CAPITAL REALTY INVESTORS II LTD PARTNERSHIP, 10-Q, 1996-04-22

CAPITAL REALTY INVESTORS II LTD PARTNERSHIP
10-Q, 1996-04-22
REAL ESTATE

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<PAGE>

FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the Quarter Ended March 31, 1996
--------------

Commission file number 0-11973
-------------

CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
- --------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

Maryland 52-1321492
- ----------------------------------------- --------------------
(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
- -------------------------------------------------------------------------
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]

Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

Class Outstanding at March 31, 1996
- ---------------------------------- ----------------------------------
(Not applicable) (Not applicable)
<PAGE>

CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 1996

PAGE
----

PART I. Financial Information (Unaudited)

Item 1. Financial Statements

Balance Sheets - March 31, 1996 and
December 31, 1995 . . . . . . . . . . . . . 1

Statements of Operations - for the three months
ended March 31, 1996 and 1995 . . . . . . . 2

Statements of Cash Flows - for the three
months ended March 31, 1996 and 1995 . . . 3

Notes to Financial Statements . . . . . . . . 4

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . 11

PART II. Other Information

Item 6. Exhibits and Reports on Form 8-K . . . . . . 17

Signature . . . . . . . . . . . . . . . . . . . . . . 18

Exhibit Index . . . . . . . . . . . . . . . . . . . . . 19
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------

CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP

BALANCE SHEETS

ASSETS

March 31, December 31,
1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
Investments in and advances to partnerships $ 6,898,059 $ 7,358,510
Cash and cash equivalents 2,014,874 3,192,539
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $415,829 and $407,496,
respectively 584,171 592,504
Property purchase costs, net of accumulated amortization of
$263,822 and $258,343, respectively 393,490 398,969
Other assets 2,963 7,851
------------ ------------
Total assets $ 9,893,557 $ 11,550,373
============ ============

LIABILITIES AND PARTNERS' DEFICIT

Due on investments in partnerships, net of unamortized discount on
purchase money notes of $7,485,570 and $8,206,853, respectively $ 12,655,108 $ 14,213,825
Accrued interest payable 28,864,917 29,256,224
Accounts payable and accrued expenses 70,810 82,324
------------ ------------
Total liabilities 41,590,835 43,552,373
------------ ------------
Commitments and contingencies
Partners' capital (deficit):
Capital paid-in:
General Partners 2,000 2,000
Limited Partners 50,015,000 50,015,000
------------ ------------
50,017,000 50,017,000
Less:
Accumulated distributions to partners (1,254,612) (1,254,612)
Offering costs (5,278,980) (5,278,980)
Accumulated losses (75,180,686) (75,485,408)
------------ ------------
Total partners' deficit (31,697,278) (32,002,000)
------------ ------------
Total liabilities and partners' deficit $ 9,893,557 $ 11,550,373
============ ============
</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-II LIMITED PARTNERSHIP

STATEMENTS OF OPERATIONS

(Unaudited)

For the three months ended
March 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Share of (loss) income from partnerships $ (40,773) $ 126,830
------------ ------------
Other revenue and expenses:
Revenue:
Interest income 24,583 40,948
------------ ------------
Expenses:
Interest 1,353,878 1,364,771
Management fee 62,499 62,499
General and administrative 32,459 33,413
Professional fees 20,342 19,357
Amortization 13,812 13,812
------------ ------------
1,482,990 1,493,852
------------ ------------
Total other revenue and expenses (1,458,407) (1,452,904)
------------ ------------
Loss before extraordinary gain from extinguishment of debt (1,499,180) (1,326,074)

Extraordinary gain from extinguishment of debt 1,803,902 --
------------ ------------
Net income (loss) 304,722 (1,326,074)

Accumulated losses, beginning of period (75,485,408) (69,637,480)
------------ ------------
Accumulated losses, end of period $(75,180,686) $(70,963,554)
============ ============
Income (loss) allocated to General Partners (1.51%) $ 4,601 $ (20,024)
============ ============
Income (loss) allocated to Initial and Special Limited Partners (1.49%) $ 4,540 $ (19,759)
============ ============
Income (loss) allocated to Additional Limited Partners (97%) $ 295,581 $ (1,286,291)
============ ============
Income (loss) per unit of Additional Limited Partnership Interest
based on 50,000 units outstanding $ 5.91 $ (25.73)
============ ============

