CAPITAL REALTY INVESTORS III LTD PARTNERSHIP, 10QSB, 1999-08-11

CAPITAL REALTY INVESTORS III LTD PARTNERSHIP
10QSB, 1999-08-11
REAL ESTATE

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<PAGE>

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

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 1999
-------------

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

CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
--------------------------------------------------------------------------
(Exact name of small business issuer 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
--------------------------------------------------------------------------
(Issuer's telephone number, including area code)

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

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

Not applicable Not applicable
- -------------------------- ---------------------------------------
(Class) (Outstanding at June 30, 1999)
<PAGE>

CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

INDEX TO FORM 10-QSB

FOR THE QUARTER ENDED JUNE 30, 1999

Page
----

PART I. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets - June 30, 1999
and December 31, 1998 . . . . . . . . . . . . . 1

Consolidated Statements of Operations and
Accumulated Losses - for the three and
six months ended June 30, 1999 and 1998 . . . . 2

Consolidated Statements of Cash Flows - for
the six months ended June 30, 1999 and 1998 . . 3

Notes to Consolidated Financial Statements
June 30, 1999 and 1998 . . . . . . . . . . . . . 4

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . 17

PART II. Other Information

Item 3. Defaults Upon Senior Securities . . . . . . . . . . 23

Item 5. Other Information . . . . . . . . . . . . . . . . . 26

Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . 27

Signature . . . . . . . . . . . . . . . . . . . . . . . . 28

Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . 29
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------

CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

CONSOLIDATED BALANCE SHEETS

ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Investments in and advances to partnerships $ 20,319,012 $ 21,458,167
Partnership interest held in escrow 1,311,603 --
Cash and cash equivalents 10,349,729 10,804,306
Investments held in escrow -- 100,000
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $484,297 and $478,988, respectively 455,885 483,132
Property purchase costs, net of accumulated amortization of
$442,875 and $438,256, respectively 438,864 464,823
Other assets -- 5,982
------------ ------------

Total assets $ 32,875,093 $ 33,316,410
============ ============

LIABILITIES AND PARTNERS' DEFICIT

Due on investments in partnerships $ 24,790,683 $ 23,387,882
Accrued interest payable 44,501,521 45,129,245
Accounts payable 112,524 141,849
------------ ------------
Total liabilities 69,404,728 68,658,976
------------ ------------

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 (4,088,131) (4,088,131)
Offering costs (6,156,933) (6,156,933)
Accumulated losses (86,288,071) (85,101,002)
------------ ------------
Total partners' deficit (36,529,635) (35,342,566)
------------ ------------
Total liabilities and partners' deficit $ 32,875,093 $ 33,316,410
============ ============
</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

AND ACCUMULATED LOSSES

(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Share of income from partnerships $ 247,277 $ 4,796,488 $ 855,580 $ 5,077,782
------------ ------------ ------------ ------------
Other revenue and expenses:
Revenue:
Interest and other income 120,454 122,656 243,514 227,995
------------ ------------ ------------ ------------
Expenses:
Interest 906,764 1,983,307 2,081,617 3,936,901
Management fee 75,000 75,000 150,000 150,000
General and administrative 70,571 51,821 140,591 105,381
Professional fees 25,521 29,479 50,643 55,819
Amortization of deferred costs 15,543 15,827 31,086 31,652
------------ ------------ ------------ ------------
1,093,399 2,155,434 2,453,937 4,279,753
------------ ------------ ------------ ------------
Total other revenue and expenses (972,945) (2,032,778) (2,210,423) (4,051,758)
------------ ------------ ------------ ------------

(Loss) income before loss on disposition of
investment in partnership (725,668) 2,763,710 (1,354,843) 1,026,024

Loss on disposition of investment in partnership -- (221,727) -- (221,727)
------------ ------------ ------------ ------------

(Loss) income before extraordinary gain from
extinguishment of debt (725,668) 2,541,983 (1,354,843) 804,297

Extraordinary gain from extinguishment of debt -- -- 167,774 --
------------ ------------ ------------ ------------

Net (loss) income (725,668) 2,541,983 (1,187,069) 804,297

Accumulated losses, beginning of period (85,562,403) (85,988,688) (85,101,002) (84,251,002)
------------ ------------ ------------ ------------
Accumulated losses, end of period $(86,288,071) $(83,446,705) $(86,288,071) $(83,446,705)
============ ============ ============ ============

Net (loss) income allocated to General Partners (1.51%) $ (10,958) $ 38,384 $ (17,925) $ 12,145
============ ============ ============ ============
</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 OPERATIONS

AND ACCUMULATED LOSSES - Continued

Net (loss) income allocated to Additional Limited
Partners (97%) $ (703,898) $ 2,465,723 $ (1,151,457) $ 780,168
============ ============ ============ ============
Net (loss) income per unit of Additional Limited
Partner Interest based on 60,000 units outstanding $ (11.73) $ 41.10 $ (19.19) $ 13.00
============ ============ ============ ============
</TABLE>

