CAPITAL REALTY INVESTORS II LTD PARTNERSHIP, 10-Q, 1997-04-29

CAPITAL REALTY INVESTORS II LTD PARTNERSHIP
10-Q, 1997-04-29
REAL ESTATE

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<PAGE>

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

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

For the Quarter Ended March 31, 1997
--------------

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, 1997
- ---------------------------------- ----------------------------------
(Not applicable) (Not applicable)
<PAGE>

CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 1997

PAGE
----

PART I. Financial Information (Unaudited)

Item 1. Financial Statements

Balance Sheets - March 31, 1997 and
December 31, 1996 . . . . . . . . . . . . . 1

Statements of Operations - for the three months
ended March 31, 1997 and 1996 . . . . . . . 2

Statements of Cash Flows - for the three
months ended March 31, 1997 and 1996 . . . 3

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

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . 14

PART II. Other Information

Item 3. Defaults Upon Senior Securities . . . . . . . 22

Item 6. Exhibits and Reports on Form 8-K . . . . . . 23

Signature . . . . . . . . . . . . . . . . . . . . . . 24

Exhibit Index . . . . . . . . . . . . . . . . . . . . . 25
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------

CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP

BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Investments in and advances to partnerships $ 5,855,231 $ 5,962,920
Assets held for sale -- 789,258
Cash and cash equivalents 6,470,735 2,128,849
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $401,406 and $393,948,
respectively 493,545 501,003
Property purchase costs, net of accumulated amortization of
$263,930 and $258,870, respectively 343,318 348,378
Other assets 47,975 9,657
------------ ------------
Total assets $ 13,210,804 $ 9,740,065
============ ============

LIABILITIES AND PARTNERS' DEFICIT

Due on investments in partnerships, net of unamortized discount on
purchase money notes of $4,007,115 and $5,159,494, respectively $ 14,840,563 $ 14,981,184
Accrued interest payable 29,069,174 30,584,862
Accounts payable and accrued expenses 108,491 91,418
------------ ------------
Total liabilities 44,018,228 45,657,464
------------ ------------
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 (74,290,832) (79,400,807)
------------ ------------
Total partners' deficit (30,807,424) (35,917,399)
------------ ------------
Total liabilities and partners' deficit $ 13,210,804 $ 9,740,065
============ ============
</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)

<TABLE>
<CAPTION>
For the three months ended
March 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Share of income (loss) from partnerships $ 81,263 $ (40,773)
------------ ------------
Other revenue and expenses:
Revenue:
Interest and other income 33,594 24,583
------------ ------------
Expenses:
Interest 1,381,941 1,353,878
Management fee 62,499 62,499
General and administrative 42,859 32,459
Professional fees 42,818 20,342
Amortization 12,518 13,812
------------ ------------
1,542,635 1,482,990
------------ ------------
Total other revenue and expenses (1,509,041) (1,458,407)
------------ ------------
Loss before gain on disposition of investment in partnership (1,427,778) (1,499,180)
Gain on disposition of investment in partnership 4,884,657 --
------------ ------------
Income (loss) before extraordinary gain from
extinguishment of debt 3,456,879 (1,499,180)
Extraordinary gain from extinguishment of debt 1,653,096 1,803,902
------------ ------------
Net income 5,109,975 304,722
Accumulated losses, beginning of period (79,400,807) (75,485,408)
------------ ------------
Accumulated losses, end of period $(74,290,832) $(75,180,686)
============ ============
Income allocated to General Partners (1.51%) $ 77,161 $ 4,601
============ ============
Income allocated to Initial and Special
Limited Partners (1.49%) $ 76,138 $ 4,540
============ ============
Income allocated to Additional Limited Partners (97%) $ 4,956,676 $ 295,581
============ ============
Income per unit of Additional Limited
Partnership Interest based on 50,000 units
outstanding $ 99.13 $ 5.91
============ ============
</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,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,109,975 $ 304,722

