<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, 1997
-----------------
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)
1997 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
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PART I
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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-9
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . II-9
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-2
Item 13. Certain Relationships and Related Transactions . III-3
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-29
<PAGE>
PART I
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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
partnership interest in limited partnerships (Local Partnerships). The
Partnership originally made investments in eighteen Local Partnerships. As of
December 31, 1997, 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
Partnerships 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.
I-2
<PAGE>
PART I
------
ITEM 1. BUSINESS - continued
--------
A schedule of the apartment complexes owned by Local Partnerships in which
the Partnership is a limited partner follows.
SCHEDULE OF PROJECTS OWNED BY LOCAL PARTNERSHIPS IN WHICH
CAPITAL REALTY INVESTORS, LTD. HAS AN INVESTMENT(1)
<TABLE>
<CAPTION>
Units Expiration
Mortgage Authorized for of
Name and Location Payable at Financed and/or Insured Number of Rental Asst. Section 8
of Apartment Complex 12/31/97 (2) and/or Subsidized Under Rental Units Under Sec. 8 HAP Contract
- -------------------- ------------ ----------------------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Baltic Plaza $ 7,979,125 New Jersey Housing and 169 168 02/10/13
Atlantic City, NJ Mortgage Finance Agency
Capitol Commons 7,008,700 Michigan State Housing 200 200 05/31/02
Lansing, MI Development Authority
Chestnut 2,617,296 California Housing 90 88 01/13/13
Fresno, CA Finance Agency
Court Place 6,634,956 Illinois Housing 160 160 02/01/13
Pekin, IL Development Authority (IHDA)
Frederick Heights 3,096,180 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 11/30/98 (4)
New Orleans, LA of the NHA
Hillview Terrace 2,600,969 Farmers Home Administration 125 115 09/30/00
Traverse City, MI Section 515 (FmHA)
Lihue Gardens 2,829,366 FmHA 58 58 02/22/03
Lihue, Kauai, HI
Linden Place 9,664,486 IHDA 190 190 01/01/22
Arlington Heights, IL
New Sharon Woods Apts. 2,509,385 Section 221(d)(4) of the NHA 50 50 07/31/04
Deptford, NJ
Park Glen 5,306,856 IHDA 125 125 08/01/23
Taylorville, IL
Shallowford Oaks 5,838,177 Section 221(d)(4) of the NHA 204 41 07/31/01
Chamblee, GA
Sundance Apts. 2,491,048 Section 221(d)(4) of the NHA 60 60 05/07/02
Bakersfield, CA
Tandem Townhouses 1,499,440 Pennsylvania Housing 48 47 09/28/12
Fairview Borough, PA Finance Agency
</TABLE>
I-3
<PAGE>
PART I
------
ITEM 1. BUSINESS - continued
--------
SCHEDULE OF PROJECTS OWNED BY LOCAL PARTNERSHIPS IN WHICH
CAPITAL REALTY INVESTORS, LTD. HAS AN INVESTMENT(1) - Continued
<TABLE>
<CAPTION>
Units Expiration
Mortgage Authorized for of
Name and Location Payable at Financed and/or Insured Number of Rental Asst. Section 8
of Apartment Complex 12/31/97 (2) and/or Subsidized Under Rental Units Under Sec. 8 HAP Contract
- -------------------- ------------ ----------------------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Warner House 2,053,490 Section 221(d)(4) of the NHA 60 60 09/01/01
Warren, OH
Westwood Village 1,557,558 Connecticut Housing Finance 48 48 02/01/12
New Haven, CT Authority
Winthrop Beach 1,109,048 First mortgage loan by First 69 0 N/A
Chicago, IL Federal Savings and Loan Assoc.
of Chicago; second mortgage loan
by Chicago Department of Housing
- -------------------- ------------ -------- ------
Totals 17 $ 71,295,260 2,132 1,441
============ ======== ======
</TABLE>
I-4
<PAGE>
PART I
------
ITEM 1. BUSINESS - continued
--------
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 1997 1996 1995 1994 1993 1997 1996 1995 1994 1993
- -------------------- ---- ---- ---- ---- ---- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Baltic Plaza 97% 100% 99% 99% 98% $ 12,981 $ 13,143 $ 13,106 $ 13,102 $ 12,205
Atlantic City, NJ
Capitol Commons 94% 98% 99% 99% 100% 9,340 9,451 9,335 9,296 9,153
Lansing, MI
Chestnut 98% 98% 98% 97% 99% 7,459 7,580 7,369 7,441 7,343
Fresno, CA
Court Place 100% 100% 100% 100% 100% 12,483 12,191 11,997 11,657 11,410
Pekin, IL
Frederick Heights 96% 96% 97% 97% 97% 7,164 6,983 6,809 6,841 6,741
Frederick, MD
Frenchman's Wharf I 91% 89% 92% 91% 86% 4,499 4,403 4,246 4,148 4,071
New Orleans, LA
Hillview Terrace 100% 99% 99% 100% 100% 2,752 3,930 3,779 3,694 3,532
Traverse City, MI
Lihue Gardens 95% 100% 100% 100% 88% 11,139 11,359 11,164 10,552 10,056
Lihue, Kauai, HI
Linden Place 100% 99% 100% 100% 100% 13,246 12,880 12,637 12,387 11,974
Arlington Heights, IL
New Sharon Woods Apts. 100% 100% 94% 100% 88% 11,826 11,805 11,589 11,060 10,076
Deptford, NJ
Park Glen 100% 100% 100% 100% 100% 9,415 9,303 9,250 9,221 9,159
Taylorville, IL
Shallowford Oaks 99% 95% 100% 91% 80% 7,162 7,002 6,934 5,930 4,393
Chamblee, GA
Sundance Apts. 100% 100% 98% 100% 100% 8,559 8,390 8,387 8,294 9,419
Bakersfield, CA
Tandem Townhouses 100% 100% 100% 100% 100% 9,223 8,859 8,798 8,789 8,676
Fairview Borough, PA
</TABLE>
I-5
<PAGE>
PART I
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ITEM 1. BUSINESS - continued
--------
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 1997 1996 1995 1994 1993 1997 1996 1995 1994 1993
- -------------------- ---- ---- ---- ---- ---- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Warner House 100% 98% 98% 95% 100% 7,624 7,584 7,505 7,420 7,294
Warren, OH
Westwood Village 98% 96% 94% 100% 96% 11,217 11,017 11,294 10,908 10,849
New Haven, CT
Winthrop Beach 93% 94% 96% 94% 97% 4,076 3,903 4,007 3,886 3,841
Chicago, IL
- -------------------- ---- ---- ---- ---- ---- -------- -------- -------- -------- --------
Totals (3) 17 98% 98% 98% 98% 96% $ 8,833 $ 8,811 $ 8,718 $ 8,507 $ 8,247
==== ==== ==== ==== ==== ======== ======== ======== ======== ========
</TABLE>
(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, 1997.
