CAPITAL REALTY INVESTORS III LTD PARTNERSHIP, 10-Q, 1996-10-30

CAPITAL REALTY INVESTORS III LTD PARTNERSHIP
10-Q, 1996-10-30
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 September 30, 1996
------------------

Commission file number 0-11962
-------

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

Maryland 52-1311532
- ----------------------------------------- -------------------
(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.
[X] Yes [ ] 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 September 30, 1996
- ------------------------- ----------------------------------
(Not applicable) (Not applicable)
<PAGE>

CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 1996

Page
----

PART I. Financial Information (Unaudited)

Item 1. Financial Statements

Consolidated Balance Sheets - September 30, 1996
and December 31, 1995 . . . . . . . . . . . . . 1

Consolidated Statements of Operations - for
the three and nine months ended September 30, 1996
and 1995 . . . . . . . . . . . . . . . . . . . . 2

Consolidated Statements of Cash Flows - for
the nine months ended September 30, 1996
and 1995 . . . . . . . . . . . . . . . . . . . . 3

Notes to Consolidated 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 . . . . . . . . . 24

Signature . . . . . . . . . . . . . . . . . . . . . . . . 25

Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . 26
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------

CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
Investments in partnerships $ 24,714,276 $ 28,502,606
Investment in partnership held for sale -- 1,249,305
Cash and cash equivalents 4,067,837 2,897,013
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $441,912 and $415,716,
respectively 605,927 632,123
Property purchase costs, net of accumulated amortization of
$400,513 and $376,110, respectively 575,623 600,026
Other assets 75,759 80,183
------------ ------------
Total assets $ 30,039,422 $ 33,961,256
============ ============

LIABILITIES AND PARTNERS' DEFICIT

Due on investments in partnerships, net of unamortized discount on
purchase money notes of $9,255,876 and $11,879,234,
respectively $ 18,691,564 $ 24,303,206
Accrued interest payable 42,717,787 45,542,056
Consulting fees payable to related parties 117,028 --
Accounts payable and accrued expenses 127,213 114,599
------------ ------------
Total liabilities 61,653,592 69,959,861
------------ ------------
Commitments and contingencies

Partners' capital (deficit):
Capital paid-in:
General Partners 2,000 2,000
Limited Partners 60,001,500 60,001,500
------------ ------------
60,003,500 60,003,500
Less:
Accumulated distributions to partners (2,288,681) (1,709,681)
Offering costs (6,156,933) (6,156,933)
Accumulated losses (83,172,056) (88,135,491)
------------ ------------
Total partners' deficit (31,614,170) (35,998,605)
------------ ------------
Total liabilities and partners' deficit $ 30,039,422 $ 33,961,256
============ ============
</TABLE>

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

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

CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
---------------------------- ----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Share of income from partnerships $ 699,308 $ 711,770 $ 6,091,988 $ 1,478,380
------------ ------------ ------------ ------------

Other revenue and expenses:

