CAPITAL REALTY INVESTORS III LTD PARTNERSHIP, 10-Q, 1996-08-01

CAPITAL REALTY INVESTORS III LTD PARTNERSHIP
10-Q, 1996-08-01
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 June 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 June 30, 1996
- ------------------------- ----------------------------------
(Not applicable) (Not applicable)
<PAGE>

CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 1996

Page
----

PART I. Financial Information (Unaudited)

Item 1. Financial Statements

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

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

Consolidated Statements of Cash Flows - for
the three months ended June 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 . . . . . . . . . . . . . . . . . . . 13

PART II. Other Information

Item 3. Defaults Upon Senior Securities . . . . . . . . . . 20

Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . 22

Signature . . . . . . . . . . . . . . . . . . . . . . . . 23

Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . 24
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------

CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
Investments in partnerships $ 24,780,659 $ 28,502,606
Investment in partnership held for sale -- 1,249,305
Cash and cash equivalents 3,423,540 2,897,013
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $433,180 and $415,716,
respectively 614,659 632,123
Property purchase costs, net of accumulated amortization of
$392,378 and $376,110, respectively 583,758 600,026
Other assets 79,755 80,183
------------ ------------
Total assets $ 29,482,371 $ 33,961,256
============ ============

LIABILITIES AND PARTNERS' DEFICIT

Due on investments in partnerships, net of unamortized discount on
purchase money notes of $10,103,020 and $11,879,234,
respectively $ 17,844,420 $ 24,303,206
Accrued interest payable 41,746,302 45,542,056
Consulting fees payable to related parties 117,028 --
Accounts payable and accrued expenses 107,316 114,599
------------ ------------
Total liabilities 59,815,066 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 (81,890,581) (88,135,491)
------------ ------------
Total partners' deficit (30,332,695) (35,998,605)
------------ ------------
Total liabilities and partners' deficit $ 29,482,371 $ 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 six months ended
June 30, June 30,
---------------------------- ----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Share of income from partnerships $ 600,693 $ 235,460 $ 5,392,680 $ 766,610
------------ ------------ ------------ ------------
Other revenue and expenses:

Revenue:
Interest and other income 43,669 41,998 89,659 81,508
------------ ------------ ------------ ------------
Expenses:
Interest 1,862,629 2,265,656 3,971,262 4,531,112
Management fee 75,000 75,000 150,000 150,000
General and administrative 44,372 27,814 87,571 68,126
Professional fees 26,349 26,077 53,241 51,734
Amortization 16,866 17,528 33,732 35,056
------------ ------------ ------------ ------------
2,025,216 2,412,075 4,295,806 4,836,028
------------ ------------ ------------ ------------
Total other revenue and expenses (1,981,547) (2,370,077) (4,206,147) (4,754,520)
------------ ------------ ------------ ------------
(Loss) income before gain on disposition
of investment in partnership (1,380,854) (2,134,617) 1,186,533 (3,987,910)
Gain on disposition of investment in partnership -- -- 5,058,377 --
------------ ------------ ------------ ------------
Net (loss) income (1,380,854) (2,134,617) 6,244,910 (3,987,910)

Accumulated losses, beginning of period (80,509,727) (81,839,437) (88,135,491) (79,986,144)
------------ ------------ ------------ ------------
Accumulated losses, end of period $(81,890,581) $(83,974,054) $(81,890,581) $(83,974,054)
============ ============ ============ ============
(Loss) income allocated to General Partners (1.51%) $ (20,851) $ (32,232) $ 94,298 $ (60,217)
============ ============ ============ ============
(Loss) income allocated to Initial and Special
Limited Partners (1.49%) $ (20,575) $ (31,806) $ 93,049 $ (59,420)
============ ============ ============ ============
(Loss) income allocated to Additional Limited
Partners (97%) $ (1,339,428) $ (2,070,579) $ 6,057,563 $(3,868,273)
============ ============ ============ ============
(Loss) income per unit of Additional Limited
Partnership Interest based on 60,000 units
outstanding $ (22.32) $ (34.51) $ 100.96 $ (64.47)
============ ============ ============ ============
</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 six months ended
June 30,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 6,244,910 $ (3,987,910)

Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Share of income from partnerships (5,392,680) (766,610)
Amortization of deferred costs 33,732 35,056
Amortization of discount on purchase money notes 1,776,214 1,865,112
Gain on disposition of investment in partnership (5,058,377) --
Payment of purchase money note interest (2,975,593) (401,469)
Changes in assets and liabilities:
Decrease (increase) in other assets 428 (24,888)
Increase in accrued interest payable 2,195,050 2,665,999
Increase in accounts payable and accrued expenses 109,745 10,426
------------ ------------
Net cash used in operating activities (3,066,571) (604,284)
------------ ------------

Cash flows from investing activities:
Receipt of distributions from partnerships 9,114,627 830,572
Proceeds from disposition of investment in partnership 3,292,471 --
------------ ------------
Net cash provided by investing activities 12,407,098 830,572
------------ ------------
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 526,527 226,288

Cash and cash equivalents, beginning of period 2,897,013 2,681,974
------------ ------------
Cash and cash equivalents, end of period $ 3,423,540 $ 2,908,262
============ ============

</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 June 30, 1996 and December 31, 1995, and its consolidated
results of operations for the three months and six months ended June 30, 1996
and 1995 and its consolidated cash flows for the six months ended June 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

As of June 30, 1996, the Partnership's obligations with respect to its
investments in Local Partnerships, in the form of purchase money notes of
$27,827,896 (exclusive of unamortized discount on purchase money notes of
$10,103,020) plus accrued interest of $41,712,326, are payable upon the earliest
of: (i) sale or refinancing of the respective Local Partnership's rental
property; (ii) payment in full of the respective Local Partnership's permanent
loan; or (iii) maturity. Purchase money notes in an aggregate principal amount
of $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. The remaining
purchase money notes mature from 1997 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 six months ended June 30, 1996 was $1,862,629 and $3,971,262, respectively,
and for the three and six months ended June 30, 1995 was $2,265,656 and
$4,531,112, respectively. Amortization of the imputed interest on purchase
money notes increased interest expense during the three and six months ended
June 30, 1996 by $847,144 and $1,776,214, respectively, and $932,556 and
$1,865,112, during the three and six months ended June 30, 1995, respectively.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN PARTNERSHIPS - Continued

As of June 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 August 1, 1996
-------- --------- ---------------- ----------------
<S> <C> <C> <C>
Briar Crest I $ 525,050 $ 746,672 $ 787,932
Briar Crest II 415,920 574,963 607,074
Briar Hills 458,100 683,564 720,377
Indian Hills 327,000 477,973 503,924
---------- ---------- ----------
$1,726,070 $2,483,172 $2,619,307
========== ========== ==========

</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. No agreement has been reached as of July 26, 1996.
There can be no assurance that an agreement will be reached, or that
the eventual sale of the properties will occur. As of July 26, 1996,
the Managing General Partner considers it doubtful that these
properties will be sold under the LIHPRHA program. 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
and a net tax gain in 1996 of approximately $5.1 million and $7.0
million, respectively. On April 30, 1996, the Partnership distributed
$579,000 (or approximately $9.65 per Additional Limited Partner unit)
to the Additional Limited Partners as return of capital on a generally
accepted accounting principles basis. 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 of 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 July 26,
1996, these fees have not been paid.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN PARTNERSHIPS - Continued

approximately $560,000 of existing Partnership cash resources, were
used to pay off the related purchase money note obligations.
Approximately $4.1 million in refinancing proceeds provided to the
Partnership were in excess of the Partnership's investment in the
respective Local Partnerships and are included in share of income from
Local Partnerships in the consolidated statement 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 August 1, 1996, principal
totaling $2,100,000 and $3,243,172, respectively, were due. On May 2,
1996, the noteholders sent notice to the Partnership to demand 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 August 1, 1996, the Partnership is investigating the counter-
offer and negotiations with the noteholders continue. There is no
assurance that any agreement will be reached with the noteholders.
Should the noteholders begin foreclosure proceedings on the
Partnership's interest in the related Local Partnership, the
Partnership intends to vigorously defend any action. 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 Partnership's, 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 at June 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
June 30, 1996 was approximately $847,000.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN PARTNERSHIPS - Continued

$2,250,000, are due to mature on August 31, 1998. There is no assurance that
the noteholder will agree to a 5-year extension on the purchase money notes. In
the interim, the property remains open and as of July 26, 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.

