<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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)
(Registrant's telephone number,
including area code) (301) 468-9200
---------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ----------------------------------------- ---------------------
NONE N/A
Securities registered pursuant to Section 12(g) of the Act:
LIMITED PARTNERSHIP UNITS
- --------------------------------------------------------------------------
(Title of class)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K (X)
The partnership interests of the Registrant are not traded in any market.
Therefore, the partnership interests had neither a market selling price nor an
average bid or asked price within the 60 days prior to the date of this filing.
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
(a limited partnership)
1996 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
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Page
----
Item 1. Business . . . . . . . . . . . . . . . . . . . . I-1
Item 2. Properties . . . . . . . . . . . . . . . . . . . I-5
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . I-5
Item 4. Submission of Matters to a Vote
of Security Holders . . . . . . . . . . . . . . I-5
PART II
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Item 5. Market for the Registrant's Partnership
Interests and Related Partnership Matters . . II-1
Item 6. Selected Financial Data . . . . . . . . . . . . . II-2
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . II-3
Item 8. Financial Statements and Supplementary Data . . . II-11
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . II-11
PART III
--------
Item 10. Directors and Executive Officers
of the Registrant . . . . . . . . . . . . . . . III-1
Item 11. Executive Compensation . . . . . . . . . . . . . III-2
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . III-3
Item 13. Certain Relationships and Related Transactions . III-4
PART IV
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Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . IV-1
Signatures . . . . . . . . . . . . . . . . . . . . . . . . IV-3
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . IV-31
<PAGE>
PART I
------
ITEM 1. BUSINESS
--------
Capital Realty Investors, Ltd. (the Partnership) is a limited partnership
which was formed under the District of Columbia Limited Partnership Act on June
1, 1981. On December 31, 1981, the Partnership commenced offering 30,000 units
of limited partnership interests through a public offering which was managed by
Merrill Lynch, Pierce, Fenner & Smith, Incorporated. The Partnership closed the
offering on December 31, 1982 when 24,837 units of limited partnership interests
became fully subscribed.
The General Partners of the Partnership are C.R.I., Inc. (CRI), the
Managing General Partner, current and former shareholders of CRI and Rockville
Pike Associates, Ltd., a Maryland limited partnership which includes the
shareholders of CRI and several officers and former employees of CRI. Services
for the Partnership are performed by CRI, as the Partnership has no employees of
its own.
The Partnership was formed to invest in real estate, which is the
Partnership's principal business activity, by acquiring and holding a limited
partner interest in limited partnerships (Local Partnerships). As of December
31, 1996, the Partnership had investments in seventeen Local Partnerships. Each
of these Local Partnerships owns a federal or state government-assisted or
conventionally financed apartment complex, which provides housing principally to
the elderly or to individuals and families of low or moderate income. The
original objectives of these investments, not necessarily in order of
importance, were to:
(1) preserve and protect the Partnership's capital;
(2) provide, during the early years of the Partnership's operations,
current tax benefits to the partners in the form of tax losses which
the partners may use to offset income from other sources;
(3) provide capital appreciation through increases in the value of the
Partnership's investments and increased equity through periodic
payments on the indebtedness on the apartment complexes; and
(4) provide cash distributions from sale or refinancing of the
Partnership's investments and, on a limited basis, from rental
operations.
See Part II, Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations, for a discussion of factors affecting the original
investment objectives.
The Local Partnerships in which the Partnership has invested were organized
by private developers who acquired the sites, or options thereon, applied for
applicable mortgage insurance and/or subsidies, and remain as the local general
partners in the Local Partnerships. The Partnership became the principal
limited partner in these Local Partnerships pursuant to negotiations with these
developers who act as the local general partners. However, in the event of
non-compliance with the Local Partnerships' partnership agreements, the local
general partner may be removed and replaced with another local general partner
or with an affiliate of the Partnership's Managing General Partner. As a limited
partner, the Partnership's legal liability for obligations of the Local
Partnership is limited to its investment. An affiliate of the Managing General
Partner of the Partnership is also generally a general partner of the Local
Partnerships. In most cases, the local general partners of the Local
Partnerships retain responsibility for developing, constructing, maintaining,
operating and managing the projects. Additionally, the local general partners
and affiliates of the Managing General Partner may operate other apartment
I-1
<PAGE>
PART I
------
ITEM 1. BUSINESS - continued
--------
complexes which may be in competition for eligible tenants with the Local
Partnerships' apartment complexes.
Although each of the Local Partnerships in which the Partnership has
invested owns an apartment complex which must compete in the market place for
tenants, interest subsidies and/or rent supplements from governmental agencies
generally make it possible to offer certain of these dwelling units to eligible
tenants at a cost significantly below the market rate for comparable
conventionally financed dwelling units. Based on available data, the General
Partners believe there to be no material risk of market competition in the
operations of the apartment complexes described below which would adversely
impact the Partnership, except in specific circumstances as described in Part
II, Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following is a schedule of the apartment complexes owned by Local
Partnerships in which the Partnership is a limited partner:
I-2
<PAGE>
SCHEDULE OF PROJECTS OWNED BY LOCAL PARTNERSHIPS
IN WHICH CAPITAL REALTY INVESTORS, LTD.
HAS AN INVESTMENT(1)
<TABLE>
<CAPTION>
Units Section 8
Mortgage Authorized for Contract
Name and Location Payable at Financed and/or Insured Number of Rental Asst. Expiration
of Apartment Complex 12/31/96 (2) and/or Subsidized Under Rental Units Under Sec. 8 Date
- -------------------- ------------ ----------------------------- ------------ -------------- -----------
<S> <C> <C> <C> <C> <C>
Baltic Plaza $ 8,170,515 New Jersey Housing and 169 168 02/10/03
Atlantic City, NJ Mortgage Finance Agency
Capitol Commons 7,165,657 Michigan State Housing 200 200 01/28/02
Lansing, MI Development Authority
Chestnut 2,691,410 California Housing 90 90 01/13/13
Fresno, CA Finance Agency
Court Place 6,770,332 Illinois Housing 160 160 02/01/13
Pekin, IL Development Authority (IHDA)
Frederick Heights 3,152,516 Section 221(d)(4) of the National 156 0 N/A
Frederick, MD Housing Act (NHA)
Frenchman's Wharf I 6,499,180 Section 221(d)(4) 320 31 11/30/97 (4)
New Orleans, LA of the NHA
Hillview Terrace 2,670,849 Farmers Home Administration 125 90 09/30/00
Traverse City, MI Section 515 (FmHA)
Lihue Gardens 2,851,753 FmHA 58 58 02/22/03
Lihue, Kauai, HI
Linden Place 9,754,989 IHDA 190 190 01/01/22
Arlington Heights, IL
New Sharon Woods Apts. 2,524,375 Section 221(d)(4) of the NHA 50 50 07/31/04
Deptford, NJ
Park Glen 5,342,251 IHDA 125 125 08/01/23
Taylorville, IL
Shallowford Oaks 5,838,177 Section 221(d)(4) of the NHA 204 41 07/31/98
Chamblee, GA
Sundance Apts. 2,524,759 Section 221(d)(4) of the NHA 60 60 05/07/02
Bakersfield, CA
Tandem Townhouses 1,544,086 Pennsylvania Housing 48 47 09/28/12
Fairview Borough, PA Finance Agency
Warner House 2,082,117 Section 221(d)(4) of the NHA 60 60 09/01/00
Warren, OH
</TABLE>
I-3
<PAGE>
SCHEDULE OF PROJECTS OWNED BY LOCAL PARTNERSHIPS
IN WHICH CAPITAL REALTY INVESTORS, LTD.
HAS AN INVESTMENT(1) - Continued
<TABLE>
<CAPTION>
Units Section 8
Mortgage Authorized for Contract
Name and Location Payable at Financed and/or Insured Number of Rental Asst. Expiration
of Apartment Complex 12/31/96 (2) and/or Subsidized Under Rental Units Under Sec. 8 Date
- -------------------- ------------ ----------------------------- ------------ -------------- -----------
<S> <C> <C> <C> <C> <C>
Westwood Village 1,598,585 Connecticut Housing Finance 48 48 02/13/11
New Haven, CT Authority
Winthrop Beach 1,137,592 First mortgage loan by First 69 0 N/A
Chicago, IL Federal Savings and Loan
Association of Chicago;
second mortgage loan by
Chicago Department of Housing
- -------------------- ------------ -------- ------
Totals (3) 17 $ 72,319,143 2,132 1,418
============ ======== ======
</TABLE>
I-4
<PAGE>
SCHEDULE OF PROJECTS OWNED BY LOCAL PARTNERSHIPS
IN WHICH CAPITAL REALTY INVESTORS, LTD.
HAS AN INVESTMENT(1) - Continued
<TABLE>
<CAPTION>
Average Effective Annual
Units Occupied As Rental Per Unit
Percentage of Total Units for the Years Ended
As of December 31, December 31,
Name and Location --------------------------------- -----------------------------------------------------
of Apartment Complex 1996 1995 1994 1993 1992 1996 1995 1994 1993 1992
- -------------------- ---- ---- ---- ---- ---- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Baltic Plaza 100% 99% 99% 98% 96% $ 13,143 $ 13,106 $ 13,102 $ 12,205 $ 12,075
Atlantic City, NJ
Capitol Commons 98% 99% 99% 100% 99% 9,451 9,335 9,296 9,153 9,007
Lansing, MI
Chestnut 98% 98% 97% 99% 94% 7,580 7,369 7,441 7,343 7,382
Fresno, CA
Court Place 100% 100% 100% 100% 100% 12,191 11,997 11,657 11,410 11,202
Pekin, IL
Frederick Heights 96% 97% 97% 97% 93% 6,983 6,809 6,841 6,741 6,782
Frederick, MD
Frenchman's Wharf I 89% 92% 91% 86% 92% 4,403 4,246 4,148 4,071 3,971
New Orleans, LA
Hillview Terrace 99% 99% 100% 100% 100% 3,930 3,779 3,694 3,532 3,492
Traverse City, MI
Lihue Gardens 100% 100% 100% 88% 98% 11,359 11,164 10,552 10,056 9,165
Lihue, Kauai, HI
Linden Place 99% 100% 100% 100% 100% 12,880 12,637 12,387 11,974 11,645
Arlington Heights, IL
New Sharon Woods Apts. 100% 94% 100% 88% 100% 11,805 11,589 11,060 10,076 10,644
Deptford, NJ
Park Glen 100% 100% 100% 100% 100% 9,303 9,250 9,221 9,159 9,045
Taylorville, IL
Shallowford Oaks 95% 100% 91% 80% 78% 7,002 6,934 5,930 4,393 4,822
Chamblee, GA
Sundance Apts. 100% 98% 100% 100% 100% 8,390 8,387 8,294 9,419 9,698
Bakersfield, CA
Tandem Townhouses 100% 100% 100% 100% 100% 8,859 8,798 8,789 8,676 8,545
Fairview Borough, PA
Warner House 98% 98% 95% 100% 100% 7,584 7,505 7,420 7,294 7,148
Warren, OH
</TABLE>
I-5
<PAGE>
SCHEDULE OF PROJECTS OWNED BY LOCAL PARTNERSHIPS
IN WHICH CAPITAL REALTY INVESTORS, LTD.