Revenue:
Interest and other income 45,783 42,886 135,442 124,394
------------ ------------ ------------ ------------
Expenses:
Interest 1,862,629 2,265,855 5,833,891 6,796,967
Management fee 75,000 75,000 225,000 225,000
General and administrative 39,963 24,470 127,534 76,204
Professional fees 32,107 22,400 85,348 90,526
Amortization 16,867 17,528 50,599 52,584
------------ ------------ ------------ ------------
2,026,566 2,405,253 6,322,372 7,241,281
------------ ------------ ------------ ------------
Total other revenue and expenses (1,980,783) (2,362,367) (6,186,930) (7,116,887)
------------ ------------ ------------ ------------
Loss before gain on disposition
of investment in partnership (1,281,475) (1,650,597) (94,942) (5,638,507)
Gain on disposition of investment in partnership -- -- 5,058,377 --
------------ ------------ ------------ ------------
Net (loss) income (1,281,475) (1,650,597) 4,963,435 (5,638,507)
Accumulated losses, beginning of period (81,890,581) (83,974,054) (88,135,491) (79,986,144)
------------ ------------ ------------ ------------
Accumulated losses, end of period $(83,172,056) $(85,624,651) $(83,172,056) $(85,624,651)
============ ============ ============ ============
(Loss) income allocated to General Partners (1.51%) $ (19,350) $ (24,924) $ 74,948 $ (85,141)
============ ============ ============ ============
(Loss) income allocated to Initial and Special
Limited Partners (1.49%) $ (19,094) $ (24,594) $ 73,955 $ (84,014)
============ ============ ============ ============
(Loss) income allocated to Additional Limited
Partners (97%) $ (1,243,031) $ (1,601,079) $ 4,814,532 $ (5,469,352)
============ ============ ============ ============
(Loss) income per unit of Additional Limited
Partnership Interest based on 60,000 units
outstanding $ (20.72) $ (26.69) $ 80.24 $ (91.16)
============ ============ ============ ============
</TABLE>

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

-2-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------

CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

For the nine months ended
September 30,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 4,963,435 $ (5,638,507)

Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Share of income from partnerships (6,091,988) (1,478,380)
Amortization of deferred costs 50,599 52,584
Amortization of discount on purchase money notes 2,623,358 2,797,668
Gain on disposition of investment in partnership (5,058,377) --
Payment of purchase money note interest (3,019,593) (416,736)
Changes in assets and liabilities:
Decrease (increase) in other assets 4,424 (33,404)
Increase in accrued interest payable 3,210,535 3,999,299
Increase in accounts payable and accrued expenses 129,642 42,148
------------ ------------
Net cash used in operating activities (3,187,965) (675,328)
------------ ------------

Cash flows from investing activities:
Receipt of distributions from partnerships 9,880,318 987,272
Proceeds from disposition of investment in partnership 3,292,471 --
------------ ------------
Net cash provided by investing activities 13,172,789 987,272
------------ ------------
Cash flows from financing activities:
Pay-off of purchase money notes (8,235,000) --
Distribution paid to additional limited partners (579,000) --
------------ ------------
Net cash used in financing activities (8,814,000) --
------------ ------------

Net increase in cash and cash equivalents 1,170,824 311,944

Cash and cash equivalents, beginning of period 2,897,013 2,681,974
------------ ------------
Cash and cash equivalents, end of period $ 4,067,837 $ 2,993,918
============ ============

</TABLE>

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

In the opinion of C.R.I., Inc. (CRI), the Managing General Partner, the
accompanying unaudited consolidated financial statements contain all adjustments
of a normal recurring nature necessary to present fairly the consolidated
financial position of Capital Realty Investors-III Limited Partnership (the
Partnership) as of September 30, 1996 and December 31, 1995, and its
consolidated results of operations for the three months and nine months ended
September 30, 1996 and 1995 and its consolidated cash flows for the nine months
ended September 30, 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 consolidated financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. While the Managing General Partner believes that
the disclosures presented are adequate to make the information not misleading,
it is suggested that these consolidated financial statements be read in
conjunction with the consolidated 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 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
$27,827,896 (exclusive of unamortized discount on purchase money notes of
$9,255,876) plus accrued interest of $42,683,811 as of September 30, 1996, 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 $1,726,070 and $2,100,000 matured on January 1,
1996 and May 1, 1996, respectively, but have not been paid, as discussed below.
Purchase money notes having a principal balance of $3,065,000 mature during
1997, as discussed below. The remaining purchase money notes mature from 1998
to 2015. 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
and nine months ended September 30, 1996 was $1,862,629 and $5,833,891,
respectively, and for the three and nine months ended September 30, 1995 was
$2,265,855 and $6,796,967, respectively. Amortization of the imputed interest
on purchase money notes increased interest expense during the three and nine
months ended September 30, 1996 by $847,144 and $2,623,358, respectively, and

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN PARTNERSHIPS - Continued

$932,556 and $2,797,668, during the three and nine months ended September 30,
1995, respectively.

