CAPITAL REALTY INVESTORS III LTD PARTNERSHIP, 10-Q, 1997-04-30

CAPITAL REALTY INVESTORS III LTD PARTNERSHIP
10-Q, 1997-04-30
REAL ESTATE

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<PAGE>

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

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

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

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

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

Maryland 52-1311532
- ----------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

11200 Rockville Pike, Rockville, Maryland 20852
- ----------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)

(301) 468-9200
--------------------------------------------------------------------------
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No

Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

Class Outstanding at March 31, 1997
- ------------------------- ----------------------------------
(Not applicable) (Not applicable)

<PAGE>

CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 1997

Page
----

PART I. Financial Information (Unaudited)

Item 1. Financial Statements

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

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

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

Notes to Consolidated Financial Statements . . . . 4

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

PART II. Other Information

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

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

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

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

CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

CONSOLIDATED BALANCE SHEETS

ASSETS

March 31, December 31,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Investments in partnerships $ 24,454,595 $ 24,383,751
Cash and cash equivalents 3,988,164 3,942,254
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $441,577 and $475,794,
respectively 563,668 572,045
Property purchase costs, net of accumulated amortization of
$404,880 and $425,423, respectively 542,816 550,713
Other assets 85,919 78,199
------------ ------------
Total assets $ 29,635,162 $ 29,526,962
============ ============

LIABILITIES AND PARTNERS' DEFICIT

Due on investments in partnerships, net of unamortized discount on
purchase money notes of $7,393,327 and $8,394,548,
respectively $ 18,454,113 $ 19,552,892
Accrued interest payable 41,126,969 43,663,393
Consulting fees payable to related parties 42,500 42,500
Accounts payable and accrued expenses 87,697 94,221
------------ ------------
Total liabilities 59,711,279 63,353,006
------------ ------------
Commitments and contingencies

Partners' capital (deficit):
Capital paid-in:
General Partners 2,000 2,000
Limited Partners 60,001,500 60,001,500
------------ ------------
60,003,500 60,003,500
Less:
Accumulated distributions to partners (2,288,681) (2,288,681)
Offering costs (6,156,933) (6,156,933)
Accumulated losses (81,634,003) (85,383,930)
------------ ------------
Total partners' deficit (30,076,117) (33,826,044)
------------ ------------
Total liabilities and partners' deficit $ 29,635,162 $ 29,526,962
============ ============
</TABLE>

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

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

CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

<TABLE>
<CAPTION>
For the three months ended
March 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Share of income from partnerships $ 351,087 $ 4,791,987
------------ ------------
Other revenue and expenses:
Revenue:
Interest and other income 50,069 45,990
------------ ------------
Expenses:
Interest 1,970,410 2,108,633
Management fee 75,000 75,000
General and administrative 39,412 43,199
Professional fees 23,988 26,892
Amortization 16,274 16,866
------------ ------------
2,125,084 2,270,590
------------ ------------
Total other revenue and expenses (2,075,015) (2,224,600)
------------ ------------
(Loss) income before gain on disposition of investment in partnership (1,723,928) 2,567,387

Gain on disposition of investment in partnership -- 2,043,167
------------ ------------
(Loss) income before extraordinary gain from extinguishment of debt (1,723,928) 4,610,554

Extraordinary gain from extinguishment of debt 5,473,855 3,015,210
------------ ------------
Net income 3,749,927 7,625,764

Accumulated losses, beginning of period (85,383,930) (88,135,491)
------------ ------------
Accumulated losses, end of period $(81,634,003) $(80,509,727)
============ ============
Income allocated to General Partners (1.51%) $ 56,624 $ 115,149
============ ============
Income allocated to Initial and Special Limited Partners (1.49%) $ 55,874 $ 113,624
============ ============
Income allocated to Additional Limited Partners (97%) $ 3,637,429 $ 7,396,991
============ ============
Income per unit of Additional Limited Partnership Interest based
on 60,000 units outstanding $ 60.62 $ 123.28
============ ============
</TABLE>

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

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

CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

For the three months ended
March 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,749,927 $ 7,625,764