HAS AN INVESTMENT(1) - Continued
<TABLE>
<CAPTION>
Average Effective Annual
Units Occupied As Rental Per Unit
Percentage of Total Units for the Years Ended
As of December 31, December 31,
Name and Location --------------------------------- -----------------------------------------------------
of Apartment Complex 1996 1995 1994 1993 1992 1996 1995 1994 1993 1992
- -------------------- ---- ---- ---- ---- ---- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Westwood Village 96% 94% 100% 96% 100% 11,017 11,294 10,908 10,849 10,826
New Haven, CT
Winthrop Beach 94% 96% 94% 97% 88% 3,903 4,007 3,886 3,841 3,472
Chicago, IL
- -------------------- ---- ---- ---- ---- ---- -------- -------- -------- -------- --------
Totals (3) 17 98% 98% 98% 96% 96% $ 8,811 $ 8,718 $ 8,507 $ 8,247 $ 8,172
==== ==== ==== ==== ==== ======== ======== ======== ======== ========
</TABLE>
I-6
<PAGE>
PART I
------
ITEM 1. BUSINESS - continued
--------
(1) All properties are multifamily housing complexes. No single
tenant/resident rents 10% or more of the rentable square footage.
Residential leases are typically one year or less in length, with varying
expiration dates, and substantially all rentable space is for residential
purposes.
(2) The amounts provided are the balances of mortgage loans payable of the
Local Partnerships as of December 31, 1996.
(3) The totals for the percentage of units occupied and the average effective
annual rental per unit are based on a simple average.
(4) The Section 8 contract expiration date reflects a one-year extension from
the original expiration date, in accordance with Congressional legislation.
For additional information regarding the real estate of Local Partnerships
in which the Partnership has invested, see Part IV, Schedule III - "Real Estate
and Accumulated Depreciation of Local Partnerships in which Capital Realty
Investors, Ltd. has Invested."
On September 19, 1996, Tanglewood Apartments Associates I Limited
Partnership sold Tanglewood I to a non-profit entity. See Part II, Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the notes to the financial statements for additional information
pertaining to the sale.
There were no contemplated sales of investments in partnerships as of
March 10, 1997.
ITEM 2. PROPERTIES
----------
Through its ownership of limited partnership interests in Local
Partnerships, Capital Realty Investors, Ltd. indirectly holds an interest in the
underlying real estate. See Part 1, Item 1 and Schedule III of Part IV, Item 14
for information pertaining to these properties.
ITEM 3. LEGAL PROCEEDINGS
-----------------
There are no material legal proceedings to which the Partnership is a
party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
I-7
<PAGE>
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP INTERESTS AND
-----------------------------------------------------
RELATED PARTNERSHIP MATTERS
---------------------------
(a) On August 29, 1996, Equity Resource Bay Fund (Bay Fund), a
Massachusetts Limited Partnership which is affiliated with Equity
Resources Group, the general partner of various partnerships that are
limited partners in the Partnership, initiated a tender offer to
purchase 900 additional units in the Partnership at a price of $10 per
Limited Partner unit. Bay Fund, which is unaffiliated with CRI,
stated that it made the offer for the express purpose of holding the
Limited Partner units for investment purposes and not with a view to
resale. The purchase offer was determined solely at the discretion of
Bay Fund and did not necessarily represent the fair market value of
each Limited Partner unit. The Bay Fund offer expired on September
29, 1996, and as of March 10, 1997, Bay Fund held approximately 1.7%
of the Limited Partner units of the Partnership. Other than the Bay
Fund tender offer, or any other offers of the same type, it is not
anticipated that there will be any formal market for resale of
interests in the Partnership. As a result, investors may be unable to
sell or otherwise dispose of their interests in the Partnership.
(b) As of March 10, 1997, there were approximately 1,700 registered
holders of limited partnership interests in the Partnership.
(c) For the year ended December 31, 1996, the Partnership made a cash
distribution of $484,073 (or $19.49 per Limited Partner unit) to the
Limited Partners on October 31, 1996. The distribution was a result
of the sale of the property relating to the Partnership's investment
in Tanglewood I. No distributions were declared or paid by the
Partnership during 1995. The Partnership received distributions of
$381,770 and $434,022 from Local Partnerships during 1996 and 1995,
respectively. Some of the Local Partnerships operate under restric-
tions imposed by the pertinent governmental agencies that limit the
cash return available to the Partnership.
II-1
<PAGE>
PART II
-------
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
<TABLE>
<CAPTION>
For the years ended December 31,
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Share of income (loss) from
partnerships $ 427,744 $ 100,806 $ (117,238) $ (44,674) $ (464,667)
Interest and other income 121,696 114,423 75,477 54,264 78,336
Expenses (896,968) (938,076) (1,008,892) (1,040,741) (983,173)
Gain on disposition of investment
in partnership 1,301,766 -- -- -- --
Extraordinary gain from
extinguishment of debt 1,447,005 -- -- -- --
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 2,401,243 $ (722,847) $ (1,050,653) $ (1,031,151) $ (1,369,504)
============ ============ ============ ============ ============
Income (loss) allocated to Limited
Partners (97%) $ 2,329,206 $ (701,162) $ (1,019,133) $ (1,000,216) $ (1,328,419)
============ ============ ============ ============ ============
Income (loss) per unit of Limited
Partnership Interest based on
24,837 units outstanding $ 93.78 $ (28.23) $ (41.03) $ (40.27) $ (53.49)
============ ============ ============ ============ ============
Cash distribution per unit of Limited
Partnership Interest based on
24,837 units outstanding $ 19.49 $ -- $ -- $ -- $ --
============ ============ ============ ============ ============
Total assets $ 5,191,775 $ 6,209,709 $ 6,263,561 $ 6,936,156 $ 7,260,424
============ ============ ============ ============ ============
Total remaining amounts due on
investments, including accrued
interest on purchase money notes
and capital contributions $ 11,349,758 $ 14,273,800 $ 13,608,255 $ 13,205,616 $ 12,541,139
============ ============ ============ ============ ============
</TABLE>
II-2
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
General
-------
The Partnership has invested, through Local Partnerships, primarily in
federal or state government-assisted apartment complexes intended to provide
housing to low and moderate income tenants. In conjunction with such government
assistance, which includes federal and/or state financing at below-market
interest rates and rental subsidies, the Local Partnerships agreed to regulatory
limitations on (i) cash distributions, (ii) use of the properties and (iii) sale
or refinancing. These limitations typically were designed to remain in place
for the life of the mortgage.
The original investment objectives of the Partnership primarily were to
deliver tax benefits, as well as cash proceeds upon disposition of the
properties through the Partnership's investment in local limited partnerships.
Only limited annual cash distributions from property operations were projected
because of the regulatory restrictions on cash distributions from the
properties.
The original investment objectives of the Partnership have been affected by
the Tax Reform Act of 1986 which virtually eliminated many of the incentives for
the new construction or the sale of existing low income housing properties by
limiting the use of passive loss deductions. Therefore, the Managing General
Partner continues to concentrate on transferring the source of investment yield
from tax benefits to cash flow wherever possible and potentially enhancing the
ability of the Partnership to share in the appreciated value of the properties.
The acquisition of interests in certain Local Partnerships resulted in
purchase money note obligations of the Partnership. The purchase money notes
are nonrecourse obligations of the Partnership which typically mature fifteen
years from the date of acquisition of the interests in particular Local
Partnerships.
The Managing General Partner has been working to develop a strategy to sell
certain properties by utilizing opportunities presented by federal affordable
housing legislation, favorable financing terms and preservation incentives
available to nonprofit purchasers. The Managing General Partner intends to
utilize part or all of the Partnership's net proceeds (after a 50% distribution
to limited partners) received from the sales of properties to fund reserves for
paying at maturity, prepaying or purchasing prior to maturity, at a discount
where possible, currently outstanding purchase money notes. The Managing
General Partner believes that this represents an opportunity to reduce the
Partnership's long-term obligations.
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 strategies to sell or refinance certain properties pursuant to programs
developed by these agencies or other potential buyers. 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 to refinance the property, or to obtain supplemental financing. The Managing
General Partner continues to monitor certain state housing agency programs
II-3
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
and/or programs provided by certain lenders, to ascertain whether the properties
would qualify within the parameters of a given program 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 project-based Section 8 Rental Housing Assistance Payments
(HAP) provided by the U.S. Department of Housing and Urban Development (HUD)
pursuant to HAP contracts. In 1995 and 1996, HUD released its Reinvention
Blueprint and a revision to its Reinvention Blueprint which contained proposals
that have come to be known as "Mark-to-Market". Congress, HUD and the Clinton
Administration continue to struggle with the Mark-to-Market initiative. This
initiative was intended to deal with HUD's increasing burden of funding HAP
contracts. Under the initiative, HUD would eliminate the project-based subsidy
and provide the residents with "sticky vouchers" which would allow residents to
move to other developments should they so choose. However, with the elimination
of the HAP contract, there is no assurance that rental properties would be able
to maintain the rental income and occupancy levels necessary to pay operating
costs and debt service. The initiative will impact those properties that have
HAP contracts with shorter terms than that of the underlying property mortgage.
For instance, some properties may have a 20-year HAP contract while the
underlying mortgage has a 40-year term. In the interim, Congress has authorized
one-year extensions for properties with HAP contracts expiring during the
government's fiscal year 1997, which began October 1, 1996. In light of recent
political scrutiny of appropriations for HUD programs, continued funding of
annual renewals for Section 8 HAP contracts expiring after fiscal year 1997 is
uncertain.
With the uncertainty surrounding renewals of expiring Section 8 HAP
contracts, the Managing General Partner is developing new strategies to deal
with the ever changing environment of affordable housing policy. Properties
with expiring Section 8 HAP contracts may become convertible to market-rate
apartment properties. Currently, there are a few lenders that will provide
additional financing to allow the property to convert to market rate units.
Where opportunities exist, the Managing General Partner will continue to work
with the Local Partnerships to develop a strategy that makes economic sense for
all parties involved.
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 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
II-4
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
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. On February 6, 1996, CRI terminated the CMS contract
for cause. (The Partnership subsequently retained an independent asset
management company to perform functions previously performed by CMS.) Mr.
Schwartzberg and CMS responded to the contract termination 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.
Following subsequent litigation, none of which involved the Partnership, on
June 12, 1996, Mr. Schwartzberg, CRI and others entered an agreement (which
contemplates the execution of a subsequent definitive agreement) to resolve the
disputes between CRI and CMS. The Partnership was not a signatory to the
agreement. As part of the resolution, Mr. Schwartzberg withdrew any derogatory
statements he made about CRI and its principals. Upon execution of the
definitive agreement, Mr. Schwartzberg shall withdraw as a General Partner of
this Partnership and his interest will become that of a Special Limited Partner.
