<PAGE>
FORM 10-QSB
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
--------------
Commission file number 0-11149
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CAPITAL REALTY INVESTORS, LTD.
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(Exact name of small business issuer as specified in its charter)
District of Columbia 52-1219926
----------------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11200 Rockville Pike, Rockville, Maryland 20852
----------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
(301) 468-9200
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(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months, and (2) has
been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Not applicable Not applicable
-------------------------- ---------------------------------------
(Class) (Outstanding at June 30, 2000)
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
INDEX TO FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 2000
Page
----
PART I. Financial Information
Item 1. Financial Statements
Balance Sheets - June 30, 2000 and
December 31, 1999....................................... 1
Statements of Operations and Accumulated Losses
- for the three and six months ended
June 30, 2000 and 1999................................ 2
Statements of Cash Flows - for the six
months ended June 30, 2000 and 1999..................... 3
Notes to Financial Statements - June 30, 2000
and 1999................................................ 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 10
PART II. Other Information
Item 3. Defaults Upon Senior Securities........................... 13
Item 6. Exhibits and Reports on Form 8-K.......................... 13
Signature ...................................................... 14
Exhibit Index ....................................................... 15
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS, LTD.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Investments in and advances to partnerships $ 3,604,782 $ 3,265,726
Investment in partnership held for sale -- 15,439
Cash and cash equivalents 3,718,102 2,711,200
Restricted cash equivalents -- 140,000
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $395,662 and $384,432, respectively 502,730 513,960
Property purchase costs, net of accumulated amortization of
$99,834 and $97,035, respectively 124,233 127,032
Other assets 649 778
------------ ------------
Total assets $ 7,950,496 $ 6,774,135
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in partnerships $ 4,478,800 $ 4,478,800
Accrued interest payable 7,899,071 7,663,972
Accounts payable and accrued expenses 65,623 93,514
------------ ------------
Total liabilities 12,443,494 12,236,286
------------ ------------
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 (25,658,375) (26,627,528)
------------ ------------
Total partners' deficit (4,492,998) (5,462,151)
------------ ------------
Total liabilities and partners' deficit $ 7,950,496 $ 6,774,135
============ ============
</TABLE>
The accompanying notes are an
integral part of these
financial statements.
-1-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS, LTD.
STATEMENTS OF OPERATIONS
AND ACCUMULATED LOSSES
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Share of income from partnerships $ 475,283 $ 761,054 $ 752,412 $ 1,025,367
------------ ------------ ------------ ------------
Other revenue and expenses:
Revenue:
Interest and other income 53,083 30,309 92,136 59,224
------------ ------------ ------------ ------------
Expenses:
Interest 117,549 117,549 235,099 235,098
Management fee 23,802 23,802 47,604 47,604
General and administrative 37,097 45,262 70,938 78,121
Professional fees 17,786 17,023 35,575 34,047
Amortization of deferred costs 7,014 7,181 14,029 14,363
------------ ------------ ------------ ------------
203,248 210,817 403,245 409,233
------------ ------------ ------------ ------------
Total other revenue and expenses (150,165) (180,508) (311,109) (350,009)
------------ ------------ ------------ ------------
Income before gain on disposition
of investment in partnership 325,118 580,546 441,303 675,358
Gain on disposition of investment in partnership 82,489 -- 527,850 --
------------ ------------ ------------ ------------
Net income 407,607 580,546 969,153 675,358
Accumulated losses, beginning of period (26,065,982) (27,175,295) (26,627,528) (27,270,107)
------------ ------------ ------------ ------------
Accumulated losses, end of period $(25,658,375) $(26,594,749) $(25,658,375) $(26,594,749)
============ ============ ============ ============
Net income allocated to General Partners (3%) $ 12,228 $ 17,416 $ 29,075 $ 20,261
============ ============ ============ ============
Net income allocated to Limited Partners (97%) $ 395,379 $ 563,130 $ 940,078 $ 655,097
============ ============ ============ ============
Net income per unit of Limited Partner Interest
based on 24,737 and 24,797 units outstanding
at June 30, 2000 and 1999, respectively $ 15.98 $ 22.71 $ 38.00 $ 26.42
============ ============ ============ ============
</TABLE>
The accompanying notes are an
integral part of these
financial statements.