As of September 30, 1996 and December 31, 1995, the Partnership's
obligations with respect to its investment in Local Partnerships included
$119,544 due to local general partners, plus accrued interest on these
obligations of $33,976.

Purchase money notes, plus accrued interest, relating to the following
properties have matured in 1996:

Property Principal Amount Maturity Date
-------- ---------------- -------------
<S> <C> <C>
Briar Crest I $ 525,050 January 1, 1996(A,E)
Briar Crest II 415,920 January 1, 1996(A,E)
Briar Hills 458,100 January 1, 1996(A,E)
Indian Hills 327,000 January 1, 1996(A,E)
Park Heights Tower 2,135,000 January 1, 1996(B)
Village Squire I & II 3,660,000 March 1, 1996(C)
Village Squire III 2,440,000 March 1, 1996(C)
Cedar Valley 2,100,000 May 1, 1996(D,E)

</TABLE>

(A) On June 15, 1994, the local managing general partner of Briar Crest I,
Briar Crest II, Briar Hills and Indian Hills filed a notice of intent
to participate under the Low Income Housing Preservation and Resident
Homeownership Act of 1990 (LIHPRHA) in hopes of refinancing the
existing first mortgages of each property. As a result of the recent
changes in the LIHPRHA program, as discussed below, the Managing
General Partner asked the local managing general partner to pursue a
sale of the properties under the LIHPRHA program. On February 20,
1996, the local managing general partner filed a notice with HUD to
amend the plan of action under the LIHPRHA program requesting a sale
of the properties. The local managing general partner is also the
noteholder of the related purchase money notes. The Partnership
defaulted on its purchase money notes relating to Briar Crest I, Briar
Crest II, Briar Hills and Indian Hills on January 1, 1996 when the
notes matured and were not paid. The default amounts included
principal and accrued interest as follows:

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN PARTNERSHIPS - Continued

Accrued Interest Accrued Interest
Property Principal January 1, 1996 October 30, 1996
-------- --------- ---------------- ----------------
<S> <C> <C> <C>
Briar Crest I $ 525,050 $ 746,672 $ 805,224
Briar Crest II 415,920 574,963 620,532
Briar Hills 458,100 683,564 735,805
Indian Hills 327,000 477,973 514,800
---------- ---------- ----------
$1,726,070 $2,483,172 $2,676,361
========== ========== ==========

</TABLE>

The Managing General Partner has offered to extend the maturity dates
to coincide with the possible future sale of the properties under the
LIHPRHA program. There is no assurance that a sale of these
properties will occur due to the federal government's limited funding
of appropriations to the LIHPRHA program for fiscal year 1997, as
discussed below. No agreement has been reached as of October 30,
1996. There can be no assurance that an agreement will be reached.
The Managing General Partner will continue to work with the noteholder
to reach satisfactory resolution. Due to the uncertainty of a
potential sale or satisfactory resolution, there is no assurance that
the Partnership will be able to retain its interests in the Local
Partnerships.

(B) On January 5, 1994 the local general partners of Park Heights Towers
Limited Partnership (Park Heights) filed a notice of intent to
participate under the LIHPRHA program. On February 2, 1996, the local
general partners of Park Heights sold the property to a non-profit
entity. The sale of the property generated net proceeds to the
Partnership of approximately $1.27 million. The proceeds were net of
$2.135 million used to retire, at a discount, the Partnership's
purchase money note obligation with respect to the property. The sale
provided proceeds to the Partnership in excess of its investment in
the Local Partnership, and resulted in a net financial statement gain
in 1996 of $5,058,376, of which $3,015,210 resulted from the
retirement of the purchase money note obligation with respect to the
property. The tax gain is estimated to be approximately $7.0
million. On April 30, 1996, the Partnership distributed $579,000
(or approximately $9.65 per Additional Limited Partner unit) to the
Additional Limited Partners. The Managing General Partner intends to
retain all of the Partnership's remaining undistributed net sale
proceeds for the possible repayment, prepayment or purchase of the
outstanding purchase money notes relating to other Local
Partnerships. The General Partner and/or its affiliates earned net
fees of $117,028 for its services relating to the sale of the
property. As of October 30, 1996, these fees have not been paid.

