<PAGE>
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended June 30, 1996
-------------
Commission file number 0-11149
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CAPITAL REALTY INVESTORS, LTD.
- --------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
District of Columbia 52-1219926
- ----------------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11200 Rockville Pike, Rockville, Maryland 20852
- ----------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
(301) 468-9200
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(Registrant's telephone number, including area code)
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 and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at June 30, 1996
- ---------------------------------- ----------------------------------
(Not applicable) (Not applicable)
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1996
Page
----
PART I. Financial Information (Unaudited)
Item 1. Financial Statements
Balance Sheets - June 30, 1996 and
December 31, 1995 . . . . . . . . . . . . . . . 1
Statements of Operations - for the three and six
months ended June 30, 1996 and 1995 . . . . . . 2
Statements of Cash Flows - for the six
months ended June 30, 1996 and 1995 . . . . . . 3
Notes to Financial Statements . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . 11
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . 17
Signature . . . . . . . . . . . . . . . . . . . . . . . . 18
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . 19
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS, LTD.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
Investments in and advances to partnerships $ 3,527,749 $ 3,350,703
Cash and cash equivalents 2,097,755 1,823,863
Restricted cash equivalents -- 189,000
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $336,992 and $324,572, respectively 656,488 668,908
Property purchase costs, net of accumulated amortization of
$87,163 and $83,991, respectively 166,678 169,850
Other assets 8,462 7,385
------------ ------------
Total assets $ 6,457,132 $ 6,209,709
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in partnerships $ 6,422,800 $ 6,422,800
Accrued interest payable 8,183,238 7,851,000
Accounts payable and accrued expenses 58,060 63,292
------------ ------------
Total liabilities 14,664,098 14,337,092
------------ ------------
Commitments and contingencies
Partners' capital (deficit):
Capital paid-in:
General Partners 14,000 14,000
Limited Partners 24,837,000 24,837,000
------------ ------------
24,851,000 24,851,000
Less:
Accumulated distributions to partners (512,029) (512,029)
Offering costs (2,689,521) (2,689,521)
Accumulated losses (29,856,416) (29,776,833)
------------ ------------
Total partners' deficit (8,206,966) (8,127,383)
------------ ------------
Total liabilities and partners' deficit $ 6,457,132 $ 6,209,709
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
- 1 -
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS, LTD.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
---------------------------- ----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Share of income (loss) from partnerships $ 164,723 $ (146,094) $ 336,004 $ (155,950)
------------ ------------ ------------ ------------
Other revenue and expenses:
Revenue:
Interest income 28,369 28,679 56,816 53,926
------------ ------------ ------------ ------------
Expenses:
Interest 166,119 166,119 332,238 332,238
Management fee 23,802 23,802 47,604 47,604
General and administrative 20,522 24,310 41,989 50,622
Professional fees 17,381 15,351 34,980 32,083
Amortization 7,796 7,796 15,592 15,592
------------ ------------ ------------ ------------
235,620 237,378 472,403 478,139
------------ ------------ ------------ ------------
Total other revenue and expenses (207,251) (208,699) (415,587) (424,213)
------------ ------------ ------------ ------------
Net loss (42,528) (354,793) (79,583) (580,163)
Accumulated losses, beginning of period (29,813,888) (29,279,356) (29,776,833) (29,053,986)
------------ ------------ ------------ ------------
Accumulated losses, end of period $(29,856,416) $(29,634,149) $(29,856,416) $(29,634,149)
============ ============ ============ ============
Loss allocated to General Partners (3%) $ (1,275) $ (10,644) $ (2,387) $ (17,405)
============ ============ ============ ============
Loss allocated to Limited Partners (97%) $ (41,253) $ (344,149) $ (77,196) $ (562,758)
============ ============ ============ ============
Loss per unit of Limited Partnership Interest
based on 24,837 units outstanding $ (1.66) $ (13.86) $ (3.11) $ (22.66)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
- 2 -
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS, LTD.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
June 30,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (79,583) $ (580,163)
Adjustments to reconcile net loss to net
cash used in operating activities:
Share of (income) loss from partnerships (336,004) 155,950
Amortization of deferred costs 15,592 15,592
Increase in accrued interest receivable on
advances to partnerships (3,068) (3,067)
Changes in assets and liabilities:
Increase in other assets (1,077) (3,954)
Increase in accrued interest payable 332,238 332,238
(Decrease) increase in accounts payable and accrued expenses (5,232) 5,283
------------ ------------
Net cash used in operating activities (77,134) (78,121)
------------ ------------
Cash flows from investing activities:
Release of restricted cash equivalents 189,000 --
Receipt of distributions from partnerships 162,026 330,831
------------ ------------
Net cash provided by investing activities 351,026 330,831
------------ ------------
Net increase in cash and cash equivalents 273,892 252,710
Cash and cash equivalents, beginning of period 1,823,863 1,522,120
------------ ------------
Cash and cash equivalents, end of period $ 2,097,755 $ 1,774,830
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
- 3 -
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of C.R.I., Inc. (CRI), the Managing General Partner, the
accompanying unaudited financial statements contain all adjustments of a normal
recurring nature necessary to present fairly the financial position of Capital
Realty Investors, Ltd. (the Partnership) as of June 30, 1996 and December 31,
1995, and the results of its operations for the three and six months ended June
30, 1996 and 1995 and its cash flows for the six months ended June 30, 1996 and
1995.
These unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. While the Managing General Partner believes that the dis-
closures presented are adequate to make the information not misleading, it is
suggested that these condensed financial statements be read in conjunction with
the financial statements and the notes included in the Partnership's Annual
Report filed on Form 10-K for the year ended December 31, 1995.
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
As of June 30, 1996, the Partnership's obligations with respect to its
investments in Local Partnerships in the form of purchase money notes of
$6,422,800, plus accrued interest of $8,183,238, are payable upon the earliest
of: (i) sale or refinancing of the respective Local Partnership's rental
property; (ii) payment in full of the respective Local Partnership's permanent
loan; or (iii) maturity. Purchase money notes in an aggregate principal amount
of $1,350,000 mature on January 1, 1997, as discussed below. The remaining
purchase money notes mature in 1998. The purchase money notes are generally
secured by the Partnership's interest in the respective Local Partnerships.
There is no assurance that the underlying properties will have sufficient
appreciation and equity to enable the Partnership to pay the purchase money
notes' principal and accrued interest when due. If a purchase money note is not
paid in accordance with its terms, the Partnership will either have to
renegotiate the terms of repayment or risk losing its partnership interest in
the Local Partnership. The Managing General Partner is continuing to
investigate possible alternatives to reduce the Partnership's long-term debt
obligations. These alternatives include, among others, retaining the cash
available for distribution to meet the purchase money note requirements, buying
out certain purchase money notes at a discounted price, extending the due dates
of certain purchase money notes, or refinancing the respective properties'
underlying debt and using the Partnership's share of the proceeds to pay off or
buy down certain purchase money note obligations.
Interest expense on the Partnership's purchase money notes for the three
and six months ended June 30, 1996 was $166,119 and $332,238, respectively, and
for the three and six months ended June 30, 1995 was $166,119 and $332,238,
respectively. The accrued interest payable on the purchase money notes of
$8,183,238 and $7,851,000 as of June 30, 1996 and December 31, 1995,
respectively, is due on the respective maturity dates of the purchase money
notes or earlier if the Local Partnerships have distributable net cash flow, as
defined in the relevant Local Partnership agreements.
-4-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
As of both June 30, 1996 and December 31, 1995, the Partnership had
advanced funds totalling $377,593 to Local Partnerships. There were no funds
advanced to the Local Partnerships during the six months ended June 30, 1996.
Purchase money notes relating to Frederick Heights Limited Partnership
(Frederick Heights) and ARA Associates - Shangri-La Ltd. (Shallowford Oaks) in
the principal amounts of $650,000 and $700,000, respectively, mature on January
1, 1997. The Managing General Partner is currently analyzing its options with
respect to these purchase money notes.
On November 23, 1994, the Partnership advanced $72,195 to Shallowford Oaks
to help repay the Local Partnership's outstanding obligations to HUD. This
loan, along with accrued interest of $9,852 and $6,784 as of June 30, 1996 and
December 31, 1995, respectively, is payable from cash flows of Shallowford Oaks
after payment of first-mortgage debt service and after satisfaction by the
Partnership of certain other interest obligations on the related purchase money
notes. There is no assurance that the Local Partnership, upon expiration of any
workout, will be able to repay any loans in accordance with the terms.
In 1989, Sencit Baltic Associates (Baltic Plaza) obtained a letter of
credit in the amount of $189,000 which served as supplemental collateral to its
mortgage loan. The Partnership funded a certificate of deposit in the amount of
$189,000, which was used to collateralize the letter of credit, and as such was
classified as restricted cash equivalents on the balance sheet. As of March 28,
1996, Baltic Plaza is no longer required to provide supplemental collateral for
its mortgage loan, and the letter of credit was subsequently cancelled. As
such, the Partnership's certificate of deposit has been reclassified as
unrestricted cash equivalents.
The local general partner of Lake Properties Limited Partnership
(Frenchman's Wharf I), in conjunction with the Managing General Partner, applied
to the U.S. Department of Housing and Urban Development (HUD), holder of the
mortgage on the property, for a three-year extension of the previous workout
arrangement, which expired in December 1990. The local HUD office verbally
agreed to an extension expiring December 31, 1993 and recommended approval of
the extension to the HUD central office in Washington, D.C. In December 1993,
the local HUD office requested that a new workout proposal be submitted, and in
January 1994, the local general partner met with HUD to discuss the long-term
capital needs of the property in connection with a workout proposal. On March
1, 1994, the local general partner submitted a nine-year workout proposal to
HUD. This proposal was rejected by HUD in December 1995. On April 30, 1996,
the local general partner received approval from HUD for a four-year workout.