(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 Federal 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."
There were no contemplated sales of investments in partnerships as of
March 19, 1998.
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 I, Item I and Schedule III of Part IV, Item 14
for information pertaining to these properties.
I-6
<PAGE>
PART I
------
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 1997.
I-7
<PAGE>
PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP INTERESTS AND
-----------------------------------------------------
RELATED PARTNERSHIP MATTERS
---------------------------
(a) 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 19, 1998, 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 ($19.49 per Limited Partner unit) to the
Limited Partners on October 31, 1996. The distribution was a result
of the sale of Tanglewood I. No distributions were declared or paid
by the Partnership during 1997 or 1995. The Partnership received
distributions of $492,235, $381,770 and $434,022 from Local
Partnerships during 1997, 1996 and 1995, respectively. Some of the
Local Partnerships operate under restrictions imposed by the pertinent
governmental agencies that limit the cash return available to the
Partnership.
II-1
<PAGE>
PART II
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ITEM 6. SELECTED FINANCIAL DATA
-----------------------
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Share of income (loss) from
partnerships $ 676,176 $ 427,744 $ 100,806 $ (117,238) $ (44,674)
Interest and other income 112,679 121,696 114,423 75,477 54,264
Expenses (748,451) (896,968) (938,076) (1,008,892) (1,040,741)
Gain on disposition of investment
in partnership -- 1,301,766 -- -- --
Extraordinary gain from
extinguishment of debt -- 1,447,005 -- -- --
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 40,404 $ 2,401,243 $ (722,847) $ (1,050,653) $ (1,031,151)
============ ============ ============ ============ ============
Net income (loss) allocated to Limited
Partners (97%) $ 39,192 $ 2,329,206 $ (701,162) $ (1,019,133) $ (1,000,216)
============ ============ ============ ============ ============
Net income (loss) per unit of Limited
Partnership Interest based on
24,837 units outstanding $ 1.58 $ 93.78 $ (28.23) $ (41.03) $ (40.27)
============ ============ ============ ============ ============
Cash distribution per unit of Limited
Partnership Interest based on
24,837 units outstanding $ -- $ 19.49 $ -- $ -- $ --
============ ============ ============ ============ ============
Total assets $ 5,091,314 $ 5,191,775 $ 6,209,709 $ 6,263,561 $ 6,936,156
============ ============ ============ ============ ============
Total remaining amounts due on
investments, including accrued
interest on purchase money notes
and capital contributions $ 11,202,380 $ 11,349,758 $ 14,273,800 $ 13,608,255 $ 13,205,616
============ ============ ============ ============ ============
</TABLE>
II-2
<PAGE>
PART II
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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 (the "properties")
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 dates 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 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 a property to a qualifying purchaser who would
agree to maintain the property as low to moderate income housing in perpetuity,
or to refinance a 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 rental Housing Assistance Payments (HAP)
provided by HUD pursuant to Section 8 HAP contracts. Under Section 8 HAP
contracts, HUD guaranteed rental properties a high monthly rental payment for
each low and moderate income apartment unit maintained in the complex. Over the
years, annual increases have pushed rents on many of the Section 8 HAP contracts
above the market rate for comparable non-subsidized properties. In an effort to
deal with the increasing burden of funding Section 8 HAP contracts, many of
which are now expiring, President Clinton signed into law, effective October 1,
1997, the Fiscal Year 1998 HUD appropriations bill which includes Mark-to-Market
legislation. The new legislation allows all Section 8 contracts with rents at
(or reduced to) less than 120% of fair market rents which expire between now and
September 1998 to be renewed for one year. At the beginning of Fiscal Year 1999
(October 1, 1998), all expiring contracts with rents exceeding comparable market
rents and whose mortgages are insured by FHA will be subject to the Mark-to-
Market legislation.
Mark-to-Market implementation will reduce rental income at properties which
are currently subsidized at higher-than-market rental rates, and will therefore
lower cash flow available to meet mortgage payments and operating expenses.
Each affected property will undergo debt restructuring according to terms
determined by an individual property and operations evaluation. This will
involve reducing the first mortgage loan balance to an amount supportable by the
property, taking into account the property's operating expenses and reduced
income. The balance of the amount written down from the first mortgage will be
converted to a non-performing but accruing (soft) second mortgage.
Under current law, the write down of an FHA-insured mortgage under Mark-to
Market would trigger cancellation of debt income to the limited partners, a
taxable event, even though no actual cash is received. Additionally, the newly
created second mortgage may accrue interest at a lower-than-market rate, thereby
generating further taxable "income." Proposals to counter these tax effects
have been presented; however, no form of relief has been approved under IRS
regulations at this time. Each property subject to Mark-to-Market will be
affected in a different manner, and it is very difficult to predict the exact
form of restructuring or potential tax liabilities to the limited partners at
this time.
