<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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)
(Registrant's telephone number,
including area code) (301) 468-9200
---------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- --------------------------------------------- ---------------------
NONE N/A
Securities registered pursuant to Section 12(g) of the Act:
LIMITED PARTNERSHIP UNITS
- -------------------------------------------------------------------------------
(Title of class)
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K (X)
The partnership interests of the Registrant are not traded in any market.
Therefore, the partnership interests had neither a market selling price nor an
average bid or asked price within the 60 days prior to the date of this filing.
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
1996 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
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Page
----
Item 1. Business . . . . . . . . . . . . . . . . . . . . I-1
Item 2. Properties . . . . . . . . . . . . . . . . . . . I-7
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . I-7
Item 4. Submission of Matters to a Vote
of Security Holders . . . . . . . . . . . . . . I-7
PART II
-------
Item 5. Market for the Registrant's Partnership
Interests and Related Partnership Matters . . . II-1
Item 6. Selected Financial Data . . . . . . . . . . . . . II-2
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . II-3
Item 8. Financial Statements and Supplementary Data . . . II-14
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . II-14
PART III
--------
Item 10. Directors and Executive Officers
of the Registrant . . . . . . . . . . . . . . . III-1
Item 11. Executive Compensation . . . . . . . . . . . . . III-2
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . III-3
Item 13. Certain Relationships and Related Transactions . III-4
PART IV
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Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K . . . . . . . . . . . . . . IV-1
Signatures . . . . . . . . . . . . . . . . . . . . . . . . IV-3
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . IV-34
<PAGE>
PART I
------
ITEM 1. BUSINESS
--------
Capital Realty Investors-III Limited Partnership (the Partnership) is a
limited partnership which was formed under the Maryland Revised Uniform Limited
Partnership Act on June 27, 1983. On November 7, 1983, the Partnership
commenced offering 60,000 limited partnership interests through a public
offering which was managed by Merrill Lynch, Pierce, Fenner and Smith,
Incorporated. The Partnership closed the offering in January 1984 when it
became fully subscribed.
The General Partners of the Partnership are C.R.I., Inc. (CRI), which is
the Managing General Partner, and current and former shareholders of CRI.
Services for the Partnership are performed by CRI, as the Partnership has no
employees of its own.
The Partnership was formed to invest in real estate, which is the
Partnership's principal business activity, by acquiring and holding a limited
partnership interest in limited partnerships (Local Partnerships). As of
December 31, 1996, the Partnership had investments in thirty-four Local
Partnerships. Each of these Local Partnerships owns or owned a federal or state
government-assisted or conventionally financed apartment complex, which provides
housing principally to the elderly and/or to individuals and families of low or
moderate income. The original objectives of these investments, not necessarily
in order of importance, were to:
(1) preserve and protect the Partnership's capital;
(2) provide, during the early years of the Partnership's operations,
current tax benefits to the partners in the form of tax losses which
the partners may use to offset income from other sources;
(3) provide capital appreciation through increases in the value of the
Partnership's investments and increased equity through periodic
payments on the indebtedness on the apartment complexes; and
(4) provide cash distributions from sale or refinancing of the
Partnership's investments and, on a limited basis, from rental
operations.
See Part II, Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations, for a discussion of factors affecting the original
investment objectives.
The Local Partnerships in which the Partnership has invested were organized
by private developers who acquired the sites, or options thereon, applied for
applicable mortgage insurance and/or subsidies, and remain as the local general
partners in the Local Partnerships. The Partnership became the principal
limited partner in twenty-eight of these Local Partnerships pursuant to
negotiations with these developers who act as the local general partners.
However, in the event of non-compliance with the Local Partnerships' partnership
agreements, the local general partner may be removed and replaced with another
local general partner or with an affiliate of the Partnership's Managing General
Partner. As a limited partner, the Partnership's legal liability for
obligations of the Local Partnership is limited to its investment. In six Local
Partnerships, the Partnership has invested as a limited partner in intermediary
partnerships which, in turn, have invested in the Local Partnerships. An
affiliate of the Managing General Partner of the Partnership is also a general
partner of the twenty-eight Local Partnerships and the six intermediary
partnerships. In most cases, the local general partners of the Local Partnership
retain responsibility for developing, constructing, maintaining, operating and
managing the project. Additionally, the local general partners and affiliates
of the Managing General Partner may operate other apartment complexes which may
I-1
<PAGE>
PART I
------
ITEM 1. BUSINESS - Continued
--------
be in competition for eligible tenants with the Local Partnerships' apartment
complexes.
Although each of the Local Partnerships in which the Partnership has
invested owns an apartment complex which must compete in the market place for
tenants, interest subsidies and/or rent supplements from governmental agencies
generally make it possible to offer certain of these dwelling units to eligible
tenants at a cost significantly below the market rate for comparable
conventionally financed dwelling units. Based on available data, the General
Partners believe there to be no material risk of market competition in the
operations of the apartment complexes described below which would adversely
impact the Partnership, except in specific circumstances as described in Part
II, Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following is a schedule of the apartment complexes owned by Local
Partnerships in which the Partnership has an investment:
I-2
<PAGE>
SCHEDULE OF PROJECTS OWNED BY LOCAL PARTNERSHIPS
IN WHICH CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
HAS AN INVESTMENT(1)
<TABLE>
<CAPTION>
Units Expiration
Mortgage Authorized for of
Name and Location Payable at Financed and/or Insured Number of Rental Asst. Section 8
of Apartment Complex 12/31/96 (2) and/or Subsidized Under Rental Units Under Sec. 8 HAP Contract
- -------------------- ------------ ----------------------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
Arboretum Village $ 9,051,904 Conventional 308 0 --
Lisle, IL
Audubon Towers 3,619,485 New Jersey Housing and Mortgage 124 123 02/11/00
Audubon, NJ Finance Agency (NJHMFA)
Bartley Manor 830,421 Federal National Mortgage Associ- 70 69 05/31/98 (4)
Superior, WI ation (FNMA)/236
Briar Crest I 605,871 FNMA/236 53 53 06/30/98
Niles, MI
Briar Crest II 640,899 FNMA/236 49 49 06/30/98
Niles, MI
Briar Hills 619,588 FNMA/236 50 33 09/30/98 (4)
South Haven, MI
Cedar Valley Apts. 1,343,298 Section 221(d)(3) of the NHA 186 0 --
Cedar Rapids, IA
College Park 1,370,000 Mid Atlantic National Bank 100 100 05/01/09
Meridian, MS
Congress Plaza 2,371,969 Connecticut Housing Finance Agency 101 100 02/28/99
Bridgeport, CT
Glen Agnes 4,462,520 California Housing Finance Agency 149 149 01/27/98
Fresno, CA (CHFA)
Greeley Manor 1,342,723 FNMA/236 128 119 10/31/97
Greeley, CO
Heritage Estates I 2,843,220 Missouri Housing Development 228 0 --
St. Louis, MO Agency (MHDA)/Section 221(d)(4)
of the NHA
Heritage Estates II 2,264,011 MHDA/Section 221 (d)(4) of the NHA 160 0 --
St. Louis, MO
Highland Manor 2,306,223 Government National Mortgage 111 111 05/21/98 (4)
Birmingham, AL (GNMA)/ Section 221(d)(4) of the
NHA/ Section 8
Indian Hills 542,289 FNMA/236 40 24 09/30/98 (4)
Townhouses
Dowagiac, MI
Lakewood Apts. 832,287 Farmers Home Administration/515 50 50 08/01/99
Eufaula, AL
</TABLE>
I-3
<PAGE>
SCHEDULE OF PROJECTS OWNED BY LOCAL PARTNERSHIPS
IN WHICH CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
HAS AN INVESTMENT(1) - Continued
<TABLE>
<CAPTION>
Units Expiration
Mortgage Authorized for of
Name and Location Payable at Financed and/or Insured Number of Rental Asst. Section 8
of Apartment Complex 12/31/96 (2) and/or Subsidized Under Rental Units Under Sec. 8 HAP Contract
- -------------------- ------------ ----------------------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
Meadow Lanes Apts. $ 1,891,673 Michigan State Housing Development 118 24 10/01/97
Holland, MI Authority
Monterey/Hillcrest 13,921,899 GNMA 221(d)(4) 300 60 12/13/03
Waukesha, WI
O'Farrell Towers 8,247,252 CHFA 101 101 02/20/03
San Francisco, CA
Rolling Green at 6,204,505 Massachusetts Housing Finance 304 0 --
Milford Agency/236
Milford, MA
Southmoor Townhouse 480,085 Intrawest Mortgage Company Federal 40 8 08/31/98 (4)
Apts. National Mortgage Assn./236
Greeley, CO
Tyee Apts. 1,422,602 FNMA/236 100 56 07/31/98
Anchorage, AK
Victorian Towers 5,155,406 NJHMFA/236 205 0 --
Cape May, NJ
Villa Mirage I 2,205,118 CHFA 50 50 08/01/04
Rancho Mirage, CA
Villa Mirage II 2,186,883 CHFA 48 48 10/01/05
Rancho Mirage, CA
Village Green 363,740 FNMA/236 36 36 06/30/98 (4)
Reedsburg, WI
Village Square 490,542 FNMA/236 48 48 06/30/98 (4)
Barabou, WI
Village Squire I & II 9,062,832 Conventional 377 0 --
Canton, MI
Village Squire III 5,847,244 Conventional 224 0 --
Canton, MI
Walden Apts. 4,188,403 Conventional 396 0 --
Schaumburg, IL
Walsh Park 5,267,379 IHDA 134 134 10/31/13
Chicago, IL
Winchester Gardens Apts. 3,281,685 FNMA/236 206 202 08/31/98 (4)
Columbus, OH
</TABLE>
I-4
<PAGE>
SCHEDULE OF PROJECTS OWNED BY LOCAL PARTNERSHIPS
IN WHICH CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
HAS AN INVESTMENT(1) - Continued
<TABLE>
<CAPTION>
Units Expiration
Mortgage Authorized for of
Name and Location Payable at Financed and/or Insured Number of Rental Asst. Section 8
of Apartment Complex 12/31/96 (2) and/or Subsidized Under Rental Units Under Sec. 8 HAP Contract
- -------------------- ------------ ----------------------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
Windham Village $ 2,512,327 CHFA 50 44 10/31/15
Santa Rose, CA
Woodside Village 2,678,101 FNMA/236 180 114 09/30/98
Anchorage, AK
------------ ------ ------
Totals(3) 34 $110,454,384 4,824 1,905
============ ====== ======
</TABLE>
I-5
<PAGE>
SCHEDULE OF PROJECTS OWNED BY LOCAL PARTNERSHIPS
IN WHICH CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
HAS AN INVESTMENT(1) - Continued
<TABLE>
<CAPTION>
Average Effective Annual
Units Occupied As Rental Per Unit
Percentage of Total Units for the Years Ended
As of December 31, December 31,
Name and Location --------------------------------- -----------------------------------------------------
of Apartment Complex 1996 1995 1994 1993 1992 1996 1995 1994 1993 1992
- -------------------- ---- ---- ---- ---- ---- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Arboretum Village 92% 94% 96% 97% 87% $ 8,677 $ 8,363 $ 7,976 $ 7,593 $ 7,333
Lisle, IL
Audubon Towers 100% 100% 100% 100% 100% 9,164 9,129 9,563 8,614 8,292
Audubon, NJ
Bartley Manor 98% 90% 97% 91% 100% 5,116 5,024 5,263 4,549 4,712
Superior, WI
Briar Crest I 98% 98% 100% 98% 100% 4,844 4,611 4,696 4,572 4,423
Niles, MI
Briar Crest II 100% 100% 100% 100% 100% 4,950 4,579 4,689 4,615 4,614
Niles, MI
Briar Hills 94% 96% 98% 96% 100% 4,446 4,105 4,164 4,123 4,060
South Haven, MI
Cedar Valley Apts. 97% 100% 99% 99% 99% 3,491 3,474 3,246 3,115 2,986
Cedar Rapids, IA
College Park 100% 100% 100% 98% 99% 4,927 4,856 4,701 4,735 4,503
Meridian, MS
Congress Plaza 100% 100% 100% 100% 100% 10,524 10,507 10,196 9,895 9,411
Bridgeport, CT
Glen Agnes 94% 94% 97% 97% 99% 7,654 7,742 7,793 7,776 7,784
Fresno, CA
Greeley Manor 97% 97% 98% 98% 98% 3,087 2,928 2,819 2,816 2,832
Greeley, CO
Heritage Estates I 98% 98% 97% 95% 87% 4,722 4,629 4,494 4,267 4,186
St. Louis, MO
Heritage Estates II 94% 98% 95% 91% 83% 4,663 4,605 4,373 3,983 3,839
St. Louis, MO
Highland Manor 100% 99% 98% 98% 100% 9,011 8,739 8,621 9,173 8,269
Birmingham, AL
Indian Hills 95% 98% 100% 100% 100% 4,847 4,653 4,706 4,673 4,497
Townhouses
Dowagiac, MI
Lakewood Apts. 100% 100% 100% 100% 100% 4,264 4,200 4,103 4,951 3,904
Eufaula, AL
</TABLE>
I-6
<PAGE>
SCHEDULE OF PROJECTS OWNED BY LOCAL PARTNERSHIPS
IN WHICH CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
HAS AN INVESTMENT(1) - Continued
<TABLE>
<CAPTION>
Average Effective Annual
Units Occupied As Rental Per Unit
Percentage of Total Units for the Years Ended
As of December 31, December 31,
Name and Location --------------------------------- -----------------------------------------------------
of Apartment Complex 1996 1995 1994 1993 1992 1996 1995 1994 1993 1992
- -------------------- ---- ---- ---- ---- ---- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Meadow Lanes Apts. 96% 98% 97% 97% 98% $ 5,985 $ 5,694 $ 5,369 $ 5,110 $ 4,876
Holland, MI
Monterey/Hillcrest 90% 94% 94% 95% 94% 8,742 8,413 8,215 8,098 7,921
Waukesha, WI
O'Farrell Towers 100% 99% 100% 100% 100% 14,316 14,391 14,134 13,906 13,574
San Francisco, CA
Rolling Green at 97% 98% 99% 99% 99% 7,663 7,457 7,447 7,445 6,273
Milford
Milford, MA
Southmoor Townhouse 100% 98% 100% 100% 98% 4,547 4,464 4,415 4,147 4,111
Apts.
