June 30, 2008 to the six months ended June 30,
2007.
(Same
Property Portfolio)
Revenue
Rental
Revenue
Rental
revenue of the Same Property Portfolio increased for the six-month period ended
June 30, 2008 in comparison to the similar period of 2007. The majority of the
increase is attributable mainly to properties that have completed major
renovations in 2007 and are leasing the newly renovated units at premium rent
levels and are raising the occupancy levels at the properties following the
completion of the rehabilitation projects. Properties experiencing
increased post rehabilitation rent levels include the Berkshire of Columbia in
Maryland and the Berkshires on Brompton property in Texas. Market
conditions remain favorable in the majority of the sub-markets in which the
Company operates. The Company continues to benefit from ongoing
property rehabilitation projects at various properties in the Same Property
Portfolio where successful results benefit the Company by yielding enhanced
rental revenues as rehabilitated units are placed back into service with
incrementally higher rental rates than pre-rehabilitation levels.
Interest,
utility reimbursement and other revenue
Same
Property Portfolio interest, utility reimbursement and other revenues increased
for the six-month period ended June 30, 2008 as compared to the six-month period
ended June 30, 2007. Utility reimbursements increased, mainly due to
increased usage of bill back programs, which recover the cost of utilities from
tenants for their units, period over period and were partially offset by
decreases in interest and other miscellaneous revenues. Miscellaneous revenues
consist primarily of the fees charged to tenants and potential tenants,
including late fees, parking fees, pet fees, laundry fees, application fees and
other similar items.
Operating
Expenses
Operating
Overall
operating expenses decreased slightly in the six-months ended June 30, 2008 as
compared to the same period of 2007. The Company continues to realize
savings from improved premiums levels when it renewed its property insurance
coverage for the portfolio for the policy period as of May 1, 2007 when it was
able to achieve modest cost reductions in premiums for its property insurance
coverage. Other decreases in expenses included payroll and related
benefits, due to position vacancies at various properties and benefit related
cost reductions. The savings were partially offset by increases in
some utilities, including gas and water and sewer, advertising publications and
rubbish removal. The Seasons of Laurel property has historically
contributed significantly to the Company’s overall utility expense as the
electricity charges at the property have been paid by the Company and were not
billed directly to tenants for usage of their apartment unit. The
Company has undertaken a project to modify the utility infrastructure to allow
for direct billing of electric costs by individual apartment
unit. The project is progressing and the changes to the
infrastructure are expected to be complete in the third quarter of 2008 with the
related direct billing to be implemented to all units by the end of
2008. The Company has started to see a reduction in utility expense
at Season’s and expects the reduction to continue thru the end of the
year.
Maintenance
Maintenance
expense increased slightly in the six-months ended June 30, 2008 as compared to
the same period of 2007 and is due mainly to normal operating fluctuations
including normal maintenance activities including interior cleaning and
janitorial services, interior painting as well as exterior activities such as
landscaping, snow removal and pool services. As it historically has
operated it’s properties, Management continues to employ a proactive maintenance
rehabilitation strategy at its multifamily apartment communities within its Same
Store portfolio and considers it an effective program that contributes to
preserving, and in some cases increasing, its occupancy levels through improved
consumer appeal of the apartment communities.
Real
Estate Taxes
Real
estate taxes increased for the six-months ended June 30, 2008 from the
comparable period of 2007. The increase is due to the increased costs at
properties in the same property portfolio due to increased rates and property
assessments. Also, the current period expense is higher as a rebate
of taxes was recognized in the comparable prior period at one of the
properties. Additionally, the Company continues to see a trend of
escalation in assessed property valuations for properties in the Same Property
Portfolio. The Company scrutinizes the assessed values of its
properties and avails itself of arbitration or similar forums made available by
the taxing authority for increases in assessed value that it considers to be
unreasonable. The Company has been successful in achieving tax abatements for
certain of its properties based on challenges made to the assessed values. The
Company anticipates a continued upward trend in real estate tax expense as local
and state taxing agencies continue to place significant reliance on property tax
revenue.