Adjustments to reconcile net income to net cash used in operating
activities:
Share of (income) loss from partnerships (81,263) 40,773
Amortization of deferred costs 12,518 13,812
Amortization of discount on purchase money notes 768,749 721,283
Gain on extinguishment of debt (1,653,096) (1,803,902)
Extraordinary gain on disposition of investment in partnership (4,884,657) --

Changes in assets and liabilities:
(Increase) decrease in other assets (38,318) 4,888
Increase in accrued interest payable 613,192 632,595
Increase (decrease) in accounts payable and accrued expenses 17,073 (11,514)
------------ ------------
Net cash used in operating activities (135,827) (97,343)
------------ ------------
Cash flows from investing activities:
Receipt of distributions from partnerships 188,952 419,678
Proceeds from disposition of investment in partnership 5,673,915 --
------------ ------------
Net cash provided by investing activities 5,862,867 419,678
------------ ------------

Cash flows from financing activities:
Pay-off of purchase money note and related interest (1,385,154) (1,500,000)
------------ ------------

Net increase (decrease) in cash and cash equivalents 4,341,886 (1,177,665)

Cash and cash equivalents, beginning of period 2,128,849 3,192,539
------------ ------------
Cash and cash equivalents, end of period $ 6,470,735 $ 2,014,874
============ ============

</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, 1997
and December 31, 1996, and the results of its operations for the three months
ended March 31, 1997 and 1996 and its cash flows for the three months ended
March 31, 1997 and 1996.

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, 1996.

2. INVESTMENTS IN AND ADVANCES TO 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
$18,847,678 (exclusive of unamortized discount on purchase money notes of
$4,007,115) plus accrued interest of $29,069,174 as of March 31, 1997, are
payable in full 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 $2,100,000 matured on December 31, 1996, as
discussed below. Purchase money notes in an aggregate principal amount of
$1,900,000 and $2,380,000 mature on December 31, 1997 and January 1, 1998,
respectively, as discussed below. The remaining purchase money notes mature
later in 1998 and 1999. The purchase money notes are generally secured by the
Partnership's interest in the respective Local Partnerships. There is no
assurance that the underlying properties will have sufficient appreciation and
equity to enable the Partnership to pay the purchase money notes' principal and
accrued interest when due. If a purchase money note is not paid in accordance
with its terms, the Partnership will either have to renegotiate the terms of
repayment or risk losing its partnership interest in the Local Partnership. The
Managing General Partner is continuing to investigate possible alternatives to
reduce the Partnership's long-term debt obligations. These alternatives
include, among others, retaining the cash available for distribution to meet the
purchase money note requirements, buying out certain purchase money notes at a
discounted price, extending the due dates of certain purchase money notes, or
refinancing the respective properties' underlying debt and using the
Partnership's share of the proceeds to pay off or buy down certain purchase
money note obligations.

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

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

Interest expense on the Partnership's purchase money notes was $1,381,941
and $1,353,878 for the three months ended March 31, 1997 and 1996, respectively.
Amortization of the imputed interest on purchase money notes increased interest
expense during the three months ended March 31, 1997 and 1996 by $768,749 and
$721,283, respectively. The accrued interest on the purchase money notes of
$29,069,174 and $30,584,862 as of March 31, 1997 and December 31, 1996,
respectively, is due on the respective maturity dates of the purchase money
notes or earlier, in some instances, if the pertinent Local Partnership has
distributable net cash flow, as defined in the relevant Local Partnership
agreements.

As of March 31, 1997 and December 31, 1996, the Partnership had advanced
funds totalling $324,410 to Local Partnerships.