Greeley, CO
Tyee Apts. 94% 98% 99% 98% 100% 8,565 8,311 7,540 6,721 6,427
Anchorage, AK
Victorian Towers 100% 100% 100% 99% 100% 4,783 4,588 4,504 4,325 4,126
Cape May, NJ
Villa Mirage I 98% 100% 98% 92% 100% 9,660 9,560 9,686 9,339 9,113
Rancho Mirage, CA
Villa Mirage II 98% 100% 100% 98% 98% 9,702 9,673 9,580 9,349 9,198
Rancho Mirage, CA
Village Green 98% 94% 97% 100% 94% 3,744 3,761 3,796 3,638 3,674
Reedsburg, WI
Village Square 95% 94% 96% 92% 94% 4,023 3,988 4,083 3,944 3,909
Barabou, WI
Village Squire I 91% 98% 96% 85% 87% 5,898 5,682 5,247 4,766 4,540
& II
Canton, MI
Village Squire III 94% 96% 96% 77% 85% 5,813 5,567 5,077 4,535 4,384
Canton, MI
Walden Apts. 93% 95% 94% 95% 97% 7,737 7,460 7,068 6,831 6,892
Schaumburg, IL
Walsh Park 99% 100% 100% 100% 100% 11,083 10,777 10,584 10,255 10,090
Chicago, IL
</TABLE>
I-7
<PAGE>
SCHEDULE OF PROJECTS OWNED BY LOCAL PARTNERSHIPS
IN WHICH CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
HAS AN INVESTMENT(1) - Continued
<TABLE>
<CAPTION>
Average Effective Annual
Units Occupied As Rental Per Unit
Percentage of Total Units for the Years Ended
As of December 31, December 31,
Name and Location --------------------------------- -----------------------------------------------------
of Apartment Complex 1996 1995 1994 1993 1992 1996 1995 1994 1993 1992
- -------------------- ---- ---- ---- ---- ---- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Winchester Gardens 100% 98% 100% 100% 99% $ 4,447 $ 4,405 $ 4,129 $ 4,094 $ 3,959
Apts.
Columbus, OH
Windham Village 100% 100% 98% 100% 100% 10,439 10,396 10,038 10,157 9,656
Santa Rose, CA
Woodside Village 84% 90% 93% 95% 89% 8,927 9,145 9,027 7,886 7,652
Anchorage, AK
- ---------------- ---- ---- ---- ---- ---- -------- -------- -------- -------- --------
Totals(3) 34 97% 97% 98% 96% 97% $ 6,778 $ 6,643 $ 6,510 $ 6,294 $ 6,059
==== ==== ==== ==== ==== ======== ======== ======== ======== ========
</TABLE>
(1) All properties are multifamily housing complexes. No single
tenant/resident rents 10% or more of the rentable square footage.
Residential leases are typically one year or less in length, with varying
expiration dates, and substantially all rentable space is for residential
purposes.
(2) The amounts provided are the balances of first mortgage loans payable of
the Local Partnerships as of December 31, 1996.
(3) The totals for the percentage of units occupied and the average effective
annual rental per unit are based on a simple average.
(4) The Section 8 contract expiration date reflects a one year extension from
the original expiration date, in accordance with Congressional legislation.
For additional information regarding the real estate of Local Partnerships
in which the Partnership has invested, see Part IV, Schedule III - "Real Estate
and Accumulated Depreciation of Local Partnerships in which Capital Realty
Investors-III Limited Partnership has Invested."
On February 2, 1996 Park Heights Towers Limited Partnership sold Park
Heights Towers to a non-profit entity. See Part II, Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
notes to the consolidated financial statements for additional information
pertaining to the sale.
On January 16, 1997, the purchase money noteholders foreclosed on the
Partnership's interest in Cedar Valley Apartments Limited (Cedar Valley) as a
result of the Partnership's default on the purchase money notes relating to the
Local Partnership which came due on May 1, 1996. See Part II, Item 7,
Management's Discussion and Analysis of Financial Statements for additional
information pertaining to the foreclosure.
I-8
<PAGE>
PART I
------
ITEM 1. BUSINESS - Continued
--------
On February 17, 1997, the local managing general partner of New Fifth
Lakewood Associates Limited Partnership (Walden Apartments) entered into an
agreement to sell the property to an unaffiliated entity. The potential buyer
has made a deposit of $200,000 and has commenced its due diligence review.
There is no assurance that a sale of Walden Apartments will occur as the
potential buyer has the option to cancel the agreement and receive its deposit
on or before April 18, 1997, based on the results of its due diligence review.
See Part II, Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations and the notes to the consolidated financial statements
for additional information pertaining to the potential sale.
ITEM 2. PROPERTIES
----------
Through its ownership of limited partnership interests in Local
Partnerships, Capital Realty Investors-III Limited Partnership indirectly holds
an interest in the underlying real estate. See Part I, Item 1 and Schedule III
in Part IV, Item 14 for information pertaining to these properties.
ITEM 3. LEGAL PROCEEDINGS
-----------------
There are no material legal proceedings to which the Partnership is a
party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
I-9
<PAGE>
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP INTERESTS AND
-----------------------------------------------------
RELATED PARTNERSHIP MATTERS
---------------------------
(a) On August 29, 1996, Equity Resource Bay Fund (Bay Fund), a
Massachusetts Limited Partnership which is affiliated with Equity
Resources Group, the general partner of various partnerships that are
additional limited partners in the Partnership, initiated a tender
offer to purchase 1,400 additional units in the Partnership at a price
of $10 per Additional Limited Partner unit. Bay Fund, which is
unaffiliated with CRI, Inc., stated that it made the offer for the
express purpose of holding the limited partnership units for
investment purposes and not with a view to resale. The purchase offer
was determined solely at the discretion of Bay Fund and did not
necessarily represent the fair market value of each Additional Limited
Partner unit. The Bay Fund offer expired on September 29, 1996, and
as of March 10, 1997, Bay Fund held approximately 3.1% of the
Additional Limited Partner units of the Partnership. Other than the
Bay Fund tender offer, or any others of the same type, it is not
anticipated that there will be any formal market for resale of
interests in the Partnership. As a result, investors may be unable to
sell or otherwise dispose of their interests in the Partnership.
(b) As of March 10, 1997 there were approximately 5,500 registered holders
of limited partner interests in the Partnership.
(c) On April 30, 1996, the Partnership distributed $579,000 (or $9.65 per
Additional Limited Partner) to the Additional Limited Partners. The
distribution was a result of the sale of the property relating to the
Partnership's investment in the Park Heights Towers Limited
Partnership. No distributions were declared or paid by the
Partnership in 1995. The Partnership received distributions of
$10,047,625 and $2,142,665 from the Local Partnerships during 1996 and
1995, respectively. Some of the Local Partnerships operate under
restrictions imposed by the pertinent government agencies that limit
the cash return available to the Partnership.
II-1
<PAGE>
PART II
-------
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
<TABLE>
<CAPTION>
For the years ended December 31,
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Share of income from
partnerships $ 5,890,474 $ 1,761,512 $ 3,036,990 $ 759,161 $ 111,479
Interest and other income 187,470 166,943 201,695 194,736 155,280
Expenses (8,423,056) (10,077,802) (9,081,713) (9,419,795) (8,119,603)
Gain on disposition of investment
in partnership 2,081,463 -- -- -- 1,833,981
Extraordinary gain from
extinguishment of debt 3,015,210 -- 3,052,664 -- --
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 2,751,561 $ (8,149,347) $ (2,790,364) $ (8,465,898) $ (6,018,863)
============ ============ ============ ============ ============
Income (loss) allocated to
Additional Limited Partners (97%) $ 2,669,014 $ (7,904,867) $ (2,706,654) $ (8,211,921) $ (5,838,298)
============ ============ ============ ============ ============
Income (loss) per unit of
Additional Limited Partner
Interest based on 60,000 units
outstanding $ 44.48 $ (131.75) $ (45.11) $ (136.87) $ (97.30)
============ ============ ============ ============ ============
Cash distribution per unit
of Additional Limited
Partner Interest based
on 60,000 units outstanding $ 579,000 $ -- $ -- $ -- $ --
============ ============ ============ ============ ============
Total assets $ 29,526,962 $ 33,961,256 $ 34,138,522 $ 38,256,363 $ 39,038,858
============ ============ ============ ============ ============
Total remaining amounts due on
investments, including accrued
interest on purchase money
notes and unpaid purchase price $ 71,610,833 $ 81,724,496 $ 78,337,884 $ 83,631,738 $ 78,850,589
============ ============ ============ ============ ============
</TABLE>
II-2
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
General
-------
The Partnership has invested, through Local Partnerships, primarily in
federal or state government-assisted apartment complexes intended to provide
housing to low and moderate income tenants. In conjunction with such government
assistance, which includes federal and/or state financing at below-market
interest rates and rental subsidies, the Local Partnerships agreed to regulatory
limitations on (i) cash distributions, (ii) use of the properties and (iii) sale
or refinancing. These limitations typically were designed to remain in place
for the life of the mortgage.
The original investment objectives of the Partnership primarily were to
deliver tax benefits, as well as cash proceeds upon disposition of the
properties, through the Partnership's investment in local limited partnerships.
Only limited annual cash distributions from property operations were projected
because of the regulatory restrictions on cash distributions from the
properties.
The original investment objectives of the Partnership have been affected by
the Tax Reform Act of 1986, which virtually eliminated many of the incentives
for the new construction or the sale of existing low income housing properties
by limiting the use of passive loss deductions. Therefore, the Managing General
Partner continues to concentrate on transferring the source of investment yield
from tax benefits to cash flow wherever possible and potentially enhancing the
ability of the Partnership to share in the appreciated value of the properties.
The acquisition of interests in certain Local Partnerships resulted in
purchase money note obligations of the Partnership. The purchase money notes
are nonrecourse obligations of the Partnership which typically mature fifteen
years from the dates of acquisition of the interests in particular Local
Partnerships.
The Managing General Partner has been working to develop a strategy to sell
certain properties by utilizing opportunities presented by federal affordable
housing legislation, favorable financing terms and preservation incentives
available to non-profit purchasers. The Managing General Partner intends to
utilize part or all of the Partnership's net proceeds (after a 50% distribution
to limited partners) received from the sales of properties to fund reserves for
paying at maturity, prepaying or purchasing prior to maturity, at a discount
where possible, currently outstanding purchase money notes. The Managing
General Partner believes that this represents an opportunity to reduce the
Partnership's long-term obligations.
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. The Low Income Housing Preservation and
Resident Homeownership Act of 1990 (LIHPRHA), which provided property owners
with restricted opportunities to sell low income housing, ended effective
September 30, 1996. However, HUD received approximately $175 million to fund
sales of qualifying properties under the LIHPRHA program during the federal
government's fiscal year 1997, which began October 1, 1996. Continued funding
of the LIHPRHA program after fiscal year 1997 is uncertain. There is no
assurance that a sale of any properties that previously qualified under the
LIHPRHA program will occur.
II-3
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
Some of the rental properties owned by the Local Partnerships are financed
by state housing agencies. The Managing General Partner has been working to
develop strategies to sell or refinance certain properties pursuant to programs
developed by these agencies or other potential buyers. These programs may
include opportunities to sell the property to a qualifying purchaser who would
agree to maintain the property as low to moderate income housing in perpetuity,
or to refinance the property, or to obtain supplemental financing. The Managing
General Partner continues to monitor certain state housing agency programs
and/or programs provided by certain lenders, to ascertain whether the properties
would qualify within the parameters of a given program and whether these
programs would provide an appropriate economic benefit to the limited partners
of the Partnership.
Some of the rental properties owned by the Local Partnerships are dependent
on the receipt of project-based Section 8 Rental Housing Assistance Payments
(HAP) provided by the U.S. Department of Housing and Urban Development (HUD)
pursuant to HAP contracts. In 1995 and 1996, HUD released its Reinvention
Blueprint and a revision to its Reinvention Blueprint which contained proposals
that have come to be known as "Mark-to-Market". Congress, HUD and the Clinton
Administration continue to struggle with the Mark-to-Market initiative. This
initiative was intended to deal with HUD's increasing burden of funding HAP
contracts. Under the initiative, HUD would eliminate the project-based subsidy
and provide the residents with "sticky vouchers" which would allow residents to
move to other developments should they so choose. However, with the elimination
of the HAP contract, there is no assurance that rental properties would be able
to maintain the rental income and occupancy levels necessary to pay operating
costs and debt service. The initiative will impact those properties that have
HAP contracts with shorter terms than that of the underlying property mortgage.