Under the workout agreement, Frenchman's Wharf I will make minimum monthly
payments to HUD, consisting of a service charge and tax escrow. Additionally,
Frenchman's Wharf I will make monthly interest payments representing
approximately 50%, 65%, 85% and 100% of the interest due on the outstanding
principal balance of the note for the periods July 1 through June 30 during the
years 1996 through 2000, respectively. Prior to July 1, 1996, payments were
being made from available cash flow. To cover operating deficits incurred in
prior years for Frenchman's Wharf I, the Partnership advanced funds totalling
$305,398 as of both June 30, 1996 and December 31, 1995. The last advance was
made to Frenchman's Wharf I in March 1987. No advances have been made to
Frenchman's Wharf I since March 1987, and the Partnership does not expect to
advance any additional funds in connection with Frenchman's Wharf I's loan
-5-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
workout with HUD. These loans, together with accrued interest of $183,102 as of
both June 30, 1996 and December 31, 1995, are payable from cash flow of
Frenchman's Wharf I after payment of first-mortgage debt service and after
satisfaction by the Partnership of certain other interest obligations on the
purchase money notes relating to the Local Partnership. There is no assurance
that the Local Partnership, upon expiration of the workout, will be able to
repay the loans in accordance with the terms. The purchase money notes related
to Frenchman's Wharf I in the principal amount of $3,778,800 which were
initially due to mature on June 1, 1988, have been extended to mature on June 1,
1998. In conjunction with the four-year workout agreement, the Partnership is
currently negotiating with the purchase money note holders to reach a
forbearance and extension agreement which would be co-terminus with the
expiration of the HUD workout arrangement. There is no assurance that the
noteholders will consent to a forbearance and extension agreement. Since the
first mortgage is in default, the purchase money notes may technically be called
at any time. As of July 26, 1996, the noteholders had not given consent to a
forebearance and extension agreement. As such, the Local Partnership's
continued ownership of the property is uncertain. The uncertainty about the
Local Partnership's continued ownership of the property does not impact the
Partnership's financial condition because the related purchase money note is
nonrecourse and secured solely by the Partnership's interest in the Local
Partnership. Therefore, should the investment in Frenchman's Wharf I not
produce sufficient value to satisfy the related purchase money note, the
indebtedness exceeds the carrying amount of the investment in and advances to
the Local Partnership. Thus, even a complete loss of this investment would not
have a material impact on the operations of the Partnership.
The rental property owned by Tanglewood Apartments Associates I
(Tanglewood I) has a mortgage which is federally insured under Section 221(d)(3)
of the National Housing Act, as amended. This property may be eligible for
sale, subject to numerous requirements, under the Low Income Housing
Preservation and Resident Homeownership Act of 1990 (LIHPRHA). This program may
provide incentives to owners of qualifying multifamily housing who commit to
permanently maintain their properties as low to moderate income housing.
Incentives originally available under LIHPRHA included selling the property to
qualified buyers or obtaining supplemental financing for the property. On March
28, 1996, Congress enacted the Housing Opportunity Program Extension Act of 1996
which includes revisions to the LIHPRHA program. These revisions include: (i)
severely limiting the availability of the supplemental financing option for
owners of qualifying multifamily housing, (ii) allowing owners who no longer
qualify for supplemental financing under the revised guidelines to elect to
pursue a sale of the property under the LIHPRHA program, provided that the
election to sell was made by April 15, 1996, and (iii) continuing the funding of
sale transactions under the LIHPRHA program through October 1, 1996, but only
for transactions in which the owner's plan of action is approved by HUD by
August 15, 1996. After October 1, 1996, HUD is directed not to continue LIHPRHA
processing. On July 11, 1996, the plan of action for the sale of Tanglewood was
approved by HUD. As of July 26, 1996, it is unknown whether there will be
sufficient funding in the LIHPRHA program to complete the sale. Further, it is
unknown whether the program will be extended or if a modified program will
replace LIHPRHA. As such, the Partnership does not anticipate sale of
Tanglewood I under the current LIHPRHA program. Also there is no assurance that
the sale of any properties owned by the Local Partnerships will occur.
-6-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
Some of the rental properties owned by the Local Partnerships are financed
by state housing agencies. The Managing General Partner has been working to
develop a strategy to sell or refinance certain properties pursuant to programs
developed by these agencies. These programs may include opportunities to sell
the property to a qualifying purchaser who would agree to maintain the property
as low to moderate income housing in perpetuity, or may include opportunities to
refinance the property or obtain supplemental financing. The Managing General
Partner continues to monitor these certain state housing agency programs to
ascertain whether the properties would qualify within the parameters of these
programs and whether these programs would provide an appropriate economic
benefit to the limited partners of the Partnership.
Some of the rental properties owned by the Local Partnerships are dependent
on the receipt of housing assistance payments guaranteed by contract under the
HUD Section 8 program. The level of funding for the Section 8 program, and HUD-
insured multifamily housing in general, is dependent upon the continuation of
appropriations approved by Congress for subsidy payments. In March 1996, HUD
released a revised version of the Reinvention Blueprint issued one year ago.