Adjustments to reconcile net income to net cash used in
operating activities:
Share of income from partnerships (351,087) (4,791,987)
Amortization of deferred costs 16,274 16,866
Amortization of discount on purchase money notes 1,001,221 929,070
Gain on disposition of investment in partnership -- (2,043,167)
Extraordinary gain on extinguishment of debt (5,473,855) (3,015,210)
Payment of purchase money note interest (131,758) (127,145)

Changes in assets and liabilities:
Increase in other assets (7,720) (213,122)
Increase in accrued interest payable 969,189 1,179,564
(Decrease) increase in accounts payable and accrued expenses (6,524) 87,354
------------ ------------
Net cash used in operating activities (234,333) (352,013)
------------ ------------

Cash flows from investing activities:
Receipt of distributions from partnerships 280,243 8,537,442
Proceeds from disposition of investment in partnership -- 3,292,471
------------ ------------
Net cash provided by investing activities 280,243 11,829,913
------------ ------------
Cash flows from financing activities:
Pay-off of purchase money notes and related interest -- (10,961,076)
------------ ------------
Net cash used in financing activities -- (10,961,076)
------------ ------------

Net increase in cash and cash equivalents 45,910 516,824

Cash and cash equivalents, beginning of period 3,942,254 2,897,013
------------ ------------
Cash and cash equivalents, end of period $ 3,988,164 $ 3,413,837
============ ============

</TABLE>

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

In the opinion of C.R.I., Inc. (CRI), the Managing General Partner, the
accompanying unaudited consolidated financial statements contain all adjustments
of a normal recurring nature necessary to present fairly the consolidated
financial position of Capital Realty Investors-III Limited Partnership (the
Partnership) as of March 31, 1997 and December 31, 1996, and its consolidated
results of operations for the three months ended March 31, 1997 and 1996 and its
consolidated cash flows for the three months ended March 31, 1997 and 1996.

These unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in consolidated financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. While the Managing General Partner believes that
the disclosures presented are adequate to make the information not misleading,
it is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and the notes included in
the Partnership's Annual Report filed on Form 10-K for the year ended
December 31, 1996.

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

2. INVESTMENTS IN PARTNERSHIPS

The Partnership's obligations with respect to its investments in Local
Partnerships, in the form of purchase money notes having a principal balance of
$25,727,896 (exclusive of unamortized discount on purchase money notes of
$7,393,327) plus accrued interest of $41,092,993 as of March 31, 1997, are
payable in full upon the earliest of: (i) sale or refinancing of the respective
Local Partnership's rental property; (ii) payment in full of the respective
Local Partnership's permanent loan; or (iii) maturity. Purchase money notes in
an aggregate principal amount of $1,726,070 and $2,100,000 matured on January 1,
1996 and May 1, 1996, respectively, as discussed below. Purchase money notes
having a principal balance of $1,365,000 and $1,700,000 mature on July 1, 1997
and December 31, 1997, respectively, 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 Partnerships.
There is no assurance that the underlying properties will have sufficient
appreciation and equity to enable the Partnership to pay the purchase money
notes' principal and accrued interest when due. If a purchase money note is not
paid in accordance with its terms, the Partnership will either have to
renegotiate the terms of repayment or risk losing its partnership interest in
the Local Partnership. The Managing General Partner is continuing to
investigate possible alternatives to reduce the Partnership's long-term debt
obligations. These alternatives include, among others, retaining the cash
available for distribution to meet the purchase money note requirements, buying
out certain purchase money notes at a discounted price, extending the due dates
of certain purchase money notes, or refinancing the respective properties'
underlying debt and using the Partnership's share of the proceeds to pay off or
buy down certain purchase money note obligations.

Interest expense on the Partnership's purchase money notes for the three
months ended March 31, 1997 and 1996 was $1,970,410 and $2,108,633,
respectively. Amortization of the imputed interest on purchase money notes

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN PARTNERSHIPS - Continued

increased interest expense during the three months ended March 31, 1997 by
$1,001,221 and $929,070, respectively. The accrued interest on the purchase
money notes of $41,092,993 and $43,629,417 as of March 31, 1997 and December 31,
1996, respectively, is due on the respective maturity dates of the purchase
money notes or earlier, in some instances, if the pertinent Local Partnership
has distributable net cash flow, as defined in the relevant Local Partnership
agreements.