In addition to the above, current HUD legislation no longer funds the Low
Income Housing Preservation and Home Ownership Act (LIHPRHA) which had provided
property owners with restricted opportunities to sell low income housing. With
the discontinuation of the LIHPRHA program and the uncertainty of continued
project-based Section 8 subsidies for properties with expiring HAP contracts,
the Managing General Partner remains committed to improving operations,
increasing efficiency, maintaining and increasing occupancy, working with state
housing agencies where appropriate, and effectively increasing salability of the
properties wherever possible.
The Managing General Partner is considering new strategies to deal with the
ever changing environment of affordable housing policy. Properties with
II-4
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
expiring Section 8 HAP contracts may become convertible to market-rate apartment
properties. Currently, there are a few lenders that will provide additional
funds 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 strategies that make economic sense for all
parties involved.
Financial Condition/Liquidity
-----------------------------
As of December 31, 1997, 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 originally made investments
in eighteen Local Partnerships, of which seventeen remain at December 31, 1997.
The Partnership's liquidity, with unrestricted cash resources of $2,204,552 as
of December 31, 1997, along with anticipated future cash distributions from the
Local Partnerships, is expected to meet its current and anticipated operating
cash needs. The Partnership has determined that the carrying amounts of its
cash and cash equivalents and unrestricted certificate of deposit approximate
fair value. As of March 19, 1998, there were no material commitments for
capital expenditures.
During 1997, 1996 and 1995, the Partnership received cash distributions of
$492,235, $381,770 and $434,022, respectively, from the Local Partnerships.
The Partnership's obligations with respect to its investments in Local
Partnerships in the form of purchase money notes having a principal balance of
$4,478,800 as of December 31, 1997, plus accrued interest of $6,723,580, 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 $500,000 matured on January 1, 1997 and were paid
off. Purchase money notes in an aggregate principal amount of $700,000 matured
on January 1, 1997, and have not yet been paid or extended. The remaining
purchase money notes in an aggregate principal amount of $3,778,800 mature June
1, 1998. See the notes to the consolidated financial statements for additional
information pertaining to these purchase money notes.
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 Partnership's
inability to pay certain of the purchase money note principal and accrued
interest balances when due, and the resulting uncertainty regarding the
Partnership's continued ownership interest in the related Local Partnerships,
does not impact the Partnership's financial condition because the purchase money
notes are nonrecourse and secured solely by the Partnership's interest in the
related Local Partnerships. Therefore, should the investment in any of the
Local Partnerships with maturing purchase money notes not produce sufficient
value to satisfy the related purchase money notes, the Partnership's exposure to
loss is limited because the amount of the nonrecourse indebtedness of each of
the maturing purchase money notes exceeds the carrying amount of the investment
II-5
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
in and advances to the related Local Partnerships. Thus, even a complete loss
of one of these Local Partnerships would not have a material impact on the
financial condition of the Partnership.
The Managing General Partner is continuing to investigate possible
alternatives to reduce the Partnership's 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 or buy down certain purchase money
note obligations. See the notes to the financial statements for alternatives
relating to specific properties.
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.
The Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient cash is available for operating requirements.
In 1997, 1996 and 1995, the receipt of distributions from Local Partnerships was
adequate to support operating cash requirements. Cash and cash equivalents
decreased during 1997 primarily due to the pay off of the Frederick Heights
purchase money notes, as discussed in the notes to the financial statements.
Results of Operations
---------------------
1997 versus 1996
- ----------------
The Partnership's net income decreased in 1997 from 1996 primarily due to
the extraordinary gain from extinguishment of debt related to the Tanglewood I
sale and the Frederick Heights purchase money note pay off during 1996.
Contributing to the decrease in the Partnership's net income was the gain on
disposition of investment in partnership related to the Tanglewood I sale during
1996. Partially offsetting the decrease in the Partnership's net income was an
increase in share of income primarily due to losses recorded by the Partnership
in 1996 related to Tanglewood I which were not recorded in 1997 due to the sale
of the property during 1996. Also partially offsetting the decrease in the
Partnership's net income was a decrease in interest expense due to the pay off
of the Frederick Heights and Tanglewood I purchase money notes. See the notes
to the financial statements for further information pertaining to the Tanglewood
I sale and the Frederick Heights purchase money note pay off.
1996 versus 1995
- ----------------
The Partnership's net income increased in 1996 from 1995 principally due to
the extraordinary gain from extinguishment of debt related to the Tanglewood I
sale and the Frederick Heights purchase money note pay off during 1996, and the
II-6
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
gain on disposition of investment in partnership related to the sale of
Tanglewood I during 1996. 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 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 a portion of the
Frederick Heights purchase money notes. See the notes to the financial
statements for further information pertaining to the Tanglewood I sale and the
Frederick Heights purchase money note pay off.
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,
1997, 1996 and 1995 did not include losses of $782,889, $880,989 and $526,346,
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 $184,541, $214,060 and $248,578, received from seven, nine and
nine Local Partnerships, during 1997, 1996 and 1995, respectively, were offset
against the respective years' recorded losses because these amounts were in
excess of the Partnership's investment.
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 revenues and replacement values gradually increase.
The following table reflects the combined rental revenues of the properties
for the five years ended December 31, 1997. Combined rental revenue amounts for
years prior to 1997 have been adjusted to reflect property sales in 1996, as
discussed in the notes to the financial statements.
