CAPITAL REALTY INVESTORS III LTD PARTNERSHIP, 10-Q, 1997-10-28

CAPITAL REALTY INVESTORS III LTD PARTNERSHIP
10-Q, 1997-10-28
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, 1997
------------------

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

CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 1997

Page
----

PART I. Financial Information (Unaudited)

Item 1. Financial Statements

Consolidated Balance Sheets - September 30, 1997
and December 31, 1996 . . . . . . . . . . . . . 1

Consolidated Statements of Operations - for
the three and nine months ended September 30, 1997
and 1996 . . . . . . . . . . . . . . . . . . . . 2

Consolidated Statements of Cash Flows - for
the nine months ended September 30, 1997
and 1996 . . . . . . . . . . . . . . . . . . . . 3

Notes to Consolidated Financial Statements . . . . 4

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . 15

PART II. Other Information

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,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
Investments in partnerships $ 21,568,988 $ 24,383,751
Cash and cash equivalents 9,168,420 3,942,254
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $442,619 and $475,794,
respectively 527,804 572,045
Property purchase costs, net of accumulated amortization of
$412,107 and $425,423, respectively 516,602 550,713
Other assets 104,693 78,199
------------ ------------
Total assets $ 31,886,507 $ 29,526,962
============ ============

LIABILITIES AND PARTNERS' DEFICIT

Due on investments in partnerships, net of unamortized discount on
purchase money notes of $5,879,864 and $8,394,548,
respectively $ 19,752,776 $ 19,552,892
Accrued interest payable 42,858,604 43,663,393
Distributions payable 1,199,800 --
Accounts payable and accrued expenses 110,769 94,221
Consulting fees payable to related parties 42,500 42,500
------------ ------------
Total liabilities 63,964,449 63,353,006
------------ ------------
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 (3,488,481) (2,288,681)
Offering costs (6,156,933) (6,156,933)
Accumulated losses (82,436,028) (85,383,930)
------------ ------------
Total partners' deficit (32,077,942) (33,826,044)
------------ ------------
Total liabilities and partners' deficit $ 31,886,507 $ 29,526,962
============ ============
</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,
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Share of income from partnerships $ 713,267 $ 699,308 $ 1,519,520 $ 6,091,988
------------ ------------ ------------ ------------
Other revenue and expenses:
Revenue:
Interest and other income 122,620 45,783 224,486 135,442
------------ ------------ ------------ ------------
Expenses:
Interest 1,794,916 1,862,629 5,395,287 5,833,891
Management fee 75,000 75,000 225,000 225,000
General and administrative 51,130 39,963 228,936 127,534
Professional fees 24,869 32,107 72,530 85,348
Amortization 15,826 16,867 48,374 50,599
------------ ------------ ------------ ------------
1,961,741 2,026,566 5,970,127 6,322,372
------------ ------------ ------------ ------------
Total other revenue and expenses (1,839,121) (1,980,783) (5,745,641) (6,186,930)
------------ ------------ ------------ ------------
Loss before gain on disposition of investment in
partnership (1,125,854) (1,281,475) (4,226,121) (94,942)
Gain on disposition of investment in partnership 1,700,168 -- 1,700,168 2,043,167
------------ ------------ ------------ ------------
Income (loss) before extraordinary gain from
extinguishment of debt 574,314 (1,281,475) (2,525,953) 1,948,225
Extraordinary gain from extinguishment of debt -- -- 5,473,855 3,015,210
------------ ------------ ------------ ------------
Net income (loss) 574,314 (1,281,475) 2,947,902 4,963,435
Accumulated losses, beginning of period (83,010,342) (81,890,581) (85,383,930) (88,135,491)
------------ ------------ ------------ ------------
Accumulated losses, end of period $(82,436,028) $(83,172,056) $(82,436,028) $(83,172,056)
============ ============ ============ ============
Income (loss) allocated to General Partners (1.51%) $ 8,672 $ (19,350) $ 44,513 $ 74,948
============ ============ ============ ============
Income (loss) allocated to Initial and Special Limited
Partners (1.49%) $ 8,557 $ (19,094) $ 43,924 $ 73,955
============ ============ ============ ============
Income (loss) allocated to Additional Limited Partners
(97%) $ 557,085 $ (1,243,031) $ 2,859,465 $ 4,814,532
============ ============ ============ ============
Income (loss) per unit of Additional Limited Partnership
Interest based on 60,000 units outstanding $ 9.28 $ (20.72) $ 47.66 $ 80.24
============ ============ ============ ============
</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,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,947,902 $ 4,963,435