The Reinvention Blueprint contains a proposal which has come to be known as the
"Mark to Market" initiative. Per this initiative, HUD is proposing to eliminate
the Section 8 Housing Assistance Payment (HAP) contracts on certain properties,
under which the property owners directly receive monthly subsidies for units
occupied by low-income tenants. Instead, HUD would provide voucher or
certificate rental assistance directly to eligible residents. In the event that
this initiative is enacted as originally proposed, there is no assurance that
the rental properties will be able to maintain the occupancy levels necessary to
pay debt service and operating costs or that the rents necessary to pay debt
service and operating costs will be competitive with rents for comparable units
in the rental properties' respective market areas. As of July 26, 1996
Congress, the Senate and the Clinton Administration continue to struggle with
the "Mark to Market" legislation. In the interim, Congress has authorized a
one-year extension of project-based Section 8 HAP contracts expiring during
fiscal year 1996. In light of recent political scrutiny of appropriations for
HUD programs, continued funding of annual renewals for Section 8 HAP contracts
expiring in fiscal year 1997 and thereafter is uncertain.
The Partnership has been informed by Equity Resources Group, Inc. (ERG), a
Massachusetts limited partnership and limited partner in the Partnership, that
it plans to initiate a tender offer to purchase additional units in the
Partnership, but in no case more than a 5% interest in the Partnership. ERG has
stated that it plans to make the offer for the express purpose of holding the
limited partnership units as a long-term investment and not with a view to
resale. ERG has not indicated the price per unit which it plans to offer for
the limited partnership units in the Partnership. In the event that a tender
offer is initiated, the purchase price will be determined solely at the
discretion of ERG and may not necessarily represent the fair market value of the
limited partnership units. The General Partner takes no position as to
recommending or not recommending ERG to make an offer, nor will it take a
position as to recommending or not recommending the offer to investors, in the
event that an offer is made.
-7-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
Other than the potential ERG offer, it is not anticipated that there will
be any other market for resale of units in the Partnership. As a result, an
investor may be unable to sell or otherwise dispose of his or her interest in
the Partnership. There is no assurance that ERG will initiate a tender offer.
The following are combined statements of operations for the Local
Partnerships in which the Partnership has invested. The statements are compiled
from information supplied by the management agents of the projects and are
unaudited.
-8-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
---------------------------- ----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Rental revenue $ 4,672,849 $ 4,517,611 $ 9,291,313 $ 9,006,025
Other 267,039 187,099 531,307 429,654
------------ ------------ ------------ ------------
4,939,888 4,704,710 9,822,620 9,435,679
------------ ------------ ------------ ------------
Expenses:
Operating 2,429,523 2,484,784 4,817,393 4,857,333
Interest 1,699,810 1,755,536 3,399,621 3,511,070
Depreciation and amortization 851,127 852,682 1,702,252 1,705,362
------------ ------------ ------------ ------------
4,980,460 5,093,002 9,919,266 10,073,765
------------ ------------ ------------ ------------
Net loss $ (40,572) $ (388,292) $ (96,646) $ (638,086)
============ ============ ============ ============
</TABLE>
As of June 30, 1996 and December 31, 1995, the Partnership's share of
cumulative losses to date for seven and eleven of the eighteen Local
Partnerships, respectively, exceeds the amount of the Partnership's investments
in and advances to those Local Partnerships by $7,495,502 and $7,060,300,
respectively. As the Partnership has no further obligation to advance funds or
provide financing to these Local Partnerships, the excess losses have not been
reflected in the accompanying financial statements.
3. RELATED-PARTY TRANSACTIONS
In accordance with the terms of the Partnership Agreement, the Partnership
is obligated to reimburse the Managing General Partner for its direct expenses
in managing the Partnership and to pay an annual incentive management fee (the
Management Fee) after all other expenses of the Partnership are paid. The
Partnership paid $16,047 and $34,944 for the three and six months ended June 30,
1996 and $17,803 and $33,631 for the three and six months ended June 30, 1995,
respectively, as direct reimbursement of expenses incurred on behalf of the
Partnership. Such expenses are included in the accompanying statements of
operations as general and administrative expenses. Additionally, the
Partnership paid the Managing General Partner a Management Fee of $23,802 and
$47,604 for the three and six months, respectively, ended June 30, 1996 and
1995.
-9-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
4. CONTINGENCIES
In 1990, CRI, as managing general partner of the Partnership and various
other entities, subcontracted certain property-level asset management functions
for certain properties to Capital Management Strategies, Inc. (CMS). Among
these properties were properties owned by some of the Local Partnerships in
which the Partnership invested. CMS was formed by Martin C. Schwartzberg, a
nominal general partner of the Partnership and a former stockholder of CRI, when
he retired from and cashed out of CRI and its related businesses as of January
1, 1990. Mr. Schwartzberg agreed not to act as a general partner with respect
to any of the CRI-sponsored partnerships, including this Partnership, and has
not done so since that time. In late 1995, a dispute arose between CRI and CMS
over the funding level of the 1996 contract for CMS. On November 9, 1995, CRI
filed a complaint against CMS to determine the proper amount of fees to be paid
in 1996 under the asset management agreement. CMS answered on January 10, 1996,
but asserted no counterclaims.