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS, LTD.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
June 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 969,153 $ 675,358
Adjustments to reconcile net income to net cash used in
operating activities:
Share of income from partnerships (752,412) (1,025,367)
Amortization of deferred costs 14,029 14,363
Gain on disposition of investment in partnership (527,850) --
Changes in assets and liabilities:
Increase in accrued interest receivable on
advances to partnerships (3,068) (3,068)
Decrease in other assets 129 1,669
Increase in accrued interest payable 235,099 235,098
Decrease in accounts payable and accrued expenses (27,891) (14,327)
------------ ------------
Net cash used in operating activities (92,811) (116,274)
------------ ------------
Cash flows from investing activities:
Receipt of distributions from partnerships 417,886 567,799
Proceeds from disposition of investment in partnership 543,289 --
Release of investment held in escrow 140,000 --
Advances made to local partnerships (1,990) (29,995)
Collection of advances made to local partnerships 528 --
------------ ------------
Net cash provided by investing activities 1,099,713 537,804
------------ ------------
Net increase in cash and cash equivalents 1,006,902 421,530
Cash and cash equivalents, beginning of period 2,711,200 2,318,302
------------ ------------
Cash and cash equivalents, end of period $ 3,718,102 $ 2,739,832
============ ============
</TABLE>
The accompanying notes are an
integral part of these
financial statements.
-3-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 and 1999
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of C.R.I., Inc. (CRI), the Managing General Partner, the
accompanying unaudited financial statements reflect all adjustments, consisting
of normal recurring accruals, necessary for a fair presentation of the financial
position of Capital Realty Investors, Ltd. (the Partnership) as of June 30,
2000, and the results of its operations for the three and six months ended June
30, 2000 and 1999, and its cash flows for the six months ended June 30, 2000 and
1999. The results of operations for the interim periods ended June 30, 2000, are
not necessarily indicative of the results to be expected for the full year.
The accompanying unaudited financial statements have been prepared in
conformity with accounting principles generally accepted in the United States
and with the instructions to Form 10-QSB. Certain information and accounting
policies and footnote disclosures normally included in financial statements
prepared in conformity with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to such instructions.
These condensed financial statements should be read in conjunction with the
financial statements and notes thereto included in the Partnership's annual
report on Form 10-KSB at December 31, 1999.
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
a. Due on investments in partnerships and accrued interest payable
---------------------------------------------------------------
The Partnership is the maker of purchase money notes which have matured
and have not been paid with respect to two Local Partnerships, Lake Properties
Limited Partnership (Frenchman's Wharf I) and ARA Associates-Shangri-La Ltd.
(Shallowford Oaks). The purchase money notes accrue interest and require payment
in full of all unpaid accrued interest and principal upon the occurrence of
certain events, such as the sale or refinancing of the underlying apartment
complex or the maturity of the respective purchase money note. The purchase
money notes, which are nonrecourse to the Partnership, are secured by the
Partnership's interest in the respective Local Partnerships. The total amounts
due on the purchase money notes consist of outstanding principal and accrued
interest of approximately $4.479 million and $7.899 million, respectively, as of
June 30, 2000, and $4.479 million and $7.664 million, respectively, as of
December 31, 1999. The Managing General Partner is hopeful that an extension of
the purchase money notes' maturity dates can be negotiated with some but not all
of the noteholders. It is possible, however, that the noteholders could refuse
to negotiate or, even if extensions are obtained, that the underlying
properties' values will be insufficient to pay off the purchase money notes at
the time of sale or refinancing.