Purchase money notes relating to Wexford Ridge Associates (Wexford Ridge)
in the principal amount of $1,900,000 mature on December 31, 1997. The Managing
General Partner anticipates negotiating with the purchase money note holders for
a five year extension on the purchase money notes. There is no assurance that
the Managing General Partner will reach an agreement of any kind with the
noteholders. Accordingly, there can be no assurance that the Partnership will
be able to retain its interest in the Local Partnership. The uncertainty about
the continued ownership of the Partnership's interest in the related Local
Partnership does not impact the Partnership's financial condition because the
related purchase money notes are nonrecourse and secured solely by the
Partnership's interest in the Local Partnership. Therefore, should the
investment in Wexford Ridge not produce sufficient value to satisfy the purchase
money notes related to Wexford Ridge, the Partnership's exposure to loss is
limited since the amount of the nonrecourse indebtedness exceeds the carrying
amount of the investment in and advances to the Local Partnership. Thus, even a
complete loss of this investment would not have a material impact on the
operations of the Partnership.

The Partnership defaulted on its purchase money notes relating to Chevy
Chase Park, Limited (Chevy Chase) on December 31, 1996 when the notes matured
and were not paid. The default amount included principal and accrued interest
of $2,100,000 and $3,553,912, respectively. As of April 29, 1997, principal and
accrued interest totalling $2,100,000 and $3,648,721, respectively, were due.
The Managing General Partner is currently negotiating a five year extension of
the purchase money notes with the noteholders. The Managing General Partner is
also awaiting the potential future sale of the property under the Low Income
Housing Preservation and Resident Homeownership Act of 1990 (LIHPRHA) program.
There is no assurance that a sale will take place under the LIHPRHA program, nor
is there any assurance that an 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 regarding 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

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, 1997 and 1996. 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.

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. The noteholder signed a standstill agreement which expired on 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
approximately $1.8 million.

On May 23, 1994, the local general partner of Tanglewood Apartments
Associates II Limited Partnership (Tanglewood II) filed a notice of intent to
participate under LIHPRHA. On July 11, 1996, the local managing general
partner's plan of action regarding the sale of Tanglewood II under the LIHPRHA
program was approved by HUD. On February 19, 1997, Tanglewood II sold the
property, a 192-unit apartment complex located in Westwego, Louisiana, under the
LIHPRHA program. The sale of the property generated net cash proceeds to the
Partnership of $933,987. The proceeds were net of $1,385,154 used to retire, at
a discount, the Partnership's purchase money note obligation with respect to the
property. The sale provided proceeds to the Partnership in excess of its
investment in the Local Partnership, and resulted in a net financial statement
gain of approximately $3.2 million, of which approximately $1.7 million resulted
from the retirement of the purchase money note obligation with respect to the
property. The federal tax gain is estimated to be approximately $4.9 million.
The Managing General Partner of the Partnership and/or its affiliates will not
receive fees relating to the sale.

On January 31, 1996, the local managing general partner of Palatine-
Barrington Associates Limited Partnership (Deer Grove) received an offer to sell
the property to an unaffiliated entity. This offer was rejected by the local
managing general partner. On September 13, 1996, the local managing general
partner of Deer Grove received another offer to sell the property. The local
managing general partner accepted the offer and on March 18, 1997, Deer Grove
sold the property, a 448-unit apartment complex located in Palatine, Illinois.
The sale of the property generated cash proceeds to the Partnership of $3.4
million at closing. The Partnership anticipates receiving additional proceeds
upon final release of the property's reserves. The proceeds received at closing
were in excess of the Partnership's investment in the Local Partnership and
resulted in a net financial statement gain of approximately $3.4 million. The
federal tax gain is estimated to be approximately $17.8 million.

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

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

The local general partner of Lake Properties Limited Partnership
(Frenchman's Wharf II), in conjunction with the Managing General Partner,
engaged in extensive negotiations with the U. S. Department of Housing and Urban
Development (HUD), holder of the mortgage on the property, to extend the
previous workout arrangement related to the mortgage loan on the property, which
expired in December 1993. On April 30, 1996, the local general partner received
approval from HUD for a four-year workout. Under the workout agreement,
Frenchman's Wharf II makes minimum monthly payments, consisting of a service
charge and tax escrow. Additionally, Frenchman's Wharf II makes monthly
interest payments representing approximately 50%, 65%, 85% and 100% of the
interest due on the outstanding principal balance of the note for the periods
July 1 through June 30 during the years 1996 through 2000, respectively. As of
April 25, 1997, Frenchman's Wharf II made all monthly payments in accordance
with the workout arrangement. There is, however, no assurance that the Local
Partnership, upon expiration of the workout, will be able to repay the loan in
accordance with the terms.