Thereafter, Mr. Schwartzberg launched a hostile consent solicitation to be
designated as managing general partner of approximately 125 private partnerships
sponsored by CRI. On January 18, 1996, Mr. Schwartzberg and CMS filed a
complaint in the Circuit Court of Montgomery County, Maryland (the Circuit
Court), against CRI and Messrs. Dockser and Willoughby (who are general partners
of the Partnership) alleging, among other things, that CRI and Messrs. Dockser
and Willoughby breached the asset management agreement pursuant to which Mr.
Schwartzberg's company, CMS, agreed to perform limited functions related to
property-level issues for a portion of CRI's subsidized housing portfolio
(including some of the properties in which the Partnership invested), by
reducing the proposed budget for 1996. The Partnership was not named as a
defendant in this action. Messrs. Dockser and Willoughby entered an answer
denying all of Mr. Schwartzberg's claims. Messrs. Dockser and Willoughby
publicly responded that Mr. Schwartzberg's suit was motivated by his budget
dispute with CRI and personal animosity. On February 6, 1996, CRI terminated
the CMS contract for cause. Mr. Schwartzberg and CMS responded by filing a
motion for injunctive relief in the Circuit Court, asking the court to enjoin
CRI from terminating the contract. In a ruling issued on February 12, 1996, the
Circuit Court, among other things, refused to grant the injunction requested by
CMS. On February 12, 1996, the Circuit Court also issued a memorandum opinion
and order enjoining CMS and Mr. Schwartzberg from disclosing information made
confidential under the asset management agreement.
On February 1, 1996 and February 16, 1996, Mr. Schwartzberg sent letters to
the Partnership requesting investor lists and other forms of investor
information. On February 5, 1996, the Partnership, acting through its managing
general partner, CRI, denied Mr. Schwartzberg's request. On February 20, 1996,
counsel for the Partnership responded to Mr. Schwartzberg's second request,
denying that Mr. Schwartzberg had standing or a proper purpose for requesting
the investor lists. On June 12, 1996, Mr. Schwartzberg and CRI entered an
agreement resolving the disputes between CRI and CMS. The Partnership was not
named in any of the litigation prior to the resolution, nor was the Partnership
a signatory of the agreement. CRI does not anticipate further litigation with
Mr. Schwartzberg.
-10-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Business
--------
Capital Realty Investors, Ltd.'s (the Partnership) Management's Discussion
and Analysis of Financial Condition and Results of Operations contains
information that may be considered forward looking. This information contains a
number of risks and uncertainties, as discussed herein and in the Partnership's
Annual Report filed on Form 10-K, that could cause actual results to differ
materially.
Financial Condition/Liquidity
-----------------------------
The Partnership's liquidity, with unrestricted cash resources of $2,097,755
and $1,823,863 as of June 30, 1996 and December 31, 1995, respectively, along
with anticipated future cash distributions from the Local Partnerships, is
expected to meet its current and anticipated operating cash needs. On March 28,
1996, $189,000 of previously restricted cash resources was reclassified as
unrestricted cash and cash equivalents, as discussed below. As of July 26,
1996, there are no material commitments for capital expenditures.
As of June 30, 1996, the Partnership's obligations with respect to its
investments in Local Partnerships in the form of purchase money notes of
$6,422,800, plus accrued interest of $8,138,238, are payable upon the earliest
of: (i) sale or refinancing of the respective Local Partnership's rental
property; (ii) payment in full of the respective Local Partnership's permanent
loan; or (iii) maturity. Purchase money notes in an aggregate principal amount
of $1,350,000 mature on January 1, 1997, as discussed below. The remaining
purchase money notes mature in 1998. The purchase money notes are generally
secured by the Partnership's interest in the respective Local Partnerships.
There is no assurance that the underlying properties will have sufficient
appreciation and equity to enable the Partnership to pay the purchase money
notes' principal and accrued interest when due. If a purchase money note is not
paid in accordance with its terms, the Partnership will either have to
renegotiate the terms of repayment or risk losing its partnership interest in
the Local Partnership. The Managing General Partner is continuing to
investigate possible alternatives to reduce the Partnership's long-term debt
obligations. These alternatives include, among others, retaining the cash
available for distribution to meet the purchase money note requirements, buying
out certain purchase money notes at a discounted price, extending the due dates
of certain purchase money notes, or refinancing the respective properties'
underlying debt and using the Partnership's share of the proceeds to pay off or
buy down certain purchase money note obligations.
Purchase money notes relating to Frederick Heights Limited Partnership
(Frederick Heights) and ARA Associates - Shangri-La Ltd. (Shallowford Oaks) in
the principal amounts of $650,000 and $700,000, respectively, mature on January
1, 1997. The Managing General Partner is currently analyzing its options with
respect to these purchase money notes.