Adjustments to reconcile net income to net cash used in
operating activities:
Share of income from partnerships (1,519,520) (6,091,988)
Amortization of deferred costs 48,374 50,599
Amortization of discount on purchase money notes 2,514,684 2,623,358
Gain on disposition of investment in partnership (1,700,168) (2,043,167)
Extraordinary gain on extinguishment of debt (5,473,855) (3,015,210)
Payment of purchase money note interest (310,434) (293,517)

Changes in assets and liabilities:
(Increase) decrease in other assets (26,494) 4,424
Increase in accrued interest payable 2,879,499 3,210,535
Increase in accounts payable and accrued expenses 16,548 129,642
------------ ------------
Net cash used in operating activities (623,464) (461,889)
------------ ------------

Cash flows from investing activities:
Receipt of distributions from partnerships 950,656 9,880,318
Proceeds from disposition of investment in partnership 5,113,774 3,292,471
------------ ------------
Net cash provided by investing activities 6,064,430 13,172,789
------------ ------------
Cash flows used in financing activities:
Pay-off of purchase money notes and related interest -- (10,961,076)
Payment of purchase money note principal (214,800) --
Distribution paid to additional limited partners -- (579,000)
------------ ------------
Net cash used in financing activities (214,800) (11,540,076)
------------ ------------
Net increase in cash and cash equivalents 5,226,166 1,170,824

Cash and cash equivalents, beginning of period 3,942,254 2,897,013
------------ ------------
Cash and cash equivalents, end of period $ 9,168,420 $ 4,067,837
============ ============
</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, 1997 and December 31, 1996, and its
consolidated results of operations for the three and nine months ended September
30, 1997 and 1996 and its consolidated cash flows for the nine months ended
September 30, 1997 and 1996.

These unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in 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, 1996.

Certain amounts in the 1996 financial statements have been reclassified to
conform to the 1997 presentation.

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
$25,513,096 (exclusive of unamortized discount on purchase money notes of
$5,879,864) plus accrued interest of $42,824,628 as of September 30, 1997, are
payable in full upon the earliest of: (i) sale or refinancing of the respective
Local Partnership's rental property; (ii) payment in full of the respective
Local Partnership's permanent loan; or (iii) maturity. Purchase money notes in
an aggregate principal amount of $1,726,070, $2,100,000 and $1,365,000 matured
on January 1, 1996, May 1, 1996 and July 1, 1997, respectively, as discussed
below. Purchase money notes having a principal balance of $1,700,000 and
$2,250,000 mature on December 31, 1997 and August 31, 1998, respectively, as
discussed below. The remaining purchase money notes mature from 1999 to 2015.
The purchase money notes are generally secured by the Partnership's interest in
the respective Local Partnerships. There is no assurance that the underlying
properties will have sufficient appreciation and equity to enable the
Partnership to pay the purchase money notes' principal and accrued interest when
due. If a purchase money note is not paid in accordance with its terms, the
Partnership will either have to renegotiate the terms of repayment or risk
losing its partnership interest in the Local Partnership. The Managing General
Partner is continuing to investigate possible alternatives to reduce the
Partnership's long-term debt obligations. These alternatives include, among
others, retaining the cash available for distribution to meet the purchase money
note requirements, buying out certain purchase money notes at a discounted
price, extending the due dates of certain purchase money notes, or refinancing
the respective properties' underlying debt and using the Partnership's share of
the proceeds to pay off or buy down certain purchase money note obligations.

Interest expense on the Partnership's purchase money notes for the three
and nine months ended September 30, 1997 was $1,794,916 and $5,395,287,

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN PARTNERSHIPS - Continued

respectively, and $1,862,629 and $5,833,891 for the three and nine months ended
September 30, 1996, respectively. Amortization of the imputed interest on
purchase money notes increased interest expense during the three and nine months
ended September 30, 1997 by $838,228 and $2,514,684, respectively, and by
$847,144 and $2,623,358 during the three and nine months ended September 30,
1996, respectively. The accrued interest on the purchase money notes of
$42,824,628 and $43,629,417 as of September 30, 1997 and December 31, 1996,
respectively, is due on the respective maturity dates of the purchase money
notes or earlier, in some instances, if the pertinent Local Partnership has
distributable net cash flow, as defined in the relevant Local Partnership
agreement.