General
and Administrative
General
and administrative expenses decreased in the six-month period ended June 30,
2008 compared to 2007. The overall increase is due mainly to normal
operating expense fluctuations experienced throughout the properties of the Same
Property Portfolio including increases in professional services, recruiting
costs and temporary help as well as legal fees related to tenant issues
including those related to rent collection at various properties in the
portfolio.
Management
Fees
Management
fees of the Same Property Portfolio increased in the six-month period ended June
30, 2008 compared to the same period of 2007 based on a proportionate increased
level of revenues in the comparative periods. Property
management fees are assessed on the revenue stream of the properties managed by
an affiliate of the Company.
Non
Operating Expenses
Depreciation
Depreciation
expense of the Same Property Portfolio increased for the six-months ended June
30, 2008 as compared to the same period of the prior year. The increased expense
is related to the additions to the basis of fixed assets in the portfolio driven
by substantial rehabilitation projects ongoing at the Seasons of Laurel,
Hannibal Grove, Standard of Lenox and the Hampton House properties and to a
lesser degree, normal recurring capital spending activities over the remaining
properties in the Same Property Portfolio.
Interest
Interest
expense for the six-months ended June 30, 2008 increased slightly over the
comparable period of 2007. The majority of the increase is attributable to the
refinancing of a mortgage on the Berkshires on Brompton property at an
incrementally higher principal level than the related paid-off loan, which was
partially offset by the reduced interest rate obtained on the new
debt. Additionally, new second mortgage debt on two properties that
was not in place in the comparative period of 2007 also contributed to the
increased interest expense.
Amortization
of acquired in-place leases and tenant relationships
Amortization
of acquired in-place-leases and tenant relationships decreased significantly in
the six-months ended June 30, 2008 as compared to the same period of
2007. The decrease is related mainly to the completion of
amortization of the acquired-in-place lease intangible assets booked at
acquisition and amortized over a 12 month period which did not extend into the
twelve-months period ended June 30, 2008.
Comparison
of the six months ended June 30, 2008 to the six months ended June 30,
2007. (Total Property Portfolio).
In
general, increases in revenues, operating expenses, non-operating expenses and
the related losses of the Total Property Portfolio for the six months ended June
30, 2008 as compared to the six months ended June 30, 2007 are due mainly to the
increase in the number of properties owned by the Company in the comparative
periods presented and to the increase in the level of mortgage and revolving
credit debt outstanding during the comparative periods.
Debt
to Fair Value of Real Estate Assets
The
Company’s total debt summary and debt maturity schedule, as of June 30, 2008, is
as follows:
Debt
Summary
|
|
|
|
|
Weighted
|
|
|
Balance
|
|
Average
Rate
|
|
|
|
|
|
|
Total
- Collateralized - Fixed Rate Debt
|
|
$
|
458,328,182
|
|
5.58%
|
Debt
Maturity Summary
|
|
|
|
|
|
Year
|
|
Balance
|
|
%
of Total
|
|
|
|
|
|
|
2008
|
|
$
|
1,347,533
|
|
0.29%
|
2009
|
|
|
19,625,244
|
|
4.28%
|
2010
|
|
|
4,115,382
|
|
0.90%
|
2011
|
|
|
4,390,562
|
|
0.96%
|
2012
|
|
|
4,881,427
|
|
1.07%
|
Thereafter
|
|
|
423,968,034
|
|
92.50%
|
Total
|
|
$
|
458,328,182
|
|
100.00%
|
The
Company’s “Debt-to-Fair Value of Real Estate Assets” as of June 30, 2008 is
presented in the following table. Fair value of real estate assets is based on
management’s best estimate of fair value for properties purchased in prior years
or purchase price for properties acquired within the current year. As with any
estimate, management’s estimate of the fair value of properties purchased in
prior years represents only its good faith opinion as to that value, and there
can be no assurance that the actual value that might, in fact, be realized for
any such property would approximate that fair value. The following
information is presented in lieu of information regarding the Company’s
“Debt-to-Total Market Capitalization Ratio”, which is a commonly used measure in
our industry, because the Company’s market capitalization is not readily
determinable since there was no public market for its common equity during the
periods presented in this report.