On November 23, 1994, the Partnership advanced $72,195 to Shallowford Oaks
to help repay the Local Partnership's outstanding obligations to HUD. This
loan, along with accrued interest of $9,852 and $6,784 as of June 30, 1996 and
December 31, 1995, respectively, is payable from cash flows of Shallowford Oaks
after payment of first-mortgage debt service and after satisfaction by the
-11-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
Partnership of certain other interest obligations on the related purchase money
notes. There is no assurance that the Local Partnership, upon expiration of any
workout, will be able to repay any loans in accordance with the terms.
In 1989, Sencit Baltic Associates (Baltic Plaza) obtained a letter of
credit in the amount of $189,000 which served as supplemental collateral to its
mortgage loan. The Partnership funded a certificate of deposit in the amount of
$189,000, which was used to collateralize the letter of credit, and as such was
classified as restricted cash equivalents on the balance sheet. As of March 28,
1996, Baltic Plaza is no longer required to provide supplemental collateral for
its mortgage loan, and the letter of credit was subsequently cancelled. As
such, the Partnership's certificate of deposit has been reclassified as
unrestricted cash equivalents.
The Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient cash is available for operating requirements.
For the six months ended June 30, 1996, the receipt of distributions from Local
Partnerships was adequate to support operating cash requirements.
Results of Operations
---------------------
The Partnership's net loss for the three and six months ended June 30, 1996
decreased from the comparable periods in 1995 principally due to an increase in
share of income from Local Partnerships primarily as a result of one property's
accumulated losses exceeding the Partnership's basis in the related investment
in Local Partnership during the fourth quarter of 1995. The Partnership does
not record losses from the Local Partnerships in excess of its investment, as
discussed below. The Partnership's share of income from Local Partnerships also
increased as a result of a decrease in real estate tax expense at one property.
The decrease in real estate tax expense resulted from a successful appeal for a
reduction in the property's tax assessment due to a reduction in the valuation
of the property. Also contributing to the decrease in net loss was a decrease
in general and administrative expense primarily resulting from decreased payroll
costs.
For financial reporting purposes, the Partnership, as a limited partner in
the Local Partnerships, does not record losses from the Local Partnerships in
excess of its investment to the extent that the Partnership has no further
obligation to advance funds or provide financing to the Local Partnerships. As
a result, the Partnership's recognized losses for the three and six months ended
June 30, 1996 did not include losses of $205,988 and $435,202, respectively,
compared to excluded losses of $233,703 and $467,398, for the three and six
months ended June 30, 1995, respectively.
The local general partner of Lake Properties Limited Partnership
(Frenchman's Wharf I), in conjunction with the Managing General Partner, applied
to the U.S. Department of Housing and Urban Development (HUD), holder of the
mortgage on the property, for a three-year extension of the previous workout
arrangement, which expired in December 1990. The local HUD office verbally
agreed to an extension expiring December 31, 1993 and recommended approval of
the extension to the HUD central office in Washington, D.C. In December 1993,
the local HUD office requested that a new workout proposal be submitted, and in
-12-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
January 1994, the local general partner met with HUD to discuss the long-term
capital needs of the property in connection with a workout proposal. On March
1, 1994, the local general partner submitted a nine-year workout proposal to
HUD. This proposal was rejected by HUD in December 1995. On April 30, 1996,
the local general partner received approval from HUD for a four-year workout.
Under the workout agreement, Frenchman's Wharf I will make minimum monthly
payments to HUD, consisting of a service charge and tax escrow. Additionally,
Frenchman's Wharf I will make monthly interest payments representing
approximately 50%, 65%, 85% and 100% of the interest due on the outstanding
principal balance of the note for the periods July 1 through June 30 during the
years 1996 through 2000, respectively. Prior to July 1, 1996, payments were
being made from available cash flow. To cover operating deficits incurred in
prior years for Frenchman's Wharf I, the Partnership advanced funds totalling
$305,398 as of both June 30, 1996 and December 31, 1995. The last advance was
made to Frenchman's Wharf I in March 1987. No advances have been made to
Frenchman's Wharf I since March 1987, and the Partnership does not expect to
advance any additional funds in connection with Frenchman's Wharf I's loan
workout with HUD. These loans, together with accrued interest of $183,102 as of
both June 30, 1996 and December 31, 1995, are payable from cash flow of
Frenchman's Wharf I after payment of first-mortgage debt service and after
satisfaction by the Partnership of certain other interest obligations on the
purchase money notes relating to the Local Partnership. There is no assurance
that the Local Partnership, upon expiration of any workout, will be able to
repay the loans in accordance with the terms. The purchase money notes related
to Frenchman's Wharf I in the principal amount of $3,778,800 which were
initially due to mature on June 1, 1988 have been extended to mature on June 1,
1998. In conjunction with the four-year workout agreement, the Partnership is
currently negotiating with the purchase money note holders to reach a
forbearance and extension agreement which would be co-terminus with the
expiration of the HUD workout arrangement. There is no assurance that the
noteholders will consent to a forbearance and extension agreement. Since the
first mortgage is in default, the purchase money notes may technically be called
at any time. As of July 26, 1996, the noteholders had not given consent to a
forebearance and extension agreement. As such, the Local Partnership's
continued ownership of the property is uncertain. The uncertainty about the
Local Partnership's continued ownership of the property does not impact the
Partnership's financial condition because the related purchase money note is
nonrecourse and secured solely by the Partnership's interest in the Local
Partnership. Therefore, should the investment in Frenchman's Wharf I not
produce sufficient value to satisfy the related purchase money note, the
indebtedness exceeds the carrying amount of the investment in and advances to
the Local Partnership. Thus, even a complete loss of this investment would not
have a material impact on the operations of the Partnership.