As of September 30, 1997 and December 31, 1996, 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 relating to the following properties matured in 1996:

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

</TABLE>

(A) The Partnership defaulted on its purchase money notes relating to
Briar Crest I, Briar Crest II and Briar Hills on January 1, 1996 when
the notes matured and were not paid. On April 1, 1997, the
Partnership and the purchase money noteholders entered agreements
extending the purchase money note maturity dates until January 1,
2002. In connection with the extension agreements, on April 10, 1997,
the Partnership made principal payments of $55,000, $54,800 and
$55,000 to the purchase money noteholders related to Briar Crest I,
Briar Crest II and Briar Hills, respectively. Additionally, the
Partnership paid $30,243, $34,391 and $36,380 to reimburse the
purchase money noteholders and related entities for Low Income Housing
Preservation and Resident Homeownership Act of 1990 (LIHPRHA)
processing and legal fees previously incurred on behalf of Briar Crest
I, Briar Crest II and Briar Hills, respectively. The LIHPRHA program
is discussed further below. Pursuant to the extension agreements, the
Partnership will make interest payments on the purchase money notes
from 70% of all annual cash flow distributions received from the
related Local Partnerships to the purchase money noteholders. The
Partnership did not receive any cash flow distributions from the

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN PARTNERSHIPS - Continued

related Local Partnerships for the nine months ended September 30,
1997 and 1996, respectively.

(B) The Partnership defaulted on its purchase money notes relating to
Indian Hills on January 1, 1996 when the notes matured and were not
paid. On July 17, 1997, the Partnership and the purchase money
noteholders entered into an agreement extending the purchase money
note maturity dates until January 1, 2002. In connection with the
extension agreement, on July 28, 1997 and August 12, 1997, the
Partnership made principal payments aggregating $50,000 to the
purchase money noteholders related to Indian Hills. In July and
August 1997, the Partnership paid $14,484 to reimburse the purchase
money noteholders and related entities for LIHPRHA processing and
legal fees previously incurred on behalf of Indian Hills. The LIHPRHA
program is discussed further below. Pursuant to the extension
agreements, the Partnership will make interest payments on the
purchase money notes from 70% of all annual cash flow distributions
received from Indian Hills to the purchase money noteholders. The
Partnership did not receive any cash flow distributions from Indian
Hills for the nine months ended September 30, 1997 and 1996,
respectively.

(C) On January 5, 1994 the local general partners of 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 approximately $5.1 million, of
which approximately $3 million resulted from the retirement of the
purchase money note obligation with respect to the property. The
federal tax gain was approximately $7.1 million. On April 30, 1996,
the Partnership distributed $579,000 (or $9.65 per Additional Limited
Partner unit) to the Additional Limited Partners. The Managing
General Partner is retaining all of the Partnership's remaining
undistributed net sale proceeds from this sale 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 24, 1997, $42,500
of 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

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.

(E) The Partnership defaulted on its purchase money notes relating to
Cedar Valley on May 1, 1996 when the notes matured and were not paid.
The default amount included principal and accrued interest of
$2,100,000 and $3,166,710, respectively. 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 the parties agreed to extend the purchase money notes
until January 1997. On January 16, 1997, the purchase money
noteholders foreclosed on the Partnership's interest in Cedar Valley.
As a result of the foreclosure on the Partnership's interest in Cedar
Valley, the purchase money noteholders assumed ownership of the
Partnership's interest in the Local Partnership. The Partnership's
loss of ownership interest in Cedar Valley did not impact the
Partnership's financial condition because the related purchase money
notes were nonrecourse and secured solely by the Partnership's
interest in Cedar Valley. The Partnership's investment in Cedar
Valley had previously been reduced to zero as a result of losses from
the Local Partnership during prior years. Acquisition fees and
property purchase costs relating to Cedar Valley were fully amortized
as of December 31, 1996, in order to record the investment at its net
realizable value. The release of the Partnership's purchase money
note obligation as a result of the Partnership's loss of ownership
interest in Cedar Valley resulted in a net financial statement gain of
approximately $5.5 million during 1997. The federal tax gain is
estimated to be approximately $5.8 million.