As of March 31, 1997 and December 31, 1996, the Partnership'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:

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

</TABLE>

(A) The Partnership defaulted on its purchase money notes relating to
Briar Crest I, Briar Crest II and Briar Hills on January 1, 1996 when
the notes matured and were not paid. The default amounts included
principal and accrued interest as follows:

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN PARTNERSHIPS - Continued

<TABLE>
<CAPTION>
Accrued Interest Accrued Interest
Property Principal January 1, 1996 March 31, 1997
-------- --------- ---------------- ----------------
<S> <C> <C> <C>
Briar Crest I $ 525,050 $ 746,672 $ 832,634
Briar Crest II 415,920 574,963 643,580
Briar Hills 458,100 683,564 759,010
---------- ---------- ----------
$1,399,070 $2,005,199 $2,235,224
========== ========== ==========

</TABLE>

On April 1, 1997, the Partnership and the purchase money note holders
entered agreements extending the purchase money note maturity dates
until January 1, 2002. In connection with the terms of the extension
agreements, on April 10, 1997, the Partnership made principal payments
of $55,000, $54,800 and $55,000 relating to the purchase money notes
of Briar Crest I, Briar Crest II and Briar Hills, respectively.
Additionally, the Partnership paid $30,243, $34,391 and $36,380 to
reimburse the purchase money note holders and related entities for Low
Income Housing Preservation and Resident Homeownership Act of 1990
(LIHPRHA) processing and legal fees previously incurred on behalf of
Briar Crest I, Briar Crest II and Briar Hills, respectively. The
LIHPRHA program is discussed further below. Pursuant to the extension
agreements, the Partnership will pay up to 70% of all annual cash flow
distributions received from the related Local Partnerships to the
purchase money note holders. The Partnership did not receive any cash
flow distributions from the related Local Partnerships for the three
months ended March 31, 1997 and 1996, respectively.

(B) The Partnership defaulted on its purchase money notes relating to
Indian Hills Townhouses, Limited (Indian Hills) on January 1, 1996
when the notes matured and were not paid. The default amount included
principal and accrued interest of $327,000 and $477,973, respectively.
As of April 30, 1997, principal and interest totalling $327,000 and
$537,083, respectively, were due. The Managing General Partner has
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. As such, there is no
assurance that the Partnership will be able to retain its interest in
Indian Hills. The purchase money notes relating to Indian Hills are
nonrecourse and secured solely by the Partnership's interest in the
Local Partnership. As of March 31, 1997, the carrying amount of the
Partnership's investment in Indian Hills exceeds the amount of
nonrecourse indebtedness. Should the Partnership be unable to retain
its interest in Indian Hills, the Partnership's exposure to loss is
limited to this excess, which at March 31, 1997, was approximately
$800,000. Additionally, should the Partnership be unable to retain
its interest in Indian Hills, the Partnership's investments in
partnerships would be reduced by the Partnership's basis in Indian
Hills, which as of March 31, 1997, was approximately 7% of the total
investments in partnerships.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN PARTNERSHIPS - Continued

(C) On January 5, 1994 the local general partners of Park Heights filed a
notice of intent to participate under the LIHPRHA program. On
February 2, 1996, the local general partners of Park Heights sold the
property to a non-profit entity. The sale of the property generated
net proceeds to the Partnership of approximately $1.27 million. The
proceeds were net of $2.135 million used to retire, at a discount, the
Partnership's purchase money note obligation with respect to the
property. The sale provided proceeds to the Partnership in excess of
its investment in the Local Partnership, and resulted in a net
financial statement gain in 1996 of approximately $5.1 million, of
which approximately $3 million resulted from the retirement of the
purchase money note obligation with respect to the property. The
federal tax gain was approximately $7.1 million. On April 30, 1996,
the Partnership distributed $579,000 (or $9.65 per Additional Limited
Partner unit) to the Additional Limited Partners. The Managing
General Partner is retaining all of the Partnership's remaining
undistributed net sale proceeds 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 April 25, 1997, $42,500 of these fees have not been
paid.