The rental property owned by Tanglewood Apartments Associates I
(Tanglewood I) has a mortgage which is federally insured under Section 221(d)(3)
of the National Housing Act, as amended. This property may be eligible for
sale, subject to numerous requirements, under the Low Income Housing
Preservation and Resident Homeownership Act of 1990 (LIHPRHA). This program may
provide incentives to owners of qualifying multifamily housing who commit to
permanently maintain their properties as low to moderate income housing.
Incentives originally available under LIHPRHA included selling the property to
qualified buyers or obtaining supplemental financing for the property. On March
28, 1996, Congress enacted the Housing Opportunity Program Extension Act of 1996
-13-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
which includes revisions to the LIHPRHA program. These revisions include: (i)
severely limiting the availability of the supplemental financing option for
owners of qualifying multifamily housing, (ii) allowing owners who no longer
qualify for supplemental financing under the revised guidelines to elect to
pursue a sale of the property under the LIHPRHA program, provided that the
election to sell was made by April 15, 1996, and (iii) continuing the funding of
sale transactions under the LIHPRHA program through October 1, 1996, but only
for transactions in which the owner's plan of action is approved by HUD by
August 15, 1996. After October 1, 1996, HUD is directed not to continue LIHPRHA
processing. On July 11, 1996, the plan of action for the sale of Tanglewood was
approved by HUD. As of July 26, 1996, it is unknown whether there will be
sufficient funding in the LIHPRHA program to complete the sale. Further, it is
unknown whether the program will be extended or if a modified program will
replace LIHPRHA. As such, the Partnership does not anticipate sale of
Tanglewood I under the current LIHPRHA program. Also there is no assurance that
the sale of any properties owned by the Local Partnerships will occur.
Some of the rental properties owned by the Local Partnerships are financed
by state housing agencies. The Managing General Partner has been working to
develop a strategy to sell or refinance certain properties pursuant to programs
developed by these agencies. These programs may include opportunities to sell
the property to a qualifying purchaser who would agree to maintain the property
as low to moderate income housing in perpetuity, or may include opportunities to
refinance the property or obtain supplemental financing. The Managing General
Partner continues to monitor these certain state housing agency programs to
ascertain whether the properties would qualify within the parameters of these
programs and whether these programs would provide an appropriate economic
benefit to the limited partners of the Partnership.
Some of the rental properties owned by the Local Partnerships are dependent
on the receipt of housing assistance payments guaranteed by contract under the
HUD Section 8 program. The level of funding for the Section 8 program, and HUD-
insured multifamily housing in general, is dependent upon the continuation of
appropriations approved by Congress for subsidy payments. In March 1996, HUD
released a revised version of the Reinvention Blueprint issued one year ago.
The Reinvention Blueprint contains a proposal which has come to be known as the
"Mark to Market" initiative. Per this initiative, HUD is proposing to eliminate
the Section 8 Housing Assistance Payment (HAP) contracts on certain properties,
under which the property owners directly receive monthly subsidies for units
occupied by low-income tenants. Instead, HUD would provide voucher or
certificate rental assistance directly to eligible residents. In the event that
this initiative is enacted as originally proposed, there is no assurance that
the rental properties will be able to maintain the occupancy levels necessary to
pay debt service and operating costs or that the rents necessary to pay debt
service and operating costs will be competitive with rents for comparable units
in the rental properties' respective market areas. As of July 26, 1996
Congress, the Senate and the Clinton Administration continue to struggle with
the "Mark to Market" legislation. In the interim, Congress has authorized a
one-year extension of project-based Section 8 HAP contracts expiring during
fiscal year 1996. In light of recent political scrutiny of appropriations for
HUD programs, continued funding of annual renewals for Section 8 HAP contracts
expiring in fiscal year 1997 and thereafter is uncertain.
-14-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
No other significant changes in the Partnership's operations have taken
place during this period.