II-7
<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,
-----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Combined Rental
Revenue $18,256,810 $18,203,181 $17,950,982 $17,334,130 $16,642,366
Annual Percentage
Increase 0.3% 1.4% 3.6% 4.2%
</TABLE>
Year 2000 Computer Issue
------------------------
The Year 2000 ("Y2K") computer issue refers to the inability of many
computer systems in use today to recognize "00" in the date field as the year
2000 and to recognize the year 2000 as a leap year. The Y2K problem arose
because, for many years, computer software programs, including programs embedded
in hardware, utilized only the last two digits to specify the year with the
assumption that the first two digits were "19." As a result, such programs may
not be able to recognize and process dates beyond 1999; rather they may
recognize and process "00," "01," "02,", etc., incorrectly as 1900, 1901, 1902,
instead of as 2000, 2001, 2002. In the opinion of computer experts, this could
cause such programs to create erroneous results, malfunction, or fail completely
unless corrective measures are taken.
The Partnership utilizes software and related computer technologies
essential to its operations that will be affected by the Y2K issue. The
Managing General Partner is studying what actions will be necessary to make its
computer systems Y2K compliant; certain upgrades are already scheduled. The
expense associated with these actions cannot presently be determined, but the
Managing General Partner does not expect it to be material.
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-8
<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, 61, 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 properties. 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 and a Director of CRIIMI MAE Inc. and CRIIMI, Inc.
H. William Willoughby, 51, has been President, Secretary and a Director of CRI
since January 1990 and was 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 & Co. He holds a Juris Doctor 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. and CRIIMI, Inc.
Ronald W. Thompson, 51, is 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.
III-1
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - Continued
--------------------------------------------------
Susan R. Campbell, 39, is Executive Vice President and Chief Operating Officer.
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.
Melissa Cecil Lackey, 42, is 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 Doctor degree 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 incorporated herein by
reference to Notes 3 and 4 of the notes to the financial statements
contained in Part IV, Item 14.
(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 of 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, 1997.
(b) Security ownership of management.
III-2
<PAGE>
PART III
--------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------
MANAGEMENT - Continued
----------
The following table sets forth certain information concerning all
units beneficially owned, as of December 31, 1997, by each director
and by all directors and officers as a group of the Managing General
Partner of the Partnership.
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%
(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-3
<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, 1997 and 1996 IV-6
Statements of Operations for the years
ended December 31, 1997, 1996 and 1995 IV-7
Statements of Changes in Partners'
Deficit for the years ended December 31,
1997, 1996 and 1995 IV-8
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 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, 1997, 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-25
Schedule III - Real Estate and Accumulated
Depreciation IV-26
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, Ltd.. (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, Ltd.. (Incorporated by reference from Exhibit
No. 10(b) to 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 Registrant's Registration
Statement on Form S-11, as amended, dated December 4, 1981.)
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the quarter ended
December 31, 1997.
(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 30, 1998 by: /s/ William B. Dockser
- ----------------- ---------------------------------
DATE William B. Dockser, Director,
Chairman of the Board,
and Treasurer
(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 30, 1998 by: /s/ H. William Willoughby
- ----------------- ---------------------------------
DATE H. William Willoughby,
Director, President
and Secretary
March 30, 1998 by: /s/ Michael J. Tuszka
- ----------------- ---------------------------------
DATE Michael J. Tuszka
Vice President
and Chief Accounting Officer
(Principal Financial Officer
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. (a
District of Columbia limited partnership) as of December 31, 1997 and 1996, and
the related statements of operations, changes in partners' deficit and cash
flows for the years ended December 31, 1997, 1996 and 1995. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of certain Local
Partnerships. The Partnership's share of income or loss from these Local
Partnerships constitutes $497,570 of income in 1997, $213,684 of income in 1996
and $143,055 of losses in 1995 included in the Partnership's net income or 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 amounts 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. as of
December 31, 1997 and 1996 and the results of its operations, changes in
partners' deficit and cash flows for the years ended December 31, 1997, 1996 and
1995, in conformity with generally accepted accounting principles.
Vienna, VA Grant Thornton LLP
March 19, 1998
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 26, 1998, in accordance with
the Securities and Exchange Commission's continuing hardship exemption
granted January 22, 1998.
IV-5
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Investments in and advances to partnerships $ 2,166,362 $ 1,976,284
Cash and cash equivalents 2,204,552 2,243,295
Unrestricted certificate of deposit -- 189,000
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $344,688 and $321,878, respectively 567,732 590,542
Property purchase costs, net of accumulated amortization of
$90,419 and $84,505, respectively 146,148 152,062
Other assets 6,520 40,592
------------ ------------
Total assets $ 5,091,314 $ 5,191,775
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in
partnerships $ 4,478,800 $ 4,978,800
Accrued interest payable 6,723,580 6,370,958
Accounts payable and accrued expenses 58,743 52,230
------------ ------------
Total liabilities 11,261,123 11,401,988
------------ ------------
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) (996,102)
Offering costs (2,689,521) (2,689,521)
Accumulated losses (27,335,186) (27,375,590)
------------ ------------
Total partners' deficit (6,169,809) (6,210,213)
------------ ------------
Total liabilities and partners' deficit $ 5,091,314 $ 5,191,775
============ ============
</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,
--------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Share of income from partnerships $ 676,176 $ 427,744 $ 100,806
----------- ----------- -----------
Other revenue and expenses:
Revenue
Interest and other income 112,679 121,696 114,423
----------- ----------- -----------
Expenses
Interest 470,189 617,759 665,545
Management fee 95,208 95,208 95,208
General and administrative 91,305 95,233 82,193
Professional fees 63,025 58,274 63,946
Amortization 28,724 30,494 31,184
----------- ----------- -----------
748,451 896,968 938,076
----------- ----------- -----------
Total other revenue and expenses (635,772) (775,272) (823,653)