(D) On March 1, 1996, the local general partner of Village Squire I & II
and Village Squire III refinanced the loans secured by first mortgages
on the respective properties. On March 1, 1996, proceeds provided to
the Partnership from the refinancings, along with approximately
$560,000 of existing Partnership cash resources, were used to pay off
the related purchase money note obligations. This advance was
subsequently repaid by the Local Partnership during 1996. The
refinancing proceeds received by the Partnership exceeded the
Partnership's investment in the respective Local Partnerships by
approximately $4.1 million, and is included in share of income from
partnerships in the consolidated statements of operations.

(E) The Partnership defaulted on its purchase money notes relating to
Cedar Valley on May 1, 1996 when the notes matured and were not paid.
The default amount included principal and accrued interest of
$2,100,000 and $3,166,710, respectively. On May 2, 1996, the
noteholders demanded payment on the purchase money notes. The
Managing General Partner began negotiations with the noteholders to
extend the purchase money notes until 1998. The noteholders rejected
this offer and the parties agreed to extend the purchase money notes
until January 1997. On January 16, 1997, the purchase money
noteholders foreclosed on the Partnership's interest in Cedar Valley.
As a result of the foreclosure on the Partnership's interest in Cedar
Valley, the purchase money noteholders assumed ownership of the
Partnership's interest in the Local Partnership. The Partnership's
loss of ownership interest in Cedar Valley did not impact the
Partnership's financial condition because the related purchase money
notes 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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN PARTNERSHIPS - Continued

December 31, 1996, in order to record the investment at its net
realizable value. The release of the Partnership's purchase money
note obligation as a result of the Partnership's loss of ownership
interest in Cedar Valley resulted in a net financial statement gain of
approximately $5.5 million during 1997. The federal tax gain is
estimated to be approximately $5.8 million.

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

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. On April 17, 1997, the Managing General
Partner reached an agreement in principle with one of the purchase money note
holders to extend the purchase money notes until October 1, 1999. This
agreement in principle is subject to the consent of the remaining purchase money
note holders. There is no assurance that a final agreement will be reached with
the purchase money note holders. The Managing General Partner anticipates
negotiating with the purchase money note holders of Winchester Gardens as well,
for a five year extension on the related purchase money notes. There is no
assurance that an agreement will be reached. Due to the uncertainty of a
satisfactory resolution with the purchase money noteholders related to the above
Local Partnerships, 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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN PARTNERSHIPS - Continued

March 31, 1997, was approximately 8% of the total investment in Local
Partnerships.

The Rolling Green at Milford (Rolling Green) 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 property remained
approximately 97% leased during the roof work, which was completed during 1996.
The Managing General Partner is currently negotiating a fifteen year extension
on the purchase money notes related to Rolling Green. The purchase money notes,
which aggregate a principal amount of $2,250,000, are due to mature on August
31, 1998. In connection with the proposed extension of the purchase money
notes, the Managing General Partner and the purchase money note holders are
jointly exploring various options to prepay the MHFA and HUD Section 236
interest rate subsidy loan, in order to maximize the cash flows from this
property. There is no assurance that the noteholders will agree to a fifteen-
year extension on the purchase money notes, or that a prepayment of the loan
will be made.

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 commenced its due diligence review, which was to expire on April
18, 1997. The due diligence review period was subsequently extended for seven
days, thereby expiring on April 25, 1997. Deposits made by the potential buyer
totalling $200,000 became non-refundable at the expiration of the due diligence
period, provided that Walden Apartments fulfills certain terms as set forth in
the purchase agreement. There is no assurance that a sale of Walden Apartments
will occur as the closing of the sale is contingent upon the satisfactory
fulfillment of certain terms as set forth in the purchase agreement.