Some of the rental properties owned by the Local Partnerships have
mortgages which are federally insured under Section 236 or Section 221(d)(3) of
the National Housing Act, as amended. These properties may be eligible for
sale, subject to numerous requirements, under the LIHPRHA program. This program
may provide incentives to owners of qualifying multifamily housing who commit to
permanently maintain their properties as low to moderate income housing.
Incentives originally available under LIHPRHA included selling the property to
qualified buyers or obtaining supplemental financing for the property. On March
28, 1996, Congress enacted the Housing Opportunity Program Extension Act of 1996
which includes revisions to the LIHPRHA program. These revisions include: (i)
severely limiting the availability of the supplemental financing option for
owners of qualifying multifamily housing, (ii) allowing owners who no longer
qualify for supplemental financing under the revised guidelines to elect to
pursue a sale of the property under the LIHPRHA program, provided that the
election to sell was made by April 15, 1996, and (iii) continuing the funding of
sale transactions under the LIHPRHA program through October 1, 1996, but only
for transactions in which the owner's plan of action is approved by HUD by
August 15, 1996. After October 1, 1996, HUD is directed not to continue LIHPRHA
processing. As of July 26, 1996, it is unknown whether the program will be
extended or if a modified program will replace LIHPRHA. The partnership does
not anticipate sale of any of the properties owned by the Local Partnerships
under the LIHPRHA program. Also, there is no assurance that the 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 may include opportunities to
refinance the property or obtain supplemental financing. The Managing General
Partner continues to monitor these programs to ascertain whether the properties
would qualify within the parameters of the programs and whether the programs
would provide an appropriate economic benefit to the limited partners of the
Partnership.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN PARTNERSHIPS - Continued

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 July 26, 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 year 1996. In light of recent political scrutiny of appropriations for
HUD programs, continued funding of annual renewals for Section 8 HAP contracts
expiring in fiscal year 1997 and thereafter is uncertain.

The Partnership has been informed by Equity Resources Group, Inc. (ERG), a
Massachusetts limited partnership and limited partner in the Partnership, that
it plans to initiate a tender offer to purchase additional units in the
Partnership, but in no case more than a 5% interest in the Partnership. ERG has
stated that it plans to make the offer for the express purpose of holding the
limited partnership units as a long-term investment and not with a view to
resale. ERG has not indicated the price per unit which it plans to offer for
the limited partnership units in the Partnership. In the event that a tender
offer is initiated, the purchase price will be determined solely at the
discretion of ERG and may not necessarily represent the fair market value of the
limited partnership units. The General Partner takes no position as to
recommending or not recommending ERG to make an offer, nor will it take a
position as to recommending or not recommending the offer to investors, in the
event that an offer is made.

Other than the potential ERG offer, it is not anticipated that there will
be any other market for resale of units in the Partnership. As a result, an
investor may be unable to sell or otherwise dispose of his or her interest in
the Partnership. There is no assurance that ERG will initiate a tender offer.