----------- ----------- -----------
Loss before gain on disposition of
investment in partnership 40,404 (347,528) (722,847)
----------- ----------- -----------
Gain on disposition of investment in partnership -- 1,301,766 --
----------- ----------- -----------
Income (loss) before extraordinary gain from
extinguishment of debt 40,404 954,238 (722,847)
----------- ----------- -----------
Extraordinary gain from extinguishment of debt -- 1,447,005 --
----------- ----------- -----------
Net income (loss) $ 40,404 $ 2,401,243 $ (722,847)
=========== =========== ===========
Net income (loss) allocated to General Partners (3%) $ 1,212 $ 72,037 $ (21,685)
=========== =========== ===========
Net income (loss) allocated to Limited Partners (97%) $ 39,192 $ 2,329,206 $ (701,162)
=========== =========== ===========
Net income (loss) per unit of Limited Partnership Interest
based on 24,837 units outstanding $ 1.58 $ 93.78 $ (28.23)
=========== =========== ===========
</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
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
--------- ----------- -----------
<S> <C> <C> <C>
Partners' deficit, January 1, 1995 $(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)
Net income 1,212 39,192 40,404
--------- ----------- -----------
Partners' deficit, December 31, 1997 $(821,418) $(5,348,391) $(6,169,809)
========= =========== ===========
</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,
---------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 40,404 $ 2,401,243 $ (722,847)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Share of income from partnerships (676,176) (427,744) (100,806)
Gain on disposition of investment in partnership -- (1,301,766) --
Extraordinary gain from extinguishment of debt -- (1,447,005) --
Increase in accrued interest receivable
on advances to partnerships (6,137) (6,137) (6,136)
Amortization of deferred costs 28,724 30,494 31,184
Changes in assets and liabilities:
Decrease (increase) in other assets 34,072 (33,207) (2,669)
Increase in accrued interest payable 470,196 617,759 665,545
Increase (decrease) in accounts payable 6,513 (11,062) 3,450
----------- ----------- -----------
Net cash used in operating activities (102,404) (177,425) (132,279)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from disposition of investment in partnership -- 2,793,955 --
Receipt of distributions from partnerships 492,235 381,770 434,022
Maturity of unrestricted certificate of deposit 189,000 -- --
----------- ----------- -----------
Net cash provided by investing activities 681,235 3,175,725 434,022
----------- ----------- -----------
Cash flows from financing activities:
Pay-off of purchase money notes and related interest (617,574) (2,094,795) --
Distribution to limited partners -- (484,073) --
----------- ----------- -----------
Net cash used in financing activities (617,574) (2,578,868) --
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (38,743) 419,432 301,743
Cash and cash equivalents, beginning of year 2,243,295 1,823,863 1,522,120
----------- ----------- -----------
Cash and cash equivalents, end of year $ 2,204,552 $ 2,243,295 $ 1,823,863
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 117,574 $ 665,795 $ --
=========== =========== ===========
</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 partnership interest in limited
partnerships (Local Partnerships) which own and operate federal or state
government-
assisted or conventionally financed apartment properties 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), which
is 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 December 31, 1997 and 1996, the Partnership's share of cumulative losses
of twelve and eleven, respectively, of the Local Partnerships exceeds the
amount of the Partnership's investment in and advances to those Local
Partnerships by $8,377,985 and $7,595,096, 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, 1997 and 1996,
cumulative cash distributions of $2,451,313 and $2,266,772, 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 capitalized 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.
e. 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.
f. 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.
g. 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 of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
h. Fair Value of Financial Instruments
-----------------------------------
The financial statements include estimated fair value information as
of December 31, 1997, as required by Statement of Financial Accounting
Standards (SFAS) No. 107, "Disclosure About Fair Value of Financial
Instruments." Such information, which pertains to the Partnership's
financial instruments (primarily cash and cash equivalents and purchase
money notes), is based on the requirements set forth in SFAS No. 107 and
does not purport to represent the aggregate net fair value of the
Partnership.
The balance sheet carrying amounts for cash and cash equivalents
approximate estimated fair values of such assets.
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.
IV-11
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
a. Due on investments in partnerships
----------------------------------
As of both December 31, 1997 and 1996, the Partnership held limited
partnership interests in seventeen Local Partnerships which were organized
to develop, construct, own, maintain and operate rental apartment
properties which provide housing principally to the elderly and to
individuals and families of low or moderate income. The remaining
principal amounts due on investments in the Local Partnerships were as
follows.
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Purchase money notes due in:
1997 $ 700,000 $1,200,000
1998 3,778,800 3,778,800
---------- ----------
Total $4,478,800 $4,978,800
========== ==========
</TABLE>
The purchase money notes have stated interest rates ranging from 7.25%
to 11.10%. The purchase money notes are payable 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
$500,000 matured on January 1, 1997 and were paid off. Purchase money
notes in an aggregate principal amount of $700,000 matured on January 1,
1997, and have not yet been paid or extended. The remaining purchase money
notes in an aggregate principal amount of $3,778,800 mature on June 1,
1998. Each of these purchase money notes is discussed in further detail
below.
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 Partnership's inability to pay certain of the purchase
money note principal and accrued interest balances when due, and the
resulting uncertainty regarding the Partnership's continued ownership
interest of the related Local Partnerships, does not impact the
Partnership's financial condition because the purchase money notes are
nonrecourse and secured solely by the Partnership's interest in the related
Local Partnerships. Therefore, should the investment in any of the Local
Partnerships with maturing purchase money notes not produce sufficient
value to satisfy the related purchase money notes, the Partnership's
exposure to loss is limited because the amount of the nonrecourse
indebtedness of each of the maturing purchase money notes exceeds the
carrying amount of the investment in and advances to the related Local
IV-12
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
Partnerships. Thus, even a complete loss of one of these Local
Partnerships would not have a material impact on the financial condition of
the Partnership.
Interest expense on the Partnership's purchase money notes for the
years ended December 31, 1997, 1996 and 1995 was $470,189, $617,759 and
$665,545, respectively. The accrued interest on the purchase money notes
of $6,723,580 and $6,370,958, as of December 31, 1997 and 1996,
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.