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, 1997
and December 31, 1996. 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, 1997 and
December 31, 1996, 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 relating to
the Local Partnership. There is no assurance that the Local Partnership, upon
expiration of the workout, will be able to repay the loans in accordance with
the terms.

The purchase money notes related to Frenchman's Wharf II in the principal
amount of $3,150,000 which were initially due to mature on June 1, 1988 have
been extended to mature on June 1, 1998. In conjunction with the four-year
workout agreement, the Partnership is currently negotiating with the purchase
money note holders to reach an extension agreement which would be coterminous
with the expiration of the HUD workout arrangement. There is no assurance that
the noteholders will consent to an extension agreement. As of April 25, 1997,
the noteholders had not consented to an extension agreement.

The report of the auditors on the financial statements of Frenchman's Wharf
II for the year ended December 31, 1996 indicated that substantial doubt exists
about the ability of the Local Partnership to continue as a going concern due to
the Local Partnership's default on its mortgage loan and the expiration of its
Section 8 Rental Housing Assistance Payments (HAP) contract with HUD on November
30, 1997. The uncertainty about the Local Partnerships' continued ownership of
the property does not impact the Partnership's financial condition because the
related purchase money notes are nonrecourse and secured solely by the
Partnership's interest in the Local Partnership. Therefore, should the
investment in Frenchman's Wharf II not produce sufficient value to satisfy the
respective purchase money notes, the Partnership's exposure to loss is limited
since the amount of nonrecourse indebtedness exceeds the carrying amount of the
investment in and advances to the Local Partnership. Thus, even a complete loss
of this investment would not have a material impact on the operations of the
Partnership.

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

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

Posada Associates Limited Partnership (Posada Vallarta Apartments) was
operating under an extension of a three-year workout agreement with HUD, the
holder of the mortgage. The workout provided for, among other things, a minimum
monthly debt service payment, with excess cash, if any, being applied to
delinquent interest. All debt service payments were 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. In June 1996, HUD sold the
mortgage loan to a third party. The new mortgagee issued a notice of default
and acceleration of the loan to Posada Vallarta Apartments. The notice was
determined to be in error, and on July 8, 1996 the notice of default and
acceleration was withdrawn by the new mortgagee. The workout agreement related
to Posada Vallarta Apartments provided that upon cancellation of the workout
agreement, the loan would be recast at an annual interest rate of 7.5%, if
certain conditions are satisfied. As of October 1, 1996, the expiration of the
workout agreement, the local managing general partner and the new mortgagee were
disputing whether or not those conditions had been satisfied. On October 1,
1996, the Local Partnership made a monthly payment, and has continued to make
such monthly payments, on the debt in the amount which would be due if the loan
is recast at a 7.5% annual interest rate. The new mortgagee made an offer to
extend the workout agreement for two years. The local managing general partner
made a counter-offer to extend the workout agreement for ten years. On February
6, 1997, the local managing general partner and the new mortgagee reached an
agreement in principle to recast the loan at a 7.5% annual interest rate with a
ten-year call provision, as stated in the workout agreement. As of April 25,
1997, the parties are negotiating revised loan documents implementing their
agreement. There is no assurance that a final agreement will be reached on
these documents. Should the mortgagee begin foreclosure proceedings, the
Partnership intends to vigorously defend such action.

Wexford Ridge, 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 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.