As of March 10, 1997, CRI and Mr. Schwartzberg were unable to agree on the
language of various provisions of the definitive agreement and have agreed to
submit the open issues to arbitration. The Partnership is not a party to the
arbitration proceeding.
Financial Condition/Liquidity
-----------------------------
As of December 31, 1996, the Partnership had approximately 1,700 investors
who subscribed to a total of 24,837 units of limited partnership interests in
the original amount of $24,837,000. The Partnership has investments in
seventeen Local Partnerships. The Partnership's liquidity, with unrestricted
cash resources of $2,243,295 as of December 31, 1996, along with anticipated
future cash distributions from the Local Partnerships, is expected to meet its
current and anticipated operating cash needs. As of December 31, 1995, $189,000
of cash resources were restricted for the purpose of collateralizing a letter of
credit related to the mortgage loan outstanding on a certain Local Partnership.
On March 28, 1996, these cash resources were reclassified as an unrestricted
certificate of deposit, as discussed below. The Partnership has determined that
the carrying amounts of its cash and cash equivalents and certificate of deposit
approximate fair value. As of March 10, 1997, there were no material
commitments for capital expenditures.
During 1996, 1995 and 1994, the Partnership received cash distributions of
$381,770, $434,022 and $433,794, respectively, from the Local Partnerships.
II-5
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
The Partnership's obligations with respect to its investments in Local
Partnerships in the form of purchase money notes having a principal balance of
$4,978,800 as of December 31, 1996, plus accrued interest of $6,370,958, are
payable in full upon the earliest of: (1) sale or refinancing of the respective
Local Partnership's rental property; (2) payment in full of the respective Local
Partnership's permanent loan; or (3) maturity. Purchase money notes in an
aggregate principal amount of $1,200,000 matured 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 Partnership. 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.
On August 30, 1996, the Partnership paid off one of the purchase money
notes in the principal amount of $150,000 relating to Frederick Heights Limited
Partnership (Frederick Heights) at a discount, resulting in a gain on
extinguishment of debt of $18,224. The remaining purchase money notes related
to Frederick Heights in the aggregate principal and accrued interest amount of
$500,000 and $117,567, respectively, matured and were paid-off on January 1,
1997. These notes were paid off at their carrying value, hence, the Partnership
did not recognize a gain or loss on the extinguishment of the debt.
The Partnership defaulted on its purchase money note relating to ARA
Associates-Shangri-La Ltd. (Shallowford Oaks) on January 1, 1997 when the note
matured and was not paid. The default amount included principal and accrued
interest of $700,000 and $761,389, respectively. As of March 10, 1997,
principal and accrued interest totalling $700,000 and $770,844, respectively,
were due. The Managing General Partner is currently negotiating a five year
extension of the purchase money notes with the noteholders. There is no
assurance that any agreement will be reached with the noteholders. As such,
there is no assurance that the Partnership will be able to retain its interest
in Shallowford Oaks. The uncertainty regarding the continued ownership of the
Partnership's interests in Shallowford Oaks does not impact the Partnership's
financial condition because the related purchase money notes are nonrecourse and
secured solely by the Partnership's interest in the related Local Partnership.
Therefore, should the investment in Shallowford Oaks not produce sufficient
value to satisfy the related purchase money notes, the Partnership's exposure to
loss is limited since the amount of the nonrecourse 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 Partnership has determined that it is not practicable to estimate the
fair value of the purchase money notes, either individually or in the aggregate,
due to: (1) the lack of an active market for this type of financial instrument,
II-6
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
(2) the variable nature of purchase money note interest payments as a result of
fluctuating cash flow distributions received from the related Local
Partnerships, and (3) the excessive costs associated with an independent
appraisal of the purchase money notes.
On May 23, 1994, the local general partners of Tanglewood Apartments
Associates I Limited Partnership (Tanglewood I) filed a notice of intent to
participate under the Low Income Housing Preservation and Resident Homeownership
Act of 1990 (LIHPRHA). On July 11, 1996, the plan of action for the sale of
Tanglewood I under the LIHPRHA program was approved by HUD. This program
provides incentives to owners of multifamily housing who commit to operate their
properties as low to moderate-income housing permanently and who have
participated under specific federal subsidy programs (Section 236 or Section
221(d)(3)) for at least 18 years. Incentives available under the LIHPRHA
program include selling the property to qualified buyers.
On September 19, 1996, Tanglewood I sold the property, a 192-unit apartment
complex located in Westwego, Louisiana, under the LIHPRHA program to New Orleans
Affordable Housing, Inc., a District of Columbia non-profit entity. The sale of
the property generated net cash proceeds to the Partnership of approximately
$904,000 at the time of sale. Additionally, on January 23, 1997, the
Partnership received additional sales proceeds of $31,704 from the release of
the property's reserves. The proceeds received were net of approximately $1.9
million used to retire, at a discount, the Partnership's purchase money note
obligation with respect to the property. The sale provided proceeds to the
Partnership in excess of its investment in the Local Partnership, and resulted
in a net financial statement gain of $2,730,547, of which $1,428,781 resulted
from the retirement of the purchase money note obligation with respect to the
property. The federal tax gain was $4,453,631. The Partnership distributed
$484,073 (or $19.49 per Limited Partner unit) to the Limited Partners on October
31, 1996 as a result of the sale of the property. The Managing General Partner
intends to retain all of the Partnership's remaining undistributed net sale
proceeds for the possible repayment, prepayment or purchase of the Partnership's
outstanding purchase money notes related to other Local Partnerships. The
Managing General Partner of the Partnership and/or its affiliates did not
receive any fees for its services relating to the sale of the property.
The Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient cash is available for operating requirements.
In 1996 and 1995, the receipt of distributions from Local Partnerships was
adequate to support operating cash requirements.
Results of Operations
---------------------
The Partnership's net income increased in 1996 from 1995 principally due to
the extraordinary gain from the extinguishment of debt and the gain on
disposition of investment in partnership related to the sale of Tanglewood I, as
discussed above. Contributing to the increase in the Partnership's net income
was an increase in share of income from partnerships primarily as a result of
one property's accumulated losses exceeding the Partnership's basis in the
related investment in that Local Partnership during 1995. The Partnership does
II-7
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
not record losses from the Local Partnerships in excess of its investment, as
discussed below. Also contributing to the increase in the Partnership's net
income was the extraordinary gain from the extinguishment of the Frederick
Heights purchase money note, as discussed above.
The Partnership's net loss decreased in 1995 from 1994 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 1995. The Partnership does not
record losses from the Local Partnerships in excess of its investment, as
discussed below. Contributing to the decrease in net loss was a decrease in
interest expense incurred during 1995, resulting from the release of the
outstanding capital contributions of New Sharon Woods during 1994, as discussed
below. Also contributing to the decrease in net loss was an increase in
interest income as a result of higher cash balances and increased yields on
investments.
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 years ended December 31,
1996, 1995 and 1994 did not include losses of $880,989, $526,346 and $862,598,
respectively. The Partnership's net loss recognized from the Local
Partnerships is generally expected to decrease in subsequent years as the
Partnership's investments in the Local Partnerships are reduced to zero.
Accordingly, excludable losses are generally expected to increase.
Distributions of $214,060, $248,578 and $256,261, received from nine, nine and
eight Local Partnerships, respectively, during 1996, 1995 and 1994,
respectively, were offset against the respective years' recorded losses because
these amounts were in excess of the Partnership's investment.
The local general partner of Lake Properties Limited Partnership
(Frenchman's Wharf I), in conjunction with the Managing General Partner, engaged
in extensive negotiations with HUD, holder of the mortgage on the property, to
extend the previous workout arrangement related to the mortgage loan on the
property which expired December 1993. 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. As of March 10, 1997, Frenchman's Wharf I had made all monthly
payments in accordance with the workout arrangement. There is, however, no
assurance that the Local Partnership will be able to comply with the terms of
the workout arrangement.
To cover operating deficits incurred in prior years for Frenchman's Wharf
I, the Partnership advanced funds totalling $305,398 as of both December 31,
1996 and 1995. 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 December 31, 1996 and
1995, are payable from cash flow of Frenchman's Wharf I after payment of first-
II-8
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
mortgage debt service and after satisfaction by the Partnership of certain other
interest obligations on the purchase money notes relating to the Local
Partnership. No interest has been accrued since 1992 due to the uncertainty of
future collection. 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 an extension agreement which would be coterminous
with the expiration of the HUD workout arrangement. There is no assurance that
the noteholders will consent to an extension agreement. As of March 10, 1997,
the noteholders had not given consent to an extension agreement.
The report of the auditors on the financial statements of Frenchman's Wharf
I for the year ended December 31, 1996 indicated that substantial doubt exists
about the ability of the Local Partnership to continue as a going concern due to
the Local Partnership's default on its mortgage and the expiration of its HAP
contract with HUD on November 30, 1997. The report of the auditors on the
financial statements of Frenchman's Wharf I for the year ended December 31, 1995
indicated that substantial doubt exists about the ability of the Local
Partnership to continue as a going concern due to the property's recurring
operating deficits and the Local Partnership's default on its mortgage. The
uncertainty about the Local Partnerships' continued ownership of the property
does not impact the Partnership's financial condition because the related
purchase money notes are 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 respective
purchase money notes, the Partnership's exposure to loss is limited since the
amount of nonrecourse 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.
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 $12,921 and $6,784 as of December 31, 1996
and 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 a restricted certificate of deposit on the balance sheet as of
December 31, 1995. As of March 28, 1996, Baltic Plaza was no longer required to
provide supplemental collateral for its mortgage loan, and the letter of credit
was subsequently cancelled. Accordingly, the Partnership's certificate of
deposit has been reclassified as unrestricted.
II-9
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
On March 23, 1993, New Sharon Woods Associates achieved HUD final
endorsement closing. In connection with the closing, Philadelphia National
Bank, the bond trustee, released the Partnership's letters of credit totaling
$170,076. On April 19, 1994, the Partnership concluded negotiations with the
local general partner and executed the partnership agreement as well as the
first and second amendments to the partnership agreement. In accordance with
the agreement, on May 2, 1994, the Partnership released the outstanding capital
contributions of $185,975, along with accrued interest thereon of $33,700, to
the local managing general partner. The remaining accrued interest of $62,332,
which is included in interest expense in the accompanying statements of
operations, was released in 1994 to establish an operating deficit escrow
account for New Sharon Woods Associates.
Inflation
---------
Inflation allows for increases in rental rates, usually offsetting any
higher operating and replacement costs. Furthermore, inflation generally does
not impact the fixed rate long-term financing under which the Partnership's real
property investments were purchased. Future inflation could allow for
appreciated values of the Local Partnerships' properties over an extended period
of time as rental revenue and replacement values gradually increase.