Frederick Heights
-----------------
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, and thus the Partnership did not recognize a gain or loss on the
extinguishment of the debt.
Frenchman's Wharf
-----------------
The purchase money notes related to Lake Properties Limited
Partnership (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 on the Local Partnership's mortgage loan, the Partnership is
currently negotiating with the purchase money noteholders to reach an
extension agreement which would be coterminous with the expiration of the
workout arrangement. As of March 19, 1998, the noteholders had not given
consent to an extension agreement. 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
Frenchman's Wharf I after June 1, 1998. The uncertainty regarding the
continued ownership of the Partnership's interest in Frenchman's Wharf I
does not impact the Partnership's financial condition, as discussed above.
Shallowford Oaks
----------------
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 19,
1998, principal and accrued interest totaling $700,000 and $898,188,
respectively, were due. The Managing General Partner has proposed to
extend the note until November 2001, coterminous with the maturity of the
Local Partnership's provisional workout agreement on its mortgage loan, and
as of March 19, 1998, the Managing General Partner is awaiting a response
from the purchase money noteholder. There is no assurance that any
agreement will be reached with the noteholder.
IV-13
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
In addition, the lender associated with the Shallowford Oaks mortgage
loan filed notice on November 3, 1997 accelerating the Local Partnership's
mortgage loan and demanding payment in full due to a purported nonmonetary
default of the provisional workout agreement. The Managing General Partner
and the local managing general partner are disputing this foreclosure
notice and a hearing has been scheduled for April 20, 1998. In the
interim, a temporary restraining order has been granted which suspends the
foreclosure action until the hearing. The Managing General Partner and the
local managing general partner intend to vigorously contest the foreclosure
action and have hired an independent accounting firm to perform a
compliance audit. As of March 19, 1998, the compliance audit has not yet
been completed.
Due to the uncertainties regarding the outcome of an extension of the
purchase money notes and/or the foreclosure proceedings on the Local
Partnership's mortgage loan, 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 interest in
Shallowford Oaks does not impact the Partnership's financial condition, as
discussed above.
Tanglewood I
------------
In conjunction with the sale of the property, on September 19, 1996,
the Partnership paid off the purchase money note relating to Tanglewood
Apartments Associates I (Tanglewood I) at a discount, as discussed below.
b. Interests in profits, losses and cash distributions
---------------------------------------------------
made by Local Partnerships
--------------------------
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 $492,235, $381,770 and $434,022 during the
years ended December 31, 1997, 1996 and 1995, respectively. As of both
December 31, 1997 and 1996, twelve of the Local Partnerships had surplus
cash, as defined by their respective agencies, in the amount of $2,539,150
and $2,133,429, respectively, which may be 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
state or federal agency for the benefit of the property.
Upon sale or refinancing of a property owned by a Local Partnership,
or upon the liquidation of a Local Partnership, the proceeds from such
sale, refinancing or liquidation shall be distributed in accordance with
the respective provisions of each Local Partnership's partnership
IV-14
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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 advances, and accrued interest thereon, made to the Local
Partnerships were as follows.
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
----------- -----------
<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:
Principal amount of funds advanced 72,195 72,195
Accrued interest on advances 19,057 12,921
----------- -----------
Total $ 579,752 $ 573,616
=========== ===========
</TABLE>
Baltic Plaza
------------
In 1989, the Partnership funded a certificate of deposit in the amount
of $189,000, which was used to collateralize a letter of credit which
served as supplemental collateral for Sencit Baltic Associates' (Baltic
Plaza) mortgage loan. 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. On March 18, 1997, the
certificate of deposit matured.
Frenchman's Wharf I
-------------------
To cover operating deficits incurred in prior years for Frenchman's
Wharf I, the Partnership advanced funds totaling $305,398 as of both
December 31, 1997 and 1996. No advances have been made to Frenchman's
Wharf I since March 1987, and the Partnership does not expect to advance
any additional funds to the Local Partnership. These loans, together with
accrued interest of $183,102 as of both December 31, 1997 and 1996, are
IV-15
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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 the workout, will be able to repay the
loans in accordance with the terms thereof. For financial reporting
purposes, these loans have been reduced to zero by the Partnership as a
result of losses from the Local Partnership during prior years.
The lender associated with Frenchman's Wharf I's mortgage loan has
requested an operational audit. The local managing general partner and the
Managing General Partner are of the opinion that the lender does not have
the legal right to perform such an audit under the terms of the Local
Partnership's loan documents. No agreement has been reached as of March
19, 1998.
The report of the auditors on the financial statements of Frenchman's
Wharf I for the years ended December 31, 1997 and 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, 1998. The uncertainty
about the Local Partnership's continued ownership of the property does not
impact the Partnership's financial condition, as discussed above.
Shallowford Oaks
----------------
On November 23, 1994, the Partnership advanced $72,195 to Shallowford
Oaks to help repay the Local Partnership's outstanding obligations related
to its mortgage loan. This loan, along with accrued interest of $15,989
and $12,921 as of December 31, 1997 and 1996, respectively, is payable from
cash flow 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 note. As the Partnership
currently is in default on the purchase money note related to Shallowford
Oaks, as discussed above, it is unlikely that the Partnership will receive
any repayment of the loan. For financial reporting purposes, these loans
have been reduced to zero by the Partnership as a result of losses from the
Local Partnership during prior years.
Tanglewood I
------------
On September 19, 1996, Tanglewood I, a 192-unit apartment complex
located in Westwego, Louisiana was sold. The sale of the property
generated net cash proceeds to the Partnership of approximately $904,000 at
closing. The proceeds were net of funds used to retire, at a discount, the
Partnership's purchase money note obligation with respect to the property.
The sale resulted in a net financial statement gain of approximately $2.731
million, of which approximately $1.429 million resulted from the retirement
of the purchase money note obligation with respect to the property. The
federal tax gain was approximately $4.454 million.