In September 1994, the Partnership modified purchase money notes totaling
$1,365,000 relating to Bartley Manor, Village Square and Village Green. In
accordance with the modification agreement, the Partnership paid an aggregate of
$100,000 in accrued interest, and the maturity dates for the notes were extended
from February 1994 to July 1, 1997. On July 1, 1997, the Partnership defaulted
on the purchase money notes relating to these Local Partnerships when the notes
matured and were not paid. The Managing General Partner and the purchase money
noteholders have reached an agreement to extend the purchase money notes until
October 1, 1999. In connection with the extension agreements, in August 1997,
the Partnership made interest payments of $51,282, $28,571 and $20,147 to the
purchase money noteholders related to Bartley Manor, Village Square and Village
Green, respectively. Pursuant to the extension agreements, the Partnership will
make interest payments on the purchase money notes of 100% of all annual cash
flow distributions received from the related Local Partnerships to the purchase
money noteholders. The Partnership did not receive any cash flow distributions
from the related Local Partnerships for the nine months ended September 30, 1997
and 1996, respectively.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN PARTNERSHIPS - Continued

Due to the uncertainty of a satisfactory resolution with the purchase money
noteholders related to Winchester Gardens, there is no assurance that the
Partnership will be able to retain its interest in this Local Partnership. The
uncertainty about the continued ownership of the Partnership's interest in this
Local Partnership does not impact the Partnership's financial condition because
the related purchase money notes are nonrecourse and secured solely by the
Partnership's interest in the Local Partnership. Should the investment in
Winchester Gardens not produce sufficient value to satisfy the related purchase
money notes, the Partnership's exposure to loss is limited, as the amount of
the nonrecourse indebtedness exceeds the carrying amount of the investment in
and advances to the Local Partnership. Thus, even a complete loss of this
investment would not have a material impact on the operations of the
Partnership.

Roberts Milford Associates (Rolling Green) 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 property remained
approximately 97% leased during the roof work, which was completed during 1996.
The Managing General Partner is currently negotiating an extension on the
purchase money notes related to Rolling Green, subject to obtaining a
satisfactory refinancing of the mortgage loans related to the Local Partnership.
The purchase money notes, which aggregate a principal amount of $2,250,000, are
due to mature on August 31, 1998. In connection with the proposed extension of
the purchase money notes, the Managing General Partner, the local managing
general partner and the purchase money noteholders are jointly exploring various
options to refinance the Massachusetts Housing Finance Agency (MHFA) and HUD
Section 236 interest rate subsidized mortgage loan related to this property.
The parties have signed a term sheet to restructure the deal, and as of October
24, 1997, the parties are working toward a finalized agreement. There is no
assurance that a finalized agreement will be reached. Further, even if a
finalized agreement is reached, there is no assurance that a satisfactory
refinancing will occur. Accordingly, there is no assurance that the Partnership
will be able to retain its interest in this Local Partnership. The uncertainty
about the continued ownership of the Partnership's interest in this Local
Partnership does not impact the Partnership's financial condition because the
related purchase money notes are nonrecourse and secured solely by the
Partnership's interest in the Local Partnership. Should the investment in
Rolling Green not produce sufficient value to satisfy the related purchase money
notes, the Partnership's exposure to loss is limited, as the amount of the
nonrecourse indebtedness exceeds the carrying amount of the investment in and
advances to the Local Partnership. Thus, even a complete loss of this
investment would not have a material impact on the operations of the
Partnership.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN PARTNERSHIPS - Continued

accounts related to Walden Apartments. Additionally, on July 11, the
Partnership received $431,437 representing the release of the property's real
estate tax escrows. On August 15, 1997 and September 10, 1997, the Partnership
received funds totalling $2,299 related to the closing out of the property's
remaining accounts. In September and October, 1997, the Partnership paid
$56,183 and $12,840, respectively, related to outstanding invoices from the
Local Partnership's operations. The proceeds received at and subsequent to
closing were in excess of the Partnership's investment in the Local Partnership
and resulted in an estimated net financial statement gain of approximately $1.7
million. The federal tax gain is estimated to be approximately $9 million.