The Board
has established investment guidelines under which management may not incur
indebtedness such that at the time we incur the indebtedness our ratio of debt
to total assets exceeds 75%. This measure is calculated based on the
fair value of the assets determined by management as described
above.
The
information regarding “Debt-to-Fair Value of Real Estate Assets” is presented to
allow investors to calculate our loan-to-value ratios in a manner consistent
with those used by management and others in our industry, including those used
by our current and potential lenders. Management uses this information when
making decisions about financing or refinancing properties. Management also uses
fair value information when making decisions about selling assets as well as
evaluating acquisition opportunities within markets where we have
assets.
Fair
Value of Real Estate Assets is not a GAAP financial measure and should not be
considered as an alternative to net book value of real estate assets, the most
directly comparable financial measure calculated and presented in accordance
with GAAP. The net book value of our real estate assets was
$411,651,846 at June 30, 2008 and is presented on the balance sheet as
multifamily apartment communities, net of accumulated depreciation. The
following table reconciles the fair value of our real estate assets to the net
book value of real estate assets as of June 30, 2008.
Debt-to-Fair
Value of Real Estate Assets as of
|
|
June
30, 2008
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
Net
book value of multifamily apartment
communities
|
|
$ |
411,651,846 |
|
|
$ |
464,265,061 |
|
Accumulated
depreciation
|
|
|
148,782,155 |
|
|
|
144,240,061 |
|
Historical
cost
|
|
|
560,434,001 |
|
|
|
608,505,122 |
|
Increase
in fair value over historical cost
|
|
|
192,086,481 |
|
|
|
216,414,878 |
|
Fair
Value – estimated
|
|
$ |
752,520,482 |
|
|
$ |
824,920,000 |
|
|
|
|
|
|
|
|
|
|
Mortgage
Debt
|
|
$ |
458,328,182 |
|
|
$ |
506,903,882 |
|
|
|
|
|
|
|
|
|
|
Debt-to-Fair
Value of Real Estate Assets
|
|
|
60.91 |
% |
|
|
61.45 |
% |
The
Debt-to-Fair Value of Real Estate Assets includes the outstanding borrowings
under the Company’s revolving credit facility, which were $0 at June 30, 2008
and December 31, 2007, respectively. The revolving credit facility contains
covenants that require the Company to maintain certain financial ratios,
including an indebtedness to value ratio not to exceed 75%. If the
Company were to be in violation of this covenant, we would be unable to draw
advances from our line, which could have a material impact on our ability to
meet our short-term liquidity requirements. Further, if we were
unable to draw on the line, we may have to slow or temporarily stop our
rehabilitation projects, which could have a negative impact on our results of
operations and cash flows. As of June 31, 2008 and December 31, 2007,
the Company was in compliance with the covenants of the revolving credit
facility. Fair value of the real estate assets is based on
management’s most current valuation of properties, which was made for all
properties owned at December 31, 2007, and acquisition cost of properties
acquired subsequent to December 31, 2007, if any.
Funds
From Operations
The
Company has adopted the revised definition of Funds from Operations (“FFO”)
adopted by the Board of Governors of the National Association of Real Estate
Investment Trusts (“NAREIT”). Management considers FFO to be an appropriate
measure of performance of an equity REIT. We calculate FFO by adjusting net
income (loss) (computed in accordance with GAAP, including non-recurring items),
for gains (or losses) from sales of properties, real estate related depreciation
and amortization, and adjustment for unconsolidated partnerships and ventures.
Management believes that in order to facilitate a clear understanding of the
historical operating results of the Company, FFO should be considered in
conjunction with net income as presented in the consolidated financial
statements included elsewhere herein. Management considers FFO to be a useful
measure for reviewing the comparative operating and financial performance of the
Company because, by excluding gains and losses related to sales of previously
depreciated operating real estate assets and excluding real estate asset
depreciation and amortization (which can vary among owners of identical assets
in similar condition based on historical cost accounting and useful life
estimates), FFO can help one compare the operating performance of a company’s
real estate between periods or as compared to different companies.