IV-16
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
d. Affordable housing legislation
------------------------------
President Clinton signed the Fiscal Year 1998 HUD appropriations bill
into law, effective October 1, 1997. The new legislation allows all
Section 8 contracts with rents at (or reduced to) less than 120% of fair
market rents which expire between now and September 1998 to be renewed for
one year. At the beginning of Fiscal Year 1999 (October 1, 1998), all
expiring contracts with rents exceeding comparable market rents and whose
mortgages are insured by FHA will be subject to the Mark-to-Market
legislation.
Mark-to-Market implementation will reduce rental income at properties
which are currently subsidized at higher-than-market rental rates, and will
therefore lower cash flow available to meet mortgage payments and operating
expenses. Each affected property will undergo debt restructuring according
to terms determined by an individual property and operations evaluation.
This will involve reducing the first mortgage loan balance to an amount
supportable by the property, taking into account the property's operating
expenses and reduced income. The balance of the amount written down from
the first mortgage will be converted to a non-performing but accruing
(soft) second mortgage. The Section 8 HAP contracts for the following
property expires during the government's fiscal year 1998.
IV-17
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
<TABLE>
<CAPTION>
Units
Authorized for Expiration of
Number of Rental Assistance Section 8
Property Rental Units Under Section 8 HAP Contract
-------- ------------ ----------------- -------------
<S> <C> <C> <C>
Frenchman's Wharf I 320 31 11/30/98
</TABLE>
With the uncertainty of continued project-based Section 8 subsidies
for properties with expiring HAP contracts, there is no assurance that
these rental properties will be able to maintain the rental income and
occupancy levels necessary to pay operating costs and debt service. It is
difficult to predict the impact on the Local Partnerships and the resulting
impact on the Partnership at this time.
e. Summarized financial information
--------------------------------
Summarized financial information for the Local Partnerships at
December 31, 1997 and 1996 and for the years ended December 31, 1997, 1996
and 1995 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,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Rental property, at cost, net of accumulated depreciation
of $48,654,880 and $45,371,886, respectively $ 45,238,626 $ 47,596,093
Land 8,029,484 8,029,484
Other assets 14,976,556 14,054,983
------------ ------------
Total assets $ 68,244,666 $ 69,680,560
============ ============
Mortgage notes payable $ 71,295,260 $ 72,319,143
Other liabilities 8,023,703 7,918,946
------------ ------------
Total liabilities 79,318,963 80,238,089
Partners' deficit (11,074,297) (10,557,529)
------------ ------------
Total liabilities and partners' deficit $ 68,244,666 $ 69,680,560
============ ============
</TABLE>
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Rental $ 18,256,810 $ 18,796,791 $ 18,756,429
Interest 570,552 518,861 501,649
Other 418,670 276,327 430,203
------------ ------------ ------------
Total revenue 19,246,032 19,591,979 19,688,281
------------ ------------ ------------
Expenses:
Operating 9,474,319 9,822,276 9,656,615
Interest 6,572,693 6,658,337 6,799,235
Depreciation 3,282,995 3,386,412 3,369,059
Amortization 39,721 48,537 35,436
------------ ------------ ------------
Total expenses 19,369,728 19,915,562 19,860,345
------------ ------------ ------------
Net loss $ (123,696) $ (323,583) $ (172,064)
============ ============ ============
</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 each of the years ended
December 31, 1997, 1996 and 1995, to recognize the Partnership's increased
depreciable basis for the Local Partnerships' rental properties.
f. Reconciliation of the Local Partnerships' financial statement
-------------------------------------------------------------
net loss to taxable income (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 on the
property as permitted by Internal Revenue Service (IRS) Regulations. These
returns are subject to examination and, therefore, possible adjustment by
the IRS.
A reconciliation of the Local Partnerships' financial statement net
loss reflected above to taxable income (loss) 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,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Financial statement net loss $ (123,696) $ (323,583) $ (172,064)
Adjustments:
Differences arising from the use of accelerated methods,
net of depreciation on construction period expenses
capitalized for financial statement purposes 281,811 (557,058) (888,691)
Amortization for financial statement purposes not
deducted for income tax purposes 46,892 48,647 46,717
Miscellaneous, net 129,048 125,780 72,037
------------ ------------ ------------
Taxable income (loss) $ 334,055 $ (706,214) $ (942,001)
============ ============ ============
</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, 1997, 1996 and
1995, the Partnership paid $62,933, $71,142 and $58,095, 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, 1997, 1996 and 1995, the Part-
nership paid the Managing General Partner a Management Fee of $95,208.
The Managing General Partner and/or its affiliates may receive a fee of not
more than 2% of the sales price of an investment in a Local Partnership or the
property it owns, payable under certain conditions upon the sale of an
investment in a Local Partnership or the property its owns. The payment of the
fee is subject to certain restrictions, including the 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 1997, 1996 and 1995.
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).
IV-22
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
4. PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS - Continued
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 properties, shall not in
the aggregate exceed the lesser of the competitive rate or 6% of the sales price
of the apartment properties.
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 amounts were paid to the Managing General Partner and/or its
affiliates during 1997, 1996 and 1995.
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 $0,
$218,000 and $298,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
On October 31, 1996, the Partnership distributed $484,073 ($19.49 per
Limited Partnership unit) to the Limited Partners as a result of the sale of
Tanglewood I. No distributions were declared or paid by the Partnership during
1997 or 1995. 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.
5. RECONCILIATION OF THE PARTNERSHIP'S FINANCIAL STATEMENT NET
INCOME (LOSS) TO TAXABLE (LOSS) INCOME
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 2g), including
losses in excess of related investment 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 taxable (loss) income follows.