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

-9-
<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 six months ended
June 30, June 30,
---------------------------- ----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Rental revenue $ 8,361,649 $ 8,132,593 $ 16,529,681 $ 16,111,394
Other 477,808 381,818 897,842 731,700
------------ ------------ ------------ ------------
8,839,457 8,514,411 17,427,523 16,843,094
------------ ------------ ------------ ------------
Expenses:
Operating 5,089,031 5,322,663 10,160,706 10,159,914
Interest 1,766,358 1,761,705 3,534,379 3,523,410
Depreciation and amortization 1,392,680 1,427,604 2,802,993 2,855,205
------------ ------------ ------------ ------------
8,248,069 8,511,972 16,498,078 16,538,529
------------ ------------ ------------ ------------
Net income $ 591,388 $ 2,439 $ 929,445 $ 304,565
============ ============ ============ ============
</TABLE>

As of June 30, 1996 and December 31, 1995, the Partnership's share of
cumulative losses to date for seven and eleven, respectively, of the thirty-five
Local Partnerships exceeds the amount of the Partnership's investments in these
Local Partnerships by $11,729,586 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 and to pay an annual incentive management fee (the
Management Fee) after all other expenses of the Partnership are paid. The
Partnership paid $32,716 and $67,770 for the three and six months ended June 30,
1996, respectively, and $24,733 and $45,770 for the three and six months ended
June 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 paid the Managing General Partner a Management Fee of $75,000, and
$150,000 for the three and six months ended June 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

-10-
<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 the Partnership's interest in Park Heights
of $117,028 on February 2, 1996. These fees have not been paid as of July 26,
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.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. CONTINGENCIES - Continued (Unaudited)

agreement resolving the disputes between CRI and CMS. The Partnership was not
named in any of the litigation prior to the resolution, nor was the Partnership
a signatory of the agreement. CRI does not anticipate further litigation with
Mr. Schwartzberg.

-12-
<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 $3,423,540 and
$2,897,013 as of June 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 July 26, 1996,
there are no material commitments for capital expenditures.

As of June 30, 1996, the Partnership's obligations with respect to its
investments in Local Partnerships, in the form of purchase money notes of
$27,827,896 (exclusive of unamortized discount on purchase money notes of
$10,103,020) plus accrued interest of $41,712,326, are payable upon the earliest
of: (i) sale or refinancing of the respective Local Partnership's rental
property; (ii) payment in full of the respective Local Partnership's permanent
loan; or (iii) maturity. Purchase money notes in an aggregate principal amount
of $1,726,070 and $2,100,000 matured on January 1, 1996 and May 1, 1996,
respectively, but not have been paid, as discussed below. The remaining
purchase money notes mature from 1997 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.

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

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

</TABLE>

</TABLE>

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

the Managing General Partner considers it doubtful that these
properties will be sold under the LIHPRHA program. 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.

(C) On March 1, 1996, the local general partner of Village Squire I & II
and Village Squire III refinanced the respective properties' existing
first mortgages. On March 1, 1996, proceeds provided to the
Partnership from the properties' mortgage refinancings, along with
approximately $560,000 of existing Partnership cash resources, were
used to pay off the related purchase money note obligations.
Approximately $4.1 million in refinancing proceeds provided to the
Partnership were in excess of the Partnership's investment in the
respective Local Partnerships and are included in share of income from
Local Partnerships in the consolidated statement of operations.

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

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 Partnership's, 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 at June 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
June 30, 1996 was approximately $847,000.

The Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient cash is available for operating requirements.
For the six months ended June 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 and the pay-
off of the related purchase money notes.

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

The Partnership's net loss for the three months ended June 30, 1996
decreased from the comparable 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. Contributing to the decrease in net loss was an increase in share of
income from Local Partnerships principally due to increased rental revenue at
two of the properties due to a decrease in vacancies and an increase in the
rental rate during 1996. Partially offsetting the decrease in net loss was an
increase in general and administrative expenses due to increased payroll
expenses.

The Partnership's net income for the six months ended June 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

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

interest expense, as discussed above, partially offset by an increase in general
and administrative expenses, as discussed above.

For financial reporting purposes, the Partnership, as a limited partner in
the Local Partnerships, does not record losses from the Local Partnerships in
excess of its investment. As a result, the Partnership's recognized income for
the three and six months ended June 30, 1996 did not include losses of $205,864
and $411,727, respectively, compared to excluded losses of $234,561 and $469,114
for the three and six months ended June 30, 1995, respectively.