On May 1, 1996, CRHC, Inc. (CRHC), an affiliate of the Managing General
Partner, notified the local managing general partner of Arrowhead Apartments
Associates Limited Partnership (Arrowhead) and Moorings Apartments Associates
Limited Partnership (Moorings) that he was in default under the Partnership
Agreements and threatened to remove him as managing general partner of the Local
Partnerships. The managing agent of Arrowhead and Moorings, which is an
affiliate of the local managing general partner, filed arbitration against CRHC
seeking, among other things, a declaration that the allegations set forth in
CRHC's notice did not constitute grounds for removal of the local managing
general partner. CRHC subsequently filed for arbitration against the local
managing general partner seeking his removal. On September 3, 1996, CRHC filed
an emergency petition in the arbitration to have a trustee appointed to serve as
local managing general partner and managing agent of the Local Partnerships
until the arbitration hearings are held. The emergency petition was denied. As
of April 25, 1997, the litigation is in discovery, and the parties are
negotiating the terms of a settlement. There is no assurance that a settlement
of the arbitration will occur. The hearing is scheduled for July 1997.

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

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

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

the National Housing Act, as amended. LIHPRHA, which provided property owners
with restricted opportunities to sell low income housing, ended effective
September 30, 1996. However, HUD received approximately $175 million to fund
sales of qualifying properties under the LIHPRHA program during the federal
government's fiscal year 1997, which began October 1, 1996. Continued funding
of the LIHPRHA program after fiscal year 1997 is uncertain. There is no
assurance that a sale of any properties that previously qualified under the
LIHPRHA program will occur.

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

Some of the rental properties owned by the Local Partnerships are dependent
on the receipt of project-based rental housing assistance payments provided by
HUD pursuant to Section 8 HAP contracts. In 1995 and 1996, HUD released its
Reinvention Blueprint and a revision to its Reinvention Blueprint which
contained proposals that have come to be known as "Mark-to-Market". Congress,
HUD and the Clinton Administration continue to struggle with the Mark-to-Market
initiative. This initiative was intended to deal with HUD's increasing burden
of funding HAP contracts. Under the initiative, HUD would eliminate the
project-based subsidy and provide the residents with "sticky vouchers" which
would allow residents to move to other developments should they so choose.
However, with the elimination of the HAP contract, there is no assurance that
rental properties would be able to maintain the rental income and occupancy
levels necessary to pay operating costs and debt service. The initiative will
impact those properties that have HAP contracts with shorter terms than that of
the underlying property mortgage. For instance, some properties may have a 20-
year HAP contract while the underlying mortgage has a 40-year term. In the
interim, Congress has authorized one-year extensions for properties with HAP
contracts expiring during the government's fiscal year 1997, which began October
1, 1996. In light of recent political scrutiny of appropriations for HUD
programs, continued funding of annual renewals for Section 8 HAP contracts
expiring after fiscal year 1997 is uncertain.

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

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

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 a strategy that makes economic sense for
all parties involved.

The following are combined statements of operations for the twenty and
twenty-two Local Partnerships in which the Partnership has invested as of March
31, 1997 and March 31, 1996, respectively. The 1997 statements contain
information on Tanglewood II and Deer Grove through the respective dates of
sale. The statements are compiled from information supplied by the management
agents of the projects and are unaudited.

COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>

For the three months ended
March 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Revenue:
Rental revenue $ 7,341,095 $ 7,314,701
Other 334,262 303,282
------------ ------------
7,675,357 7,617,983
------------ ------------
Expenses:
Operating 5,098,642 5,189,127
Interest 2,067,160 2,114,732
Depreciation and amortization 1,372,521 1,378,535
------------ ------------
8,538,323 8,682,394
------------ ------------
Net loss $ (862,966) $ (1,064,411)
============ ============

</TABLE>

As of March 31, 1997 and December 31, 1996, the Partnership's share of
cumulative losses to date for eleven of the twenty and twenty-two Local
Partnerships, respectively, exceeds the amount of the Partnership's investments
in and advances to those Local Partnerships by $29,151,086 and $28,225,703,
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. The Partnership paid $29,069 and $25,498 for the
three months ended March 31, 1997 and 1996, respectively, as direct

-10-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

3. RELATED-PARTY TRANSACTION - Continued

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 is obligated to pay 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
$62,499 for each of the three month periods ended March 31, 1997 and 1996.