For instance, some properties may have a 20-year HAP contract while the
underlying mortgage has a 40-year term. In the interim, Congress has authorized
one-year extensions for properties with HAP contracts expiring during the
government's fiscal year 1997, which began October 1, 1996. In light of recent
political scrutiny of appropriations for HUD programs, continued funding of
annual renewals for Section 8 HAP contracts expiring after fiscal year 1997 is
uncertain.
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
II-4
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
provide additional funds to allow the property to convert to market rate units.
Where opportunities exist, the Managing General Partner will continue to work
with the Local Partnerships to develop a strategy that makes economic sense for
all parties involved.
In 1990, CRI, as managing general partner of the Partnership and various
other entities, subcontracted certain property-level asset management functions
for certain properties to Capital Management Strategies, Inc. (CMS). Among
these properties were properties owned by some of the Local Partnerships in
which the Partnership invested. CMS was formed by Martin C. Schwartzberg, a
nominal general partner of the Partnership and a former stockholder of CRI, when
he retired from CRI and its related businesses as of January 1, 1990. Mr.
Schwartzberg agreed not to act as a general partner with respect to any of the
CRI-sponsored partnerships, including this Partnership, and has not done so
since that time. In late 1995, a dispute arose between CRI and CMS over the
funding level of the 1996 contract for CMS. On November 9, 1995, CRI filed a
complaint against CMS to determine the proper amount of fees to be paid in 1996
under the asset management agreement. CMS answered on January 10, 1996, but
asserted no counterclaims.
Thereafter, Mr. Schwartzberg launched a hostile consent solicitation to be
designated as managing general partner of approximately 125 private partnerships
sponsored by CRI. On January 18, 1996, Mr. Schwartzberg and CMS filed a
complaint in the Circuit Court of Montgomery County, Maryland (the Circuit
Court), against CRI and Messrs. Dockser and Willoughby (who are general partners
of the Partnership) alleging, among other things, that CRI and Messrs. Dockser
and Willoughby breached the asset management agreement pursuant to which Mr.
Schwartzberg's company, CMS, agreed to perform limited functions related to
property-level issues for a portion of CRI's subsidized housing portfolio
(including some of the properties in which the Partnership invested), by
reducing the proposed budget for 1996. The Partnership was not named as a
defendant in this action. Messrs. Dockser and Willoughby entered an answer
denying all of Mr. Schwartzberg's claims. On February 6, 1996, CRI terminated
the CMS contract for cause. (CRI subsequently retained an independent asset
management company to perform functions previously performed by CMS.) Mr.
Schwartzberg and CMS responded to the contract termination by filing a motion
for injunctive relief in the Circuit Court, asking the court to enjoin CRI from
terminating the contract. In a ruling issued on February 12, 1996, the Circuit
Court, among other things, refused to grant the injunction requested by CMS. On
February 12, 1996, the Circuit Court also issued a memorandum opinion and order
enjoining CMS and Mr. Schwartzberg from disclosing information made confidential
under the asset management agreement.
Following subsequent litigation, none of which involved the Partnership, on
June 12, 1996, Mr. Schwartzberg, CRI and others entered an agreement (which
contemplates the execution of a subsequent definitive agreement) to resolve the
disputes between CRI and CMS. The Partnership was not a signatory to the
agreement. As part of the resolution, Mr. Schwartzberg withdrew any derogatory
statements he made about CRI and its principals. Upon execution of the
definitive agreement, Mr. Schwartzberg shall withdraw as a General Partner of
this Partnership and his interest will become that of a Special Limited Partner.
As of March 10, 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.
II-5
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
Financial Condition/Liquidity
-----------------------------
As of March 10, 1997 the Partnership had approximately 5,500 investors who
subscribed to a total of 60,000 units of limited partnership interests in the
original amount of $60,000,000. As of December 31, 1996, the Partnership had
investments in thirty-four Local Partnerships. The Partnership's liquidity,
with unrestricted cash resources of $3,942,254 as of December 31, 1996, along
with anticipated future cash distributions from the Local Partnerships, is
expected to meet its current and anticipated operating cash needs. The
Partnership determined that the carrying amount of its cash and cash equivalents
approximates fair value. As of March 10, 1997, there are no material
commitments for capital expenditures.
During 1996, 1995 and 1994, the Partnership received cash distributions of
$10,047,625, $2,142,665 and $4,716,303, respectively, from the Local
Partnerships.
The Partnership's obligations with respect to its investments in Local
Partnerships, in the form of purchase money notes having a principal balance of
$27,827,896 (exclusive of unamortized discount on purchase money notes of
$8,394,548) plus accrued interest of $43,629,417 as of December 31, 1996, are
payable in full upon the earliest of: (i) sale or refinancing of the respective
Local Partnership's rental property; (ii) payment in full of the respective
Local Partnership's permanent loan; or (iii) maturity. Purchase money notes in
an aggregate principal amount of $1,726,070 matured on January 1, 1996, but have
not been paid, as discussed below. Purchase money notes in an aggregate
principal amount of $2,100,000 matured on May 1, 1996, as discussed below.
Purchase money notes having a principal balance of $3,065,000 mature during
1997, as discussed below. The remaining purchase money notes mature from 1998
to 2015. The purchase money notes are generally secured by the Partnership's
interest in the respective Local Partnership. There is no assurance that the
underlying properties will have sufficient appreciation and equity to enable the
Partnership to pay the purchase money notes' principal and accrued interest when
due. If a purchase money note is not paid in accordance with its terms, the
Partnership will either have to renegotiate the terms of repayment or risk
losing its partnership interest in the Local Partnership. The Managing General
Partner is continuing to investigate possible alternatives to reduce the
Partnership's long-term debt obligations. These alternatives include, among
others, retaining the cash available for distribution to meet the purchase money
note requirements, buying out certain purchase money notes at a discounted
price, extending the due dates of certain purchase money notes, or refinancing
the respective properties' underlying debt and using the Partnership's share of
the proceeds to pay off or buy down certain purchase money note obligations.
II-6
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
As of 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, plus accrued interest, relating to the following
properties matured in 1996:
<TABLE>
<CAPTION>
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 (A)
Park Heights Towers 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)
</TABLE>
(A) 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 March 10, 1997
-------- --------- ---------------- ----------------
<S> <C> <C> <C>
Briar Crest I $ 525,050 $ 746,672 $ 828,564
Briar Crest II 415,920 574,963 640,414
Briar Hills 458,100 683,564 755,379
Indian Hills 327,000 477,973 530,867
---------- ---------- ----------
$1,726,070 $2,483,172 $2,755,224
========== ========== ==========
</TABLE>
The Managing General Partner and the purchase money noteholders have
reached an agreement in principle for a five year extension of the purchase
money notes relating to Briar Crest I, Briar Crest II and Briar Hills, and
as of March 10, 1997, the parties are drafting extension documents to
reflect the agreement. There is no assurance that a final agreement will
be reached. The Managing General Partner has also proposed
II-7
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
a five year extension of the purchase money notes relating to Indian Hills.
No agreement has been reached, and there is no assurance that an agreement
will be reached.
On June 15, 1994, the local managing general partner of Briar Crest I,
Briar Crest II, Briar Hills and Indian Hills, who is also one of the
purchase money note holders, filed a notice of intent to participate under
the LIHPRHA program in hopes of refinancing the existing first mortgages of
each property. 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. There is no assurance that a
sale of these properties will occur due to the federal government's limited
funding of appropriations to the LIHPRHA program, as discussed above. Due
to the uncertainty of a potential sale or satisfactory resolution with the
purchase money noteholders, there is no assurance that the Partnership will
be able to retain its interests in the Local Partnerships.
The uncertainty about the continued ownership of the Partnership's interest
in the Briar Crest I, Briar Crest II, Briar Hills and Indian Hills does not
impact the Partnership's financial condition because the related purchase
money notes are nonrecourse and secured solely by the Partnership's
interest in the respective Local Partnerships. Should the investment in
any or all of the above listed Local Partnerships, excluding Indian Hills,
not produce sufficient value to satisfy the related purchase money notes,
the Partnership's exposure to loss is limited since the amount of the
nonrecourse indebtedness exceeds the carrying amount of the investment in
and advances to the Local Partnerships. Thus, even a complete loss of
these investments would not have a material impact on the operations of the
Partnership. However, should the Partnership be unable to retain its
interest in these Local Partnerships, the investments in Local Partnerships
would be reduced by the Partnership's basis in these Local Partnerships,
which as of December 31, 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
December 31, 1996 was approximately $800,000.
(B) On January 5, 1994 the local general partners of Park Heights Towers
Limited Partnership (Park Heights) filed a notice of intent to participate
under the LIHPRHA program. On February 2, 1996, the local general partners
of Park Heights sold the property to a non-profit entity. The sale of the
property generated net proceeds to the Partnership of approximately $1.27
million. The proceeds were net of $2.135 million used to retire, at a
discount, the Partnership's purchase money note obligation with respect to
the property. The sale provided proceeds to the Partnership in excess of
its investment in the Local Partnership, and resulted in a net financial
statement gain in 1996 of $5,096,673, of which $3,015,210 resulted from the
retirement of the purchase money note obligation with respect to the
property. The federal tax gain was $7,131,652. 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
intends to retain all of the Partnership's remaining undistributed net sale
proceeds for the possible repayment, prepayment or purchase of the
outstanding purchase money notes relating to other Local Partnerships. The
General Partner and/or its affiliates earned net fees of $117,028 for its
II-8
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
services relating to the sale of the property. As of March 10, 1997,
$42,500 of these fees have not been paid.
(C) On March 1, 1996, the local general partner of Village Squire I & II and
Village Squire III refinanced the loans secured by first mortgages on the
respective properties. On March 1, 1996, proceeds provided to the
Partnership from the refinancings, along with approximately $560,000 of
existing Partnership cash resources, were used to pay off the related
purchase money note obligations. The refinancing proceeds received by the
Partnership exceeded the Partnership's investment in the respective Local
Partnerships by approximately $4.1 million, and is included in share of
income from partnerships in the consolidated statements of operations.
(D) The Partnership defaulted on its purchase money 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 are
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 will result in a
net financial statement gain of $5,473,855 during 1997. The federal tax
gain is estimated to be approximately $5.8 million.
Purchase money notes plus accrued interest relating to the following
properties mature in 1997:
II-9
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
<TABLE>
<CAPTION>
Property Principal Amount Maturity Date
-------- ---------------- -------------
<S> <C> <C>
Bartley Manor $ 700,000 July 1, 1997
Village Green 275,000 July 1, 1997
Village Square 390,000 July 1, 1997
Winchester Gardens 1,700,000 December 31, 1997
-----------
$ 3,065,000
===========
</TABLE>
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. The Managing General Partner anticipates
negotiating with these purchase money note holders, as well as the purchase
money note holders for 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, there is no assurance that the Partnership will be able to
retain its interest in the Local Partnerships. The uncertainty about the
continued ownership of the Partnership's interest in Bartley Manor, Village
Green, Village Square and Winchester Gardens does not impact the Partnership's
financial condition because the related purchase money notes are nonrecourse and
secured solely by the Partnership's interest in the respective Local
Partnerships. Should the investment in any or all of the above listed Local
Partnerships not produce sufficient value to satisfy the related purchase money
notes, the Partnership's exposure to loss is limited since the amount of the
nonrecourse indebtedness exceeds the carrying amount of the investment in and
advances to the Local Partnerships. Thus, even a complete loss of these
investments would not have a material impact on the operations of the
Partnership. However, should the Partnership be unable to retain its interest
in these Local Partnerships, the investments in Local Partnerships would be
reduced by the Partnership's basis in these Local Partnerships, which as of
December 31, 1996, was approximately 8% of the total investment in Local
Partnerships.
The Partnership has determined that it is not practicable to estimate the
fair value of the purchase money notes, either individually or in the aggregate,
due to: (1) the lack of an active market for this type of financial instrument,
(2) the variable nature of purchase money note interest payments as a result of
fluctuating cash flow distributions received from the related Local
Partnerships, and (3) the excessive costs associated with an independent
appraisal of the purchase money notes.
II-10
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
The Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient cash is available for operating requirements.
In 1996 and 1995, the receipt of distributions from Local Partnerships was
adequate to support operating cash requirements.
Results of Operations
---------------------
The Partnership's net income increased in 1996 from 1995 primarily due to
an increase in share of income from partnerships principally due to the receipt
of refinancing proceeds from Village Squire I & II and Village Squire III
mortgages which were in excess of the Partnership's investments in the
respective Local Partnerships. Contributing to the increase in the
Partnership's net income was the extraordinary gain on the extinguishment of
debt related to Park Heights as well as the gain on disposition of the
Partnership's investment in Park Heights, as discussed above. Also contributing
to the increase in the Partnership's net income was a decrease in interest
expense resulting from the retirement of the Park Heights, Village Squire I & II
and Village Squire III purchase money notes during 1996. The increase in the
Partnership's net income was partially offset by an increase in amortization
expense due to the write-down of acquisition fees and property purchase costs
during 1996 relating to Cedar Valley in order to record the investment at its
net realizable value.