Some of the rental properties owned by the Local Partnerships have
mortgages which are federally insured under Section 236 or Section 221(d)(3)of
the National Housing Act, as amended. LIHPRHA, which provided property owners
with restricted opportunities to sell low income housing, ended effective
September 30, 1996. However, HUD received approximately $175 million to fund
sales of qualifying properties under the LIHPRHA program during the federal
government's fiscal year 1997, which began October 1, 1996. Continued funding
of the LIHPRHA program after fiscal year 1997 is uncertain. There is no
assurance that a sale of any properties that previously qualified under the
LIHPRHA program will occur.

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN PARTNERSHIPS - Continued

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
provide additional funds to allow the property to convert to market rate units.
Where opportunities exist, the Managing General Partner will continue to work
with the Local Partnerships to develop a strategy that makes economic sense for
all parties involved.

The following are combined statements of operations for the thirty-three
and thirty-four Local Partnerships in which the Partnership has invested as of
March 31, 1997 and 1996, respectively. The 1996 statements contain information
on the Park Heights property through the date of sale. Additionally, the 1997
statements contain information on the Cedar Valley property through the date of
foreclosure. These statements are compiled from information supplied by the
management agents of the projects and are unaudited.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2. INVESTMENTS IN PARTNERSHIPS - Continued

COMBINED STATEMENTS OF OPERATIONS

(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Revenue:
Rental revenue $ 8,236,346 $ 8,168,032
Other 358,049 420,034
------------ ------------
8,594,395 8,588,066
------------ ------------
Expenses:
Operating 5,144,352 5,071,675
Interest 1,877,404 1,768,021
Depreciation and amortization 1,370,097 1,410,313
------------ ------------
8,391,853 8,250,009
------------ ------------
Net income $ 202,542 $ 338,057
============ ============
</TABLE>

As of March 31, 1997 and December 31, 1996, the Partnership's share of
cumulative losses to date for eleven of the thirty-three and thirty-four Local
Partnerships, respectively, exceeds the amount of the Partnership's investments
in these Local Partnerships by $12,178,288 and $12,026,985, respectively. As the
Partnership has no further obligation to advance funds or provide financing to
these Local Partnerships, the excess losses have not been reflected in the
accompanying consolidated financial statements.

3. RELATED-PARTY TRANSACTIONS

In accordance with the terms of the Partnership Agreement, the Partnership
is obligated to reimburse the Managing General Partner for its direct expenses
in managing the Partnership. The Partnership paid $24,622 and $35,054 for the
three months ended March 31, 1997 and 1996, respectively, as direct
reimbursement of expenses incurred on behalf of the Partnership. Such expenses
are included in the statement of operations as general and administrative
expenses. Additionally, the Partnership is obligated to pay an annual incentive
management fee (the Management Fee) after all other expenses of the Partnership
are paid. The Partnership paid the Managing General Partner a Management Fee of
$75,000, for each of the three-month periods ended March 31, 1997 and 1996.

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 it owns. The payment of the
fee is subject to certain restrictions, including the achievement of a certain
level of sales proceeds and making certain minimum distributions to limited

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

3. RELATED-PARTY TRANSACTIONS - Continued

partners. The Managing General Partner and/or its affiliates earned net fees
for services relating to the sale of Park Heights of $117,028 on February 2,
1996. As of April 25, 1997, $42,500 of these fees have not been paid.

4. CONTINGENCIES

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4. CONTINGENCIES - Continued

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

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

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

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

The Partnership's liquidity, with cash resources of $3,988,164 (or
approximately $64.48 per Additional Limited Partner unit) and $3,942,254 (or
approximately $63.73 per Additional Limited Partner unit) as of March 31, 1997
and December 31, 1996, respectively, along with anticipated future cash
distributions from the Local Partnerships, is expected to meet its current and
anticipated operating cash needs. As of April 25, 1997, there are no material
commitments for capital expenditures.

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

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

</TABLE>

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

</TABLE>

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

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

realizable value. The release of the Partnership's purchase money
note obligation as a result of the Partnership's loss of ownership
interest in Cedar Valley resulted in a net financial statement gain of
approximately $5.5 million during 1997. The federal tax gain is
estimated to be approximately $5.8 million.