</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-II LIMITED PARTNERSHIP

STATEMENTS OF CASH FLOWS

(Unaudited)

For the three months ended
March 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 304,722 $ (1,326,074)

Adjustments to reconcile net loss to net cash used in operating
activities:
Share of loss (income) from partnerships 40,773 (126,830)
Amortization of deferred costs 13,812 13,812
Amortization of discount on purchase money notes 721,283 704,119
Gain on extinguishment of debt (1,803,902) --
Payment of purchase money note interest -- (44,855)

Changes in assets and liabilities:
Decease (increase) in other assets 4,888 (2,387)
Increase in accrued interest payable 632,595 660,652
Decrease in accounts payable and accrued expenses (11,514) (7,283)
------------ ------------
Net cash used in operating activities (97,343) (128,846)
------------ ------------
Cash flows from investing activities:
Receipt of distributions from partnerships 419,678 59,620
------------ ------------
Cash flows from financing activities:
Pay-off of purchase money note (1,500,000) --
------------ ------------
Net decrease in cash and cash equivalents (1,177,665) (69,226)

Cash and cash equivalents, beginning of period 3,192,539 2,812,577
------------ ------------
Cash and cash equivalents, end of period $ 2,014,874 $ 2,743,351
============ ============
</TABLE>

The accompanying notes are an integral part
of these financial statements.

-3-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

In the opinion of C.R.I., Inc. (CRI), the Managing General Partner, the
accompanying unaudited financial statements contain all adjustments of a normal
recurring nature necessary to present fairly the financial position of Capital
Realty Investors-II Limited Partnership (the Partnership) as of March 31, 1996
and December 31, 1995, and the results of its operations for the three months
ended March 31, 1996 and 1995 and its cash flows for the three months ended
March 31, 1996 and 1995.

These unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. While the Managing General Partner believes that the dis-
closures presented are adequate to make the information not misleading, it is
suggested that these condensed financial statements be read in conjunction with
the financial statements and the notes included in the Partnership's Annual
Report filed on Form 10-K for the year ended December 31, 1995.

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS

As of March 31, 1996, the Partnership's obligations with respect to its
investments in Local Partnerships, in the form of purchase money notes of
$20,140,678 (exclusive of unamortized discount on purchase money notes of
$7,485,570) plus accrued interest of $28,864,917, are payable upon the earliest
of: (i) sale or refinancing of the respective Local Partnership's rental
property; (ii) payment in full of the respective Local Partnership's permanent
loan; or (iii) maturity. Purchase money notes in an aggregate principal amount
of $2,380,000, which had originally matured in August 1995, were extended to
January 1, 1998, as discussed below. Purchase money notes in an aggregate
principal amount of $2,100,000 are scheduled to mature on December 31, 1996, as
discussed below. The remaining purchase money notes mature in 1998 and 1999.
The purchase money notes are generally secured by the Partnership's interest in
the respective Local Partnership. There is no assurance that the underlying
properties will have sufficient appreciation and equity to enable the
Partnership to pay the purchase money notes' principal and accrued interest when
due. If a purchase money note is not paid in accordance with its terms, the
Partnership will either have to renegotiate the terms of repayment or risk
losing its partnership interest in the Local Partnership. The Managing General
Partner is continuing to investigate possible alternatives to reduce the
Partnership's long-term debt obligations. These alternatives include, among
others, retaining the cash available for distribution to meet the purchase money
note requirements, buying out certain purchase money notes at a discounted
price, extending the due dates of certain purchase money notes, or refinancing
the respective properties' underlying debt and using the Partnership's share of
the proceeds to pay off or buy down certain purchase money note obligations.

Interest expense on the Partnership's purchase money notes for the three
months ended March 31, 1996 and 1995 was $1,353,878 and $1,364,771,
respectively. Amortization of the imputed interest on purchase money notes
increased interest expense during the three months ended March 31, 1996 and 1995
by $721,283 and $704,119, respectively.

-4-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

As of March 31, 1996 and December 31, 1995, the Partnership had advanced
funds totalling $324,410 to Local Partnerships. There were no funds advanced to
the Local Partnerships during the three months ended March 31, 1996.