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 CRI and its related businesses as of January 1, 1990. Mr.
Schwartzberg agreed not to act as a general partner with respect to any of the
CRI-sponsored partnerships, including this Partnership, and has not done so
since that time. In late 1995, a dispute arose between CRI and CMS over the
funding level of the 1996 contract for CMS. On November 9, 1995, CRI filed a
complaint against CMS to determine the proper amount of fees to be paid in 1996
under the asset management agreement. CMS answered on January 10, 1996, but
asserted no counterclaims.

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

Following subsequent litigation, none of which involved the Partnership, on
June 12, 1996, Mr. Schwartzberg, CRI and others entered an agreement (which
contemplates the execution of a subsequent definitive agreement) to resolve the
disputes between CRI and CMS. The Partnership was not a signatory to the
agreement. As part of the resolution, Mr. Schwartzberg withdrew any derogatory
statements he made about CRI and its principals. Upon execution of the
definitive agreement, Mr. Schwartzberg shall withdraw as a General Partner of
this Partnership and his interest will become that of a Special Limited Partner.

-11-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

4. CONTINGENCIES - Continued

As of April 25, 1997, CRI and Mr. Schwartzberg were unable to agree on the
language of various provisions of the definitive agreement and have agreed to
submit the open issues to arbitration. The Partnership is not a party to the
arbitration proceeding.

-12-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------

Capital Realty Investors-II Limited Partnership's (the Partnership)
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains information that may be considered forward looking. This
information contains a number of risks and uncertainties, as discussed herein
and in the Partnership's Annual Report filed on Form
10-K, that could cause actual results to differ materially.

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

The Partnership's liquidity, with unrestricted cash resources of $6,470,735
(or approximately $125.53 per Additional Limited Partner unit) and $2,128,849
(or approximately $41.29 per Additional Limited Partner unit) as of March 31,
1997 and December 31, 1996, 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 25, 1997, there are no material
commitments for capital expenditures.

-13-
<PAGE>

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

Partnership's interest in the Local Partnership. Therefore, should the
investment in Wexford Ridge not produce sufficient value to satisfy the purchase
money notes related to Wexford Ridge, 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.

-14-
<PAGE>

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, 1997, the receipt of distributions from
Local Partnerships and distributions from the sales of Tanglewood II and Deer
Grove were adequate to support operating cash requirements and the pay-off of
the Tanglewood II purchase money notes. Cash and cash equivalents increased
during the three months ended March 31, 1997 as a result of the receipt of net
proceeds from the sales of Tanglewood II and Deer Grove, as discussed above.

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

The Partnership's net income for the three months ended March 31, 1997
increased from the comparable period in 1996 primarily due to the gain on
disposition of investments related to the sales of Tanglewood II and Deer Grove.
Also contributing to the increase in the Partnership's net income was an
increase in share of income from partnerships primarily due to decreased
maintenance costs at two properties and an increase in interest income due to
higher cash and cash equivalent balances during 1997. Partially offsetting the
increase in net income was a decrease in extraordinary gain from extinguishment
of debt due to a higher discounted pay-off of the Rock Glen purchase money note
versus the pay-off for the Tanglewood II purchase money notes. Also partially
offsetting the increase in net income was an increase in interest expense due to
the amortization of imputed interest and an increase in professional fees due to

-15-
<PAGE>

legal fees incurred in connection with the Arrowhead and Moorings litigation, as
discussed below.

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, 1997 did not include losses of $925,383, compared to excluded losses of
$882,716 for the three months ended March 31, 1996.

-16-
<PAGE>

30, 1997. The uncertainty about the Local Partnerships' continued ownership of
the property does not impact the Partnership's financial condition because the
related purchase money notes are nonrecourse and secured solely by the
Partnership's interest in the Local Partnership. Therefore, should the
investment in Frenchman's Wharf II not produce sufficient value to satisfy the
respective purchase money notes, the Partnership's exposure to loss is limited
since the amount of nonrecourse indebtedness exceeds the carrying amount of the
investment in and advances to the Local Partnership. Thus, even a complete loss
of this investment would not have a material impact on the operations of the
Partnership.