The
Company’s calculation of FFO may not be directly comparable to FFO reported by
other REITs or similar real estate companies that have not adopted the term in
accordance with the current NAREIT definition or that interpret the current
NAREIT definition differently. FFO is not a GAAP financial measure and should
not be considered as an alternative to net income (loss), the most directly
comparable financial measure of our performance calculated and presented in
accordance with GAAP, as an indication of our performance. FFO does
not represent cash generated from operating activities determined in accordance
with
GAAP and
is not a measure of liquidity or an indicator of our ability to make cash
distributions. We believe that to further understand our performance, FFO should
be compared with our reported net income (loss) and considered in addition to
cash flows in accordance with GAAP, as presented in our consolidated financial
statements.
The
following table presents a reconciliation of net gain (loss) to FFO for the
three and six months ended June 30, 2008 and 2007:
|
|
Three months
ended
Six months ended
June
30,
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
9,639,034 |
|
|
$ |
23,119,830 |
|
|
$ |
2,197,043 |
|
|
$ |
16,211,635 |
|
Add
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
of real property
|
|
|
6,113,243 |
|
|
|
6,611,275 |
|
|
|
13,276,905 |
|
|
|
12,630,905 |
|
Depreciation
of real property included in results
of discontinued operations
|
|
|
982,405 |
|
|
|
171,147 |
|
|
|
982,405 |
|
|
|
371,043 |
|
Minority
common interest in Operating Partnership
|
|
|
10,737,100 |
|
|
|
976,100 |
|
|
|
11,713,200 |
|
|
|
1,952,200 |
|
Minority
interest in properties
|
|
|
206,688 |
|
|
|
1,471,581 |
|
|
|
394,032 |
|
|
|
1,695,195 |
|
Amortization
of acquired in-place leases and
tenant relationships
|
|
|
50,498 |
|
|
|
380,573 |
|
|
|
116,481 |
|
|
|
751,811 |
|
Equity
in loss of Multifamily Limited Partnership
and Mezzanine Loan Limited Liability
Company
|
|
|
1,020,262 |
|
|
|
689,536 |
|
|
|
1,549,824 |
|
|
|
1,297,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds
from operations of Multifamily Venture
and Limited Partnership Venture
|
|
|
272,200 |
|
|
|
(320,989 |
) |
|
|
767,609 |
|
|
|
(338,208 |
) |
Minority
interest in properties share of funds
from operations
|
|
|
(240,135 |
) |
|
|
(185,405 |
) |
|
|
(440,670 |
) |
|
|
(376,774 |
) |
Gain
on disposition of real estate assets
|
|
|
(27,031,898 |
) |
|
|
(32,122,606 |
) |
|
|
(27,031,898 |
) |
|
|
(32,122,606 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds
from Operations
|
|
$ |
1,749,397 |
|
|
$ |
791,042 |
|
|
$ |
3,524,931 |
|
|
$ |
2,072,967 |
|
FFO for
the three and six months ended June 30, 2008 increased as compared to FFO for
the three and six month periods ended June 30, 2007. The increase is
due mainly to increases in Net Operating Income of the properties, which was
offset in part by increases in interest expense related to increased debt
balances in the comparative six-month periods ended June 30, 2008 and
2007.
Environmental
Issues
There are
no recorded amounts resulting from environmental liabilities because there are
no known contingencies with respect to environmental liabilities. The Company
obtains environmental audits through various sources, including lender
evaluations and acquisition due diligence, for each of its properties at various
intervals throughout a property’s useful life. The Company has not been advised
by any third party as to the existence of, nor has it identified on its own, any
material liability for site restoration or other costs that may be incurred with
respect to any of its properties.
Inflation
and Economic Conditions
Substantially
all of the leases at the initial properties are for a term of one year or less,
which enables the Company to seek increased rents for new leases or upon renewal
of existing leases. These short-term leases minimize the potential
adverse effect of inflation on rental income, although residents may leave
without penalty at the end of their lease terms and may do so if rents are
increased significantly.