The Partnership's inability to pay 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,
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<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 and 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
does not adversely impact the Partnership's financial condition because the
purchase money notes are nonrecourse and secured solely by the Partnership's
interests in the related Local Partnerships. Therefore, should the investment in
Frenchman's Wharf I and/or Shallowford Oaks 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, each of the related Local Partnerships. Thus, even a complete
loss of the Partnership's interest in one or both of these Local Partnerships
would not have a material adverse impact on the financial condition of the
Partnership. However, since these notes remain unpaid, the noteholders have the
right to foreclose on the Partnership's interest in the related Local
Partnerships. The noteholders with respect to Frenchman's Wharf I have already
filed foreclosure lawsuits. In the event of a foreclosure, the excess of the
nonrecourse indebtedness over the carrying amount of the Partnership's
investment in the related Local Partnership would be deemed cancellation of
indebtedness income, which would be taxable to Limited Partners at a federal tax
rate of up to 39.6%. Additionally, in the event of a foreclosure, the
Partnership would lose its investment in the Local Partnership and, likewise,
its share of any future cash flow distributed by the Local Partnership from
rental operations, mortgage debt refinancings, or the sale of the real estate.
The Partnership did not receive any distributions from Frenchman's Wharf I or
Shallowford Oaks during the six month periods ended June 30, 2000 and 1999, and
its aggregate share of income from these two Local Partnerships was $0 for the
three month periods ended June 30, 2000 and 1999, respectively, and $0 for the
six month periods ended June 30, 2000 and 1999, respectively. See further
discussion of these purchase money notes, below.
Interest expense on the Partnership's purchase money notes for the
three and six month periods ended June 30, 2000 was $117,549 and $235,099,
respectively, and $117,549 and $235,098 for the three and six months ended June
30, 1999, respectively. The accrued interest payable on the purchase money notes
of $7,899,071 and $7,663,972 as of June 30, 2000 and December 31, 1999,
respectively, is currently due because all the notes have matured.
Frenchman's Wharf I
-------------------
The Partnership defaulted on its purchase money notes related to
Frenchman's Wharf I on June 1, 1998 when the notes matured and were not paid.
The default amount included principal and accrued interest of $3,778,800 and
$6,086,253, respectively. As of August 7, 2000, principal and accrued interest
of $3,778,800 and $7,002,598, respectively, were due. The purchase money notes
were initially due to mature on June 1, 1988, but were extended to mature on
June 1, 1998. The Partnership requested another extension of the maturity date
of the purchase money notes until May 2000, to be coterminous with the
expiration of the Local Partnership's provisional workout agreement (PWA) with
HUD related to its mortgage loan. In 1996, HUD sold the mortgage loan to the
same lender as Shallowford Oaks (see discussion concerning Shallowford Oaks,
-5-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 and 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
below). The local managing general partner has obtained a forbearance of the PWA
from the lender until January 31, 2001, with two 30-day extension periods
available. The forbearance agreement allows for the discounted payoff of the
mortgage loan. The purchase money noteholders initiated two separate foreclosure
proceedings. One group of plaintiffs has indicated it would be willing to stay
its action until the end of the forbearance period with the Local Partnership's
lender, so long as the plaintiff in the other lawsuit does the same, but to date
there has been no agreement with that noteholder. The Partnership intends to
defend vigorously against the foreclosure proceedings. However, there is no
assurance that the Partnership will be able to retain its interest in
Frenchman's Wharf I. In the event of a foreclosure, the Partnership would also
lose its share of any future cash flow distributed by the Local Partnership from
rental operations, mortgage debt refinancings, or the sale of the real estate.
The uncertainty regarding the continued ownership of the Partnership's interest
in Frenchman's Wharf I does not adversely impact the Partnership's financial
condition, as discussed above.
Shallowford Oaks
----------------
The Partnership defaulted on its purchase money note relating to
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 August 7, 2000, principal and accrued interest of $700,000
and $944,005, respectively, were due. The Managing General Partner has proposed
to extend the maturity date of the note until November 2001, coterminous with
the expiration of the Local Partnership's PWA related to its mortgage loan which
matures in November 2001. As of August 7, 2000, the Managing General Partner is
awaiting a response from the noteholders. There is no assurance that any
agreement will be reached with the noteholders.