-17-
<PAGE>

general partner. CRHC subsequently filed for arbitration against the local
managing general partner seeking his removal. On September 3, 1996, CRHC filed
an emergency petition in the arbitration to have a trustee appointed to serve as
local managing general partner and managing agent of the Local Partnerships
until the arbitration hearings are held. The emergency petition was denied. As
of April 25, 1997, the litigation is in discovery, and the parties are
negotiating the terms of a settlement. There is no assurance that a settlement
of the arbitration will occur. The hearing is scheduled for July 1997.

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. LIHPRHA, which provided property owners
with restricted opportunities to sell low income housing, ended effective
September 30, 1996. However, HUD received approximately $175 million to fund
sales of qualifying properties under the LIHPRHA program during the federal
government's fiscal year 1997, which began October 1, 1996. Continued funding
of the LIHPRHA program after fiscal year 1997 is uncertain. There is no
assurance that a sale of any properties that previously qualified under the
LIHPRHA program will occur.

-18-
<PAGE>

With the ending of the LIHPRHA program and with the uncertainty surrounding
renewals of expiring Section 8 HAP contracts, the Managing General Partner is
developing new strategies to deal with the ever changing environment of
affordable housing policy. Section 236 and Section 221(d)(3) properties that
are in the 18th year of their mortgage may be eligible for pre-payment of the
mortgage. Properties with expiring Section 8 HAP contracts may become
convertible to market-rate apartment properties. Currently, there are a few
lenders that will provide financing either to prepay the existing mortgage or
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 a strategy that makes economic sense for
all parties involved.

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

General
--------

-19-
<PAGE>

Court, among other things, refused to grant the injunction requested by CMS. On
February 12, 1996, the Circuit Court also issued a memorandum opinion and order
enjoining CMS and Mr. Schwartzberg from disclosing information made confidential
under the asset management agreement.

PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------

The Partnership defaulted on its purchase money notes relating to Chevy
Chase Park, Limited (Chevy Chase) on December 31, 1996 when the notes matured
and were not paid. The default amount included principal and accrued interest
of $2,100,000 and $3,553,912, respectively. As of April 29, 1997, principal and
accrued interest totalling $2,100,000 and $3,648,721, respectively, were due.
The Managing General Partner is currently negotiating a five year extension of
the purchase money notes with the noteholders. The Managing General Partner is
also awaiting the potential future sale of the property under the Low Income
Housing Preservation and Resident Homeownership Act of 1990 (LIHPRHA) program.
There is no assurance that a sale will take place under the LIHPRHA program, nor
is there any 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 regarding 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.

-20-
<PAGE>
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, 1997.

All other items are not applicable.

-21-
<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 29, 1997 By: /s/ Susan R. Campbell
- --------------------- ------------------------------------
Date Susan R. Campbell
Senior Vice President

Signing on behalf of the
Registrant and as Acting Chief
Accounting Officer, Principal
Financial and Principal
Accounting Officer

-22-
<PAGE>

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

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

27 Financial Data Schedule Filed herewith electronically

-23-

<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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 6,470,735
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,210,804
<CURRENT-LIABILITIES> 0
<BONDS> 43,909,737
0
0
<COMMON> 0
<OTHER-SE> (30,807,424)
<TOTAL-LIABILITY-AND-EQUITY> 13,210,804
<SALES> 0
<TOTAL-REVENUES> 114,857
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 160,694
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,381,941
<INCOME-PRETAX> (1,427,778)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,427,778)
<DISCONTINUED> 4,884,657
<EXTRAORDINARY> 1,653,096
<CHANGES> 0
<NET-INCOME> 5,109,975
<EPS-PRIMARY> 99.13
<EPS-DILUTED> 99.13

</TABLE>