The Partnership's net loss increased in 1995 from 1994 primarily due to the
extraordinary gain on early extinguishment of the Arboretum Village purchase
money note in 1994, as discussed below. Contributing to the increase in net
loss was a decrease in income from Local Partnerships, resulting principally
from the receipt in 1994 of a distribution in excess of the Partnership's basis,
as a result of the refinancing of the Arboretum Village first mortgage, as
discussed below. Also contributing to the increase in net loss was an increase
in interest expense as a result of the amortization of imputed interest, as well
as a decrease in interest income primarily due to the receipt in 1994 of the
outstanding receivable and accrued interest from Arbor Club.
The purchase money notes originated from 1983 through 1985. When they were
issued, the market interest rate was approximately 15%, while the stated
interest rates ranged from 9% to 12%. The notes were discounted as required by
Generally Accepted Accounting Principles, and a simple/compound method was used
at the stated interest rate for tax purposes, and the compound method at the
market interest rate was used for book purposes. As the book interest is being
compounded, the interest expense for book purposes will eventually surpass the
interest expense for tax purposes, thereby reducing the discount and increasing
the interest expense. In fiscal year 1996, all properties, except O'Farrell,
with purchase money notes had book interest which exceeded the tax interest.
This increase in interest expense and the resulting reduction in the discount is
expected to increase in future years.
For financial reporting purposes, the Partnership, as a limited partner in
the Local Partnerships, does not record losses from the Local Partnerships in
excess of its investment to the extent that the Partnership has no further
obligation to advance funds or provide financing to the Local Partnerships. As
a result, the Partnership's share of income from Local Partnerships for the
years ended December 31, 1996, 1995 and 1994 did not include losses of $655,126,
$822,642 and $912,870, respectively. The Partnership's net loss recognized from
II-11
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
the Local Partnerships is generally expected to decrease in subsequent years as
the Partnership's investments in the Local Partnerships are reduced to zero.
Accordingly, excludable losses are generally expected to increase. Distributions
of $4,891,762, $287,289 and $2,253,433 received from nine, six and seven Local
Partnerships during 1996, 1995 and 1994, respectively, were offset against the
respective years' recorded losses because those amounts were in excess of the
Partnership's investment.
The Rolling Green at Milford property received a mortgage loan increase
from its lender in June 1996 to pay for replacing the roof, which suffered
extensive damage caused by microorganisms. The roof work was completed during
1996, and the property, which remained open during the roof work, was
approximately 97.1% leased as of March 10, 1997. The Managing General Partner
is negotiating a fifteen year extension on the Partnership's related purchase
money notes. The Partnership's purchase money notes, which aggregate a
principal amount of $2,250,000, are due to mature on August 31, 1998. There is
no assurance that the noteholders will agree to a fifteen-year extension on the
purchase money notes.
In September 1995, HUD sold the mortgage of New Fifth Lakewood Associates
Limited Partnership (Walden Apartments) to a new mortgagee. As a result, Walden
Apartments is no longer subject to HUD regulatory requirements. On September
13, 1996, the local managing general partner of Walden Apartments received an
offer from a third party to purchase the property. The local managing general
partner rejected this offer due to the fact that it did not meet the criteria as
set forth 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. The potential buyer has made a deposit of $200,000
and has commenced its due diligence review. There is no assurance that a sale
of Walden Apartments will occur as the potential buyer has the option to cancel
the agreement and receive its deposit on or before April 18, 1997, based on the
results of its due diligence review.
The Partnership purchased the Walden Apartments purchase money note for
$2,450,000 (the original principal was $4,000,000) at a public auction on
December 11, 1989, and the $4,000,000 purchase money note was retired. The
purchase price was financed through the payment of $350,000 cash from the
Partnership and a $2,100,000 loan from Bank One (formerly First Illinois Bank of
Evanston). The new note had a maturity date of July 1, 1994 and bore interest at
7.5%. The Partnership paid-off the new note in full on June 30, 1994. Interest
expense on the note payable was $80,063 for the year ended December 31, 1994.
The Partnership received cash distributions of $63,348 from Walden Apartments
during 1996. No cash distributions were received from Walden Apartments during
1995 or 1994.
On May 5, 1994, the local general partner of Arboretum Village Limited
Partnership (Arboretum Village) refinanced the property's first mortgage. The
refinancing provided proceeds of $3,387,382 to the Partnership with which the
Partnership acquired, at a discount, the existing purchase money note in the
original principal amount of $4,106,944, which resulted in an extraordinary gain
from extinguishment of debt of $3,052,664. In addition, proceeds to the
Partnership relating to the refinancing of $1,987,969 were in excess of the
Partnership's investment and were included in share of income from Local
Partnerships. In connection with the refinancing, the Partnership executed a
new purchase money note to the local general partner in the principal amount of
II-12
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
$1,050,000, which was a non-cash transaction. The new purchase money note bears
simple interest at the same rate (9.73%) and matures at the same time (May 2001)
as the new first mortgage. In August 1994, the Partnership made a $300,000
payment towards the principal balance of the purchase money note. Accrued
interest on the purchase money note was $72,772 and $71,636 as of December 31,
1996 and 1995, respectively.
The local general partners of the following properties have each filed a
notice of intent to participate under the LIHPRHA program:
<TABLE>
<CAPTION>
Property Date of Filing
-------- -----------------
<C> <C>
Rolling Green at Milford April 23, 1993 (1)
Woodside Village March 31, 1994 (1)
Briar Crest I June 15, 1994
Briar Crest II June 15, 1994
Briar Hills June 15, 1994
Indian Hills June 15, 1994 (1)
Winchester Gardens July 18, 1994
Tyee Apartments November 28, 1994 (1)
Bartley Manor December 5, 1994 (1)
Village Green December 5, 1994 (1)
Village Square December 5, 1994 (1)
Southmoor January 31, 1995
Greeley Manor January 31, 1995 (1)
</TABLE>
(1) The plan of actions for these properties were not approved by HUD,
therefore, these properties are no longer eligible to participate in what
remains of the LIHPRHA program.
Incentives available under LIHPRHA are discussed above in the General
section. As discussed above, there is no assurance that a sale or supplemental
financing of these properties will occur due to the federal government's limited
funding or appropriations to the LIHPRHA program. Of the properties listed
above, Southmoor, Winchester Gardens, Briarcrest I, Briarcrest II and Briar
Hills are ranked on the master funding list, which is subject to future
government appropriations.
II-13
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
Inflation
---------
Inflation allows for increases in rental rates, usually offsetting any
higher operating and replacement costs. Furthermore, inflation generally does
not impact the fixed rate long-term financing under which real property
investments were purchased. Future inflation could allow for appreciated values
of the Local Partnerships' properties over an extended period of time as rental
revenue and replacement values gradually increase.
The following table reflects the combined rental revenues of the properties
for the five years ended December 31, 1996. Combined rental revenue amounts for
years prior to 1996 have been adjusted to reflect property sales in 1996, as
discussed above.
II-14
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Combined Rental
Revenue $33,378,276 $32,609,624 $31,618,822 $30,356,984 $29,202,522
Annual Percentage
Increase 2.35% 3.13% 4.16% 3.95%
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The information required by this item is contained in Part IV.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
None.
II-15
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
(a), (b) and
(c) The Partnership has no directors, executive officers or
significant employees of its own.
(a), (b), (c)
and (e) The names, ages and business experience for the directors and
executive officers of C.R.I., Inc. (CRI), the Managing General
Partner of the Partnership, are as follows:
William B. Dockser, 60, has been the Chairman of the Board of CRI and a Director
since 1974. Prior to forming CRI, he served as President of Kaufman and Broad
Asset Management, Inc., an affiliate of Kaufman and Broad, Inc., which managed a
number of publicly held limited partnerships created to invest in low and
moderate income multifamily apartment complexes. For a period of 2-1/2 years
prior to joining Kaufman and Broad, he served in various positions at HUD,
culminating in the post of Deputy FHA Commissioner and Deputy Assistant
Secretary for Housing Production and Mortgage Credit, where he was responsible
for all federally insured housing production programs. Before coming to
Washington, Mr. Dockser was a practicing attorney in Boston and also was a
special Assistant Attorney General for the Commonwealth of Massachusetts. He
holds a Bachelor of Laws degree from Yale University Law School and a Bachelor
of Arts degree, cum laude, from Harvard University. He is also Chairman of the
Board of CRIIMI MAE Inc., CRIIMI, Inc. and CRI Liquidating REIT, Inc.
H. William Willoughby, 50, President, Secretary and a Director of CRI since
January 1990 and Senior Executive Vice President, Secretary and a Director of
CRI from 1974 to 1989. He is principally responsible for the financial
management of CRI and its associated partnerships. Prior to joining CRI in 1974,
he was Vice President of Shelter Corporation of America and a number of its
subsidiaries dealing principally with real estate development and equity
financing. Before joining Shelter Corporation, he was a Senior Tax Accountant
with Arthur Andersen & Company. He holds a Juris Doctorate degree, a Master of
Business Administration degree and a Bachelor of Science degree in Business
Administration from the University of South Dakota. He is also a Director and
executive officer of CRIIMI MAE Inc., CRIIMI, Inc. and CRI Liquidating REIT,
Inc.
Ronald W. Thompson, 50, Group Executive Vice President-Hotel Asset Management.
Prior to joining CRI in 1985, he was employed at the Hyatt Organization where he
most recently served as the General Manager of the Hyatt Regency in Flint,
Michigan. During his nine year tenure with Hyatt, he held senior management
positions with the Hyatt Regency in Dearborn, Michigan, the Hyatt in Richmond,
Virginia, the Hyatt in Winston-Salem, North Carolina and the Hyatt Regency in
Atlanta, Georgia. Before joining Hyatt, Mr. Thompson worked in London, England
for the English Tourist Board as well as holding management positions in Europe,
Australia, and New Zealand in the hotel industry. Mr. Thompson received his
education in England where he received a business degree in Hotel Administration
from Winston College.
Susan R. Campbell, 38, Senior Vice President-CRI Realty Services. Prior to
joining CRI in March 1985, she was a budget analyst for the B. F. Saul Advisory
Company. She holds a Bachelor of Science degree in General Business from the
University of Maryland.
Melissa Cecil Lackey, 41, Senior Vice President and General Counsel. Prior to
joining CRI in 1990, she was associated with the firms of Zuckerman, Spaeder,
Goldstein, Taylor & Kolker in Washington, D.C. and Hirsch & Westheimer in
III-1
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - Continued
--------------------------------------------------
Houston, Texas. She holds a Juris Doctorate from the University of Virginia
School of Law and a Bachelor of Arts degree from the College of William & Mary.
(d) There is no family relationship between any of the foregoing directors
and executive officers.
(f) Involvement in certain legal proceedings.
None.
(g) Promoters and control persons.
Not applicable.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
(a), (b), (c), (d), (e), (f), (g), (i), (j), (k) and (l)
The Partnership has no officers or directors. However, in accordance with
the Partnership Agreement, and as disclosed in the public offering, various
kinds of compensation and fees were paid or are payable to the General
Partners and their affiliates. Additional information required in these
sections is included in Notes 3 and 4 to the consolidated financial
statements contained in Part IV, Item 14.
Additionally, the General Partners may receive an annual distribution from
the Partnership if there is cash available for distribution, as defined in
the Partnership Agreement. The General Partners are also entitled to the
following payments:
(1) Annual incentive management fee for managing the affairs and business
of the Partnership in an amount not to exceed .25% of invested assets,
including the Partnership's allocable share of the mortgages, payable
first, in an annual amount equal to $300,000; and second, after
distributions to investors in the amount of 1% of the gross proceeds
of the offering, the balance of such .25% of invested assets. The
annual incentive management fee amounted to $300,000 for each of the
years ended December 31, 1996, 1995, and 1994.
(2) 15% of sale and refinancing proceeds remaining after the limited
partners have received a return of all their capital contributions,
adjusted as provided in the Partnership Agreement, and the General
Partners have received the property disposition fees described below.
The General Partners may also receive a return of their capital
contributions and repayment of any loans made to the Partnership. No
sale proceeds were paid to the General Partners during the years ended
December 31, 1996, 1995 or 1994.
III-2
<PAGE>
PART III
--------
ITEM 11. EXECUTIVE COMPENSATION - Continued
----------------------
(3) 1% of the aggregate selling prices, including any amounts previously
unpaid upon prior sales of apartment complexes, payable after the
limited partners have received a return of all their capital
contributions, adjusted as provided in the Partnership Agreement.
This amount and any other commissions or fees payable upon the sale of
apartment complexes shall not in the aggregate exceed the lesser of
the competitive rate or 6% of the sales price of the apartment
complexes. No such amounts were paid to the General Partners during
the years ended December 31, 1996, 1995 and 1994.
(4) In addition, the Managing General Partner and/or its affiliates may
receive a fee in an amount of not more than 2% of the sales price of
the investment in a Local Partnership or the property it owns. The
fee would only be payable upon the sale of the investment in a Local
Partnership or the property it owns and would be subject to certain
restrictions, including 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 fees of
$117,028 for its services relating to the sale of Park Heights Towers
on February 2, 1996. As of March 10, 1997, $42,500 of these fees have
not been paid. No such amounts were paid to the Managing General
Partner and/or its affiliates during 1995 and 1994.