General
-------
In 1990, CRI, as managing general partner of the Partnership and various
other entities, subcontracted certain property-level asset management functions
for certain properties to Capital Management Strategies, Inc. (CMS). Among
these properties were properties owned by some of the Local Partnerships in
which the Partnership invested. CMS was formed by Martin C. Schwartzberg, a
nominal general partner of the Partnership and a former stockholder of CRI, when
he retired from and cashed out of CRI and its related businesses as of January
1, 1990. Mr. Schwartzberg agreed not to act as a general partner with respect
to any of the CRI-sponsored partnerships, including this Partnership, and has
not done so since that time. In late 1995, a dispute arose between CRI and CMS
over the funding level of the 1996 contract for CMS. On November 9, 1995, CRI
filed a complaint against CMS to determine the proper amount of fees to be paid
in 1996 under the asset management agreement. CMS answered on January 10, 1996,
but asserted no counterclaims.
Thereafter, Mr. Schwartzberg launched a hostile consent solicitation to be
designated as managing general partner of approximately 125 private partnerships
sponsored by CRI. On January 18, 1996, Mr. Schwartzberg and CMS filed a
complaint in the Circuit Court of Montgomery County, Maryland (the Circuit
Court), against CRI and Messrs. Dockser and Willoughby (who are general partners
of the Partnership) alleging, among other things, that CRI and Messrs. Dockser
and Willoughby breached the asset management agreement pursuant to which Mr.
Schwartzberg's company, CMS, agreed to perform limited functions related to
property-level issues for a portion of CRI's subsidized housing portfolio
(including some of the properties in which the Partnership invested), by
reducing the proposed budget for 1996. The Partnership was not named as a
defendant in this action. Messrs. Dockser and Willoughby entered an answer
denying all of Mr. Schwartzberg's claims. Messrs. Dockser and Willoughby
publicly responded that Mr. Schwartzberg's suit was motivated by his budget
dispute with CRI and personal animosity. On February 6, 1996, CRI terminated
the CMS contract for cause. Mr. Schwartzberg and CMS responded by filing a
motion for injunctive relief in the Circuit Court, asking the court to enjoin
CRI from terminating the contract. In a ruling issued on February 12, 1996, the
Circuit Court, among other things, refused to grant the injunction requested by
CMS. On February 12, 1996, the Circuit Court also issued a memorandum opinion
and order enjoining CMS and Mr. Schwartzberg from disclosing information made
confidential under the asset management agreement.
On February 1, 1996 and February 16, 1996, Mr. Schwartzberg sent letters to
the Partnership requesting investor lists and other forms of investor
information. On February 5, 1996, the Partnership, acting through its managing
general partner, CRI, denied Mr. Schwartzberg's request. On February 20, 1996,
counsel for the Partnership responded to Mr. Schwartzberg's second request,
denying that Mr. Schwartzberg had standing or a proper purpose for requesting
the investor lists. On June 12, 1996, Mr. Schwartzberg and CRI entered an
agreement resolving the disputes between CRI and CMS. The Partnership was not
-15-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
named in any of the litigation prior to the resolution, nor was the Partnership
a signatory of the agreement. CRI does not anticipate further litigation with
Mr. Schwartzberg.
The Partnership has been informed by Equity Resources Group, Inc. (ERG), a
Massachusetts limited partnership and limited partner in the Partnership, that
it plans to initiate a tender offer to purchase additional units in the
Partnership, but in no case more than a 5% interest in the Partnership. ERG has
stated that it plans to make the offer for the express purpose of holding the
limited partnership units as a long-term investment and not with a view to
resale. ERG has not indicated the price per unit which it plans to offer for
the limited partnership units in the Partnership. In the event that a tender
offer is initiated, the purchase price will be determined solely at the
discretion of ERG and may not necessarily represent the fair market value of the
limited partnership units. The General Partner takes no position as to
recommending or not recommending ERG to make an offer, nor will it take a
position as to recommending or not recommending the offer to investors, in the
event that an offer is made.
Other than the potential ERG offer, it is not anticipated that there will
be any other market for resale of units in the Partnership. As a result, an
investor may be unable to sell or otherwise dispose of his or her interest in
the Partnership. There is no assurance that ERG will initiate a tender offer.
PART II. OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
No reports on Form 8-K were filed with the Commission during the quarter
ended June 30, 1996.
All other items are not applicable.
-16-
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CAPITAL REALTY INVESTORS, LTD.
(Registrant)
By: C.R.I., Inc.
Managing General Partner
July 31, 1996 /s/ Deborah K. Browning
- --------------------------- ---------------------------------
Date Deborah K. Browning
Vice President/Chief Accounting
Officer
Signing on behalf of the
Registrant and as Principal
Accounting Officer
-17-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
- ------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
-18-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SECOND QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,097,755
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,457,132
<CURRENT-LIABILITIES> 0
<BONDS> 14,606,038
0
0
<COMMON> 0
<OTHER-SE> (8,206,966)
<TOTAL-LIABILITY-AND-EQUITY> 6,457,132
<SALES> 0
<TOTAL-REVENUES> 392,820
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 140,165
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 332,238
<INCOME-PRETAX> (79,583)
<INCOME-TAX> 0
<INCOME-CONTINUING> (79,583)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (79,583)
<EPS-PRIMARY> (3.11)
<EPS-DILUTED> (3.11)
</TABLE>