The following table reflects the combined rental revenues of the properties
for the five years ended December 31, 1996. Combined rental revenue amounts for
years prior to 1996 have been adjusted to reflect property sales in 1996, as
discussed above.
II-10
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Combined Rental
Revenue $18,203,181 $17,950,982 $17,334,130 $16,642,366 $16,636,832
Annual Percentage
Increase 1.4% 3.6% 4.2% .03%
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The information required by this item is contained in Part IV.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
None.
II-11
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
(a), (b) and
(c) The Partnership has no directors, executive officers or
significant employees of its own.
(a), (b), (c)
and (e) The names, ages and business experience of the directors and
executive officers of C.R.I., Inc. (CRI), the Managing General
Partner of the Partnership, are as follows:
William B. Dockser, 60, has been the Chairman of the Board of CRI and a Director
since 1974. Prior to forming CRI, he served as President of Kaufman and Broad
Asset Management, Inc., an affiliate of Kaufman and Broad, Inc., which managed a
number of publicly held limited partnerships created to invest in low and
moderate income multifamily apartment complexes. For a period of 2-1/2 years
prior to joining Kaufman and Broad, he served in various positions at HUD,
culminating in the post of Deputy FHA Commissioner and Deputy Assistant
Secretary for Housing Production and Mortgage Credit, where he was responsible
for all federally insured housing production programs. Before coming to
Washington, Mr. Dockser was a practicing attorney in Boston and also was a
special Assistant Attorney General for the Commonwealth of Massachusetts. He
holds a Bachelor of Laws degree from Yale University Law School and a Bachelor
of Arts degree, cum laude, from Harvard University. He is also Chairman of the
Board of CRIIMI MAE Inc., CRIIMI, Inc. and CRI Liquidating REIT, Inc.
H. William Willoughby, 50, President, Secretary and a Director of CRI since
January 1990 and Senior Executive Vice President, Secretary and a Director of
CRI from 1974 to 1989. He is principally responsible for the financial
management of CRI and its associated partnerships. Prior to joining CRI in
1974, he was Vice President of Shelter Corporation of America and a number of
its subsidiaries dealing principally with real estate development and equity
financing. Before joining Shelter Corporation, he was a senior tax accountant
with Arthur Andersen & Company. He holds a Juris Doctorate degree, a Master of
Business Administration degree and a Bachelor of Science degree in Business
Administration from the University of South Dakota. He is also a Director and
executive officer of CRIIMI MAE Inc., CRIIMI, Inc. and CRI Liquidating REIT,
Inc.
Ronald W. Thompson, 50, Group Executive Vice President-Hotel Asset Management.
Prior to joining CRI in 1985, he was employed at the Hyatt Organization where he
most recently served as the General Manager of the Hyatt Regency in Flint,
Michigan. During his nine year tenure with Hyatt, he held senior management
positions with the Hyatt Regency in Dearborn, Michigan, the Hyatt in Richmond,
Virginia, the Hyatt in Winston-Salem, North Carolina and the Hyatt Regency in
Atlanta, Georgia. Before joining Hyatt, Mr. Thompson worked in London, England
for the English Tourist Board as well as holding management positions in Europe,
Australia, and New Zealand in the hotel industry. Mr. Thompson received his
education in England where he received a business degree in Hotel Administration
from Winston College.
Susan R. Campbell, 38, Senior Vice President-CRI Realty Services. Prior to
joining CRI in March 1985, she was a budget analyst for the B. F. Saul Advisory
Company. She holds a Bachelor of Science degree in General Business from the
University of Maryland.
III-1
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - Continued
--------------------------------------------------
Melissa Cecil Lackey, 41, Senior Vice President and General Counsel. Prior to
joining CRI in 1990, she was associated with the firms of Zuckerman, Spaeder,
Goldstein, Taylor & Kolker in Washington, D.C. and Hirsch & Westheimer in
Houston, Texas. She holds a Juris Doctorate from the University of Virginia
School of Law and a Bachelor of Arts degree from the College of William & Mary.
(d) There is no family relationship between any of the foregoing directors
and executive officers.
(f) Involvement in certain legal proceedings.
None.
(g) Promoters and control persons.
Not applicable.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
(a), (b), (c), (d), (e), (f), (g), (i), (j), (k) and (l)
The Partnership has no officers or directors. However, in accordance with
the Partnership Agreement, and as disclosed in the public offering, various
kinds of compensation and fees were paid or are payable to the General
Partners and their affiliates. Additional information required in these
sections is included in Notes 3 and 4 to the financial statements contained
in Part IV, Item 14.
Additionally, the General Partners may receive an annual distribution from
the Partnership if there is cash available for distribution, as defined in
the Partnership Agreement.
The General Partners are also entitled to the following payments:
(1) Annual incentive management fee for managing the affairs and business
of the Partnership in an amount not to exceed .25% of invested assets,
including the Partnership's allocable share of the mortgages, payable
first, in an annual amount equal to $95,208; and second, after
distributions to investors in the amount of 1% of the gross proceeds
of the offering, the balance of such .25% of invested assets. The
annual incentive management fee amounted to $95,208 for each of the
years ended December 31, 1996, 1995 and 1994.
(2) 15% of sale and refinancing proceeds remaining after the limited
partners have received a return of all their capital contributions,
adjusted as provided in the Partnership Agreement, and the General
Partners have received a return of all their capital contributions and
the property disposition fees described below. The General Partners
may also receive a return of their capital contributions and repayment
of any loans made to the Partnership. No sale or refinancing proceeds
were paid to the General Partners during the years ended December 31,
1996, 1995 and 1994.
III-2
<PAGE>
PART III
--------
ITEM 11. EXECUTIVE COMPENSATION - Continued
----------------------
(3) 1% of the aggregate selling prices including any amounts previously
unpaid upon prior sales of apartment complexes, payable after the
limited partners have received a return of all their capital
contributions, adjusted as provided in the Partnership Agreement.
This amount and any other commissions or fees payable upon the sale of
apartment complexes shall not in the aggregate exceed the lesser of
the competitive rate or 6% of the sales price of the apartment
complexes. No such amounts were paid to the General Partners during
the years ended December 31, 1996, 1995 and 1994.
(4) In addition, the Managing General Partner and/or its affiliates may
receive a fee in an amount of not more than 2% of the sales price of
the investment in a Local Partnership or the property it owns. The
fee would only be payable upon the sale of the investment in a Local
Partnership or the property it owns and would be subject to certain
restrictions, including achievement of a certain level of sales
proceeds and making certain minimum distributions to limited partners.
No such fees were paid to the Managing General Partner and/or its
affiliates during the years ending December 31, 1996, 1995 and 1994.
(h) Termination of employment and changes in control arrangements.
None.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------
MANAGEMENT
----------
(a) Security ownership of certain beneficial owners.
No person or "group", as that term is used in Section 13(d)(3) of the
Securities Exchange Act 1934, is known by the Partnership to be the
beneficial owner of more than 5% of the issued and outstanding
partnership units at December 31, 1996.
(b) Security ownership of management.
The following table sets forth certain information concerning all
units beneficially owned, as of December 31, 1996, by each director
and by all directors and officers as a group of the Partnership's
Managing General Partner.
Name of Amount and Nature % of total
Beneficial Owner of Beneficial Ownership Units issued
---------------- ----------------------- ------------
William B. Dockser None 0%
H. William Willoughby None 0%
All Directors and Officers
as a Group (5 persons) None 0%
III-3
<PAGE>
PART III
--------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------
MANAGEMENT - Continued
----------
(c) Changes in control.
There exists no arrangement known to the Partnership, the operation of
which may, at a subsequent date, result in a change in control of the
Partnership. There is a provision in the Limited Partnership
Agreement which allows, under certain circumstances, the ability to
change control.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
(a) Transactions with management and others.
The Partnership has no directors or officers. In addition, the
Partnership has had no transactions with individual officers or
directors of the Managing General Partner of the Partnership other
than any indirect interest such officers and directors may have in the
amounts paid to the Managing General Partner or its affiliates by
virtue of their stock ownership in CRI. Item 11 of this report, which
contains a discussion of the fees and other compensation paid or
accrued by the Partnership to the General Partners or their
affiliates, is incorporated herein by reference. Note 3 of the notes
to financial statements, which contains disclosure of related party
transactions, is also incorporated herein by reference.
(b) Certain business relationships.
The Partnership's response to Item 13(a) is incorporated herein by
reference. In addition, the Partnership has no business relationship
with entities of which the officers and directors of the Managing
General Partner of the Partnership are officers, directors or equity
owners other than as set forth in the Partnership's response to Item
13(a).
(c) Indebtedness of management.
None.
(d) Transactions with promoters.
Not applicable.
III-4
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
-------------------------------------------------------
FORM 8-K
--------
(a) 1. Financial Statements Page
-------------------- ----
Report of Independent Certified Public
Accountants - Capital Realty Investors, Ltd. IV-4
Reports of Independent Certified Public
Accountants - Local Partnerships in which
Capital Realty Investors, Ltd. has invested IV-5
Balance Sheets as of December 31, 1996 and 1995 IV-6
Statements of Operations for the years
ended December 31, 1996, 1995 and 1994 IV-7
Statements of Changes in Partners'
Deficit for the years ended December 31,
1996, 1995 and 1994 IV-8
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 IV-9
Notes to Financial Statements IV-10
(a) 2. Financial Statement Schedules
-----------------------------
Included in Part IV of this report are the
following schedules for the year ended
December 31, 1996, which are applicable to the
Local Partnerships in which Capital Realty
Investors, Ltd. has invested:
Report of Independent Certified Public
Accountants on Financial Statement Schedule IV-27
Schedule III - Real Estate and Accumulated
Depreciation IV-28
The remaining schedules are omitted because the required
information is included in the financial statements and notes
thereto or they are not applicable or not required.
(a) 3. Exhibits (listed according to the number assigned in the table
in Item 601 of Regulation S-K).
Exhibit No. 4 - Instruments defining the rights of security
holders, including indentures.
IV-1
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
-------------------------------------------------------
FORM 8-K - Continued
--------
a. Amended Certificate and Limited Partnership Agreement of
Capital Realty Investors Limited Partnership. (Incorporated
by reference from Exhibit 4 to Registrant's Registration
Statement on Form S-11, as amended, dated December 4, 1981.)
Exhibit No. 10 - Material Contracts.
a. Management Services Agreement between CRI and Capital Realty
Investors Limited Partnership. (Incorporated by reference
from Exhibit No. 10(b) to the Registrant's Registration
Statement on Form S-11, as amended, dated December 4, 1981.)
Exhibit No. 27 - Financial Data Schedule.
Exhibit No. 99 - Additional Exhibits.
a. Prospectus of the Partnership, dated December 31, 1981.
(Incorporated by reference to the Registrant's Registration
Statement on Form S-11, as amended, dated December 4, 1981.)