The Managing General Partner plans to distribute approximately $1.2 million
(or approximately $20 per Additional Limited Partner Unit) to the Additional
Limited Partners from the proceeds of the sale of Walden Apartments by November
30, 1997 to holders of record as of September 30, 1997. 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
Partnership's outstanding purchase money notes related to other Local
Partnerships.

The local managing general partners of Tyee Associates Limited Partnership
(Tyee Apartments), Victorian Towers Associates (Victorian Towers) and Walsh Park
Associates Limited Partnership (Walsh Park) have received offers from third
parties to purchase the respective properties. The local managing general
partners and the Managing General Partner are analyzing the offers and purchase
contracts are being negotiated. There is no assurance that any sales will
result from these negotiations.

Some of the rental properties owned by the Local Partnerships have
mortgages which are federally insured under Section 236 or Section 221(d)(3)of
the National Housing Act, as amended. LIHPRHA, which provided property owners
with restricted opportunities to sell low income housing, ended effective
September 30, 1996. However, HUD received approximately $175 million to fund
sales of qualifying properties under the LIHPRHA program during the federal
government's fiscal year 1997, which began October 1, 1996. In October 1997,
the HUD appropriations bill does not include any funding for LIHPRHA.
Therefore, this program is effectively terminated.

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN PARTNERSHIPS - Continued

moderate income apartment unit maintained in the complex. Over the years,
annual increases have pushed rents on many of the Section 8 HAP contracts above
the market rate for comparable neighborhoods. In an effort to deal with the
increasing burden of funding Section 8 HAP contracts, many of which are now
expiring, in 1995 HUD released its Reinvention Blueprint, and in 1996 a revision
to its Reinvention Blueprint, which contained proposals that have come to be
known as "Mark-to-Market". Under the initiative, HUD would eliminate the
Section 8 project-based subsidy and provide the residents with "sticky vouchers"
which would allow residents to move to other developments should they so choose.
However, with the elimination of the Section 8 HAP subsidies, most rental
properties will not be able to maintain sufficient income to pay debt service.
Therefore, the Mark-to-Market initiative will allow for a part of the existing
first mortgage to become a "soft" second mortgage which will accrue interest at
a low 1% interest rate. The splitting of the existing first mortgage into a new
first and second mortgage may generate ordinary taxable income. Unfortunately,
there is no corresponding tax relief legislation at this time.

In October 1997, both the House and the Senate passed the FY 1998 HUD
spending bill which includes Mark-to-Market legislation and President Clinton is
expected to sign the appropriations bill. Between now and October 1, 1998 all
expiring Section 8 contracts with rents less than 120% of fair market rents
(FMR's) will be renewed for one-year. Properties with rents in excess of 120%
of FMR's will be subject to the terms of the current Mark-to-Market
demonstration program. Effective October 1, 1998, all properties with expiring
Section 8 contracts will be subject to Mark-to-Market. The Section 8 HAP
contracts for the following properties expire during the government's fiscal
year 1998:

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN PARTNERSHIPS - Continued

Units
Authorized for Expiration of
Number of Rental Assistance Section 8
Property Rental Units Under Section 8 HAP Contract
-------- ------------ ----------------- -------------
<S> <C> <C> <C>
Bartley Manor 70 69 05/31/98
Briar Crest I 53 53 06/30/98
Briar Crest II 49 49 06/30/98
Briar Hills 50 33 09/30/98
Glen Agnes 149 149 01/27/98
Greeley Manor 128 119 10/31/97
Highland Manor 111 111 05/21/98
Indian Hills Townhouses 40 24 09/30/98
Meadow Lanes Apartments 118 24 10/01/97
Southmoor Townhouse Apartments 40 8 08/31/98
Tyee Apartments 100 56 07/31/98
Village Green 36 36 06/30/98
Village Square 48 48 06/30/98
Winchester Gardens Apartments 206 202 08/31/98
Woodside Village 180 114 09/30/98

</TABLE>

With the potential elimination of the HAP contracts, there is no assurance
that these rental properties would be able to maintain the rental income and
occupancy levels necessary to pay operating costs and debt service.

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

The following are combined statements of operations for the thirty-two and
thirty-four Local Partnerships in which the Partnership has invested as of
September 30, 1997 and 1996, respectively. The 1996 statements contain
information on the Park Heights property through the date of sale.
Additionally, the 1997 statements contain information on the Cedar Valley
property through the date of foreclosure on the Partnership's interest therein
and the Fifth Lakewood property through the date of sale. These statements are
compiled from information supplied by the management agents of the projects and
are unaudited.