(C) On March 1, 1996, the local general partner of Village Squire I & II
and Village Squire III refinanced the loans secured by first mortgages

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN PARTNERSHIPS - Continued

on the respective properties. On March 1, 1996, proceeds provided to
the Partnership from the refinancings, along with approximately
$560,000 of existing Partnership cash resources, were used to pay off
the related purchase money note obligations. The refinancing proceeds
received by the Partnership exceeded the Partnership's investment in
the respective Local Partnerships by approximately $4.1 million, and
is included in share of income from partnerships in the consolidated
statements of operations.

(D) The Partnership defaulted on its purchase money note relating to Cedar
Valley on May 1, 1996 when the note matured and was not paid. The
default amount included principal and accrued interest of $2,100,000
and $3,168,856, respectively. As of October 30, 1996, principal and
accrued interest totaling $2,100,000 and $3,311,847, respectively,
were due. On May 2, 1996, the noteholders demanded payment on the
purchase money notes. The Managing General Partner began negotiations
with the noteholders to extend the purchase money notes until 1998.
The noteholders rejected this offer and proposed a counter-offer to
extend the purchase money notes until January 1997. As of October 30,
1996, the Partnership is negotiating the documentation of this
extension with the noteholders. The noteholders have initiated
foreclosure proceedings on the Partnership's interest in the Local
Partnership, but have agreed to an extension of the time by which the
Partnership must respond to allow time to complete the negotiations.
There is no assurance that any agreement will be reached with the
noteholders. The Partnership intends to vigorously defend any action
initiated by the purchase money noteholders. There is, however, no
assurance that the Partnership will be able to retain its interest in
Cedar Valley.

(E) The uncertainty about the continued ownership of the Partnership's
interest in the Briar Crest I, Briar Crest II, Briar Hills, Indian
Hills and Cedar Valley Local Partnerships 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 respective Local Partnerships. Should the investment in any or
all of the above listed Local Partnerships, excluding Indian Hills,
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 Partnerships. Thus, even a
complete loss of these investments would not have a material impact on
the operations of the Partnership. However, should the Partnership be
unable to retain its interest in these Local Partnerships, the
investments in Local Partnerships would be reduced by the
Partnership's basis in these Local Partnerships, which as of September
30, 1996, was approximately 5% of the total investment in Local
Partnerships. In the case of Indian Hills, the carrying amount of the
investment exceeds the amount of nonrecourse indebtedness. However,
the Partnership's exposure to loss is limited to this excess, which at
September 30, 1996 was approximately $851,000.

Purchase money notes plus accrued interest relating to the following
properties mature in 1997:

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN PARTNERSHIPS - Continued

Property Principal Amount Maturity Date
-------- ---------------- -------------
<S> <C> <C>
Bartley Manor $ 700,000 July 1, 1997
Village Green 275,000 July 1, 1997
Village Square 390,000 July 1, 1997
Winchester Gardens 1,700,000 December 31, 1997

</TABLE>

The Managing General Partner is currently analyzing its options with
respect to these purchase money notes.