(b) Reports on Form 8-K
-------------------
A report on Form 8-K was filed with the Commission on October 4, 1996
regarding the sale of the property relating to the Partnership's
investment in Tanglewood I.
(c) Exhibits
--------
The list of Exhibits required by Item 601 of Regulation S-K is
included in Item (a)3., above.
(d) Financial Statement Schedules
-----------------------------
See (a)2., above.
IV-2
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Capital Realty Investors, Ltd.
By: C.R.I., Inc.
Managing General Partner
March 20, 1997 /s/ William B. Dockser
- --------------------------- --------------------------------
DATE William B. Dockser, Director,
Chairman of the Board,
Treasurer and Principal
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
March 20, 1997 /s/ H. William Willoughby
- --------------------------- --------------------------------
DATE H. William Willoughby
Director, President and
Secretary
March 20, 1997 /s/ Deborah K. Browning
- --------------------------- --------------------------------
DATE Deborah K. Browning
Vice President,
Chief Accounting Officer,
Principal Financial and
Principal Accounting Officer
IV-3
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
-------------------------------
PUBLIC ACCOUNTANTS
------------------
To the Partners
Capital Realty Investors, Ltd.
We have audited the balance sheets of Capital Realty Investors, Ltd.
Limited Partnership as of December 31, 1996 and 1995, and the related statements
of operations, changes in partners' deficit and cash flows for the years ended
December 31, 1996, 1995 and 1994. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion of these financial statements based on our audit. We did not
audit the financial statements of certain Local Partnerships. The Partnership's
share of income or loss from these Local Partnerships constitutes $213,684 of
income in 1996, $143,055 of losses in 1995 and $414,979 of losses in 1994
included in the Partnership's net income/loss. The financial statements of
these Local Partnerships were audited by other auditors whose reports thereon
have been furnished to us, and our opinion expressed herein, insofar as it
relates to the amount included for these Local Partnerships, is based solely
upon the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based upon our audits and the reports of other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Capital Realty Investors, Ltd. (a limited
partnership) as of December 31, 1996 and 1995 and the results of its operations,
changes in partners' deficit and cash flows for the years ended December 31,
1996, 1995 and 1994, in conformity with generally accepted accounting
principles.
Vienna, VA Grant Thornton LLP
March 10, 1997
IV-4
<PAGE>
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS -
LOCAL PARTNERSHIPS IN WHICH
CAPITAL REALTY INVESTORS, LTD.
HAS INVESTED*
* The reports of independent certified public accountants - Local
Partnerships in which Capital Realty Investors, Ltd. has invested were
filed in paper format under Form SE on March 20, 1997, in accordance with
the Securities and Exchange Commission's continuing hardship exemption
granted December 19, 1996.
IV-5
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
1996 1995
------------ ------------
<S> <C> <C>
Investments in and advances to partnerships $ 1,976,284 $ 3,350,703
Cash and cash equivalents 2,243,295 1,823,863
Restricted certificate of deposit -- 189,000
Unrestricted certificate of deposit 189,000 --
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $321,878 and $324,572, respectively 590,542 668,908
Property purchase costs, net of accumulated amortization of
$84,505 and $83,991, respectively 152,062 169,850
Other assets 40,592 7,385
------------ ------------
Total assets $ 5,191,775 $ 6,209,709
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in
partnerships $ 4,978,800 $ 6,422,800
Accrued interest payable 6,370,958 7,851,000
Accounts payable and accrued expenses 52,230 63,292
------------ ------------
Total liabilities 11,401,988 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 (996,102) (512,029)
Offering costs (2,689,521) (2,689,521)
Accumulated losses (27,375,590) (29,776,833)
------------ ------------
Total partners' deficit (6,210,213) (8,127,383)
------------ ------------
Total liabilities and partners' deficit $ 5,191,775 $ 6,209,709
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
IV-6
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended December 31,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Share of income (loss) from partnerships $ 427,744 $ 100,806 $ (117,238)
----------- ----------- -----------
Other revenue and expenses:
Revenue
Interest and other income 121,696 114,423 75,477
----------- ----------- -----------
Expenses
Interest 617,759 665,545 726,809
Management fee 95,208 95,208 95,208
General and administrative 95,233 82,193 79,205
Professional fees 58,274 63,946 76,486
Amortization 30,494 31,184 31,184
----------- ----------- -----------
896,968 938,076 1,008,892
----------- ----------- -----------
Total other revenue and expenses (775,272) (823,653) (933,415)
----------- ----------- -----------
Loss before gain on disposition of
investment in partnership (347,528) (722,847) (1,050,653)
----------- ----------- -----------
Gain on disposition of investment in partnership 1,301,766 -- --
----------- ----------- -----------
Income (loss) before extraordinary gain from
extinguishment of debt 954,238 (722,847) (1,050,653)
----------- ----------- -----------
Extraordinary gain from extinguishment of debt 1,447,005 -- --
----------- ----------- -----------
Net income (loss) $ 2,401,243 $ (722,847) $(1,050,653)
=========== =========== ===========
Income (loss) allocated to General Partners (3%) $ 72,037 $ (21,685) $ (31,520)
=========== =========== ===========
Income (loss) allocated to Limited Partners (97%) $ 2,329,206 $ (701,162) $(1,019,133)
=========== =========== ===========
Income (loss) per unit of Limited Partnership Interest based
on 24,837 units outstanding $ 93.78 $ (28.23) $ (41.03)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
IV-7
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
--------- ----------- -----------
<S> <C> <C> <C>
Partners' deficit, January 1, 1994 $(841,462) $(5,512,421) $(6,353,883)
Net loss (31,520) (1,019,133) (1,050,653)
--------- ----------- -----------
Partners' deficit, December 31, 1994 (872,982) (6,531,554) (7,404,536)
Net loss (21,685) (701,162) (722,847)
--------- ----------- -----------
Partners' deficit, December 31, 1995 (894,667) (7,232,716) (8,127,383)
Distribution of $19.49 per Limited
Partnership Interest -- (484,073) (484,073)
Net income 72,037 2,329,206 2,401,243
--------- ----------- -----------
Partners' deficit, December 31, 1996 $(822,630) $(5,387,583) $(6,210,213)
========= =========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
IV-8
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December 31,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,401,243 $ (722,847) $(1,050,653)
Adjustments to reconcile net loss to net cash
used in operating activities:
Share of (income) loss from partnerships (427,744) (100,806) 117,238
Increase in accrued interest receivable
on advances to partnerships (6,137) (6,136) (648)
Gain on disposition of investment in partnership (1,301,766) -- --
Gain on extinguishment of debt (1,447,005) -- --
Payment of purchase money note interest -- -- (42,163)
Payment of interest due on investments in partnerships -- -- (96,032)
Amortization of deferred costs 30,494 31,184 31,184
Changes in assets and liabilities:
(Increase) decrease in other assets (33,207) (2,669) 3,279
Increase in accrued interest payable 617,759 665,545 726,809
(Decrease) increase in accounts payable (11,062) 3,450 (24,581)
----------- ----------- -----------
Net cash used in operating activities (177,425) (132,279) (335,567)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from disposition of investment in partnership 2,793,955 -- --
Receipt of distributions from partnerships 381,770 434,022 433,794
Repayment of advances to partnerships -- -- 8,135
Advances to partnerships -- -- (72,195)
----------- ----------- -----------
Net cash provided by investing activities 3,175,725 434,022 369,734
----------- ----------- -----------
Cash flows from financing activities:
Pay-off of purchase money notes and related interest (2,094,795) -- --
Distribution to limited partners (484,073) -- --
Decrease in amount due on investments in partnerships -- -- (185,975)
----------- ----------- -----------
Net cash used in financing activities (2,578,868) -- (185,975)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 419,432 301,743 (151,808)
Cash and cash equivalents, beginning of year 1,823,863 1,522,120 1,673,928
----------- ----------- -----------
Cash and cash equivalents, end of year $ 2,243,295 $ 1,823,863 $ 1,522,120
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
IV-9
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization
------------
Capital Realty Investors, Ltd. (the Partnership) was formed under the
District of Columbia Limited Partnership Act on June 1, 1981 and shall
continue until December 31, 2030 unless sooner dissolved in accordance with
the Partnership Agreement. The Partnership was formed to invest in real
estate by acquiring and holding a limited partner interest in limited
partnerships (Local Partnerships) which own and operate federal or state
government-
assisted or conventionally financed apartment complexes located throughout
the United States, which provide housing principally to the elderly or to
individuals and families of low or moderate income.
The General Partners of the Partnership are C.R.I., Inc. (CRI), the
Managing General Partner, current and former shareholders of CRI and
Rockville Pike Associates, Ltd., a Maryland limited partnership which
includes the shareholders of CRI and certain officers and former employees
of CRI.
The Partnership sold 24,837 units at $1,000 per unit of Limited
Partnership Interest through a public offering. The offering period was
terminated on December 31, 1982.
b. Method of accounting
--------------------
The financial statements of the Partnership are prepared on the
accrual basis of accounting in accordance with generally accepted
accounting principles.
c. Investments in and advances to partnerships
-------------------------------------------
The investments in and advances to Local Partnerships (see Note 2) are
accounted for by the equity method because the Partnership is a limited
partner in the Local Partnerships. Under this method, the carrying amount
of the investments in and advances to Local Partnerships is (i) reduced by
distributions received and (ii) increased or reduced by the Partnership's
share of earnings or losses, respectively, of the Local Partnerships. As
of both December 31, 1996 and 1995, the Partnership's share of cumulative
losses of eleven of the Local Partnerships exceeds the amount of the
Partnership's investment in and advances to those Local Partnerships by
$7,595,096 and $7,060,300, respectively. Since 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. As of December 31, 1996 and 1995, cumulative cash
distributions of $2,266,772 and $2,052,712, respectively, have been
received from the Local Partnerships for which the Partnership's carrying
value is zero. These distributions are recorded as increases in the
Partnership's share of income from partnerships.
Costs incurred in connection with acquiring these investments have
been deferred and are being amortized using the straight-line method over
the estimated useful lives of the properties owned by the Local
Partnerships.