In addition, Shallowford Oaks' mortgage lender filed notice on November
3, 1997 accelerating the maturity of the Local Partnership's mortgage loan and
demanding payment in full due to a purported nonmonetary default of the
provisional workout agreement. Subsequently, the local managing general partner
filed an action to enjoin the attempted foreclosure. The court entered an order
for equitable relief in Shallowford's favor on November 12, 1998. The lender
filed a motion for a new trial and a motion to alter or amend judgment in
December 1998. The court denied the lender's motions by order dated March 24,
1999. Subsequently, the lender filed an appeal to the order for equitable relief
and oral arguments were held on October 13, 1999. In February 2000, the
Partnership received written notification of the court's ruling in its favor.
For the six months ended June 30, 2000 and 1999, the Partnership advanced
Shallowford Oaks $1,462 (net) and $29,995, respectively, for legal costs.
Due to the uncertainties regarding the outcome of an extension of the
maturity date of the purchase money note, there is no assurance that the
Partnership will be able to retain its interest in Shallowford Oaks. In the
event of a foreclosure, the Partnership would also lose its share of any future
-6-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 and 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
cash flow distributed by the Local Partnership from rental operations, mortgage
debt refinancings, or the sale of the real estate. The uncertainty regarding the
continued ownership of the Partnership's interest in Shallowford Oaks does not
adversely impact the Partnership's financial condition, as discussed above.
b. Advances to Local Partnerships
------------------------------
As of June 30, 2000 and December 31, 1999, the Partnership had advanced
funds, including accrued interest, totaling $760,086 and $755,556 to Local
Partnerships. For financial reporting purposes, these loans have been or will be
reduced to zero by the Partnership as a result of losses from the related Local
Partnerships.
c. Property matters
----------------
Frenchman's Wharf I
-------------------
The report of the auditors on the financial statements of Frenchman's
Wharf I for the year ended December 31, 1999 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 loan and the expiration
of its Section 8 Rental Housing Assistance Payments (HAP) contract with HUD on
November 30, 2000. The uncertainty about the Local Partnership's continued
ownership of the property does not adversely impact the Partnership's financial
condition, as discussed above.
Winthrop Beach
--------------
On March 23, 2000, Winthrop Beach Associates (Winthrop Beach) sold its
property. The sale resulted in a financial statement gain of $527,850, an
estimated federal tax gain of approximately $1,439,376, and net cash proceeds of
$543,289 to the Partnership.
d. Summarized financial information
--------------------------------
Combined statements of operations for the 16 and 17 Local Partnerships
in which the Partnership was invested as of June 30, 2000 and 1999,
respectively, follow. The combined statements have been compiled from
information supplied by the management agents of the projects and are unaudited.
The combined statements of operations for the three and six months ended June
30, 2000 include information for Winthrop Beach through the date of sale.
-7-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 and 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Rental $ 4,620,608 $ 4,640,577 $ 9,335,508 $ 9,264,821
Other 254,202 232,919 519,397 478,749
------------ ------------ ------------ ------------
Total revenue 4,874,810 4,873,496 9,854,905 9,743,570
------------ ------------ ------------ ------------
Expenses:
Operating 2,155,456 2,211,721 4,504,499 4,631,063
Interest 1,573,350 1,600,436 3,154,352 3,200,877
Depreciation and amortization 833,483 837,314 1,682,406 1,674,628
------------ ------------ ------------ ------------
Total expenses 4,562,289 4,649,471 9,341,257 9,506,568
------------ ------------ ------------ ------------
Net income $ 312,521 $ 224,025 $ 513,648 $ 237,002
============ ============ ============ ============
</TABLE>
As of June 30, 2000 and 1999, the Partnership's share of cumulative
losses to date for eight and nine, respectively, of the 16 and 17 Local
Partnerships, respectively, exceeded the amount of the Partnership's investments
in and advances to those Local Partnerships by $8,428,463 and $9,200,448,
respectively. As the Partnership has no further obligation to advance funds or
provide financing to these Local Partnerships, the excess losses have not been
reflected in the accompanying financial statements.