The Rolling Green at Milford property received a mortgage loan increase
from its lender in June 1996 to pay for replacing the roof, which suffered
extensive damage caused by microorganisms. The estimated costs to replace the
roof are approximately $2.1 million. The Managing General Partner is
negotiating a five year extension on the Partnership's related purchase money
notes. The Partnership's purchase money notes, which aggregate a principal
amount of $2,250,000, are due to mature on August 31, 1998. There is no
assurance that the noteholders will agree to a 5-year extension on the purchase
money notes. In the interim, the property remains open and, as of October 24,
1996, Rolling Green was approximately 97% leased. The work to replace the roof
will begin soon, and the property will remain open while the roof work is
performed.

On September 13, 1996, the local managing general partner of New Fifth
Lakewood Associates Limited Partnership (Fifth Lakewood Apartments) received an
offer from a third party to purchase the property. The local managing general
partner has decided to reject this offer due to the fact that it did not meet
the criteria as set forth by the Managing General Partner.

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 LIHPRHA. 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. HUD has subsequently received appropriations of $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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN PARTNERSHIPS - Continued

funding of the LIHPRHA program after fiscal year 1997, however, is uncertain.
There is no assurance that a sale of any of the properties owned by the Local
Partnerships 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 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 to refinance the property,
or to obtain supplemental financing. The Managing General Partner continues to
monitor certain state housing agency programs to ascertain whether the
properties would qualify within the parameters of the programs and whether the
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 Housing Assistance Payment (HAP) program. The level of funding
for the Section 8 HAP program, and HUD-insured multifamily housing in general,
is dependent upon the continuation of appropriations approved by Congress for
subsidy payments. In March 1996, HUD released a revised version of the
Reinvention Blueprint issued one year ago. The Reinvention Blueprint contains a
proposal which has come to be known as the "Mark to Market" initiative. Per
this initiative, HUD is proposing to eliminate the Section 8 HAP contracts on
certain properties, under which the property owners directly receive monthly
subsidies for units occupied by low-income tenants. Instead, HUD would provide
voucher or certificate rental assistance directly to eligible residents. In the
event that the Section 8 HAP program is eliminated or funding of Section 8 HAP
contracts of rental properties owned by the Local Partnerships is discontinued,
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.
As of October 24, 1996 Congress, the Senate and the Clinton Administration
continue to struggle with the "Mark to Market" legislation. In the interim,
Congress has authorized a one-year extension of project-based Section 8 HAP
contracts expiring during fiscal years 1996 and 1997. 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.

On August 29, 1996, Equity Resource Bay Fund (Bay Fund), a Massachusetts
Limited Partnership and an Additional Limited Partner in the Partnership, and
affiliates of Bay Fund initiated a tender offer to purchase 1,400 additional
units in the Partnership at a price of $10 per Additional Limited Partner unit.
Bay Fund, which is unaffiliated with CRI, Inc., stated that it made the offer
for the express purpose of holding the limited partnership units for investment
purposes and not with a view to resale. The purchase offer was determined
solely at the discretion of Bay Fund and does not necessarily represent the fair
market value of each Additional Limited Partner unit. The Bay Fund and
affiliates' offer expired on September 29, 1996, and as of October 24, 1996, Bay
Fund and affiliates held approximately 3.1% of the Additional Limited Partner
units of the Partnership as a result of their tender offer.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN PARTNERSHIPS - Continued

The following are combined statements of operations for the thirty-four and
thirty-five Local Partnerships in which the Partnership has invested as of
September 30, 1996 and 1995, respectively. The 1996 statements contain
information on the thirty-fifth property, Park Heights, through the date of
sale. These statements are compiled from information supplied by the management
agents of the projects and are unaudited.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN PARTNERSHIPS - Continued