The Partnership defaulted on its purchase money note relating to Rock Glen
Limited Partnership (Rock Glen) on August 1, 1995 when the note matured and was
not paid. A standstill agreement from the noteholder was granted until October
31, 1995. The Managing General Partner made an offer to the noteholder to
extend the purchase money note due date to August 2000. This offer was rejected
by the noteholder. On January 11, 1996, the Partnership paid off the purchase
money note at a discount, resulting in a gain on extinguishment of debt of
$1,803,902.

The Partnership defaulted on its purchase money notes relating to Beech
Hill Development Co. (Beech Hill I) and Beech Hill Development Co. II (Beech
Hill II) on August 1, 1995 when the notes matured and were not paid. On March
29, 1996, the noteholders agreed to extend the purchase money note due dates to
January 1, 1998. Under the agreement, the Partnership will pay the purchase
money noteholders of Beech Hill I and Beech Hill II all annual cash flow
distributions received from the related Local Partnerships in excess of $5,000
and $2,500, respectively. There were no annual cash flow distributions made to
the Partnership from the related Local Partnerships during the three months
ended March 31, 1996 and 1995. Also under the agreement, documents transferring
the Partnership's interests in the related Local Partnerships to the noteholders
have been placed in escrow and would be released to the noteholders upon a
future default by the Partnership on the respective purchase money notes.

Purchase money notes relating to Chevy Chase Park Limited (Chevy Chase) in
the aggregate principal amount of $2,100,000 mature on December 31, 1996. The
Managing General Partner is currently negotiating with the noteholders to extend
the purchase money note due dates to coincide with potential future processing
under the Low Income Housing Preservation and Resident Homeownership Act of 1990
(LIHPRHA), or to accept a discounted pay-off. 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 Chevy Chase. The
uncertainty about the continued ownership of the Partnership's interests in
Chevy Chase does not impact the Partnership's financial condition because the
related purchase money notes are nonrecourse and secured solely by the
Partnership's interest in the related Local Partnership. Therefore, should the
investment in Chevy Chase not produce sufficient value to satisfy the related
purchase money notes, the Partnership's exposure to loss is limited since the
amount of the nonrecourse indebtedness exceeds the carrying amount of the
investment in and advances to the Local Partnership. Thus, even a complete loss
of this investment would not have a material impact on the operations of the
Partnership.

-5-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

this type of financial instrument, (ii) the variable nature of purchase money
note interest payments as a result of fluctuating cash flow distributions
received from the related Local Partnerships, and (iii) the excessive costs
associated with an independent appraisal of the purchase money notes.

The local general partner of Frenchman's Wharf Apartments Associates II
(Frenchman's Wharf II), in conjunction with the Managing General Partner,
applied to the Department of Housing and Urban Development (HUD), holder of the
mortgage on the property, for a three-year extension of the previous workout
arrangement, which expired in December 1990. The local HUD office verbally
agreed to an extension expiring December 31, 1993 and recommended approval of
the extension to the HUD central office in Washington, D.C. In December 1993,
the local HUD office requested that a new workout proposal be submitted, and in
January 1994, the local general partner met with HUD to discuss the long-term
capital needs of the property in connection with a workout proposal. On March
1, 1994, the local general partner submitted a nine-year workout proposal to
HUD. This proposal was rejected by HUD in December 1995. As of April 17, 1996,
the local general partner is continuing to work directly with the HUD central
office to submit a five-year workout proposal. There is no assurance that
approval for a workout will be received. If a workout proposal is not accepted
and another alternative is not found, then HUD could foreclose on the property.
Frenchman's Wharf II was notified by HUD that HUD had planned to offer its
mortgage loan for sale in September of 1995. HUD later notified Frenchman's
Wharf II that its loan was not included in the pool of loans sold by HUD in
September 1995. As of April 17, 1996, Frenchman's Wharf II had not been
notified by HUD as to whether HUD will offer the Frenchman's Wharf II loan for
sale at a later date. If the mortgage is eventually sold by HUD, a new
mortgagee would service the defaulted loan and could foreclose on the property.
The uncertainty about the Local Partnership's continued ownership of the
property does not impact the Partnership's financial condition because the
related purchase money note is nonrecourse and secured solely by the
Partnership's interest in the Local Partnership. Therefore, should the
investment in Frenchman's Wharf II not produce sufficient value to satisfy the
purchase money note related to Frenchman's Wharf II, the Partnership's exposure
to loss is limited since the amount of the nonrecourse indebtedness exceeds the
carrying amount of the investment in and advances to the Local Partnership.
Thus, even a complete loss of this investment would not have a material impact
on the operations of the Partnership. Currently, debt service payments are
being made from available cash flow. To cover operating deficits incurred in
prior years for Frenchman's Wharf II, the Partnership advanced funds totalling
$324,410 as of both March 31, 1996 and December 31, 1995. The last advance was
made to Frenchman's Wharf II in March 1987. The Partnership does not expect to
advance any additional funds in connection with Frenchman's Wharf II's loan
workout with HUD. These loans, together with accrued interest of $187,372 as of
both March 31, 1996 and December 31, 1995, are payable from cash flow of
Frenchman's Wharf II after payment of first-mortgage debt service and after
satisfaction by the Partnership of certain other interest obligations on the
purchase money notes due from the Local Partnership. There is no assurance that
the Local Partnership, upon expiration of any workout, will be able to repay any
loans in accordance with the terms.