3. AFFORDABLE HOUSING LEGISLATION
Frenchman's Wharf I and Shallowford Oaks have Section 8 HAP contracts
covering 10% and 20%, respectively, of their apartment units, which contracts
expire during 2000. A Section 8 HAP contract provides rental subsidies to a
property owner for units occupied by low income tenants. If either contract is
not extended, there would likely be a temporary increase in vacancy during the 6
to 12 months after expiration. As residents in the low-income units move out,
the units would be made available to market-rate residents.
Most of the Local Partnerships in which the Partnership is invested
have mortgage loans financed by various state housing agencies, and two Local
Partnerships have mortgage loans financed by the Rural Economic Community
Development (RECD) agency. Further, these Local Partnerships have Section 8 HAP
contracts in place for all or substantially all of their apartment units which
are generally regulated by the Department of Housing and Urban
-8-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 and 1999
(Unaudited)
3. AFFORDABLE HOUSING LEGISLATION - Continued
Development (HUD) (the state housing agencies, RECD and HUD, collectively, the
Agencies). These Section 8 HAP contracts begin to expire, or have been extended
to expire, in November 2000. Currently, the Managing General Partner believes
that the Agencies will strive to preserve the units as low income, or
affordable, housing. Therefore, it appears unlikely that the Agencies will allow
a prepayment of the respective mortgage loans or a conversion of the units to
market rate housing, primarily because the Agencies have the right under the
mortgage and/or regulatory agreement to disallow the mortgage prepayment. The
Managing General Partner continues to monitor the actions of these financing
Agencies to assess how these Agencies will deal with expiring Section 8 HAP
contracts and what impact these Agencies' strategies will have on the operations
of the Local Partnerships and, consequently, the impact on the Partnership's
investments in the Local Partnerships. As of June 30, 2000, the Partnership's
investment in Local Partnerships with Section 8 HAP contracts expiring in the
year 2000 was $0.
4. RELATED PARTY TRANSACTIONS
In accordance with the terms of the Partnership Agreement, the
Partnership is obligated to reimburse the Managing General Partner for its
direct expenses in managing the Partnership. The Partnership paid $29,047 and
$55,604 for the three and six month periods ended June 30, 2000, respectively,
and $26,539 and $55,460 for the three and six months ended June 30, 1999,
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 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 Partnership paid the Managing General Partner a Management Fee of
$23,802 and $47,604 for each of the three and six month periods ended June 30,
2000 and 1999, respectively.
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 it 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 fees were earned by the Managing General Partner or its
affiliates for the three and six month periods ended June 30, 2000 or 1999.
-9-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Capital Realty Investors, Ltd.'s (the Partnership) Management's
Discussion and Analysis of Financial Condition and Results of Operations section
contains information that may be considered forward looking, including
statements regarding the effect of governmental regulations. Actual results may
differ materially from those described in the forward looking statements and
will be affected by a variety of factors including national and local economic
conditions, the general level of interest rates, governmental regulations
affecting the Partnership and interpretations of those regulations, the
competitive environment in which the Partnership operates, and the availability
of working capital.
General
-------
C.R.I., Inc. (the Managing General Partner) continues to evaluate the
Partnership's underlying apartment complexes to develop strategies that make
sense for all parties involved. Issues that are at the forefront of the Managing
General Partner's strategic planning include: matured purchase money notes,
expiring Section 8 Housing Assistance Payment (HAP) contracts, properties with
state housing financing or Rural Economic Community Development (RECD) agency
financing, the cessation of losses to the Partnership due to the complete
depletion of low-income housing accelerated depreciation deductions on the Local
Partnerships' properties, and declining mortgage interest deductions as the
mortgage loans move closer to maturity.