COMBINED STATEMENTS OF OPERATIONS

(Unaudited)
<TABLE>
<CAPTION>

For the three months ended For the nine months ended
September 30, September 30,
---------------------------- ----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Rental revenue $ 8,163,727 $ 8,177,523 $ 24,693,408 $ 24,288,917
Other 420,660 368,877 1,318,502 1,100,577
------------ ------------ ------------ ------------
8,584,387 8,546,400 26,011,910 25,389,494
------------ ------------ ------------ ------------
Expenses:
Operating 4,924,160 4,873,648 15,084,866 15,033,562
Interest 1,766,352 1,761,699 5,300,731 5,285,109
Depreciation and amortization 1,392,684 1,427,593 4,195,677 4,282,798
------------ ------------ ------------ ------------
8,083,196 8,062,940 24,581,274 24,601,469
------------ ------------ ------------ ------------
Net income $ 501,191 $ 483,460 $ 1,430,636 $ 788,025
============ ============ ============ ============
</TABLE>

As of September 30, 1996 and December 31, 1995, the Partnership's share of
cumulative losses to date for seven of the thirty-four and thirty-five Local
Partnerships, respectively, exceeds the amount of the Partnership's investments
in these Local Partnerships by $11,935,454 and $11,371,859, 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 consolidated 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 $19,972 and $87,742 for the
three and nine months ended September 30, 1996, respectively, and $12,752 and
$58,522 for the three and nine months ended September 30, 1995, respectively, as
direct reimbursement of expenses incurred on behalf of the Partnership. Such
expenses are included in the statement 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 $75,000, and $225,000 for the three and nine months ended
September 30, 1996 and 1995, 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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

3. RELATED-PARTY TRANSACTIONS - Continued

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. The Managing General Partner and/or its affiliates earned net fees
for services relating to the sale of Park Heights of $117,028 on February 2,
1996. These fees have not been paid as of October 24, 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 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 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. Messrs. Dockser and Willoughby
publicly responded that Mr. Schwartzberg's suit was 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. 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 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

-12-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4. CONTINGENCIES - Continued

Partner. As of October 24, 1996, CRI and Mr. Schwartzberg continue to finalize
the terms of the definitive agreement.

-13-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------

Capital Realty Investors-III 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 cash resources of $4,067,837 (or
approximately $65.76 per Additional Limited Partner unit) and $2,897,013 (or
approximately $46.84 per Additional Limited Partner unit) as of September 30,
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 October 24, 1996, there are no material
commitments for capital expenditures.

Purchase money notes, plus accrued interest, relating to the following
properties have matured in 1996:

-14-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------

</TABLE>

-15-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------

</TABLE>

(B) On January 5, 1994 the local general partners of Park Heights Towers
Limited Partnership (Park Heights) filed a notice of intent to
participate under the LIHPRHA program. On February 2, 1996, the local
general partners of Park Heights sold the property to a non-profit
entity. The sale of the property generated net proceeds to the
Partnership of approximately $1.27 million. The proceeds were net of
$2.135 million used to retire, at a discount, the Partnership's
purchase money note obligation with respect to the property. The sale
provided proceeds to the Partnership in excess of its investment in
the Local Partnership, and resulted in a net financial statement gain
in 1996 of $5,058,376, of which $3,015,210 resulted from the
retirement of the purchase money note obligation with respect to the
property. The tax gain is estimated to be approximately $7.0 million.
On April 30, 1996, the Partnership distributed $579,000 (or
approximately $9.65 per Additional Limited Partner unit) to the
Additional Limited Partners. The Managing General Partner intends to
retain all of the Partnership's remaining undistributed net sale
proceeds for the possible repayment, prepayment or purchase of the
outstanding purchase money notes relating to other Local Partnerships.
The General Partner and/or its affiliates earned net fees of $117,028
for its services relating to the sale of the property. As of October
30, 1996, these fees have not been paid.

(C) On March 1, 1996, the local general partner of Village Squire I & II
and Village Squire III refinanced the loans secured by first mortgages
on the respective properties. On March 1, 1996, proceeds provided to

-16-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------

the Partnership from the refinancings, along with approximately
$560,000 of existing Partnership cash resources, were used to pay off
the related purchase money note obligations. The refinancing proceeds
received by the Partnership exceeded the Partnership's investment in
the respective Local Partnerships by approximately $4.1 million, and
is included in share of income from partnerships in the consolidated
statements of operations.