(h) Termination of employment and change in control arrangements.
None.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------
MANAGEMENT
----------
(a) Security ownership of certain beneficial owners.
No person or "group", as that term is used in Section 13(d)(3) of the
Securities Exchange Act of 1934, is known by the Partnership to be the
beneficial owner of more than 5% of the issued and outstanding
partnership units at December 31, 1996.
(b) Security ownership of management.
The following table sets forth certain information concerning all
units beneficially owned, as of December 31, 1996, by each director
and by all directors and officers as a group of the Managing General
Partner of the Partnership.
Name of Amount and Nature % of total
Beneficial Owner of Beneficial Ownership Units issued
---------------- ----------------------- ------------
William B. Dockser None 0%
H. William Willoughby None 0%
All Directors and Officers
as a Group (5 persons) None 0%
(c) Changes in control.
III-3
<PAGE>
PART III
--------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------
MANAGEMENT - Continued
----------
There exists no arrangement known to the Partnership, the operation of
which may, at a subsequent date, result in a change in control of the
Partnership. There is a provision in the Limited Partnership
Agreement which allows, under certain circumstances, the ability to
change control.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
(a) Transactions with management and others.
The Partnership has no directors or officers. In addition, the
Partnership has had no transactions with individual officers or
directors of the Managing General Partner of the Partnership other
than any indirect interest such officers and directors may have in the
amounts paid to the Managing General Partner or its affiliates by
virtue of their stock ownership in CRI. Item 11 of this report, which
contains a discussion of the fees and other compensation paid or
accrued by the Partnership to the General Partners or their
affiliates, is incorporated herein by reference. Note 3 of the notes
to consolidated financial statements, which contains disclosure of
related party transactions, is also incorporated herein by reference.
(b) Certain business relationships.
The Partnership's response to Item 13(a) is incorporated herein by
reference. In addition, the Partnership has no business relationship
with entities of which the officers and directors of the Managing
General Partner of the Partnership are officers, directors or equity
owners other than as set forth in the Partnership's response to Item
13(a).
(c) Indebtedness of management.
None.
(d) Transactions with promoters.
Not applicable.
III-4
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
------------------------------------------------------
FORM 8-K
--------
(a) 1. Financial Statements Page
-------------------- ----
Report of Independent Certified Public Accountants -
Capital Realty Investors-III Limited
Partnership IV-4
Reports of Independent Certified Public Accountants -
Local Partnerships in which Capital
Realty Investors-III Limited
Partnership has invested IV-5
Consolidated Balance Sheets as of December 31,
1996 and 1995 IV-6
Consolidated Statements of Operations for the
years ended December 31, 1996, 1995 and 1994 IV-7
Consolidated Statements of Changes in
Partners' Deficit for the years
ended December 31, 1996, 1995 and 1994 IV-8
Consolidated Statements of Cash Flows for the
years ended December 31, 1996, 1995 and 1994 IV-9
Notes to Consolidated Financial Statements IV-10
(a) 2. Financial Statement Schedules
-----------------------------
Included in Part IV of this report are the following schedules
for the year ended December 31, 1996, which are applicable to the
Local Partnerships in which Capital Realty Investors-III Limited
Partnership has invested:
Report of Independent Certified Public
Accountants on Financial Statement Schedule IV-30
Schedule III - Real Estate and Accumulated
Depreciation IV-31
The remaining schedules are omitted because the required
information is included in the financial statements and notes
thereto or they are not applicable or not required.
(a) 3. Exhibits (listed according to the number assigned to the table
in Item 601 of Regulation S-K)
Exhibit No. 3. - Articles of Incorporation and bylaws
a. Certificate of Limited Partnership of Capital Realty
Investors-III Limited Partnership. (Incorporated by
reference from Exhibit 4 to Registrant's Registration
IV-1
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
------------------------------------------------------
FORM 8-K - Continued
--------
Statement on Form S-11, as amended, dated October 24, 1983).
Exhibit No. 4.- Instruments defining rights of security holders
including indentures
a. Limited Partnership Agreement of Capital Realty
Investors-III Limited Partnership. (Incorporated by
reference from Exhibit 4 to Registrant's Registration
Statement on Form S-11, as amended, dated October 24, 1983).
Exhibit No. 10. - Material contracts
a. Management Services Agreement between CRI and Capital Realty
Investors-III Limited Partnership. (Incorporated by
reference from Exhibit 10B to Registrant's Registration
Statement on Form S-11, as amended, dated October 24, 1983).
Exhibit No. 27 - Financial Data Schedule
Exhibit No. 99 - Additional Exhibits
a. Prospectus of the Partnership, dated May 6, 1983
(Incorporated by reference to the Registrant's Registration
Statement on Form S-11, as amended, dated October 24, 1983.)
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the quarter ended
December 31, 1996.
(c) Exhibits
--------
The list of Exhibits required by Item 601 of Regulation S-K is
included in Item (a)3., above.
(d) Financial Statement Schedules
-----------------------------
See Item (a)2., above.
IV-2
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this Annual Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Capital Realty Investors-III
Limited Partnership
By: C.R.I., Inc.
Managing General Partner
March 26, 1997 /s/ William B. Dockser
- --------------------------- --------------------------------
DATE William B. Dockser, Director,
Chairman of the Board,
Treasurer and Principal
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
March 26, 1997 /s/ H. William Willoughby
- --------------------------- --------------------------------
DATE H. William Willoughby
Director, President and
Secretary
March 26, 1997 /s/ Deborah K. Browning
- --------------------------- --------------------------------
DATE Deborah K. Browning
Vice President,
Chief Accounting Officer,
Principal Financial and
Principal Accounting Officer
IV-3
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
-------------------------------
PUBLIC ACCOUNTANTS
-------------------
To the Partners
Capital Realty Investors-III
Limited Partnership
We have audited the consolidated balance sheets of Capital Realty
Investors-III Limited Partnership as of December 31, 1996 and 1995, and the
related consolidated statements of operations, changes in partners' deficit and
cash flows for the years ended December 31, 1996, 1995 and 1994. These
financial statements are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial statements based
on our audit. We did not audit the financial statements of certain Local
Partnerships. The Partnership's share of income from these Local Partnerships
constitutes $998,712 in 1996, $1,402,971 in 1995 and $1,020,370 in 1994 included
in the Partnership's net income in 1996 and net losses in 1995 and 1994. The
financial statements of these Local Partnerships were audited by other auditors
whose reports thereon have been furnished to us, and our opinion expressed
herein, insofar as it relates to the amount included for these Local
Partnerships, is based solely upon the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based upon our audits and the reports of other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Capital Realty Investors-III
Limited Partnership as of December 31, 1996 and 1995, and the consolidated
results of its operations, changes in partners' deficit and cash flows for the
years ended December 31, 1996, 1995 and 1994, in conformity with generally
accepted accounting principles.
Grant Thornton LLP
Vienna, VA
March 10, 1997
IV-4
<PAGE>
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS -
LOCAL PARTNERSHIPS IN WHICH
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
HAS INVESTED*
* The reports of independent certified public accountants - Local
Partnerships in which Capital Realty Investors-III Limited Partnership has
invested were filed in paper format under Form SE on March 26, 1997, in
accordance with the Securities and Exchange Commission's continuing
hardship exemption granted December 19, 1996.
IV-5
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
1996 1995
------------ ------------
<S> <C> <C>
Investments in partnerships $ 24,383,751 $ 28,502,606
Investment in partnership held for sale -- 1,249,305
Cash and cash equivalents 3,942,254 2,897,013
Acquisition fees, principally paid to related parties, net
of accumulated amortization of $475,794 and $415,716,
respectively 572,045 632,123
Property purchase costs, net of accumulated amortization of
$425,423 and $376,110, respectively 550,713 600,026
Other assets 78,199 80,183
------------ ------------
Total assets $ 29,526,962 $ 33,961,256
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in partnerships $ 19,552,892 $ 24,303,206
Accrued interest payable 43,663,393 45,542,056
Accounts payable and accrued expenses 136,721 114,599
------------ ------------
Total liabilities 63,353,006 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 (85,383,930) (88,135,491)
------------ ------------
Total partners' deficit (33,826,044) (35,998,605)
------------ ------------
Total liabilities and partners' deficit $ 29,526,962 $ 33,961,256
============ ============
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
IV-6
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended December 31,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Share of income from partnerships $ 5,890,474 $ 1,761,512 $ 3,036,990
----------- ----------- -----------
Other revenue and expenses:
Revenue
Interest and other income 187,470 166,943 201,695
----------- ----------- -----------
Expenses
Interest 7,758,316 9,462,914 8,458,314
Management fee 300,000 300,000 300,000
General and administrative 161,362 132,791 133,945
Professional fees 93,987 111,985 119,341
Amortization 109,391 70,112 70,113
----------- ----------- -----------
8,423,056 10,077,802 9,081,713
----------- ----------- -----------
Total other revenue and expenses (8,235,586) (9,910,859) (8,880,018)
----------- ----------- -----------
Loss before gain on disposition of investment in
partnership (2,345,112) (8,149,347) (5,843,028)
----------- ----------- -----------
Gain on disposition of investment in partnership 2,081,463 -- --
----------- ----------- -----------
Loss before extraordinary gain from
extinguishment of debt (263,649) (8,149,347) (5,843,028)
Extraordinary gain from extinguishment
of debt 3,015,210 -- 3,052,664
----------- ----------- -----------
Net income (loss) $ 2,751,561 $(8,149,347) $(2,790,364)
=========== =========== ===========
Income (loss) allocated to General Partners (1.51%) $ 41,549 $ (123,055) $ (42,134)
=========== =========== ===========
Income (loss) allocated to Initial and Special Limited
Partners (1.49%) $ 40,998 $ (121,425) $ (41,576)
=========== =========== ===========
Income (loss) allocated to Additional Limited Partners (97%) $ 2,669,014 $(7,904,867) $(2,706,654)
=========== =========== ===========
Income (loss) per unit of Additional Limited Partnership Interest
based on 60,000 units outstanding $ 44.48 $ (131.75) $ (45.11)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
IV-7
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Initial and
Special Additional
General Limited Limited
Partners Partners Partners Total
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Partners' deficit, January 1, 1994 (1,186,944) (1,171,891) (22,700,059) (25,058,894)
Net loss (42,134) (41,576) (2,706,654) (2,790,364)
----------- ----------- ------------ ------------
Partners' deficit, December 31, 1994 (1,229,078) (1,213,467) (25,406,713) (27,849,258)
Net loss (123,055) (121,425) (7,904,867) (8,149,347)
----------- ----------- ------------ ------------
Partners' deficit, December 31, 1995 (1,352,133) (1,334,892) (33,311,580) (35,998,605)
Distribution of $9.65 per Additional
Limited Partnership interest -- -- (579,000) (579,000)
Net income 41,549 40,998 2,669,014 2,751,561
----------- ----------- ------------ ------------
Partners' deficit, December 31, 1996 $(1,310,584) $(1,293,894) $(31,221,566) $(33,826,044)
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
IV-8
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,751,561 $ (8,149,347) $ (2,790,364)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Share of income from partnerships (5,890,474) (1,761,512) (3,036,990)
Extraordinary gain from extinguishment of debt (3,015,210) -- (3,052,664)
Payment of interest on note payable -- -- (80,063)
Payment of purchase money note interest (3,137,083) (1,516,680) (874,636)
Gain on disposition of investment in partnership (2,081,463) -- --
Amortization of discount on purchase money notes 3,484,686 4,559,622 3,030,167
Amortization of deferred costs 109,391 70,112 70,113
Changes in assets and liabilities:
Decrease (increase) in other assets 1,984 (58,960) 212,820
Increase in accrued interest payable 4,273,630 4,903,292 5,428,149
Increase (decrease) in accounts payable 22,122 25,847 (27,340)
------------ ------------ ------------
Net cash used in operating activities (3,480,856) (1,927,626) (1,120,808)
------------ ------------ ------------
Cash flows from investing activities:
Receipt of distributions from partnerships 10,047,625 2,142,665 4,716,303
Proceeds from disposition of investment in partnership 3,292,472 -- --
------------ ------------ ------------
Net cash provided by investing activities 13,340,097 2,142,665 4,716,303
------------ ------------ ------------
Cash flows used in financing activities:
Pay-off of notes payable -- -- (2,100,000)
Payment of purchase money note principal -- -- (300,000)
Pay-off of purchase money notes (8,235,000) -- (3,387,382)
Distribution paid to additional limited partners (579,000) -- --
------------ ------------ ------------
Net cash used in financing activities (8,814,000) -- (5,787,382)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 1,045,241 215,039 (2,191,887)
Cash and cash equivalents, beginning of year 2,897,013 2,681,974 4,873,861
------------ ------------ ------------
Cash and cash equivalents, end of year $ 3,942,254 $ 2,897,013 $ 2,681,974
============ ============ ============
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
IV-9
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization
------------
Capital Realty Investors-III Limited Partnership (the Partnership) was
formed under the Maryland Revised Uniform Limited Partnership Act on June
27, 1983 and shall continue until December 31, 2037, unless sooner
dissolved in accordance with the Partnership Agreement. The Partnership
was formed to invest in real estate by acquiring and holding a limited
partner interest in limited partnerships (Local Partnerships) which own and
operate federal or state government-assisted or conventionally financed
apartment complexes located throughout the United States, which provide
housing principally to the elderly and/or to individuals and families of
low to moderate income.