Lake Properties Limited Partnership (Frenchman's Wharf I) and ARA
Associates-Shangri-La Ltd. (Shallowford Oaks) have Section 8 HAP contracts
covering 10% and 20%, respectively, of their apartment units, which contracts
expire during 2000. A Section 8 HAP contract provides rental subsidies to a
property owner for units occupied by low income tenants. If either contract is
not extended, there would likely be a temporary increase in vacancy during the 6
to 12 months after expiration. As residents in the low-income units move out,
the units would be made available to market-rate residents.
Most of the Local Partnerships in which the Partnership is invested
have mortgage loans financed by various state housing agencies, and two Local
Partnerships have mortgage loans financed by the Rural Economic Community
Development (RECD) agency. Further, these Local Partnerships have Section 8 HAP
contracts in place for all or substantially all of their apartment units which
are generally regulated by the Department of Housing and Urban Development (HUD)
(the state housing agencies, RECD and HUD, collectively, the Agencies). These
Section 8 HAP contracts begin to expire, or have been extended to expire, in
November 2000. Currently, the Managing General Partner believes that the
Agencies will strive to preserve the units as low income, or affordable,
housing. Therefore, it appears unlikely that the Agencies will allow a
prepayment of the respective mortgage loans or a conversion of the units to
market rate housing, primarily because the Agencies have the right under the
mortgage and/or regulatory agreement to disallow the mortgage prepayment. The
Managing General Partner continues to monitor the actions of these financing
Agencies to assess how these Agencies will deal with expiring Section 8 HAP
contracts and what impact these Agencies' strategies will have on the operations
of the Local Partnerships and, consequently, the impact on the Partnership's
investments in the Local Partnerships. As of June 30, 2000, the
-10-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
Partnership's investment in Local Partnerships with Section 8 HAP contracts
expiring in the year 2000 was $0.
Sales of properties with state Agency or RECD financing will be
extremely difficult. Since the Agencies are unlikely to allow mortgage
prepayment and/or sale for a conversion to market rate housing, prospective
buyers are generally limited to non-profit organizations. Generally, purchase
offers received from non-profit organizations tend to be much lower per
apartment unit than those from profit-motivated companies.
The Managing General Partner is considering marketing, on a
state-by-state basis, one or more of the properties in which the Partnership is
invested with properties in other portfolios sponsored by the Managing General
Partner. This may enhance the opportunity to sell these properties. Each
property is different, so it is impossible to predict if any of the
Partnership's properties might be included in such a combination sale.
The Managing General Partner is working diligently on behalf of the
Partnership to produce the best results possible under these difficult
circumstances. While the Managing General Partner cannot predict the outcome for
any particular property at this time, the Managing General Partner will continue
to work with the Local Partnerships to develop strategies that make sense for
all parties involved.
Financial Condition/Liquidity
-----------------------------
The Partnership's liquidity, with unrestricted cash resources of
$3,718,102 as of June 30, 2000 along with anticipated future cash distributions
from the Local Partnerships, is expected to be adequate to meet its current and
anticipated operating cash needs. As of August 7, 2000, there were no material
commitments for capital expenditures.
The Partnership is the maker of purchase money notes which have matured
and have not been paid with respect to two Local Partnerships, Frenchman's Wharf
I and Shallowford Oaks. The purchase money notes accrue interest and require
payment in full of all unpaid accrued interest and principal upon the occurrence
of certain events, such as the sale or refinancing of the underlying apartment
complex or the maturity of the respective purchase money note. The purchase
money notes, which are nonrecourse to the Partnership, are secured by the
Partnership's interest in the respective Local Partnerships. The total amounts
due on the purchase money notes consist of outstanding principal and accrued
interest of approximately $4.479 million and $7.899 million, respectively, as of
June 30, 2000, and $4.479 million and $7.664 million, respectively, as of
December 31, 1999. The Managing General Partner is hopeful that an extension of
the purchase money notes' maturity dates can be negotiated with some but not all
of the noteholders. It is possible, however, that the noteholders could refuse
to negotiate or, even if extensions are obtained, that the underlying
properties' values will be insufficient to pay off the purchase money notes at
the time of sale or refinancing.