IV-10
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
d. Cash and cash equivalents
-------------------------
Cash and cash equivalents consist of all money market funds, time and
demand deposits, repurchase agreements, commercial paper and certificates
of deposit with original maturities of three months or less. The
Partnership has determined that the carrying amount of its cash and cash
equivalents approximates fair value.
e. Restricted and unrestricted certificate of deposit
--------------------------------------------------
Restricted certificate of deposit as of December 31, 1995 consists of
a certificate of deposit with a bank to collateralize a letter of credit of
$189,000 by the Partnership issued to satisfy the requirements of its
investment in Baltic Plaza. As discussed in Note 2, as of March 28, 1996,
the supplemental collateral was no longer required, and the letter of
credit was subsequently cancelled. Accordingly, the Partnership's
certificate of deposit has been reclassified as unrestricted.
f. Offering costs
--------------
The Partnership incurred certain costs in connection with the offering
and selling of limited partnership interests. Such costs were recorded as
a reduction of partners' capital when incurred.
g. Income taxes
------------
For federal and state income tax purposes, each partner reports on his
or her personal income tax return his or her share of the Partnership's
income or loss as determined for tax purposes. Accordingly, no provision
(credit) has been made for income taxes in these financial statements.
h. Use of estimates
----------------
In preparing financial statements in conformity with generally
accepted accounting principles, the Partnership is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
a. Due on investments in partnerships
----------------------------------
As of December 31, 1996 and 1995, the Partnership had acquired limited
partnership interests in seventeen and eighteen Local Partnerships,
respectively, which were organized to develop, construct, own, maintain and
operate apartment complexes which provide housing principally to the
IV-11
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
elderly and to individuals and families of low or moderate income. The
remaining principal amounts due on investments in the Local Partnerships as
of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Purchase money notes due:
1997 $1,200,000 $1,350,000
1998 3,778,800 5,072,800
---------- ----------
$4,978,800 $6,422,800
========== ==========
</TABLE>
The Partnership's purchase money notes have stated interest rates
ranging from 6.00% to 11.10%. The purchase money notes are payable upon
the earliest of: (1) sale or refinancing of the respective Local Partner-
ship's rental property; (2) payment in full of the respective Local
Partnership's permanent loan; or (3) maturity. Purchase money notes in an
aggregate principal amount of $1,200,000 matured 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
years ended December 31, 1996, 1995 and 1994 was $617,759, $665,545 and
$664,477, respectively. The accrued interest on the purchase money notes
of $6,370,958 and $7,851,000, as of December 31, 1996 and 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.
On September 19, 1996, the Partnership paid off the purchase money
note relating to Tanglewood Apartments Associates I LP (Tanglewood I) at a
discount, as discussed below.
On August 30, 1996, the Partnership paid off one of the purchase money
notes in the principal amount of $150,000 relating to Frederick Heights
Limited Partnership (Frederick Heights) at a discount, resulting in a gain
IV-12
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
on extinguishment of debt of $18,224. The remaining purchase money notes
related to Frederick Heights in the aggregate principal and accrued
interest amount of $500,000 and $117,567, respectively, matured and were
paid-off on January 1, 1997. These notes were paid off at their carrying
value, hence, the Partnership did not recognize a gain or loss on the
extinguishment of the debt.
The Partnership defaulted on its purchase money note relating to ARA
Associates-Shangri-La Ltd. (Shallowford Oaks) on January 1, 1997 when the
note matured and was not paid. The default amount included principal and
accrued interest of $700,000 and $761,389, respectively. As of March 10,
1997, principal and accrued interest totalling $700,000 and $770,844,
respectively, were due. The Managing General Partner is currently
negotiating a five year extension of the purchase money notes with the
noteholders. There is no assurance that any agreement will be reached with
the noteholders. As such, there is no assurance that the Partnership will
be able to retain its interest in Shallowford Oaks. The uncertainty
regarding the continued ownership of the Partnership's interests in
Shallowford Oaks does not impact the Partnership's financial condition
because the related purchase money notes are nonrecourse and secured solely
by the Partnership's interest in the related Local Partnership. Therefore,
should the investment in Shallowford Oaks not produce sufficient value to
satisfy the related purchase money notes, the Partnership's exposure to
loss is limited since the amount of the nonrecourse 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 Partnership has determined that it is not practicable to estimate
the fair value of the purchase money notes, either individually or in the
aggregate, due to: (1) the lack of an active market for this type of
financial instrument, (2) the variable nature of purchase money note
interest payments as a result of fluctuating cash flow distributions
received from the related Local Partnerships, and (3) the excessive costs
associated with an independent appraisal of the purchase money notes.
b. Interests in profits, losses and cash distributions
---------------------------------------------------
The Partnership has a 74.99% to 98.99% interest in profits, losses and
cash distributions (as restricted by various federal and state housing
agencies) of each Local Partnership. An affiliate of the General Partners
of the Partnership is also a general partner of each Local Partnership. The
Partnership received cash distributions from the rental operations of the
Local Partnerships totaling $381,770, $434,022 and $433,794 during the
years ended December 31, 1996, 1995 and 1994, respectively. As of December
31, 1996, twelve of the Local Partnerships had surplus cash, as defined by
their respective agencies, in the amount of $2,133,429, which is available
for distribution in accordance with their respective agencies' regulations.
The cash distributions to the Partnership from the operations of the
rental properties may be limited by U.S. Department of Housing and Urban
Development (HUD) regulations. Such regulations limit annual cash
distributions to a percentage of the owner's equity investment in a rental
property. Funds in excess of those which may be distributed to owners are
required to be placed in a residual receipts account held by the governing
IV-13
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
state or federal agency for the benefit of the property.
Upon sale, refinancing or liquidation of each Local Partnership, the
proceeds from the sale, refinancing or liquidation shall be distributed in
accordance with the respective provisions of each Local Partnership's
partnership agreement. In accordance with such provisions, the Partnership
would receive from such proceeds its respective percentage interest of any
remaining proceeds, after payment of (1) all debts and liabilities of the
Local Partnership and certain other items, (2) the Partnership's capital
contributions plus certain specified amounts as outlined in each
partnership agreement, and (3) certain special distributions to general
partners and related entities of the Local Partnership.
c. Property matters
----------------
The following table reflects the amounts of advances, and accrued
interest thereon, made to the Local Partnerships as of December 31, 1996
and 1995.
<TABLE>
<CAPTION>
December 31,
1996 1995
----------- -----------
<S> <C> <C>
Local Partnership
- -----------------
Frenchman's Wharf I:
Principal amount of funds advanced $ 305,398 $ 305,398
Accrued interest on advances 183,102 183,102
Shallowford Oaks Apts:
Principal amount of funds advanced 72,195 72,195
Accrued interest on advances 12,921 6,784
----------- -----------
$ 573,616 $ 567,479
=========== ===========
</TABLE>
The local general partner of Lake Properties Limited Partnership
(Frenchman's Wharf I), in conjunction with the Managing General Partner,
engaged in extensive negotiations with HUD, holder of the mortgage on the
property, to extend the previous workout arrangement related to the
mortgage loan on the property which expired December 1993. 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. As of
March 10, 1997, Frenchman's Wharf I had made all monthly payments in
accordance with the workout arrangement. There is, however, no assurance
IV-14
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
that the Local Partnership will be able to comply with the terms of the
workout arrangement.
To cover operating deficits incurred in prior years for Frenchman's
Wharf I, the Partnership advanced funds totalling $305,398 as of both
December 31, 1996 and 1995. 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 December 31, 1996 and 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. No interest has been
accrued since 1992 due to the uncertainty of future collection. 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 an extension agreement which
would be coterminous with the expiration of the HUD workout arrangement.
There is no assurance that the noteholders will consent to an extension
agreement. As of March 10, 1997, the noteholders had not given consent to
an extension agreement.
The report of the auditors on the financial statements of Frenchman's
Wharf I for the year ended December 31, 1996 indicated that substantial
doubt exists about the ability of the Local Partnership to continue as a
going concern due to the Local Partnership's default on its mortgage and
the expiration of its Section 8 Rental Housing Assistance Payments (HAP)
contract with HUD on November 30, 1997. The report of the auditors on the
financial statements of Frenchman's Wharf I for the year ended December 31,
1995 indicated that substantial doubt exists about the ability of the Local
Partnership to continue as a going concern due to the property's recurring
operating deficits and the Local Partnership's default on its mortgage.
The uncertainty about the Local Partnerships' continued ownership of the
property does not impact the Partnership's financial condition because the
related purchase money notes are 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 respective purchase money notes, the Partnership's exposure to loss is
limited since the amount of nonrecourse 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.
IV-15
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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 $12,921 and $6,784 as of December
31, 1996 and 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.
On May 23, 1994, the local general partners of Tanglewood I filed a
notice of intent to participate under the Low Income Housing Preservation
and Resident Home Ownership Act of 1990 (LIHPRHA). On July 11, 1996, the
plan of action for the sale of Tanglewood I under the LIHPRHA program was
approved by HUD. This program provides incentives to owners of multifamily
housing who commit to operate their properties as low to moderate-income
housing permanently and who have participated under specific federal
subsidy programs (Section 236 or Section 221(d)(3)) for at least 18 years.
Incentives available under the LIHPRHA program include selling the property
to qualified buyers.
On September 19, 1996, Tanglewood I sold the property, a 192-unit
apartment complex located in Westwego, Louisiana, under the LIHPRHA program
to New Orleans Affordable Housing, Inc., a District of Columbia non-profit
entity. The sale of the property generated net cash proceeds to the
Partnership of approximately $904,000 at the time of sale. Additionally,
on January 23, 1997, the Partnership received additional sales proceeds of
$31,704 from the release of the property's reserves. The proceeds received
were net of approximately $1.9 million used to retire, at a discount, the
Partnership's purchase money note obligation with respect to the property.
The sale provided proceeds to the Partnership in excess of its investment
in the Local Partnership, and resulted in a net financial statement gain of
$2,730,547, of which $1,428,781 resulted from the retirement of the
purchase money note obligation with respect to the property. The federal
tax gain was $4,453,631. The Partnership distributed $484,073 (or $19.49
per Limited Partner unit) to the Limited Partners on October 31, 1996 as a
result of the sale of the property. The Managing General Partner intends
to retain all of the Partnership's remaining undistributed net sale
proceeds for the possible repayment, prepayment or purchase of the
Partnership's outstanding purchase money notes related to other Local
Partnerships. The Managing General Partner of the Partnership and/or its
affiliates did not receive any fees for its services relating to the sale
of the property.
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 a restricted certificate of deposit on the
balance sheet as of December 31, 1995. As of March 28, 1996, Baltic Plaza
was no longer required to provide supplemental collateral for its mortgage
loan, and the letter of credit was subsequently cancelled. Accordingly,
the Partnership's certificate of deposit has been reclassified as
unrestricted.
IV-16
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
On March 23, 1993, New Sharon Woods Associates achieved HUD final
endorsement closing. In connection with the closing, Philadelphia National
Bank, the bond trustee, released the Partnership's letters of credit
totaling $170,076. On April 19, 1994, the Partnership concluded
negotiations with the local general partner and executed the partnership
agreement as well as the first and second amendments to the partnership
agreement. In accordance with the agreement, on May 2, 1994, the
Partnership released the outstanding capital contributions of $185,975,
along with accrued interest thereon of $33,700, to the local managing
general partner. The remaining accrued interest of $62,332, which is
included in interest expense in the accompanying statements of operations,
was released in 1994 to establish an operating deficit escrow account for
New Sharon Woods Associates.
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 strategies to sell or refinance certain properties
pursuant to programs developed by these agencies or other potential buyers.