The
Company believes the domestic economy is poised for continued slow down and
believes a recession is reasonably possible which would continue to disadvantage
single family homeowners with unfavaorable credit arrangements. While
an economic slowdown that may result in a recession would not provide a
favorable economic environment to operate within, the multifamily sector may
benefit from the displacement of single family homeowners due to increasing
foreclosure activity in the credit markets and continue to benefit from
favorable ongoing demographic trends. While the apartment sector had
previously experienced slower growth over recent years due to rising
unemployment and a significant renter migration to single family homes, the
reversal of the renter migration to single family homes trend is now expected to
contribute to an apartment sector recovery. The Company believes
that, for single family homebuyers over the next several years, increasing
housing costs, higher interest rates, and continued escalation in foreclosure
activity may make purchases increasingly expensive and out of reach as well as
force existing homeowners back into the rental market. In addition,
we believe the projected demographic trends strongly favor the multifamily
sector, driven primarily by the continued flow of echo boomers (children of baby
boomers, age 20 to 29), the fastest growing segment of the population, and an
increasing number of immigrants who are typically renters by
necessity.
Item
3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The
Company’s mortgage notes are fixed rate instruments; therefore, the Company’s
outstanding mortgage debt is not sensitive to changes in the capital market
except upon maturity. The Company’s revolving credit facility is a
variable rate arrangement tied to LIBOR and is therefore sensitive to changes in
the capital market. The table below provides information about the
Company’s financial instruments, specifically debt obligations.
The table
presents principal cash flows and related weighted average interest rates by
expected maturity dates for the mortgage notes payable as of June 30,
2008.
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Rate Debt
|
|
$ |
1,347,533 |
|
|
$ |
19,625,244 |
|
|
$ |
4,115,382 |
|
|
$ |
4,390,562 |
|
|
$ |
4,881,427 |
|
|
$ |
423,968,034 |
|
|
$ |
458,328,182 |
|
Average
Interest Rate
|
|
|
6.20 |
% |
|
|
5.20 |
% |
|
|
5.18 |
% |
|
|
5.19 |
% |
|
|
5.24 |
% |
|
|
5.53 |
% |
|
|
5.58 |
% |
The level
of market interest rate risk remained relatively consistent from December 31,
2007 to June 30, 2008. As of June 30, 2008, $0 of the Company’s
outstanding debt is outstanding subject to variable interest rates. The Company
estimates that the effect of a 1% increase or decrease in interest rates would
not have a material impact on interest expense.
Item
4. CONTROLS AND
PROCEDURES
Disclosure
Controls and Procedures
Based on
their evaluation, as required by the Exchange Act Rules 13a-15(b) and 15d-15(b),
the Company’s principal executive officer and principal financial officer have
concluded that the Company’s disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of June 30, 2008
to ensure that information required to be disclosed by the Company in reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC rules and
forms and were effective as of June 30, 2008 to ensure that information required
to be disclosed by the Company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the Company’s management,
including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure.
Changes
in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in
connection with the evaluation required by paragraph (d) of the Exchange Act
Rules 13a-15 or 15d-15 that occurred during the fiscal quarter ended June 30,
2008, that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART
II. OTHER
INFORMATION
Item
1.
|
|
LEGAL
PROCEEDINGS
|
|
|
|
|
|
|
|
The
Company is currently party to a legal proceeding initiated by a
seller/developer from whom the Company acquired a property in
2005. The dispute involves the interpretation of certain
provisions of the purchase and sales agreement related to post acquisition
construction activities. Specifically, the purchase and sales
agreement provided that if certain conditions were met, the
seller/developer would develop a vacant parcel of land contiguous to the
acquired property with 18 new residential apartment units (the “New
Units”) for the benefit of the Company at an agreed-upon
price. The purchase and sales agreement also provided the
opportunity for the seller/developer to build a limited number of garages
(the “Garages”) for the existing apartment units for the benefit of the
Company at an agreed-upon price.
In
2006, the Company accrued $190,000 with respect to the New Units matter
based on a settlement offer extended to the plaintiff, which was not
accepted at that time. On November 9, 2007, the judge issued a
summary judgment against the Company with respect to the construction of
the New Units. The judgment did not specify damages, which the
plaintiff will be required to demonstrate at trial. On February
13, 2008, the court entered judgment related to the New Units on the
seller/developer’s behalf awarding them the amount of $774,292 for costs
and damages. The Company believes that there are reasonable
grounds for appeal of this ruling and is pursuing an appeal of the
judgment awarded by the court.