-6-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

to delinquent interest. Currently, debt-service payments are being made in
accordance with the workout. In June 1995, the three-year workout which
originally expired on October 1, 1995 was extended to October 1, 1996.

On December 15, 1995, Posada Vallarta Apartments was notified by HUD that
HUD plans to offer its mortgage loan for sale in June 1996. If the mortgage is
sold by HUD, a new mortgagee would service the loan, and Posada Vallarta
Apartments would no longer be subject to HUD regulatory requirements.

On January 31, 1996, the local general partner of Palatine-Barrington
Associates Limited Partnership (Deer Grove) received an offer for the property
from an unaffiliated entity. The offer was rejected by the Local Managing
General Partner and negotiations have ended.

Wexford Ridge Associates Local Partnership (located in Madison, Wisconsin),
its local general partner, and its management agent have been named in eight
sexual harassment and discrimination complaints filed with HUD. The Managing
General Partner and the Partnership have also been named in four of the
complaints. The Managing General Partner is monitoring the situation and is
investigating the Partnership's rights with regard to the local general partner
and/or the management agent if the situation is not dealt with to the
satisfaction of the Managing General Partner. The Managing General Partner
believes the claims will have no aggregate material effect on the financial
statements of the Partnership and that legal costs associated with the claims
will be borne by the management agent.

Some of the rental properties owned by the Local Partnerships have
mortgages which are federally insured under Section 236 or Section 221(d)(3) of
the National Housing Act, as amended. These properties may be eligible for
sale, subject to numerous requirements, under the LIHPRHA program. This program
may provide incentives to owners of qualifying multifamily housing who commit to
permanently maintain their properties as low to moderate income housing.
Incentives originally available under LIHPRHA included selling the property to
qualified buyers or obtaining supplemental financing for the property. On March
28, 1996, Congress enacted the Housing Opportunity Program Extension Act of 1996
which includes revisions to the LIHPRHA program. These revisions include: (i)
severely limiting the availability of the supplemental financing option for
owners of qualifying multifamily housing, (ii) allowing owners who no longer
qualify for supplemental financing under the revised guidelines to elect to
pursue a sale of the property under the LIHPRHA program, provided that the
election to sell was made by April 15, 1996, and (iii) continuing the funding of
sale transactions under the LIHPRHA program through October 1, 1996, but only
for transactions in which the owner's plan of action is approved by HUD by
August 15, 1996. As of April 17, 1996, there can be no assurance that Congress
will extend the LIHPRHA program beyond the October 1 deadline, or that a
modified program will be developed in place of the existing program. Also,
there is no assurance that the sale of any of the properties owned by the Local
Partnerships will occur.

-7-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

refinance the property or obtain supplemental financing. The Managing General
Partner continues to monitor these programs to ascertain whether the properties
would qualify within the parameters of these programs and whether these programs
would provide an appropriate economic benefit to the limited partners of the
Partnership.