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 to refinance the property, or to
obtain supplemental financing. The Managing General Partner continues to
monitor certain state housing agency programs and/or programs provided by
certain lenders, to ascertain whether the properties would qualify within
the parameters of a given program 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 project-based Section 8 Rental Housing
Assistance Payments (HAP) provided by the U.S. Department of Housing and
Urban Development (HUD) pursuant to HAP contracts. In 1995 and 1996, HUD
released its Reinvention Blueprint and a revision to its Reinvention
Blueprint which contained proposals that have come to be known as "Mark-to-
Market". Congress, HUD and the Clinton Administration continue to struggle
with the Mark-to-Market initiative. This initiative was intended to deal
with HUD's increasing burden of funding HAP contracts. Under the
initiative, HUD would eliminate the project-based subsidy and provide the
residents with "sticky vouchers" which would allow residents to move to
other developments should they so choose. However, with the elimination of
the HAP contract, there is no assurance that rental properties would be
able to maintain the rental income and occupancy levels necessary to pay
operating costs and debt service. The initiative will impact those
properties that have HAP contracts with shorter terms than that of the
underlying property mortgage. For instance, some properties may have a 20-
year HAP contract while the underlying mortgage has a 40-year term. In the
interim, Congress has authorized one-year extensions for properties with
HAP contracts expiring during the government's fiscal year 1997, which
began October 1, 1996. In light of recent political scrutiny of
appropriations for HUD programs, continued funding of annual renewals for
Section 8 HAP contracts expiring after fiscal year 1997 is uncertain.
With the uncertainty surrounding renewals of expiring Section 8 HAP
contracts, the Managing General Partner is developing new strategies to
deal with the ever changing environment of affordable housing policy.
Properties with expiring Section 8 HAP contracts may become convertible to
market-rate apartment properties. Currently, there are a few lenders that
IV-17
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
will provide additional financing to allow the property to convert to
market rate units. Where opportunities exist, the Managing General Partner
will continue to work with the Local Partnerships to develop a strategy
that makes economic sense for all parties involved.
d. Summarized financial information
--------------------------------
Summarized financial information for the Local Partnerships as of
December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995
and 1994 is as follows:
IV-18
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1996 1995
------------ ------------
<S> <C> <C>
Rental property, at cost, net of accumulated depreciation
of $45,371,886 and $44,203,590 $ 47,596,093 $ 51,922,086
Land 8,029,484 8,354,484
Other assets 14,054,983 13,377,120
------------ ------------
Total assets $ 69,680,560 $ 73,653,690
============ ============
Mortgage notes payable $ 72,319,143 $ 74,456,588
Other liabilities 7,918,946 7,638,224
------------ ------------
Total liabilities 80,238,089 82,094,812
Partners' deficit (10,557,529) (8,441,122)
------------ ------------
Total liabilities and partners' deficit $ 69,680,560 $ 73,653,690
============ ============
</TABLE>
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Rental $ 18,796,791 $ 18,756,429 $ 18,103,428
Interest 518,861 501,649 389,062
Other 276,327 430,203 526,649
------------ ------------ ------------
Total revenue 19,591,979 19,688,281 19,019,139
------------ ------------ ------------
Expenses:
Operating 9,822,276 9,656,615 9,846,610
Interest 6,658,337 6,799,235 7,022,133
Depreciation 3,386,412 3,369,059 3,382,048
Amortization 48,537 35,436 28,665
------------ ------------ ------------
Total expenses 19,915,562 19,860,345 20,279,456
------------ ------------ ------------
Net loss $ (323,583) $ (172,064) $ (1,260,317)
============ ============ ============
</TABLE>
IV-19
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
The above rental property and partners' capital (deficit) amounts
include $1,700,000 of the Partnership's purchase money notes payable which
were issued to partners of the Local Partnerships and $4,123,844 of
purchase price paid by the Partnership which had not been recorded in the
rental property basis by the Local Partnerships. Accordingly, depreciation
expense as reflected above includes $177,980 for the years ended December
31, 1996, 1995 and 1994, to recognize the Partnership's increased
depreciable basis for the Local Partnerships' rental properties.
e. Reconciliation of the Local Partnerships' financial statement
-------------------------------------------------------------
net loss to income tax loss
---------------------------
For federal income tax purposes, the Local Partnerships report on a
basis whereby: (1) certain revenue and the related assets are recorded
when received rather than when earned; (2) certain costs are expensed when
paid or incurred rather than capitalized and amortized over the period of
benefit; and (3) a shorter life is used to compute depreciation of the
property for tax purposes as permitted by Internal Revenue Service (IRS)
Regulations. These returns are subject to audit and, therefore, possible
adjustment by the IRS.
A reconciliation of the Local Partnerships' financial statement net
loss reflected above to the taxable loss for the years ended December 31,
1996, 1995 and 1994 is as follows:
IV-20
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
<TABLE>
<CAPTION>
For the years ended December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Financial statement net loss $ (323,583) $ (172,064) $ (1,260,317)
Adjustments:
Additional tax depreciation using accelerated methods,
net of depreciation on construction period expenses
capitalized for financial statement purposes (557,058) (888,691) (1,168,016)
Amortization for financial statement purposes not
deducted for income tax purposes 48,647 46,717 47,469
Miscellaneous, net 125,780 72,037 (139,666)
------------ ------------ ------------
Taxable loss $ (706,214) $ (942,001) $ (2,520,530)
============ ============ ============
</TABLE>
3. RELATED-PARTY TRANSACTIONS
In accordance with the Partnership Agreement, the Partnership paid the
Managing General Partner a fee for services in connection with the review,
selection, evaluation, negotiation and acquisition of the interests in the Local
Partnerships. The fee amounted to $993,480 which is equal to 4% of the Limited
Partners' capital contributions to the Partnership. The acquisition fee was
capitalized and is being amortized over a forty-year period using the
straight-line method.
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. For the years ended December 31, 1996, 1995 and
1994, the Partnership paid $71,142, $58,095 and $69,620, 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.
In addition, in accordance with the terms of the Partnership Agreement, the
Partnership is obligated to pay the Managing General Partner an annual incentive
management fee (the Management Fee), after all other expenses of the Partnership
are paid. The amount of the Management Fee shall be equal to .25% of invested
assets, as defined in the Partnership Agreement, and shall be payable from the
Partnership's cash available for distribution, as defined in the Partnership
Agreement, as of the end of each calendar year, as follows:
a. First, on a monthly basis as an operating expense before any
distributions to limited partners in an annual amount equal to
$95,208; and
IV-21
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
3. RELATED-PARTY TRANSACTIONS - Continued
b. Second, after distributions to the limited partners in the amount of
1% of the gross proceeds of the offering, the balance of such .25% of
invested assets.
For each of the years ended December 31, 1996, 1995 and 1994, the Part-
nership paid the Managing General Partner a Management Fee of $95,208.
4. PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS
All profits and losses are allocated 97% to the limited partners and 3% to
the General Partners. The net proceeds resulting from the liquidation of the
Partnership or the Partnership's share of the net proceeds from any sale or
refinancing of the projects or their rental properties which are not reinvested
shall be distributed and applied as follows:
(i) to the payment of debts and liabilities of the Partnership
(including all expenses of the Partnership incident to the sale
or refinancing) other than loans or other debts and liabilities
of the Partnership to any partner or any affiliate; such debts
and liabilities, in the case of a non-liquidating distribution,
to be only those which are then required to be paid or, in the
judgment of the Managing General Partner, required to be provided
for;
(ii) to the establishment of any reserves which the Managing General
Partner deems reasonably necessary for contingent, unmatured or
unforeseen liabilities or obligations of the Partnership;
(iii) to the limited partners in the amount of their capital
contributions without deduction for prior cash distributions
other than prior distributions of proceeds from any sale or
refinancing;
(iv) to the repayment of any unrepaid loans theretofore made by any
partner or any affiliate to the Partnership for Partnership
obligations and to the payment of any unpaid amounts owing to the
General Partners pursuant to the Partnership Agreement;
(v) to the General Partners in the amount of their capital
contributions;
(vi) thereafter, for their services to the Partnership, in equal
shares to certain general partners (or their designees), whether
or not any is then a general partner, an aggregate fee of 1% of
the gross proceeds resulting from (A) such sale (if the proceeds
are from a sale rather than a refinancing) and (B) any prior
sales from which such 1% fee was not paid to the General Partners
or their designees and,
(vii) the remainder, 15% to the General Partners (or their assignees)
and 85% to the limited partners (or their assignees).
Fees payable to certain general partners (or their designees) under (vi)
above, together with all other property disposition fees and any other
commissions or fees payable upon the sale of apartment complexes, shall not in
the aggregate exceed the lesser of the competitive rate or 6% of the sales price
of the apartment complexes.
In addition, the Managing General Partner and/or its affiliates may receive
a fee in an amount of not more than 2% of the sales price of the investment in a
Local Partnership or the property it owns. The fee would only be payable upon
the sale of the investment in a Local Partnership or the property it owns and
IV-22
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
4. PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS - Continued
would be subject to certain restrictions, including achievement of a certain
level of sales proceeds and making certain minimum distributions to limited
partners. No such amounts were paid to the Managing General Partner and/or its
affiliates during 1996, 1995 and 1994.
Pursuant to the Partnership Agreement, all cash available for distribution,
as defined, shall be distributed, not less frequently than annually, 97% to the
limited partners and 3% to the General Partners after payment of the Management
Fee (see Note 3), as specified in the Partnership Agreement. As defined in the
Partnership Agreement, prior to the establishment of any reserves deemed
necessary by the Managing General Partner and after payment of the Management
Fee, the Partnership had cash available for distribution of approximately
$218,000, $298,000 and $219,000 for the years ended December 31, 1996, 1995 and
1994, respectively. At December 31, 1996, twelve of the Local Partnerships had
surplus cash, as defined by their respective agencies, in the amount of
$2,133,429, which is available for distribution to the Partnership in accordance
with the respective agencies regulations. On October 31, 1996, the Partnership
distributed $484,073 (or $19.49 per Limited Partner unit) to the Limited
Partners resulting from the sale of the property relating to the Partnership's
investment in Tanglewood I. No distributions were declared or paid during 1995
and 1994.
5. RECONCILIATION OF THE PARTNERSHIP'S FINANCIAL STATEMENT NET
LOSS TO INCOME TAX LOSS
For federal income tax purposes, the Partnership reports on a basis
whereby: (1) certain expenses are amortized rather than expensed when incurred;
(2) certain costs are amortized over a shorter period for tax purposes, as
permitted by IRS Regulations, and (3) certain costs are amortized over a longer
period for tax purposes. The Partnership records its share of losses from its
investments in limited partnerships for federal income tax purposes as reported
on the Local Partnerships' federal income tax returns (see Note 2e), including
losses in excess of related investments amounts. These returns are subject to
audit and, therefore, possible adjustment by the IRS.