IV-23
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
5. RECONCILIATION OF THE PARTNERSHIP'S FINANCIAL STATEMENT NET
INCOME (LOSS) TO TAXABLE INCOME (LOSS)
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Financial statement net income (loss) $ 40,404 $ 2,401,243 $ (722,847)
Adjustments:
Differences between the income tax losses and
financial statement losses related to the
Partnership's equity in the Local Partnerships'
losses (124,473) (897,512) (782,540)
Costs amortized over a shorter period for
income tax purposes (47,278) (56,952) (58,300)
Difference in gain on disposition of investment
in partnership -- 1,723,084 --
------------ ------------ ------------
Taxable (loss) income $ (131,347) $ 3,169,863 $ (1,563,687)
============ ============ ============
</TABLE>
IV-24
<PAGE>
FINANCIAL STATEMENT SCHEDULE
IV-25
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON
-----------------------------------------------------
FINANCIAL STATEMENT SCHEDULE
----------------------------
To the Partners
Capital Realty Investors, Ltd.
In connection with our audits of the financial statements of Capital Realty
Investors, Ltd. referred to in our report dated March 19, 1998, which is
included in this Form 10-K, we have also audited Schedule III as of December 31,
1997, 1996 and 1995. We did not audit the financial statements for certain of
the Local Partnerships in 1997, 1996 and 1995, 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 19, 1998
IV-26
<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
December 31, 1997
<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 $ -- $ 8,908,414 $ 1,386,885
Atlantic City, NJ
(169 units-elderly
apartment complex)
Capitol Commons (A) 337,000 925,000 7,473,611 504,635
Lansing, MI
(200 units-elderly
apartment complex)
Court Place (A) 519,821 -- 7,615,336 254,477
Pekin, IL
(110 units-elderly;
50 units-family
apartment complex)
Frederick Heights (A) 319,785 2,035,217 4,100,881 --
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 -- 9,995,438 389,892
Arlington Heights, IL
(110 units-elderly;
80 units-family
apartment complex)
Park Glen (A) 293,524 -- 5,801,161 270,485
Taylorville, IL
(125 units-elderly
apartment complex)
</TABLE>
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, 1997
<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 1,235,908 --
Chamblee, GA ----------- ------------ ------------ -----------
(204 units-family
apartment complex)
Sub-total 5,874,547 20,502,448 45,514,406 2,806,374
----------- ------------ ------------ -----------
Aggregate of
remaining properties (9)
which are individually
less than 5% of the
total in Column E (A) 1,540,655 4,335,362 20,429,856 919,342
----------- ------------ ------------ -----------
Total $ 7,415,202 $ 24,837,810 $ 65,944,262 $ 3,725,716
=========== ============ ============ ===========
</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, 1997
<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 $ 10,177,992 $ 10,851,799 $ (3,744,637) 2/83 6/81 5-40
Atlantic City, NJ
(169 units-elderly
apartment complex)
Capitol Commons 346,103 8,894,143 9,240,246 (4,828,281) 6/82 8/81 5-30
Lansing, MI
(200 units-elderly
apartment complex)
Court Place 519,821 7,869,813 8,389,634 (3,738,083) 3/83 10/81 5-30
Pekin, IL
(110 units-elderly;
50 units-family
apartment complex)
Frederick Heights 319,785 6,136,098 6,455,883 (3,005,072) 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 (6,583,000) 8/78 9/82 5-30
New Orleans, LA
(320 units-family
apartment complex)
Linden Place 772,635 10,343,804 11,116,439 (5,233,499) 9/82 3/82 5-30
Arlington Heights, IL
(110 units-elderly;
80 units-family
apartment complex)
Park Glen 293,524 6,071,646 6,365,170 (2,898,603) 9/83 8/82 5-30
Taylorville, IL
(125 units-elderly
apartment complex)
</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, 1997
<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 8,084,600 9,004,996 (4,948,621) 7/81 1/82 5-25
Chamblee, GA ----------- ------------ ------------- ------------
(204 units-family
apartment complex)
Sub-total 6,042,483 68,655,292 74,697,775 (34,979,796)
----------- ------------ ------------- ------------
Aggregate of
remaining
properties (9) which
are individually
less than 5% of the
total in Column E 1,987,001 25,238,214 27,225,215 (13,675,084)
----------- ------------ ------------- ------------
Total $ 8,029,484 $ 93,893,506 $ 101,922,990 $(48,654,880)
=========== ============ ============= ============
</TABLE>
IV-30
<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, 1997
(A) Secures 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 cost of buildings and improvements for federal income
tax purposes is $91,549,447. The total of the above-mentioned items is
$99,259,910.
(D) Reconciliation of real estate
-----------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of period $100,997,463 $104,480,160 $103,668,284
Additions during period 925,527 840,972 959,888
Deletions during period -- (4,323,669) (148,012)
------------ ------------ ------------
Balance at end of period $101,922,990 $100,997,463 $104,480,160
============ ============ ============
</TABLE>
Reconciliation of accumulated depreciation
------------------------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of period $ 45,371,886 $ 44,203,590 $ 40,981,892
Depreciation expense for the period, net of deletions 3,282,994 1,168,296 3,221,698
------------ ------------ ------------
Balance at end of period $ 48,654,880 $ 45,371,886 $ 44,203,590
============ ============ ============
</TABLE>
IV-31
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
- ------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
IV-32
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,204,552
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,091,314
<CURRENT-LIABILITIES> 0
<BONDS> 11,202,380
0
0
<COMMON> 0
<OTHER-SE> (6,169,809)
<TOTAL-LIABILITY-AND-EQUITY> 5,091,314
<SALES> 0
<TOTAL-REVENUES> 788,855
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 278,262
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 470,189
<INCOME-PRETAX> 40,404
<INCOME-TAX> 0
<INCOME-CONTINUING> 40,404
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,404
<EPS-PRIMARY> 1.58
<EPS-DILUTED> 1.58
</TABLE>