Some of the rental properties owned by the Local Partnerships are dependent
on the receipt of housing assistance payments guaranteed by contract under the
HUD Section 8 program. The level of funding for the Section 8 program, and HUD-
insured multifamily housing in general, is dependent upon the continuation of
appropriations approved by Congress for subsidy payments. In the event that the
rental subsidy programs are reduced or phased out, there is no assurance that
the rental properties will be able to maintain the occupancy levels necessary to
pay debt service and operating costs or that the rents necessary to pay debt
service and operating costs will be competitive with rents for comparable units
in the rental properties' respective market areas. While the Managing General
Partner has no reason to believe that HUD will not honor its obligations under
the contracts, some uncertainty exists in light of the recent Congressional
scrutiny of appropriations for HUD programs.

The following are combined statements of operations for the Local
Partnerships in which the Partnership has invested. The statements are compiled
from information supplied by the management agents of the projects and are
unaudited.

-8-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION> For the three months ended
March 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenue:
Rental revenue $ 7,314,701 $ 7,082,315
Other 303,282 388,321
------------ ------------
7,617,983 7,470,636
------------ ------------
Expenses:
Operating 5,189,127 4,785,723
Interest 2,114,732 2,097,330
Depreciation and amortization 1,378,535 1,351,821
------------ ------------
8,682,394 8,234,874
------------ ------------
Net loss $ (1,064,411) $ (764,238)
============ ============

</TABLE>

As of March 31, 1996 and December 31, 1995, the Partnership's share of
cumulative losses to date for nine of the twenty-two Local Partnerships exceeds
the amount of the Partnership's investments in and advances to those Local
Partnerships by $25,581,873 and $24,699,157, respectively. As the Partnership
has no further obligation to advance funds or provide financing to these Local
Partnerships, the excess losses have not been reflected in the accompanying
financial statements.

3. RELATED-PARTY TRANSACTIONS

In accordance with the terms of the Partnership Agreement, the Partnership
is obligated to reimburse the Managing General Partner for its direct expenses
in managing the Partnership and to pay an annual incentive management fee (the
Management Fee) after all other expenses of the Partnership are paid. The
Partnership paid $25,498 and $21,605 for the three months ended March 31, 1996
and 1995, respectively, as direct reimbursement of expenses incurred on behalf
of the Partnership. Such expenses are included in the statements of operations
as general and administrative expenses. Additionally, the Partnership paid the
Managing General Partner a Management Fee of $62,499 for each of the three-month
periods ended March 31, 1996 and 1995.

-9-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

4. CONTINGENCIES

In 1990, CRI, as managing general partner of the Partnership and various
other entities, subcontracted certain property-level asset management functions
for certain properties to Capital Management Strategies, Inc. (CMS). Among
these properties were properties owned by some of the Local Partnerships in
which the Partnership invested. CMS was formed by Martin C. Schwartzberg, a
nominal general partner of the Partnership and a former stockholder of CRI, when
he retired from and cashed out of CRI and its related businesses as of January
1, 1990. Mr. Schwartzberg agreed not to act as a general partner with respect
to any of the CRI-sponsored partnerships, including this Partnership, and has
not done so since that time. In late 1995, a dispute arose between CRI and CMS
over the funding level of the 1996 contract for CMS. On November 9, 1995, CRI
filed a complaint against CMS to determine the proper amount of fees to be paid
in 1996 under the asset management agreement. CMS answered on January 10, 1996,
but asserted no counterclaims.

Thereafter, Mr. Schwartzberg launched a hostile consent solicitation to be
designated as managing general partner of approximately 125 private partnerships
sponsored by CRI. On January 18, 1996, Mr. Schwartzberg and CMS filed a
complaint in the Circuit Court of Montgomery County, Maryland (the Circuit
Court), against CRI and Messrs. Dockser and Willoughby (who are general partners
of the Partnership) alleging, among other things, that CRI and Messrs. Dockser
and Willoughby have breached the asset management agreement pursuant to which
Mr. Schwartzberg's company, CMS, agreed to perform limited functions related to
property-level issues for a portion of CRI's subsidized housing portfolio
(including some of the properties in which the Partnership invested), by
reducing the proposed budget for 1996. The Partnership is not named as a
defendant in this action. Messrs. Dockser and Willoughby have entered an answer
denying all of Mr. Schwartzberg's claims. Messrs. Dockser and Willoughby have
publicly responded that Mr. Schwartzberg's suit is motivated by his budget
dispute with CRI and personal animosity. On February 6, 1996, CRI terminated
the CMS contract for cause. Mr. Schwartzberg and CMS responded by filing a
motion for injunctive relief in the Circuit Court, asking the court to enjoin
CRI from terminating the contract. In a ruling issued on February 12, 1996, the
Circuit Court, among other things, refused to grant the injunction requested by
CMS. A hearing in this case is scheduled for April 29, 1996. On February 12,
1996, the Circuit Court also issued a memorandum opinion and order enjoining CMS
and Mr. Schwartzberg from disclosing information made confidential under the
asset management agreement.