-11-
<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,
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Rental revenue $ 7,266,907 $ 8,163,727 $ 23,699,376 $ 24,693,408
Other 369,157 420,660 1,131,610 1,318,502
------------ ------------ ------------ ------------
7,636,064 8,584,387 24,830,986 26,011,910
------------ ------------ ------------ ------------
Expenses:
Operating 4,044,474 4,924,160 14,242,800 15,084,866
Interest 1,747,360 1,766,352 5,498,698 5,300,731
Depreciation and amortization 1,268,075 1,392,684 3,994,888 4,195,677
------------ ------------ ------------ ------------
7,059,909 8,083,196 23,736,386 24,581,274
------------ ------------ ------------ ------------
Net income $ 576,155 $ 501,191 $ 1,094,600 $ 1,430,636
============ ============ ============ ============

</TABLE>

As of September 30, 1997 and December 31, 1996, the Partnership's share of
cumulative losses to date for ten and eleven of the thirty-two and thirty-four
Local Partnerships, respectively, exceeds the amount of the Partnership's
investments in these Local Partnerships by $12,468,193 and $12,026,985,
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 $25,198 and $73,552 for the
three and nine months ended September 30, 1997, respectively, and $19,972 and
$87,742 for the three and nine months ended September 30, 1996, 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 the
Managing General Partner an annual incentive management fee (the Management Fee)
after all other expenses of the Partnership are paid. The Partnership paid the
Managing General Partner a Management Fee of $75,000 and $225,000, for the three
and nine months ended September 30, 1997 and 1996, 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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

3. RELATED-PARTY TRANSACTIONS - Continued

property it owns, payable under certain conditions upon the sale of an
investment in a Local Partnership or the property it owns. The payment of the
fee is subject to certain restrictions, including the achievement of a certain
level of sales proceeds and making certain minimum distributions to limited
partners. 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. As of October 24, 1997, $42,500 of these fees have not been paid.

4. CONTINGENCIES

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

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

-13-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4. CONTINGENCIES - Continued

this Partnership and his interest will become that of a Special Limited Partner.
As of October 24, 1997, CRI and Mr. Schwartzberg were unable to agree on the
language of various provisions of the definitive agreement and have agreed to
submit the open issues to arbitration. The Partnership is not a party to the
arbitration proceeding.

-14-
<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 $9,168,420 (or
approximately $148.22 per Additional Limited Partner unit) and $3,942,254 (or
approximately $63.73 per Additional Limited Partner unit) as of September 30,
1997 and December 31, 1996, respectively, along with anticipated future cash
distributions from the Local Partnerships, is expected to meet its current and
anticipated operating cash needs, including a distribution to the Additional
Limited Partners by November 30, 1997, as discussed below. As of October 24,
1997, there are no material commitments for capital expenditures.

Purchase money notes relating to the following properties matured in 1996:

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

</TABLE>

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

received from Indian Hills to the purchase money noteholders. The
Partnership did not receive any cash flow distributions from Indian
Hills for the nine months ended September 30, 1997 and 1996,
respectively.

(D) 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
the Partnership from the refinancings, along with an advance of
approximately $560,000 from existing Partnership cash resources, were
used to pay off the related purchase money note obligations. This
advance was subsequently repaid by the Local Partnership during 1996.
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
-----------------------------------

interest in Cedar Valley. The Partnership's investment in Cedar
Valley had previously been reduced to zero as a result of losses from
the Local Partnership during prior years. Acquisition fees and
property purchase costs relating to Cedar Valley were fully amortized
as of December 31, 1996, in order to record the investment at its net
realizable value. The release of the Partnership's purchase money
note obligation as a result of the Partnership's loss of ownership
interest in Cedar Valley resulted in a net financial statement gain of
approximately $5.5 million during 1997. The federal tax gain is
estimated to be approximately $5.8 million.