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

</TABLE>

-18-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. 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.
For the three months ended March 31, 1997, the receipt of distributions from
Local Partnerships was adequate to support operating cash requirements.

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

The Partnership's net income for the three months ended March 31, 1997
decreased from the corresponding period in 1996 primarily as a result of a
decrease in share of income from partnerships principally due to the receipt of
refinancing proceeds during 1996 from Village Squire I & II and Village Squire
III mortgages which were in excess of the Partnership's investments in the
respective Local Partnerships, as discussed above. Contributing to the decrease
in the Partnership's net income was the gain on disposition of the Partnership's
investment in Park Heights during 1996, as discussed above. Partially
offsetting the decrease in the Partnership's net income was an increase in
extraordinary gain from extinguishment of debt related to the Cedar Valley
foreclosure, and a decrease in interest expense due to the pay-off of the
Village Squire I & II, Village Squire III and Park Heights purchase money notes
during 1996, as discussed above.

For financial reporting purposes, the Partnership, as a limited partner in
the Local Partnerships, does not record losses from the Local Partnerships in
excess of its investment. As a result, the Partnership's recognized income for
the three months ended March 31, 1997 did not include losses of $151,303,
compared to excluded losses of $205,863 for the three months ended March 31,
1996.

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

totalling $200,000 became non-refundable at the expiration of the due diligence
period, provided that Walden Apartments fulfills certain terms as set forth in
the purchase agreement. There is no assurance that a sale of Walden Apartments
will occur as the closing of the sale is contingent upon the satisfactory
fulfillment of certain terms as set forth in the purchase agreement.

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

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

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

General
-------

Following subsequent litigation, none of which involved the Partnership, on
June 12, 1996, Mr. Schwartzberg, CRI and others entered an agreement (which

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

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

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

The Partnership defaulted on its purchase money notes relating to Indian
Hills Townhouses, Limited (Indian Hills) on January 1, 1996 when the notes
matured and were not paid. The default amount included principal and accrued
interest of $327,000 and $477,973, respectively. As of April 30, 1997,
principal and interest totalling $327,000 and $537,083, respectively, were due.
The Managing General Partner has 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. As such, there is no
assurance that the Partnership will be able to retain its interest in Indian
Hills. The purchase money notes relating to Indian Hills are nonrecourse and
secured solely by the Partnership's interest in the Local Partnership. As of
March 31, 1997, the carrying amount of the Partnership's investment in Indian
Hills exceeds the amount of nonrecourse indebtedness. Should the Partnership be
unable to retain its interest in Indian Hills, the Partnerships exposure to loss
is limited to this excess, which at March 31, 1997, was approximately $800,000.
Additionally, should the Partnership be unable to retain its interest in Indian
Hills, the Partnership's investments in partnerships would be reduced by the
Partnership's basis in Indian Hills, which as of March 31, 1997, was
approximately 7% of the total investments in partnerships.

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

No reports on Form 8-K were filed with the Commission during the quarter
ended March 31, 1997.

All other items are not applicable.

-22-
<PAGE>

SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

CAPITAL REALTY INVESTORS-III
LIMITED PARTNERSHIP
(Registrant)

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

April 30, 1997 By: /s/ Susan R. Campbell
- ----------------------- ------------------------------
Date Susan R. Campbell
Senior Vice President

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

-23-
<PAGE>

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

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

27 Financial Data Schedule Filed herewith electronically

-24-

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

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,988,164
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 29,635,162
<CURRENT-LIABILITIES> 0
<BONDS> 59,581,082
0
0
<COMMON> 0
<OTHER-SE> (30,076,117)
<TOTAL-LIABILITY-AND-EQUITY> 29,635,162
<SALES> 0
<TOTAL-REVENUES> 401,156
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 154,674
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,970,410
<INCOME-PRETAX> (1,723,928)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,723,928)
<DISCONTINUED> 0
<EXTRAORDINARY> 5,473,855
<CHANGES> 0
<NET-INCOME> 3,749,927
<EPS-PRIMARY> 60.62
<EPS-DILUTED> 60.62

</TABLE>