The General Partners of the Partnership are C.R.I., Inc. (CRI), which
is the Managing General Partner, and current and former shareholders of
CRI. The Initial Limited Partner is Rockville Pike Associates Limited
Partnership-III, a limited partnership which includes certain officers and
former employees of CRI or its affiliates. The Special Limited Partner is
Two Broadway Associates II, a limited partnership which includes an
affiliate and employees of Merrill Lynch, Pierce, Fenner & Smith,
Incorporated.
The Partnership sold 60,000 units at $1,000 per unit of Additional
Limited Partner Interest through a public offering. The offering period
was terminated in January 1984.
b. Method of accounting
--------------------
The financial statements of the Partnership are prepared on the
accrual basis of accounting in accordance with generally accepted
accounting principles.
c. Principles of consolidation
---------------------------
These financial statements include the accounts of six intermediary
limited partnerships, which have invested in six Local Partnerships which
own and operate government assisted or conventionally financed apartment
complexes.
d. Investments in partnerships
---------------------------
The investments in Local Partnerships (see Note 2) are accounted for
by the equity method because the Partnership is a limited partner in the
Local Partnerships. Under this method, the carrying amount of the
investments in Local Partnerships is (i) reduced by distributions received
and (ii) increased or reduced by the Partnership's share of earnings or
losses, respectively, of the Local Partnerships. As of both December 31,
1996 and 1995, the Partnership's share of cumulative losses of eleven of
the Local Partnerships exceeds the amount of the Partnership's investments
in these Local Partnerships by $12,026,985 and $11,371,859, respectively.
Since the Partnership has no further obligation to advance funds or provide
financing to these Local Partnerships, the excess losses have not been
IV-10
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
reflected in the accompanying consolidated financial statements. During
1996 and 1995, cash distributions of $4,891,762 and $287,289, respectively,
have been received from the Local Partnerships for which the Partnership's
carrying value is zero. These distributions are included in the
Partnership's share of income from partnerships.
Costs incurred in connection with acquiring these investments have
been capitalized and are being amortized using the straight-line method
over the estimated useful lives of the properties owned by the Local
Partnerships.
e. Cash and cash equivalents
-------------------------
Cash and cash equivalents consist of all money market funds, time and
demand deposits, repurchase agreement and commercial paper with original
maturities of three months or less. The Partnership has determined that
the carrying amount of its cash and cash equivalents approximates fair
value.
f. Offering costs
--------------
The Partnership incurred certain costs in connection with the offering
and selling of limited partnership interests. Such costs were recorded as
a reduction of partners' capital when incurred.
g. Income taxes
------------
For federal and state income tax purposes, each partner reports on his
or her personal income tax return his or her share of the Partnership's
income or loss as determined for tax purposes. Accordingly, no provision
(credit) has been made for income taxes in these consolidated financial
statements.
h. Use of estimates
----------------
In preparing financial statements in conformity with generally
accepted accounting principles, the Partnership is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from those estimates.
IV-11
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
i. Asset held for sale
-------------------
On February 2, 1996, the local general partners of Park Heights Towers
Limited Partnership sold the property to a non-profit entity. Accordingly,
the Partnership's investment in this Local Partnership was classified as an
investment held for sale on the balance sheet as of December 31, 1995.
Assets held for sale are not recorded in excess of their estimated net
realizable value.
2. INVESTMENTS IN PARTNERSHIPS
a. Due on investments in partnerships
----------------------------------
As of December 31, 1996 and 1995, the Partnership had acquired limited
partnership interests in thirty-four and thirty-five Local Partnerships,
respectively, which were organized to develop, construct, own, maintain and
operate rental apartment complexes which provide housing principally to the
elderly and/or to individuals and families of low or moderate income. The
remaining principal amounts due on investments in the Local Partnerships as
of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Due to local general partners $ 119,544 $ 119,544
Purchase money notes due:
1996 3,826,070 12,061,070
1997 3,065,000 3,065,000
1998 2,250,000 2,250,000
1999 17,614,500 17,614,500
2000 -- --
2001 750,000 750,000
Thereafter 322,326 322,326
----------- -----------
27,947,440 36,182,440
Less unamortized discount
on purchase money notes (8,394,548) (11,879,234)
----------- -----------
$19,552,892 $24,303,206
=========== ===========
</TABLE>
The amounts due to local general partners will be paid upon the
occurrence of certain specific events as outlined in the respective Local
Partnership's partnership agreements.
The purchase money notes have stated interest rates ranging from 9% to
12%, certain of which are compounded annually. Unamortized discounts are
based upon an imputed interest rate of 15% to reflect market interest rates
which prevailed when the notes were issued. The resulting discount has
been recorded by the Partnership and is being amortized to interest expense
over the life of the respective purchase money notes using the effective
IV-12
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN PARTNERSHIPS - Continued
interest method. The purchase money notes are payable upon the earliest
of: (1) sale or refinancing of the respective Local Partnership's rental
property; (2) payment in full of the respective Local Partnership's
permanent loan; or (3) maturity. Purchase money notes in an aggregate
principal amount of $1,726,070 matured on January 1, 1996, but have not
been paid, as discussed below. Purchase money notes in an aggregate
principal amount of $2,100,000 matured on May 1, 1996, as discussed below.
Purchase money notes having a principal balance of $3,065,000 mature during
1997, as discussed below. The remaining purchase money notes mature from
1998 to 2015. The purchase money notes are generally secured by the
Partnership's interest in the respective Local Partnership. There is no
assurance that the underlying properties will have sufficient appreciation
and equity to enable the Partnership to pay the purchase money notes'
principal and accrued interest when due. If a purchase money note is not
paid in accordance with its terms, the Partnership will either have to
renegotiate the terms of repayment or risk losing its partnership interest
in the Local Partnership. The Managing General Partner is continuing to
investigate possible alternatives to reduce the Partnership's long-term
debt obligations. These alternatives include, among others, retaining the
cash available for distribution to meet the purchase money note
requirements, buying out certain purchase money notes at a discounted
price, extending the due dates of certain purchase money notes, or
refinancing the respective properties' underlying debt and using the
Partnership's share of the proceeds to pay off or buy down certain purchase
money note obligations.
Interest expense on the unpaid purchase price and the Partnership's
purchase money notes for the years ended December 31, 1996, 1995 and 1994
was $7,758,316, $9,462,914 and $8,322,071, respectively. The accrued
interest on the purchase money notes of $43,629,417 and $45,508,080, as of
December 31, 1996 and 1995, respectively, is due on the respective maturity
dates of the purchase money notes or earlier if the Local Partnerships have
distributable net cash flow, as defined in the relevant Local Partnership
agreements.
Purchase money notes, plus accrued interest, relating to the following
properties matured in 1996:
IV-13
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN PARTNERSHIPS - Continued
<TABLE>
<CAPTION>
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 (A)
Park Heights Towers 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)
</TABLE>
(A) 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 March 10, 1997
-------- --------- ---------------- ----------------
<S> <C> <C> <C>
Briar Crest I $ 525,050 $ 746,672 $ 828,564
Briar Crest II 415,920 574,963 640,414
Briar Hills 458,100 683,564 755,379
Indian Hills 327,000 477,973 530,867
---------- ---------- ----------
$1,726,070 $2,483,172 $2,755,224
========== ========== ==========
</TABLE>
The Managing General Partner and the purchase money noteholders have
reached an agreement in principle for a five year extension of the
purchase money notes relating to Briar Crest I, Briar Crest II and
Briar Hills, and as of March 10, 1997, the parties are drafting
extension documents to reflect the agreement. There is no assurance
that a final agreement will be reached. The Managing General Partner
has also proposed a five year extension of the purchase money notes
relating to Indian Hills. No agreement has been reached, and there is
no assurance that an agreement will be reached.
On June 15, 1994, the local managing general partner of Briar Crest I,
Briar Crest II, Briar Hills and Indian Hills, who is also one of the
purchase money note holders, filed a notice of intent to participate
under the LIHPRHA program in hopes of refinancing the existing first
mortgages of each property. 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. There
is no assurance that a sale of these properties will occur due to the
IV-14
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN PARTNERSHIPS - Continued
federal government's limited funding of appropriations to the LIHPRHA
program, as discussed below. Due to the uncertainty of a potential
sale or satisfactory resolution with the purchase money noteholders,
there is no assurance that the Partnership will be able to retain its
interests in the Local Partnerships.
The uncertainty about the continued ownership of the Partnership's
interest in the Briar Crest I, Briar Crest II, Briar Hills and Indian
Hills does not impact the Partnership's financial condition because
the related purchase money notes are nonrecourse and secured solely by
the Partnership's interest in the respective Local Partnerships.
Should the investment in any or all of the above listed Local
Partnerships, excluding Indian Hills, not produce sufficient value to
satisfy the related purchase money notes, the Partnership's exposure
to loss is limited since the amount of the nonrecourse indebtedness
exceeds the carrying amount of the investment in and advances to the
Local Partnerships. Thus, even a complete loss of these investments
would not have a material impact on the operations of the Partnership.
However, should the Partnership be unable to retain its interest in
these Local Partnerships, the investments in Local Partnerships would
be reduced by the Partnership's basis in these Local Partnerships,
which as of December 31, 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 December 31, 1996 was approximately $800,000.
(B) On February 2, 1996, the Partnership paid off the purchase money note
relating to Park Heights Towers Limited Partnership (Park Heights) at
a discount, as discussed below.
(C) On March 1, 1996, the local general partner of Village Squire I & II
and Village Squire III refinanced the loans secured by first mortgages
on the respective properties. On March 1, 1996, proceeds provided to
the Partnership from the refinancings, along with approximately
$560,000 of existing Partnership cash resources, were used to pay off
the related purchase money note obligations. The refinancing proceeds
received by the Partnership exceeded the Partnership's investment in
the respective Local Partnerships by approximately $4.1 million, and
is included in share of income from partnerships in the consolidated
statements of operations.
(D) The Partnership defaulted on its purchase money 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
IV-15
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN PARTNERSHIPS - Continued
Partnership's financial condition because the related purchase money
notes are 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 will result in a net financial statement gain
of $5,473,855 during 1997. The federal tax gain is estimated to be
approximately $5.8 million.
Purchase money notes plus accrued interest relating to the following
properties mature in 1997:
<TABLE>
<CAPTION>
Property Principal Amount Maturity Date
-------- ---------------- -------------
<S> <C> <C>
Bartley Manor $ 700,000 July 1, 1997
Village Green 275,000 July 1, 1997
Village Square 390,000 July 1, 1997
Winchester Gardens 1,700,000 December 31, 1997
-----------
$ 3,065,000
===========
</TABLE>
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. The Managing
General Partner anticipates negotiating with these purchase money note
holders, as well as the purchase money note holders for 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, there is no
assurance that the Partnership will be able to retain its interest in the
Local Partnerships. The uncertainty about the continued ownership of the
Partnership's interest in Bartley Manor, Village Green, Village Square and
Winchester Gardens does not impact the Partnership's financial condition
because the related purchase money notes are nonrecourse and secured solely
by the Partnership's interest in the respective Local Partnerships. Should
the investment in any or all of the above listed Local Partnerships 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,
IV-16
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN PARTNERSHIPS - Continued
which as of December 31, 1996, was approximately 8% of the total investment
in Local Partnerships.
The Partnership purchased the New Fifth Lakewood Associates Limited
Partnership (Walden Apartments) purchase money note for $2,450,000 (the
original principal was $4,000,000) at a public auction on December 11,
1989, and the $4,000,000 purchase money note was retired. The purchase
price was financed through the payment of $350,000 cash from the
Partnership and a $2,100,000 loan from Bank One (formerly First Illinois
Bank of Evanston). The new note had a maturity date of July 1, 1994 and
bore interest at 7.5%. The Partnership paid-off the new note in full on
June 30, 1994. Interest expense on the note payable was $80,063 for the
year ended December 31, 1994. The Partnership received cash distributions
of $63,348 from Walden Apartments during 1996. No cash distributions were
received from Walden Apartments during 1995 or 1994.
The Partnership has determined that it is not practicable to estimate
the fair value of the purchase money notes, either individually or in the
aggregate, due to: (1) the lack of an active market for this type of
financial instrument, (2) the variable nature of purchase money note
interest payments as a result of fluctuating cash flow distributions
received from the related Local Partnerships, and (3) the excessive costs
associated with an independent appraisal of the purchase money notes.
b. Interest in profits, losses and cash distributions
--------------------------------------------------
The Partnership has a 96% to 98.99% interest in profits and losses and
cash distributions (as restricted by various federal and state housing
agencies) of each Local Partnership. An affiliate of the General Partners
of the Partnership is also a general partner of each Local Partnership or
the intermediary limited partnership which invests in the Local
Partnership. The Partnership received cash distributions from the rental
operations of the Local Partnerships of $10,047,625, $2,142,665 and
$4,716,303 during the years ended December 31, 1996, 1995 and 1994,
respectively. As of December 31, 1996 and 1995, twenty-six and twenty-
eight, respectively, of the Local Partnerships had surplus cash, as defined
by their respective agencies, in the amounts of $2,044,904 and $2,551,821,
respectively, which is available for distribution in accordance with their
respective agencies' regulations.