Purchase money notes in the aggregate principal amount of $1.7 million
relating to Winchester Gardens are due to mature December 31, 1997. The
Managing General Partner anticipates negotiating with the purchase money
noteholders of Winchester Gardens for a five year extension on the related
purchase money notes. There is no assurance that an agreement will be reached.
Due to the uncertainty of a satisfactory resolution with the purchase money
noteholders related to Winchester Gardens, there is no assurance that the
Partnership will be able to retain its interest in this Local Partnership. The
uncertainty about the continued ownership of the Partnership's interest in this
Local Partnership does not impact the Partnership's financial condition because
the related purchase money notes are nonrecourse and secured solely by the
Partnership's interest in the Local Partnership. Should the investment in
Winchester Gardens not produce sufficient value to satisfy the related purchase
money notes, the Partnership's exposure to loss is limited, as the amount of the
nonrecourse indebtedness exceeds the carrying amount of the investment in and
advances to the Local Partnership. Thus, even a complete loss of this
investment would not have a material impact on the operations of the
Partnership.

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

due to mature on August 31, 1998. In connection with the proposed extension of
the purchase money notes, the Managing General Partner, the local managing
general partner and the purchase money noteholders are jointly exploring various
options to refinance the Massachusetts Housing Finance Agency (MHFA) and HUD
Section 236 interest rate subsidized mortgage loan related to this property.
The parties have signed a term sheet to restructure the deal, and as of October
24, 1997, the parties are working toward a finalized agreement. There is no
assurance that a finalized agreement will be reached. Further, even if a
finalized agreement is reached, there is no assurance that a satisfactory
refinancing will occur. Accordingly, there is no assurance that the Partnership
will be able to retain its interest in this Local Partnership. The uncertainty
about the continued ownership of the Partnership's interest in this Local
Partnership does not impact the Partnership's financial condition because the
related purchase money notes are nonrecourse and secured solely by the
Partnership's interest in the Local Partnership. Should the investment in
Rolling Green not produce sufficient value to satisfy the related purchase money
notes, the Partnership's exposure to loss is limited, as the amount of the
nonrecourse indebtedness exceeds the carrying amount of the investment in and
advances to the Local Partnership. Thus, even a complete loss of this
investment would not have a material impact on the operations of the
Partnership.

On September 13, 1996, the local managing general partner of New Fifth
Lakewood Associates Limited Partnership (Walden Apartments) received an offer
from a third party to purchase the property. The local managing general partner
rejected this offer because it did not meet the criteria recommended by the
Managing General Partner. Thereafter, the local managing general partner
received an improved offer, and a purchase agreement was signed effective
February 17, 1997. On July 2, 1997, Walden Apartments sold the property, a 396-
unit apartment complex located in Schaumberg, Illinois. The sale of the
property generated net cash proceeds to the Partnership of approximately $4.6
million at closing. On July 9, 1997, the Partnership received $158,538
representing the release of funds held in security deposit and insurance
accounts related to Walden Apartments. Additionally, on July 11, the
Partnership received $431,437 representing the release of the property's real
estate tax escrows. On August 15, 1997 and September 10, 1997, the Partnership
received funds totalling $2,299 related to the closing out of the property's
remaining accounts. In September and October, 1997, the Partnership paid
$56,183 and $12,840, respectively, related to outstanding invoices from the
Local Partnership's operations. The proceeds received at and subsequent to
closing were in excess of the Partnership's investment in the Local Partnership
and resulted in an estimated net financial statement gain of approximately $1.7
million. The federal tax gain is estimated to be approximately $9 million.

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, 1997, proceeds from the disposition of

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

Fifth Lakewood and the receipt of distributions from Local Partnerships were
adequate to support operating cash requirements.

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

The Partnership's net income for the three months ended September 30, 1997
increased from the corresponding period in 1996 primarily due to the gain on
disposition of the Partnership's investment in Fifth Lakewood. Contributing to
the increase in the Partnership's net income was an increase in interest and
other income due to higher cash and cash equivalent balances during 1997 and a
decrease in interest expense due to the amortization of imputed interest.