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<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
The Partnership's inability to pay 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 adversely impact the Partnership's financial condition
because the purchase money notes are nonrecourse and secured solely by the
Partnership's interests in the related Local Partnerships. Therefore, should the
investment in Frenchman's Wharf I and/or Shallowford Oaks 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, each of the related Local Partnerships. Thus, even a
complete loss of the Partnership's interest in one or both of these Local
Partnerships would not have a material adverse impact on the financial condition
of the Partnership. However, since these notes remain unpaid, the noteholders
have the right to foreclose on the Partnership's interest in the related Local
Partnerships. The noteholders with respect to Frenchman's Wharf I have already
filed foreclosure lawsuits. In the event of a foreclosure, the excess of the
nonrecourse indebtedness over the carrying amount of the Partnership's
investment in the related Local Partnership would be deemed cancellation of
indebtedness income, which would be taxable to Limited Partners at a federal tax
rate of up to 39.6%. Additionally, in the event of a foreclosure, the
Partnership would lose its investment in the Local Partnership and, likewise,
its share of any future cash flow distributed by the Local Partnership from
rental operations, mortgage debt refinancings, or the sale of the real estate.
The Partnership did not receive any distributions from Frenchman's Wharf I or
Shallowford Oaks during the six month periods ended June 30, 2000 and 1999, and
its aggregate share of income from these two Local Partnerships was $0 for the
three month periods ended June 30, 2000 and 1999, respectively, and $0 for the
six month periods ended June 30, 2000 and 1999, respectively. See the notes to
the financial statements for additional information concerning these 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. For the six month periods ended June 30, 2000 and 1999, the
receipt of distributions from Local Partnerships was adequate to support
operating cash requirements. Cash and cash equivalents increased during the six
months ended June 30, 2000 due to proceeds received from the sale of Winthrop
Beach, as discussed in the notes to the financial statements, and as the receipt
of distributions from partnerships was in excess of net cash used in operating
activities.
Results of Operations
---------------------
The Partnership's net income for the three month period ended June 30,
2000 decreased from the corresponding period in 1999 due to a decrease in share
of income from partnerships as the result of lower cash flow distributed at one
property, and of the exclusion from share of income in 2000 of another property
which had accumulated unallowable losses. Offsetting the decrease in net income
were an increase in interest income due to higher cash and cash equivalent
balances and higher interest rates in 2000, a decrease in general
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<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
and administrative expenses due to lower reimbursed payroll costs, and gain on
the sale of the Winthrop Beach Associates (Winthrop Beach) property.
The Partnership's net income for the six month period ended June 30,
2000 increased from the corresponding period in 1999 primarily due to gain on
disposition of investment in partnership related to the sale of Winthrop Beach.
Contributing to the increase in net income was an increase in interest income
and a decrease in general and administrative expense, both of which are
discussed above. Offsetting the increase in the Partnership's net income was a
decrease in share of income from partnerships, as discussed above.
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 share of income from partnerships for the three and
six month periods ended June 30, 2000, did not include losses of $120,722 and
$267,607, respectively, compared to excluded losses of $250,896 and $501,804 for
the three and six month periods ended June 30, 1999, respectively.
No other significant changes in the Partnership's operations have taken
place during this period.
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
See Note 2.a. of the notes to financial statements contained in Part I,
Item 1, hereof, for information concerning the Partnership's defaults on
certain purchase money notes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a. None
b. No reports on Form 8-K were filed with the Commission during
the quarter ended June 30, 2000.
All other items are not applicable.
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<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CAPITAL REALTY INVESTORS, LTD.
---------------------------------------------------
(Registrant)
by: C.R.I., Inc.
-----------------------------------------------
Managing General Partner
August 7, 2000 by: /s/ Michael J. Tuszka
----------------- -------------------------------------------
DATE Michael J. Tuszka
Vice President
and Chief Accounting Officer
(Principal Financial Officer
and Principal Accounting Officer)
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<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
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