The cash distributions to the Partnership from the operations of the
rental properties may be limited by Department of Housing and Urban
Development (HUD) regulations. Such regulations limit annual cash
distributions to a percentage of the owner's equity investment in a rental
property. Funds in excess of those which may be distributed to owners are
required to be placed in a residual receipts account held by the governing
state or federal agency for the benefit of the property.
Upon sale, refinancing or liquidation of each Local Partnership, the
proceeds from the sale, refinancing or liquidation shall be distributed in
accordance with the respective provisions of each Local Partnership's
partnership agreement. In accordance with such provisions, the Partnership
would receive from such proceeds its respective percentage interest of any
remaining proceeds, after payment of (1) all debts and liabilities of the
Local Partnership and certain other items, (2) the Partnership's capital
IV-17
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN PARTNERSHIPS - Continued
contributions plus certain specified amounts as outlined in each
partnership agreement, and (3) certain special distributions to general
partners and related entities of the Local Partnership.
c. Property matters
----------------
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
$5,096,673, of which $3,015,210 resulted from the retirement of the
purchase money note obligation with respect to the property. The federal
tax gain was $7,131,652. 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 intends to retain all of
the Partnership's remaining undistributed net sale proceeds for the
possible repayment, prepayment or purchase of the outstanding purchase
money notes relating to other Local Partnerships. The General Partner
and/or its affiliates earned net fees of $117,028 for its services relating
to the sale of the property. As of March 10, 1997, $42,500 of these fees
have not been paid.
In September 1995, HUD sold the mortgage of Walden Apartments to a new
mortgagee. As a result, Walden Apartments is no longer subject to HUD
regulatory requirements. On September 13, 1996, the local managing general
partner of Walden Apartments received an offer from a third party to
purchase the property. The local managing general partner rejected this
offer due to the fact that it did not meet the criteria as set forth 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. The potential buyer has made a deposit of $200,000 and
has commenced its due diligence review. There is no assurance that a sale
of Walden Apartments will occur as the potential buyer has the option to
cancel the agreement and receive its deposit on or before April 18, 1997,
based on the results of its due diligence review.
The Rolling Green at Milford property received a mortgage loan
increase from its lender in June 1996 to pay for replacing the roof, which
suffered extensive damage caused by microorganisms. The roof work was
completed during 1996, and the property, which remained open during the
roof work, was approximately 97.1% leased as of March 10, 1997. The
Managing General Partner is negotiating a fifteen year extension on the
Partnership's related purchase money notes. The Partnership's purchase
money notes, which aggregate a principal amount of $2,250,000, are due to
mature on August 31, 1998. There is no assurance that the noteholders will
agree to a fifteen-year extension on the purchase money notes.
On May 5, 1994, the local general partner of Arboretum Village Limited
Partnership (Arboretum Village) refinanced the property's first mortgage.
The refinancing provided proceeds of $3,387,382 to the Partnership with
IV-18
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN PARTNERSHIPS - Continued
which the Partnership acquired, at a discount, the existing purchase money
note in the original principal amount of $4,106,944, which resulted in an
extraordinary gain from extinguishment of debt of $3,052,664. In addition,
proceeds to the Partnership relating to the refinancing of $1,987,969 were
in excess of the Partnership's investment and were included in share of
income from Local Partnerships. In connection with the refinancing, the
Partnership executed a new purchase money note to the local general partner
in the principal amount of $1,050,000, which was a non-cash transaction.
The new purchase money note bears simple interest at the same rate (9.73%)
and matures at the same time (May 2001) as the new first mortgage. In
August 1994, the Partnership made a $300,000 payment towards the principal
balance of the purchase money note. Accrued interest on the purchase money
note was $72,772 and $71,636 as of December 31, 1996 and 1995,
respectively.
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. The LIHPRHA program,
which provided property owners with restricted opportunities to sell low
income housing, ended effective September 30, 1996. However, HUD received
approximately $175 million to fund sales of qualifying properties under the
LIHPRHA program during the federal government's fiscal year 1997, which
began October 1, 1996. Continued funding of the LIHPRHA program after
fiscal year 1997 is uncertain. There is no assurance that a sale of any
properties that previously qualified under the LIHPRHA program will occur.
The local general partners of the following properties have each filed
a notice of intent to participate under the LIHPRHA program:
<TABLE>
<CAPTION>
Property Date of Filing
-------- -----------------
<C> <C>
Rolling Green at Milford April 23, 1993 (1)
Woodside Village March 31, 1994 (1)
Briar Crest I June 15, 1994
Briar Crest II June 15, 1994
Briar Hills June 15, 1994
Indian Hills June 15, 1994 (1)
Winchester Gardens July 18, 1994
Tyee Apartments November 28, 1994 (1)
Bartley Manor December 5, 1994 (1)
Village Green December 5, 1994 (1)
Village Square December 5, 1994 (1)
Southmoor January 31, 1995
Greeley Manor January 31, 1995 (1)
</TABLE>
(1) The plan of actions for these properties were not approved by HUD,
therefore, these properties are no longer eligible to participate in
what remains of the LIHPRHA program.
IV-19
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN PARTNERSHIPS - Continued
Incentives available under LIHPRHA are discussed above. As discussed
above, there is no assurance that a sale or supplemental financing of these
properties will occur due to the federal government's limited funding or
appropriations to the LIHPRHA program. Of the properties listed above,
Southmoor, Winchester Gardens, Briarcrest I, Briarcrest II and Briar Hills
are ranked on the master funding list, which is subject to future
government appropriations.
Some of the rental properties owned by the Local Partnerships are
financed by state housing agencies. The Managing General Partner has been
working to develop strategies to sell or refinance certain properties
pursuant to programs developed by these agencies or other potential buyers.
These programs may include opportunities to sell the property to a
qualifying purchaser who would agree to maintain the property as low to
moderate income housing in perpetuity, or to refinance the property, or to
obtain supplemental financing. The Managing General Partner continues to
monitor certain state housing agency programs and/or programs provided by
certain lenders, to ascertain whether the properties would qualify within
the parameters of a given program and whether these programs would provide
an appropriate economic benefit to the limited partners of the Partnership.
Some of the rental properties owned by the Local Partnerships are
dependent on the receipt of project-based Section 8 Rental Housing
Assistance Payments (HAP) provided by the U.S. Department of Housing and
Urban Development (HUD) pursuant to HAP contracts. In 1995 and 1996, HUD
released its Reinvention Blueprint and a revision to its Reinvention
Blueprint which contained proposals that have come to be known as "Mark-to-
Market". Congress, HUD and the Clinton Administration continue to struggle
with the Mark-to-Market initiative. This initiative was intended to deal
with HUD's increasing burden of funding HAP contracts. Under the
initiative, HUD would eliminate the project-based subsidy and provide the
residents with "sticky vouchers" which would allow residents to move to
other developments should they so choose. However, with the elimination of
the HAP contract, there is no assurance that rental properties would be
able to maintain the rental income and occupancy levels necessary to pay
operating costs and debt service. The initiative will impact those
properties that have HAP contracts with shorter terms than that of the
underlying property mortgage. For instance, some properties may have a 20-
year HAP contract while the underlying mortgage has a 40-year term. In the
interim, Congress has authorized one-year extensions for properties with
HAP contracts expiring during the government's fiscal year 1997, which
began October 1, 1996. In light of recent political scrutiny of
appropriations for HUD programs, continued funding of annual renewals for
Section 8 HAP contracts expiring after fiscal year 1997 is uncertain.
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
IV-20
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN PARTNERSHIPS - Continued
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.
d. Summarized financial information
--------------------------------
Summarized financial information for the Local Partnerships as of
December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995
and 1994 is as follows:
IV-21
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN PARTNERSHIPS - Continued
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1996 1995
------------ ------------
<S> <C> <C>
Rental property, at cost, net of accumulated depreciation
of $73,063,135 and $69,987,195, respectively $ 93,786,201 $ 98,203,512
Land and land improvements 14,582,655 15,335,374
Other assets 18,790,710 17,933,930
------------ ------------
Total assets $127,159,566 $131,472,816
============ ============
Mortgage notes payable $110,454,384 $103,898,993
Other liabilities 10,228,071 10,551,978
------------ ------------
Total liabilities 120,682,455 114,450,971
Partners' capital 6,477,111 17,021,845
------------ ------------
Total liabilities and partners' capital $127,159,566 $131,472,816
============ ============
</TABLE>
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Rental $ 33,417,794 $ 33,256,209 $ 32,270,051
Interest 674,147 695,422 551,946
Other 773,800 748,368 604,401
------------ ------------ ------------
Total revenue 34,865,741 34,699,999 33,426,398
------------ ------------ ------------
Expenses:
Operating 21,006,072 20,943,312 20,570,071
Interest 7,538,528 7,085,360 7,046,805
Depreciation 5,546,213 5,749,135 5,679,409
Amortization 54,725 33,047 30,981
------------ ------------ ------------
Total expenses 34,145,538 33,810,854 33,327,266
------------ ------------ ------------
Net income $ 720,203 $ 889,145 $ 99,132
============ ============ ============
</TABLE>
IV-22
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN PARTNERSHIPS - Continued
e. Reconciliation of the Local Partnerships' financial statement net
-----------------------------------------------------------------
income to taxable loss
----------------------
For federal income tax purposes, the Local Partnerships report on a
basis whereby: (1) certain revenue and the related assets are recorded
when received rather than when earned; (2) certain costs are expensed when
paid or incurred rather than capitalized and amortized over the period of
benefit; and (3) a shorter life is used to compute depreciation of the
property for tax purposes as permitted by Internal Revenue Service (IRS)
Regulations. These returns are subject to audit and, therefore, possible
adjustment by the IRS.
A reconciliation of the Local Partnerships' financial statement net
income reflected above to the taxable loss for the years ended December 31,
1996, 1995 and 1994 is as follows:
IV-23
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN PARTNERSHIPS - Continued
<TABLE>
<CAPTION>
For the years ended December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Financial statement net income $ 720,203 $ 889,145 $ 99,132
Adjustments:
Additional tax depreciation using accelerated
methods, net of depreciation on construction
period expenses capitalized for financial
statement purposes (3,169,569) (3,413,758) (3,732,479)
Amortization for tax purposes not deducted for
financial statement purposes 49,756 25,569 25,569
Miscellaneous, net 49,021 2,199 119,459
------------ ------------ ------------
Taxable loss $ (2,350,589) $ (2,496,845) $ (3,488,319)
============ ============ ============
</TABLE>
3. RELATED-PARTY TRANSACTIONS
In accordance with the Partnership Agreement, the Partnership paid the
Managing General Partner a fee for services in connection with the review,
selection, evaluation, negotiation and acquisition of the interests in the Local
Partnerships. The fee amounted to $1,200,000, which is equal to 2% of the
Additional Limited Partners' capital contributions to the Partnership. The
acquisition fee was capitalized and is being amortized over a thirty-year period
using the straight-line method.
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. For the years ended December 31, 1996, 1995 and
1994, the Partnership paid $113,632, $77,544 and $102,491, respectively, as
direct reimbursement of expenses incurred on behalf of the Partnership. Such
expenses are included in the accompanying consolidated statements of operations
as general and administrative expenses.
Additionally, in accordance with the terms of the Partnership Agreement,
the Partnership is obligated to pay an annual incentive management fee (the
Management Fee), after all other expenses of the Partnership are paid. The
amount of the Management Fee shall be equal to .25% of invested assets, as
defined in the Partnership Agreement, and shall be payable from the
Partnership's cash available for distribution, as defined in the Partnership
Agreement, as of the end of each calendar year, as follows:
a. First, on a monthly basis as an operating expense before any
distributions to limited partners in the amount computed as described
in the Partnership Agreement, provided that such amount shall not be
greater than $300,000 and;
IV-24
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. RELATED-PARTY TRANSACTIONS - Continued
b. Second, after distributions to the limited partners in the amount of
1% of the gross proceeds of the offering, the balance of such .25% of
invested assets.
For each of the years ended December 31, 1996, 1995 and 1994, the
Partnership paid the Managing General Partner a Management Fee of $300,000.
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
investment in a Local Partnership or the property its 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 the Park
Heights Towers Local Partnership of $117,028 on February 2, 1996. As of March
10, 1997, $42,500 of these fees have not been paid.
4. PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS
All profits and losses prior to the first date on which Additional Limited
Partners were admitted were allocated 98.49% to the Initial Limited Partners and
1.51% to the General Partners. Upon admission of the Special Limited Partner
and the Additional Limited Partners, the interest of the Initial Limited
Partners was reduced to .49%. The net proceeds resulting from the liquidation
of the Partnership or the Partnership's share of the net proceeds from any sale
or refinancing of the projects or their rental properties which are not
reinvested shall be distributed and applied as follows:
(i) to the payment of debts and liabilities of the Partnership
(including all expenses of the Partnership incident to the sale
or refinancing) other than loans or other debts and liabilities
of the Partnership to any partner or any affiliate, such debts
and liabilities, in the case of a non-liquidating distribution,
to be only those which are then required to be paid or, in the
judgment of the Managing General Partner, required to be provided
for;
(ii) to the establishment of any reserves which the Managing General
Partner deems reasonably necessary for contingent, unmatured or
unforeseen liabilities or obligations of the Partnership;
(iii) to each partner in an amount equal to the positive balance in his
capital account as of the date of the sale or refinancing,
adjusted for operations and distributions to that date, but
before allocation of any profits for tax purposes realized from
such sale or refinancing and allocated pursuant to the
Partnership Agreement;
(iv) to the limited partners (A) an aggregate amount of proceeds from
sale or refinancing and all prior sales or refinancings equal to
their capital contributions, without reduction for prior cash
distributions other than prior distributions of sale and
refinancing proceeds, plus (B) an additional amount equal to a
cumulative noncompounded 6% return, on each limited partners'
capital contribution, reduced, but not below zero, by (1) an
amount equal to 50% of the losses for tax purposes plus tax
credits allocated to such limited partner and (2) distributions
of net cash flow to each limited partner, such return, losses for
IV-25
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS - Continued
tax purposes and net cash flow distributions commencing on the
first day of the month in which the capital contribution was
made;
(v) to the repayment of any unrepaid loans theretofore made by any
partner or any affiliate to the Partnership for Partnership
obligations and to the payment of any unpaid amounts owing to the
General Partners pursuant to the Partnership Agreement;
(vi) to the General Partners in the amount of their capital
contributions;
(vii) thereafter, for their services to the Partnership, in equal
shares to certain general partners (or their designees), whether
or not any is then a general partner, an aggregate fee of 1% of
the gross proceeds resulting from (A) such sale (if the proceeds
are from a sale rather than a refinancing) and (B) any prior sale
from which such 1% fee was not paid to the General Partners or
their designees; and,
(viii) the remainder, 12% to the General Partners (or their assignees),
3% to the Special Limited Partner and 85% to the Initial and
Additional Limited Partners (or their assignees).
Fees payable to certain general partners (or their designees) under (vii)
above, together with all other property disposition fees and any other
commissions or fees payable upon the sale of apartment complexes, shall not in
the aggregate exceed the lesser of the competitive rate or 6% of the sales price
of the apartment complexes.
In addition, the Managing General Partner and/or its affiliates may receive
a fee in an amount of not more than 2% of the sales price of the investment in a
Local Partnership or the property it owns. The fee would only be payable upon
the sale of the investment in a Local Partnership or the property it owns and
would be subject to certain restrictions, including achievement of a certain
level of sales proceeds and making certain minimum distributions to limited
partners. In February 1996, the Managing General Partner and/or its affiliates
earned fees totalling $117,028 relating to the sale of the Park Heights Towers
property. As of March 10, 1997, $42,500 of these fees have not been paid. No
such amounts were paid to the Managing General Partner and/or its affiliates
during 1995 and 1994.
Pursuant to the Partnership Agreement, all cash available for distribution,
as defined, shall be distributed, not less frequently than annually, 97% to the
Additional Limited Partners, 1% to the Special Limited Partner, .49% to the
Initial Limited Partner and 1.51% to the General Partners, after payment of the
Management Fee (see Note 3), as specified in the Partnership Agreement. As
defined in the Partnership Agreement, prior to the establishment of any reserves
deemed necessary by the Managing General Partner and after payment of the
Management Fee, the Partnership had cash available for distribution of
approximately $1,000,000, $250,000 and $0 for the years ended December 31, 1996,
1995 and 1994, respectively. On April 30, 1996, the Partnership distributed
$579,000 (or $9.65 per Additional Limited Partner unit) to the Additional
Limited Partners as a result of the sale of the property relating to the
Partnership's investment in Park Heights. No distributions were declared or
paid during 1995 and 1994.
IV-26
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. RECONCILIATION OF THE PARTNERSHIP'S FINANCIAL STATEMENT NET INCOME
(LOSS) TO TAXABLE LOSS
For federal income tax purposes, the Partnership reports on a basis
whereby: (1) certain expenses are amortized rather than expensed when incurred;
(2) certain costs are amortized over a shorter period for tax purposes, as
permitted by IRS Regulations, and (3) certain costs are amortized over a longer
period for tax purposes. The Partnership records its share of losses from its
investments in limited partnerships for federal income tax purposes as reported
on the Local Partnerships' federal income tax returns (see Note 2e), including
losses in excess of related investments amounts. In addition, adjustments
arising from the imputation of interest on the Partnership's purchase money
notes for financial reporting purposes are eliminated for income tax purposes
(see Note 2a). These returns are subject to audit and, therefore, possible
adjustment by the IRS.
A reconciliation of the Partnership's financial statement net income (loss)
to the taxable loss for the years ended December 31, 1996, 1995 and 1994 is as
follows:
IV-27
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. RECONCILIATION OF THE PARTNERSHIP'S FINANCIAL STATEMENT NET INCOME
(LOSS) TO TAXABLE LOSS - Continued
<TABLE>
<CAPTION>
For the years ended December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Financial statement net income (loss) $ 2,751,561 $ (8,149,347) $ (2,790,364)
Adjustments:
Differences between the income tax losses and financial
statement losses related to the Partnership's equity
in the Local Partnerships' losses (10,312,584) (5,112,498) (5,488,768)
Difference between extraordinary gain from early extinguishment
of debt -- (1,050,000) 1,977,258
Costs amortized over a shorter period for income tax purposes (16,698) (82,742) (82,864)
Effect of imputed interest on purchase money notes for financial
reporting purposes 3,538,365 4,570,051 2,964,825
------------ ------------ -----------
Taxable loss $ (4,039,356) $ (9,824,536) $(3,419,913)
============ ============ ===========
</TABLE>
6. 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
IV-28
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. CONTINGENCIES - Continued
defendant in this action. Messrs. Dockser and Willoughby entered an answer
denying all of Mr. Schwartzberg's claims. On February 6, 1996, CRI terminated
the CMS contract for cause. (CRI subsequently retained an independent asset
management company to perform functions previously performed by CMS.) Mr.
Schwartzberg and CMS responded to the contract termination by filing a motion
for injunctive relief in the Circuit Court, asking the court to enjoin CRI from
terminating the contract. In a ruling issued on February 12, 1996, the Circuit
Court, among other things, refused to grant the injunction requested by CMS. On
February 12, 1996, the Circuit Court also issued a memorandum opinion and order
enjoining CMS and Mr. Schwartzberg from disclosing information made confidential
under the asset management agreement.
Following subsequent litigation, none of which involved the Partnership, on
June 12, 1996, Mr. Schwartzberg, CRI and others entered an agreement (which
contemplates the execution of a subsequent definitive agreement) to resolve the
disputes between CRI and CMS. The Partnership was not a signatory to the
agreement. As part of the resolution, Mr. Schwartzberg withdrew any derogatory
statements he made about CRI and its principals. Upon execution of the
definitive agreement, Mr. Schwartzberg shall withdraw as a General Partner of
this Partnership and his interest will become that of a Special Limited Partner.
As of March 10, 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.
IV-29
<PAGE>
FINANCIAL STATEMENT SCHEDULE
IV-30
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON
-----------------------------------------------------
FINANCIAL STATEMENT SCHEDULE
----------------------------
To the Partners
Capital Realty Investors-III
Limited Partnership
In connection with our audit of the consolidated financial statements of
Capital Realty Investors-III Limited Partnership referred to in our report dated
March 10, 1997, which is included in this Form 10-K, we have also audited
Schedule III as of December 31, 1996, 1995 and 1994. We did not audit the
financial statements for certain Local Partnerships in 1996, 1995 and 1994,
which are accounted for as described in Note 1d. In our opinion, this schedule
presents fairly, in all material respects, the information required to be set
forth therein.
Grant Thornton LLP
Vienna, VA
March 10, 1997
IV-31
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION OF
LOCAL PARTNERSHIPS IN WHICH CAPITAL REALTY INVESTORS-III LIMITED
PARTNERSHIP HAS INVESTED
December 31, 1996
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D
- -------------------- ------- ------------------------------- -------------------------------
Initial Costs Capitalized
Cost to Local Subsequent
Partnership to Acquisition
------------------------------- -------------------------------
Building
Description Encum- and Improvements/ Carrying
Operating Properties brances Land Improvements (Deletions) Costs (B)
- -------------------- ------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Arboretum Village (A) $ 1,165,630 $ 9,319,370 $ 3,003,449 $ --
Lisle, IL
(308 units-family
apartment complex)
Monterey/Hillcrest (A) 1,332,233 2,168,760 13,077,342 468,293
Apartments
Waukesha, WI
(300 units-family
apartment complex)
O'Farrell Towers (A) 950,000 1,680,000 8,319,850 5,988
San Francisco, CA
(101 units-elderly
apartment complex)
Rolling Green (A) 550,000 8,926,785 2,540,298 --
at Milford
Milford, MA
(304 units-family
apartment complex)
Village Squire I & II (A) 942,500 8,864,440 (303,638) --
Canton, MI
(376 units-family
apartment complex)
Walden Apartments (A) 1,404,196 9,560,754 1,493,329 --
Schaumburg, IL
(396 units-family
apartment complex)
Aggregate of remaining
properties which are
individually less than
5% of the total of
Column E (A) 7,172,470 76,005,711 22,757,162 27,069
----------- ------------ ------------ -----------
Total $13,517,029 $116,525,820 $ 50,887,792 $ 501,350
=========== ============ ============ ===========
</TABLE>
IV-32
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION OF
LOCAL PARTNERSHIPS IN WHICH CAPITAL REALTY INVESTORS-III LIMITED
PARTNERSHIP HAS INVESTED - Continued
December 31, 1996
<TABLE>
<CAPTION>
COL. A COL. E COL. F COL. G COL. H COL. I
- -------------------- ------------------------------------------- ------------ ------- ------- ----------------
Gross amount at which Life upon
carried at close of period which dep-
------------------------------------------- Date reciation in
Land Building Accumulated of latest income
Description and Land and depreciation Const- Date statement is
Operating Properties Improvements Improvements Total (C) (D) (D) ruction Acquired computed (years)
- -------------------- ------------ ------------ ------------- ------------ ------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Arboretum Village $ 1,611,964 $ 11,876,485 $ 13,488,449 $ 5,096,732 1972 1/84 10-30
Lisle, IL
(308 units-family
apartment complex)
Monterey/Hillcrest 1,335,534 15,711,094 17,046,628 7,150,136 1984 11/83 5-30
Apartments
Waukesha, WI
(300 units-family
apartment complex)
O'Farrell Towers 950,000 10,005,838 10,955,838 3,972,984 1985 10/83 5-30
San Francisco, CA
(101 units-elderly
apartment complex)
Rolling Green 465,015 11,552,068 12,017,083 4,626,176 1974 3/84 5-30
at Milford
Milford, MA
(304 units-family
apartment complex)
Village Squire I & II 805,897 8,697,405 9,503,302 3,974,171 1980 3/84 5-33
Canton, MI
(376 units-family
apartment complex)
Walden Apartments 898,868 11,559,411 12,458,279 4,445,979 1974 3/84 5-30
Schaumburg, IL
(396 units-family
apartment complex)
Aggregate of remaining
properties which are
individually less than
5% of the total of
Column E 8,515,377 97,447,035 105,962,412 43,796,957
----------- ------------ ------------- ------------
Total $14,582,655 $166,849,336 $ 181,431,991 $ 73,063,135
=========== ============ ============= ============
</TABLE>
IV-33
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
OF LOCAL PARTNERSHIPS IN WHICH
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP HAS INVESTED
December 31, 1996
(A) Secured by mortgages.
(B) Consists of capitalized construction period interest and real estate
taxes during construction.
(C) The aggregate cost of land for federal income tax purposes is $14,591,405
and the aggregate cost of buildings and improvements for federal income
tax purposes is $183,186,783. The total of the above-mentioned items is
$197,778,188.
(D) Reconciliation of real estate
-----------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of period $183,526,081 $181,960,413 $179,101,252
Improvements and acquisitions during period 3,699,917 1,962,413 3,041,641
Deletions during period (5,794,007) (396,745) (182,480)
------------ ------------ ------------
Balance at end of period $181,431,991 $183,526,081 $181,960,413
============ ============ ============
</TABLE>
Reconciliation of accumulated depreciation
------------------------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of period $ 69,987,195 $ 64,566,221 $ 59,007,931
Depreciation expense for the period 5,546,213 5,749,135 5,679,409
Retirements (2,470,273) (328,161) (121,119)
------------ ------------ ------------
Balance at end of period $ 73,063,135 $ 69,987,195 $ 64,566,221
============ ============ ============
</TABLE>
IV-34
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
- ------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
IV-35
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,942,254
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 29,526,962
<CURRENT-LIABILITIES> 0
<BONDS> 63,216,285
0
0
<COMMON> 0
<OTHER-SE> (33,826,044)
<TOTAL-LIABILITY-AND-EQUITY> 29,526,962
<SALES> 0
<TOTAL-REVENUES> 6,077,944
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 664,740
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,758,316
<INCOME-PRETAX> (2,345,112)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,345,112)
<DISCONTINUED> 2,081,463
<EXTRAORDINARY> 3,015,210
<CHANGES> 0
<NET-INCOME> 2,751,561
<EPS-PRIMARY> 44.48
<EPS-DILUTED> 44.48
</TABLE>