-17-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------

Purchase money notes plus accrued interest relating to the following
properties mature in 1997:

</TABLE>

The Managing General Partner is currently analyzing its options with
respect to 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 nine months ended September 30, 1996, the receipt of distributions from
Local Partnerships, which included proceeds from the refinancing of the Village
Squire I & II and Village Squire III first mortgages, along with proceeds from
the sale of Park Heights was adequate to support operating cash requirements,
the pay-off of the related purchase money notes and a distribution to the
Additional Limited Partners.

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

The Partnership's net loss for the three months ended September 30, 1996
decreased from the corresponding period in 1995 primarily as a result of a
decrease in interest expense resulting from the retirement of the Park Heights,
Village Squire I & II and Village Squire III purchase money notes in 1996, as
discussed above. Partially offsetting the decrease in the Partnership's net
loss was an increase in general and administrative expenses due to increased
payroll costs and an increase in professional fees due to legal fees associated
with the Village Squire I & II and Village Squire III refinancings. Also
partially offsetting the decrease in net loss was a decrease in share of income
from partnerships due to the sale of Park Heights in 1996 and an increase in
operating costs at one property offset by increased rental revenue at two of the
properties due to a decrease in vacancies and an increase in the rental rate
during 1996.

The Partnership's net income for the nine months ended September 30, 1996
increased from the comparable period in 1995 primarily as a result of the gain
on disposition of Park Heights, as discussed above. Contributing to the
increase in net income was an increase in share of income from Local
Partnerships principally due to the receipt of refinancing proceeds from Village
Squire I & II and Village Squire III purchase money notes, which were in excess
of the Partnership's investments in the respective Local Partnerships, and due
to increased rental revenues at two of the properties as discussed above. Also
contributing to the increase in the Partnership's net income was a decrease in
interest expense, as discussed above, partially offset by an increase in general
and administrative expenses, as discussed above.

-18-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------

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. As a result, the Partnership's recognized income for
the three and nine months ended September 30, 1996 did not include losses of
$205,868 and $617,595, respectively, compared to excluded losses of $234,551 and
$703,665 for the three and nine months ended September 30, 1995, respectively.

-19-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------

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

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

General
-------

-20-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------

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. Messrs. Dockser and Willoughby
publicly responded that Mr. Schwartzberg's suit was 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. 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
-------------------------------

On June 15, 1994, the local managing general partner of Briar Crest I,
Briar Crest II, Briar Hills and Indian Hills filed a notice of intent to
participate under the Low Income Housing Preservation and Resident Homeownership
Act of 1990 (LIHPRHA) in hopes of refinancing the existing first mortgages of
each property. As a result of the recent changes in the LIHPRHA program, the
Managing General Partner asked the local managing general partner to pursue a
sale of the properties under the LIHPRHA program. On February 20, 1996, the

-21-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Continued
-------------------------------

local managing general partner filed a notice with HUD to amend the plan of
action under the LIHPRHA program requesting a sale of the properties. The local
managing general partner is also the noteholder of the related purchase money
notes. The Partnership defaulted on its purchase money notes relating to Briar
Crest I, Briar Crest II, Briar Hills and Indian Hills on January 1, 1996 when
the notes matured and were not paid. The default amounts included principal and
accrued interest as follows:

-22-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Continued
-------------------------------

<TABLE>
<CAPTION>
Accrued Interest Accrued Interest
Property Principal January 1, 1996 October 30, 1996
-------- --------- ---------------- ----------------
<S> <C> <C> <C>
Briar Crest I $ 525,050 $ 746,672 $ 805,224
Briar Crest II 415,920 574,963 620,532
Briar Hills 458,100 683,564 735,805
Indian Hills 327,000 477,973 514,800
---------- ---------- ----------
$1,726,070 $2,483,172 $2,676,361
========== ========== ==========