On February 1, 1996 and February 16, 1996, Mr. Schwartzberg sent letters to
the Partnership requesting investor lists and other forms of investor
information. On February 5, 1996, the Partnership, acting through its managing
general partner, CRI, denied Mr. Schwartzberg's request. On February 20, 1996,
counsel for the Partnership responded to Mr. Schwartzberg's second request,
denying that Mr. Schwartzberg had standing or a proper purpose for requesting
the investor lists. In view of Mr. Schwartzberg's solicitation efforts against
other CRI-sponsored partnerships, CRI anticipates that litigation may arise from
this request.

-10-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------

Financial Condition/Liquidity
-----------------------------

Capital Realty Investors-II Limited Partnership's (the Partnership)
liquidity, with unrestricted cash resources of $2,014,874 and $3,192,539 as of
March 31, 1996 and December 31, 1995, respectively, along with anticipated
future cash distributions from the Local Partnerships, is expected to meet its
current and anticipated operating cash needs. As of April 17, 1996, there are
no material commitments for capital expenditures.

-11-
<PAGE>

PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------

the Partnership's interests in the related Local Partnerships to the noteholders
have been placed in escrow and would be released to the noteholders upon a
future default by the Partnership on the respective 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 three months ended March 31, 1996, the receipt of distributions from
Local Partnerships was adequate to support operating cash requirements. Cash
and cash equivalents decreased during the three months ended March 31, 1996 as a
result of the pay-off of the Rock Glen purchase money note, as discussed above.

Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" (SFAS 107), requires the disclosure of fair
value information about financial instruments for which it is practicable to
estimate that value. The Partnership implemented SFAS 107 in 1995. The
Partnership has determined that the carrying amount of its cash and cash
equivalents approximates fair value due to the short-term nature of the related
financial instruments. The Partnership has determined that it is not
practicable to estimate the fair value of its purchase money notes, either
individually or in the aggregate, due to: (i) the lack of an active market for
this type of financial instrument, (ii) the variable nature of purchase money
note interest payments as a result of fluctuating cash flow distributions
received from the related Local Partnerships, and (iii) the excessive costs
associated with an independent appraisal of the purchase money notes.

Results of Operations
---------------------

The Partnership's net income for the three months ended March 31, 1996
increased from the comparable period in 1995 primarily due to the gain on
extinguishment of the Rock Glen purchase money note, as discussed above.
Partially offsetting the increase in the Partnership's net income was an
increase in the share of loss from Local Partnerships, principally due to an
increase in operating expenses at five properties. Partially offsetting the
increase in the share of loss from Local Partnerships was the receipt of
distributions from two Local Partnerships which were in excess of the

-12-
<PAGE>

Partnership's basis in the respective investments. Also partially offsetting
the increase in the Partnership's net income was a decrease in interest income
as a result of decreased cash and cash equivalent balances in 1996.

For financial reporting purposes, the Partnership, as a limited partner in
the Local Partnerships, does not record losses from the Local Partnerships in
excess of its investment to the extent that the Partnership has no further
obligation to advance funds or provide financing to the Local Partnerships. As
a result, the Partnership's recognized losses for the three months ended March
31, 1996 did not include losses of $882,716, compared to excluded losses of
$873,306 for the three months ended March 31, 1995.

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<PAGE>

the Local Partnership, upon expiration of any workout, will be able to repay any
loans in accordance with the terms.