A reconciliation of the Partnership's financial statement net income (loss)
to the taxable income (loss) for the years ended December 31, 1996, 1995 and
1994 is as follows:
IV-23
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
5. RECONCILIATION OF THE PARTNERSHIP'S FINANCIAL STATEMENT NET
LOSS TO INCOME TAX LOSS - Continued
<TABLE>
<CAPTION>
For the years ended December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Financial statement net income (loss) $ 2,401,243 $ (722,847) $ (1,050,653)
Adjustments:
Differences between the income tax losses and
financial statement losses related to the
Partnership's equity in the Local Partnerships'
losses (897,512) (782,540) (2,122,159)
Amortization for financial statement purposes
not deducted for income tax purposes (56,952) (58,300) (58,300)
Difference in gain on disposition of investment
in partnership 1,723,084
------------ ------------ ------------
Taxable income (loss) $ 3,169,863 $ (1,563,687) $ (3,231,112)
============ ============ ============
</TABLE>
6. 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 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
IV-24
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
6. CONTINGENCIES - Continued
this action. Messrs. Dockser and Willoughby entered an answer denying all of
Mr. Schwartzberg's claims. On February 6, 1996, CRI terminated the CMS contract
for cause. (The Partnership subsequently retained an independent asset
management company to perform functions previously performed by CMS.) Mr.
Schwartzberg and CMS responded to the contract termination 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.
Following subsequent litigation, none of which involved the Partnership, on
June 12, 1996, Mr. Schwartzberg, CRI and others entered an agreement (which
contemplates the execution of a subsequent definitive agreement) to resolve the
disputes between CRI and CMS. The Partnership was not a signatory to the
agreement. As part of the resolution, Mr. Schwartzberg withdrew any derogatory
statements he made about CRI and its principals. Upon execution of the
definitive agreement, Mr. Schwartzberg shall withdraw as a General Partner of
this Partnership and his interest will become that of a Special Limited Partner.
As of March 10, 1997, CRI and Mr. Schwartzberg were unable to agree on the
language of various provisions of the definitive agreement and have agreed to
submit the open issues to arbitration. The Partnership is not a party to the
arbitration proceeding.
IV-25
<PAGE>
FINANCIAL STATEMENT SCHEDULES
IV-26
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON
-----------------------------------------------------
FINANCIAL STATEMENT SCHEDULE
----------------------------
To the Partners
Capital Realty Investors, Ltd.
In connection with our audit of the financial statements of Capital Realty
Investors, Ltd. referred to in our report dated March 10, 1997, which is
included in this Form 10-K, we have also audited Schedule III as of December 31,
1996, 1995 and 1994. We did not audit the financial statements for certain of
the Local Partnerships in 1996, 1995 and 1994, which are accounted for as
described in Note 1c. In our opinion, this schedule presents fairly, in all
material respects, the information required to be set forth therein.
Grant Thornton LLP
Vienna, VA
March 10, 1997
IV-27
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
(a limited partnership)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION OF
LOCAL PARTNERSHIPS IN WHICH CAPITAL REALTY INVESTORS, LTD.
HAS INVESTED - Continued
December 31, 1996
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D
- -------------------- ------- ------------------------------- -------------------------------
Initial Costs Capitalized
Cost to Local Subsequent
Partnership to Acquisition
------------------------------- -------------------------------
Building
Description Encum- and Carrying
Operating Properties brances Land Improvements Improvements Costs (B)
- -------------------- ------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Baltic Plaza (A) $ 556,500 $ -- $ 8,892,847 $ 1,386,885
Atlantic City, NJ
(169 units-elderly
apartment complex)
Capitol Commons (A) 337,000 925,000 7,460,510 504,635
Lansing, MI
(200 units-elderly
apartment complex)
Court Place (A) 519,821 -- 7,492,277 254,477
Pekin, IL
(110 units-elderly;
50 units-family
apartment complex)
Frederick Heights (A) 319,785 2,035,217 4,054,552 --
Frederick, MD
(156 units-family
apartment complex)
Frenchman's Wharf I (A) 2,196,412 10,693,539 383,657 --
New Orleans, LA
(320 units-family
apartment complex)
Linden Place (A) 731,109 -- 9,932,790 389,892
Arlington Heights, IL
(110 units-elderly;
80 units-family
apartment complex)
Park Glen (A) 293,524 -- 5,771,545 270,485
Taylorville, IL
(125 units-elderly
apartment complex)
</TABLE>
IV-28
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
(a limited partnership)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION OF
LOCAL PARTNERSHIPS IN WHICH CAPITAL REALTY INVESTORS, LTD.
HAS INVESTED - Continued
December 31, 1996
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D
- -------------------- ------- ------------------------------- -------------------------------
Initial Costs Capitalized
Cost to Local Subsequent
Partnership to Acquisition
------------------------------- -------------------------------
Building
Description Encum- and Carrying
Operating Properties brances Land Improvements Improvements Costs (B)
- -------------------- ------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Shallowford Oaks Apts (A) 920,396 6,848,692 946,136 --
Chamblee, GA ----------- ------------ ------------ -----------
(204 units-family
apartment complex)
Sub-total $ 5,874,547 $ 20,502,448 $ 44,934,314 $ 2,806,374
----------- ------------ ------------ -----------
Aggregate of
remaining properties which
are individually
less than 5% of the
total in Column E 1,540,655 4,335,362 20,084,421 919,342
----------- ------------ ------------ -----------
Total $ 7,415,202 $ 24,837,810 $ 65,018,735 $ 3,725,716
=========== ============ ============ ===========
</TABLE>
IV-29
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
(a limited partnership)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION OF
LOCAL PARTNERSHIPS IN WHICH
CAPITAL REALTY INVESTORS, LTD. HAS INVESTED - Continued
December 31, 1996
<TABLE>
<CAPTION>
COL. A COL. E COL. F COL. G COL. H COL. I
- -------------------- ------------------------------------------- ------------ ------- ------- --------------
Gross amount at which Life upon
carried at close of period which dep-
------------------------------------------- Date reciation in
Building Accumulated of latest income
Description and depreciation Const- Date statement is
Operating Properties Land Improvements Total (C) (D) (D) ruction Acquired computed (years)
- -------------------- ----------- ------------ ------------- ------------ ------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Baltic Plaza $ 673,807 $ 10,162,425 $ 10,836,232 $ (3,477,304) 2/83 6/81 5-40
Atlantic City, NJ
(169 units-elderly
apartment complex)
Capitol Commons 346,103 8,881,042 9,227,145 (4,540,681) 6/82 8/81 5-30
Lansing, MI
(200 units-elderly
apartment complex)
Court Place 519,821 7,746,754 8,266,575 (3,451,034) 3/83 10/81 5-40
Pekin, IL
(110 units-elderly;
50 units-family
apartment complex)
Frederick Heights 319,785 6,089,769 6,409,554 (2,825,517) 2/79 10/81 5-40
Frederick, MD
(156 units-family
apartment complex)
Frenchman's Wharf I 2,196,412 11,077,196 13,273,608 (6,125,986) 8/78 9/82 5-30
New Orleans, LA
(320 units-family
apartment complex)
Linden Place 772,635 10,281,156 11,053,791 (4,857,330) 9/82 3/82 5-30
Arlington Heights, IL
(110 units-elderly;
80 units-family
apartment complex)
Park Glen 293,524 6,042,030 6,335,554 (2,692,544) 9/83 8/82 5-30
Taylorville, IL
(125 units-elderly
apartment complex)
</TABLE>
IV-30
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
(a limited partnership)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION OF
LOCAL PARTNERSHIPS IN WHICH
CAPITAL REALTY INVESTORS, LTD. HAS INVESTED - Continued
December 31, 1996
<TABLE>
<CAPTION>
COL. A COL. E COL. F COL. G COL. H COL. I
- -------------------- ------------------------------------------- ------------ ------- ------- --------------
Gross amount at which Life upon
carried at close of period which dep-
------------------------------------------- Date reciation in
Building Accumulated of latest income
Description and depreciation Const- Date statement is
Operating Properties Land Improvements Total (C) (D) (D) ruction Acquired computed (years)
- -------------------- ----------- ------------ ------------- ------------ ------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Shallowford Oaks Apts 920,396 7,794,828 8,715,224 (4,573,479) 7/81 1/82 5-25
Chamblee, GA ----------- ------------ ------------- ------------
(204 units-family
apartment complex)
Sub-total $ 6,042,483 $ 68,075,200 $ 74,117,683 $(32,543,875)
----------- ------------ ------------- ------------
Aggregate of
remaining
properties which
are individually
less than 5% of the
total in Column E 1,987,001 24,892,779 26,879,780 (12,828,011)
----------- ------------ ------------- ------------
Total $ 8,029,484 $ 92,967,979 $ 100,997,463 $(45,371,886)
=========== ============ ============= ============
</TABLE>
IV-31
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
(a limited partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
OF LOCAL PARTNERSHIPS IN WHICH
CAPITAL REALTY INVESTORS, LTD. HAS INVESTED
December 31, 1996
(A) Secured by mortgage loans.
(B) Consists of capitalized construction period interest and real estate taxes
during construction.
(C) The aggregate cost of land for federal income tax purposes is $7,710,463
and the aggregate costs of buildings and improvements for federal income
tax purposes is $91,749,224. The total of the above-mentioned items is
$99,459,687.
IV-32
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
(a limited partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
OF LOCAL PARTNERSHIPS IN WHICH
CAPITAL REALTY INVESTORS, LTD. HAS INVESTED - Continued
December 31, 1996
(D) Reconciliation of real estate
-----------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of period $104,480,160 $103,668,284 $102,672,550
Improvements during period: 840,972 959,888 995,734
Deletions during period (4,323,669) (148,012) --
------------ ------------ ------------
Balance at end of period $100,997,463 $104,480,160 $103,668,284
============ ============ ============
</TABLE>
Reconciliation of accumulated depreciation
------------------------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of period $ 44,203,590 $ 40,981,892 $ 37,599,844
Depreciation expense for the period, net of deletions 1,168,296 3,221,698 3,382,048
------------ ------------ ------------
Balance at end of period $ 45,371,886 $ 44,203,590 $ 40,981,892
============ ============ ============
</TABLE>
IV-33
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
- ------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
IV-34
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,243,295
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,191,775
<CURRENT-LIABILITIES> 0
<BONDS> 11,349,758
0
0
<COMMON> 0
<OTHER-SE> (6,210,213)
<TOTAL-LIABILITY-AND-EQUITY> 5,191,775
<SALES> 0
<TOTAL-REVENUES> 549,440
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 279,209
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 617,759
<INCOME-PRETAX> (347,528)
<INCOME-TAX> 0
<INCOME-CONTINUING> (347,528)
<DISCONTINUED> 1,301,766
<EXTRAORDINARY> 1,447,005
<CHANGES> 0
<NET-INCOME> 2,401,243
<EPS-PRIMARY> 93.78
<EPS-DILUTED> 93.78
</TABLE>