</TABLE>

The Managing General Partner has offered to extend the maturity dates to
coincide with the possible future sale of the properties under the LIHPRHA
program. There is no assurance that a sale of these properties will occur due
to the federal government's limited funding of appropriations to the LIHPRHA
program for fiscal year 1997. No agreement has been reached as of October 30,
1996. There can be no assurance that an agreement will be reached. The
Managing General Partner will continue to work with the noteholder to reach
satisfactory resolution. Due to the uncertainty of a potential sale or
satisfactory resolution, there is no assurance that the Partnership will be able
to retain its interests in the Local Partnerships.

The Partnership defaulted on its purchase money note relating to Cedar
Valley on May 1, 1996 when the note matured and was not paid. The default
amount included principal and accrued interest of $2,100,000 and $3,168,856,
respectively. As of October 30, 1996, principal totaling $2,100,000 and
$3,311,847, respectively, were due. On May 2, 1996, the noteholders demanded
payment on the purchase money notes. The Managing General Partner began
negotiations with the noteholders to extend the purchase money notes until 1998.
The noteholders rejected this offer and proposed a counter-offer to extend the
purchase money notes until January 1997. As of October 30, 1996, the
Partnership is negotiating the documentation of this extension with the
noteholders. The noteholders have initiated foreclosure proceedings on the
Partnership's interest in the Local Partnership, but have agreed to an extension
of the time by which the Partnership must respond to allow time to complete the
negotiations. There is no assurance that any agreement will be reached with the
noteholders. The Partnership intends to vigorously defend any action initiated
by the purchase money noteholders. There is, however, no assurance that the
Partnership will be able to retain its interest in Cedar Valley.

The uncertainty about the continued ownership of the Partnership's interest
in the Briar Crest I, Briar Crest II, Briar Hills, Indian Hills and Cedar Valley
Local Partnerships 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 respective Local Partnerships. Should the
investment in any or all of the above listed Local Partnerships, excluding
Indian Hills, 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 Partnerships. Thus, even a complete loss of these
investments would not have a material impact on the operations of the
Partnership. However, should the Partnership be unable to retain its interest

-23-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Continued
-------------------------------

in these Local Partnerships, the investments in Local Partnerships would be
reduced by the Partnership's basis in these Local Partnerships, which at
September 30, 1996 was approximately 5% of the total investment in Local
Partnerships. In the case of Indian Hills, the carrying amount of the
investment exceeds the amount of nonrecourse indebtedness, however, the
Partnership's exposure to loss is limited to this excess, which at September 30,
1996 was approximately $851,000.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------

No reports on Form 8-K were filed with the Commission during the quarter
ended September 30, 1996.

All other items are not applicable.

-24-
<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-III
LIMITED PARTNERSHIP
(Registrant)

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

October 30, 1996 By: /s/ Deborah K. Browning
- ----------------------- ------------------------------
Date Deborah K. Browning
Vice President/Chief Accounting Officer

Signing on behalf of the
Registrant and as Principal
Accounting Officer

-25-
<PAGE>

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

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

27 Financial Data Schedule Filed herewith electronically

-26-

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

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,067,837
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 30,039,422
<CURRENT-LIABILITIES> 0
<BONDS> 61,409,351
0
0
<COMMON> 0
<OTHER-SE> (31,614,170)
<TOTAL-LIABILITY-AND-EQUITY> 30,039,422
<SALES> 0
<TOTAL-REVENUES> 6,227,430
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 488,481
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,833,891
<INCOME-PRETAX> (94,942)
<INCOME-TAX> 0
<INCOME-CONTINUING> (94,942)
<DISCONTINUED> 0
<EXTRAORDINARY> 5,058,377
<CHANGES> 0
<NET-INCOME> 4,963,435
<EPS-PRIMARY> 80.24
<EPS-DILUTED> 80.24

</TABLE>