Rolling Green at Milford property received a mortgage increase in June 1996
due to extensive roof damage caused by microorganisms. The estimated costs to
replace the roof are approximately $2.1 million. The local managing general
partner has received this additional financing from the mortgagee to cover the
costs to replace the roof. 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 noteholder will agree to a 5-year extension on the purchase money notes. In
the interim, the property remains open and as of July 26, 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.

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

would provide an appropriate economic benefit to the limited partners of the
Partnership.

Some of the rental properties owned by the Local Partnerships are dependent
on the receipt of housing assistance payments guaranteed by contract under the
HUD Section 8 program. The level of funding for the Section 8 program, and HUD-
insured multifamily housing in general, is dependent upon the continuation of
appropriations approved by Congress for subsidy payments. In 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 Housing Assistance Payment (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
this initiative is enacted as originally proposed, 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 July 26, 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 year 1996. In light of recent political scrutiny of appropriations for
HUD programs, continued funding of annual renewals for Section 8 HAP contracts
expiring in fiscal year 1997 and thereafter is uncertain.

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

General
-------

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

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 February 1, 1996 and February 16, 1996, Mr. Schwartzberg sent letters to
the Partnership requesting investor lists and other forms of investor
information. On February 5, 1996, the Partnership, acting through its managing
general partner, CRI, denied Mr. Schwartzberg's request. On February 20, 1996,
counsel for the Partnership responded to Mr. Schwartzberg's second request,
denying that Mr. Schwartzberg had standing or a proper purpose for requesting
the investor lists. On June 12, 1996, Mr. Schwartzberg and CRI entered an
agreement resolving the disputes between CRI and CMS. The Partnership was not
named in any of the litigation prior to the resolution, nor was the Partnership
a signatory of the agreement. CRI does not anticipate further litigation with
Mr. Schwartzberg.

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

-19-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Continued
-------------------------------

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:

<TABLE>
<CAPTION>
Accrued Interest Accrued Interest
Property Principal January 1, 1996 August 1, 1996
-------- --------- ---------------- ----------------
<S> <C> <C> <C>
Briar Crest I $ 525,050 $ 746,672 $ 787,932
Briar Crest II 415,920 574,963 607,074
Briar Hills 458,100 683,564 720,377
Indian Hills 327,000 477,973 503,924
---------- ---------- ----------
$1,726,070 $2,483,172 $2,619,307
========== ========== ==========

</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. No agreement has been reached as of July 26, 1996. There can be no
assurance that an agreement will be reached, or that the eventual sale of the
properties will occur. As of July 26, 1996, the General Partner considers it
doubtful that these properties will be sold under the LIHPRHA program. The
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 August 1, 1996, principal totaling $2,100,000 and
$3,243,172, respectively, were due. On May 2, 1996, the noteholders sent notice
to the Partnership to demand 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
August 1, 1996, the Partnership is investigating the counter-offer and
negotiations with the noteholders continue. There is no assurance that any
agreement will be reached with the noteholders. Should the noteholders begin
foreclosure proceedings on the Partnership's interest in the related Local
Partnership, the Partnership intends to vigorously defend any action. 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

-20-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Continued
-------------------------------

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 Partnership's, 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 at June
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 June 30, 1996 was approximately $847,000.

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

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

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-III
LIMITED PARTNERSHIP
(Registrant)

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

August 1, 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

-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 SECOND QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH 10-Q.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,423,540
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 29,482,371
<CURRENT-LIABILITIES> 0
<BONDS> 59,590,722
0
0
<COMMON> 0
<OTHER-SE> (30,332,695)
<TOTAL-LIABILITY-AND-EQUITY> 29,482,371
<SALES> 0
<TOTAL-REVENUES> 5,482,339
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 324,544
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,971,262
<INCOME-PRETAX> 1,186,533
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,186,533
<DISCONTINUED> 0
<EXTRAORDINARY> 5,058,377
<CHANGES> 0
<NET-INCOME> 6,244,910
<EPS-PRIMARY> 100.96
<EPS-DILUTED> 100.96

</TABLE>