The Partnership's net income for the nine months ended September 30, 1997
decreased from the corresponding period in 1996 primarily as a result of a
decrease in share of income from partnerships principally due to the receipt of
refinancing proceeds during 1996 from the Village Squire I & II and Village
Squire III mortgages which were in excess of the Partnership's investments in
the respective Local Partnerships, as discussed above. Contributing to the
decrease in the Partnership's net income was a decrease in the gain on
disposition related to the Park Heights sale in 1996 versus the Fifth Lakewood
sale in 1997 and an increase in general and administrative expenses due to
LIHPRHA processing fees which were paid by the Partnership in connection with
the Briar Crest I, Briar Crest II and Briar Hills purchase money note
extensions, as previously discussed. Partially offsetting the decrease in the
Partnership's net income was an increase in extraordinary gain from
extinguishment of debt related to the Cedar Valley foreclosure in 1997 which
exceeded the gain on the Park Heights extinguishment in 1996, a decrease in
interest expense due to the amortization of imputed interest and the
extinguishment of the Village Squire I & II, Village Squire III, Park Heights
and Cedar Valley purchase money notes, as previously discussed, and an increase
in interest and other income, 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 nine months ended September 30, 1997 did not include losses of
$144,954 and $441,208, respectively, compared to excluded losses of $205,868 and
$617,595 for the three and nine months ended September 30, 1996, respectively.

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

government's fiscal year 1997, which began October 1, 1996. In October 1997,
the HUD appropriations bill does not include any funding for LIHPRHA.
Therefore, this program is effectively terminated.

Some of the rental properties owned by the Local Partnerships are dependent
on the receipt of project-based rental housing assistance payments provided by
HUD pursuant to Section 8 HAP contracts. Under Section 8 HAP contracts, HUD
guaranteed rental properties a high monthly rental payment for each low and
moderate income apartment unit maintained in the complex. Over the years,
annual increases have pushed rents on many of the Section 8 HAP contracts above
the market rate for comparable neighborhoods. In an effort to deal with the
increasing burden of funding Section 8 HAP contracts, many of which are now
expiring, in 1995 HUD released its Reinvention Blueprint, and in 1996 a revision
to its Reinvention Blueprint, which contained proposals that have come to be
known as "Mark-to-Market". Under the initiative, HUD would eliminate the
Section 8 project-based subsidy and provide the residents with "sticky vouchers"
which would allow residents to move to other developments should they so choose.
However, with the elimination of the Section 8 HAP subsidies, most rental
properties will not be able to maintain sufficient income to pay debt service.
Therefore, the Mark-to-Market initiative will allow for a part of the existing
first mortgage to become a "soft" second mortgage which will accrue interest at
a low 1% interest rate. The splitting of the existing first mortgage into a new
first and second mortgage may generate ordinary taxable income. Unfortunately,
there is no corresponding tax relief legislation at this time.

-21-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------

</TABLE>

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

General
-------

-22-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------

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

Following subsequent litigation, none of which involved the Partnership, on
June 12, 1996, Mr. Schwartzberg, CRI and others entered an agreement (which
contemplates the execution of a subsequent definitive agreement) to resolve the
disputes between CRI and CMS. The Partnership was not a signatory to the
agreement. As part of the resolution, Mr. Schwartzberg withdrew any derogatory
statements he made about CRI and its principals. Upon execution of the
definitive agreement, Mr. Schwartzberg shall withdraw as a General Partner of
this Partnership and his interest will become that of a Special Limited Partner.
As of October 24, 1997, CRI and Mr. Schwartzberg were unable to agree on the
language of various provisions of the definitive agreement and have agreed to
submit the open issues to arbitration. The Partnership is not a party to the
arbitration proceeding.

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

No reports on Form 8-K were filed with the Commission during the quarter
ended September 30, 1997.

All other items are not applicable.

-23-
<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 28, 1997 By: /s/ Michael J. Tuszka
- --------------------------- ---------------------------------
Date Michael J. Tuszka
Vice President/Chief Accounting
Officer

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

-24-
<PAGE>

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

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

27 Financial Data Schedule Filed herewith electronically

-25-

<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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 9,168,420
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 31,886,507
<CURRENT-LIABILITIES> 0
<BONDS> 62,611,380
0
0
<COMMON> 0
<OTHER-SE> (32,077,942)
<TOTAL-LIABILITY-AND-EQUITY> 31,886,507
<SALES> 0
<TOTAL-REVENUES> 1,744,006
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 574,840
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,395,287
<INCOME-PRETAX> (4,226,121)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,226,121)
<DISCONTINUED> 1,700,168
<EXTRAORDINARY> 5,473,855
<CHANGES> 0
<NET-INCOME> 2,947,902
<EPS-PRIMARY> 47.66
<EPS-DILUTED> 47.66

</TABLE>