As
of June 30, 2008 and December 31, 2007, respectively, the Company did not
increase its accrual of $190,000 related
to the New Units matter as it is moving forward with an appeal of the
judgment awarded by the court. Based on the court’s award of
damages in the amount of $774,292, if the appeal were to be unsuccessful,
the Company would record an additional cost of $584,292 related to the New
Units matter, the amount in excess of the $190,000 accrued as of June 30,
2008.
The
Company settled the matter related to the Garages and has executed a
contract with the seller/developer for the construction of 48 Garages at
an aggregate cost of $740,000. As of June 30, 2008, the garage
construction project is scheduled to begin in the third quarter of
2008.
The
Company and our properties are not subject to any other material pending
legal proceedings.
|
|
Item
1A.
|
|
RISK
FACTORS
|
|
|
|
|
|
|
|
Please
read the risk factors disclosed in our Annual Report on Form 10-K for the
Company’s fiscal year ended December 31, 2007 as filed with the Securities
and Exchange Commission on March 28, 2008. As of June 30, 2008
there have been no material changes to the risk factors as presented
therein. Additional risks and uncertainties not currently known
to us or that we currently deem to be immaterial also may materially
adversely affect our financial condition and/or operating
results.
|
|
|
|
|
|
Item
2.
|
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
|
|
|
|
|
|
|
-
None
|
|
|
|
|
|
Item
3.
|
|
DEFAULTS
UPON SENIOR SECURITIES
|
|
|
-
None
|
|
|
|
Item
4.
|
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
|
|
|
|
|
-
None
|
|
|
|
Item
5.
|
|
OTHER
INFORMATION
|
|
|
|
|
|
-
None
|
|
|
|
Item
6.
|
|
EXHIBITS
|
|
|
|
10.1
|
|
Purchase
and Sale Agreement between St. Marin/Karrington Limited Partnership, a
Delaware limited partnership and Williams Asset Management, LLC, a Georgia
limited liability company, dated February 26, 2008 (Incorporated by
reference to Exhibit No. 10.1 to the Registrant's Current Report on Form
8-K filed with the SEC on May 2, 2008).
|
|
|
|
10.2
|
|
Purchase
and Sale Agreement by and among EHGP, Inc., a Pennsylvania corporation ,
Eric Blumenfeld, an individual, EHA Acquisition, L.P., a Pennsylvania
limited partnership, BIR Executive GP, L.L.C. and BIR Executive LP,
L.L.C. (Incorporated by reference to Exhibit No. 99.1 to the
Registrant's Current Report on Form 8-K filed with the SEC on
August
13, 2008).
|
|
|
|
10.3
|
|
Purchase
and Sale Agreement by and among Anthony W. Packer, an individual, Jerome
D. Winnick , an individual, Shoreline/Marin LLC, a Delaware limited
liability company, BIR Executive GP, L.L.C. and BIR Executive LP, L.L.C.
(Incorporated by reference to Exhibit No. 99.2 to the Registrant's Current
Report on Form 8-K filed with the SEC on
August
13, 2008).
|
|
|
|
31.1
|
|
Certification
of Principal Executive Officer Pursuant of 18 U.S.C. Section 1350, as
Adopted Pursuant to
|
|
|
Section
302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certification
of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to
|
|
|
Section
302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certification
of Principal Executive Officer Pursuant of 18 U.S.C. Section 1350, as
Adopted Pursuant to
|
|
|
Section
906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.2
|
|
Certification
of Principal Financial Officer Pursuant of 18 U.S.C. Section 1350, as
Adopted Pursuant to
|
|
|
Section
906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
|
BERKSHIRE
INCOME REALTY, INC.
|
|
August
14, 2008
|
|
|
/s/ David
C. Quade
|
|
|
|
|
David
C. Quade
President,
Chief Financial Officer and
Principal
Executive Officer
|
|
August
14, 2008
|
|
|
/s/ Christopher
M. Nichols
|
|
|
|
|
Christopher
M. Nichols
Vice
President and Principal Accounting
Officer
|