Posada Associates Limited Partnership (Posada Vallarta Apartments) is
currently operating under an extension of a three-year workout agreement with
HUD, the holder of the mortgage. The workout provides for, among other things,
a minimum monthly debt-service payment, with excess cash, if any, being applied
to delinquent interest. Currently, debt-service payments are being made in
accordance with the workout. In June 1995, the three-year workout which
originally expired on October 1, 1995 was extended to October 1, 1996.

-14-
<PAGE>

Some of the rental properties owned by the Local Partnerships are financed
by state housing agencies. The Managing General Partner has been working to
develop a strategy to sell or refinance certain properties pursuant to programs
developed by these agencies. These programs may include opportunities to sell
the property to a qualifying purchaser who would agree to maintain the property
as low to moderate income housing in perpetuity, or may include opportunities to
refinance the property or obtain supplemental financing. The Managing General
Partner continues to monitor these programs to ascertain whether the properties
would qualify within the parameters of these programs and whether these programs
would provide an appropriate economic benefit to the limited partners of the
Partnership.

Some of the rental properties owned by the Local Partnerships are dependent
on the receipt of housing assistance payments guaranteed by contract under
the HUD Section 8 program. The level of funding for the Section 8 program, and
HUD-insured multifamily housing in general, is dependent upon the continuation
of appropriations approved by Congress for subsidy payments. In the event that
the rental subsidy programs are reduced or phased out, there is no assurance
that the rental properties will be able to maintain the occupancy levels
necessary to pay debt service and operating costs or that the rents necessary to
pay debt service and operating costs will be competitive with rents for
comparable units in the rental properties' respective market areas. While the
Managing General Partner has no reason to believe that HUD will not honor its
obligations under the contracts, some uncertainty exists in light of the recent
Congressional scrutiny of appropriations for HUD programs.

No other significant changes in the Partnership's operations have taken
place during this period.

GENERAL
-------

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<PAGE>

property-level issues for a portion of CRI's subsidized housing portfolio
(including some of the properties in which the Partnership invested), by
reducing the proposed budget for 1996. The Partnership is not named as a
defendant in this action. Messrs. Dockser and Willoughby have entered an answer
denying all of Mr. Schwartzberg's claims. Messrs. Dockser and Willoughby have
publicly responded that Mr. Schwartzberg's suit is motivated by his budget
dispute with CRI and personal animosity. On February 6, 1996, CRI terminated
the CMS contract for cause. Mr. Schwartzberg and CMS responded by filing a
motion for injunctive relief in the Circuit Court, asking the court to enjoin
CRI from terminating the contract. In a ruling issued on February 12, 1996, the
Circuit Court, among other things, refused to grant the injunction requested by
CMS. A hearing in this case is scheduled for April 29, 1996. On February 12,
1996, the Circuit Court also issued a memorandum opinion and order enjoining CMS
and Mr. Schwartzberg from disclosing information made confidential under the
asset management agreement.

PART II. OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------

No Reports on Form 8-K were filed with the Commission during the quarter
ended March 31, 1996.

All other items are not applicable.

-16-
<PAGE>

SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

CAPITAL REALTY INVESTORS-II
LIMITED PARTNERSHIP
(Registrant)

By: C.R.I., Inc.
Managing General Partner

April 22, 1996 /s/ Richard J. Palmer
- -------------------------- ------------------------------
Date Richard J. Palmer
Senior Vice President/Finance

Signing on behalf of the
Registrant and as Principal
Accounting Officer

-17-
<PAGE>

EXHIBIT INDEX
-------------

Exhibit Method of Filing
- ------- -----------------------------

27 Financial Data Schedule Filed herewith electronically

-18-

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FIRST QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH 10-Q.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 2,014,874
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,893,557
<CURRENT-LIABILITIES> 0
<BONDS> 41,520,025
0
0
<COMMON> 0
<OTHER-SE> (31,697,278)
<TOTAL-LIABILITY-AND-EQUITY> 9,893,557
<SALES> 0
<TOTAL-REVENUES> (16,190)
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 129,112
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,353,878
<INCOME-PRETAX> (1,499,180)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,499,180)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,803,902
<CHANGES> 0
<NET-INCOME> 304,722
<EPS-PRIMARY> 5.91
<EPS-DILUTED> 5.91

</TABLE>