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

-3-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------

CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
June 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (1,187,069) $ 804,297

Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Share of income from partnerships (855,580) (5,077,782)
Amortization of deferred costs 31,086 31,652
Amortization of discount on purchase money notes 346,215 2,048,895
Loss on disposition of investment in partnership -- 221,727
Extraordinary gain on extinguishment of debt (167,774) --

Changes in assets and liabilities:
Decrease (increase) in other assets 5,982 (228,362)
Increase in accrued interest payable 1,735,402 1,893,525
Payment of purchase money note interest (343,766) (403,576)
(Decrease) increase in accounts payable (29,325) 7,427
Increase in consulting fees payable to related parties -- 20,097
------------ ------------
Net cash used in operating activities (464,829) (682,100)
------------ ------------

Cash flows from investing activities:
Receipt of distributions from partnerships 705,252 5,151,866
Proceeds from disposition of investment in partnership -- 165,402
------------ ------------
Net cash provided by investing activities 705,252 5,317,268
------------ ------------

Cash flows from financing activities:
Payment of purchase money note principal (425,000) --
Pay-off of purchase money notes and related interest (370,000) (1,652,605)
Release of investment held in escrow 100,000 --
------------ ------------
Net cash used in financing activities (695,000) (1,652,605)
------------ ------------
Net (decrease) increase in cash and cash equivalents (454,577) 2,982,563

Cash and cash equivalents, beginning of period 10,804,306 8,268,903
------------ ------------
Cash and cash equivalents, end of period $ 10,349,729 $ 11,251,466
============ ============
</TABLE>

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

-4-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------

CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
June 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 343,766 $ 920,662
============ ============

Noncash financing activity:
Transfer of accrued interest payable to due on
investment in partnerships $ 1,846,067 $ --
============ ============
</TABLE>

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1999 AND 1998

(Unaudited)

1. BASIS OF PRESENTATION

In the opinion of C.R.I., Inc. (CRI), the Managing General Partner, the
accompanying unaudited financial statements reflect all adjustments, consisting
of normal recurring accruals, necessary for a fair presentation of the financial
position of Capital Realty Investors-III Limited Partnership (the Partnership)
as of June 30, 1999, and the results of its operations for the three and six
months ended June 30, 1999 and 1998, and its cash flows for the six months ended
June 30, 1999 and 1998. The results of operations for the interim period ended
June 30, 1999, are not necessarily indicative of the results to be expected for
the full year.

The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles and with the
instructions to Form 10-QSB. Certain information and accounting policies and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such instructions. These condensed financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Partnership's annual report on Form 10-KSB at December 31, 1998.

Certain amounts in the consolidated financial statements for the year ended
December 31, 1998 have been reclassified to conform to the 1999 presentation.

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS

a. Due on 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
$24,898,388 (exclusive of unamortized discount on purchase money notes of
$227,249) plus accrued interest of $44,467,545 as of June 30, 1999, are payable
in full 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 the
aggregate principal amount of $1,700,000, which originally matured on December
31, 1997, have been extended until January 31, 2001. Purchase money notes in
the aggregate principal amount of $364,481 matured January 1, 1999 and were paid
off, at a discount, on February 5, 1999. Purchase money notes in the aggregate
principal amount of $1,760,000 matured on January 1, 1999 and were extended to
January 1, 2004. Purchase money notes in the aggregate principal amount of
$900,000 matured on January 1, 1999 and were extended to January 1, 2004.
Purchase money notes in the aggregate principal amounts of $5,280,000 and
$5,290,000 matured in January and February, 1999, respectively, and were not
paid or extended. Purchase money notes in the original aggregate principal
amount of $775,000 matured on January 1, 1999, were partially paid, and have
been extended to January 1, 2002. Purchase money notes in the original
aggregate principal amount of $1,275,000 matured on January 1, 1999, were
partially paid, and have been extended to July 15, 2000. Purchase money notes
in the aggregate principal amount of $850,000 matured on June 30, 1999 and have
not been paid or extended. Purchase money notes in the aggregate principal
amount of $734,500 matured on August 1, 1999 and have not been paid or extended.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1999 AND 1998

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

Purchase money notes in the aggregate principal amount of $1,365,000 mature on
October 1, 1999. The remaining purchase money notes mature during 2002 through
2015.

The purchase money notes, which are nonrecourse to the Partnership, 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 respective Local Partnership. The Partnership's inability to pay certain of
the purchase money note principal and accrued interest balances when due, and
the resulting uncertainty regarding the Partnership's continued ownership
interest in the related Local Partnerships, does not adversely impact the
Partnership's financial condition because the purchase money notes are
nonrecourse and secured solely by the Partnership's interest in the related
Local Partnerships. Therefore, should the investment in any of the Local
Partnerships with maturing purchase money notes not produce sufficient value to
satisfy the related purchase money notes, the Partnership's exposure to loss is
limited because the amount of the nonrecourse indebtedness of each of the
maturing purchase money notes exceeds the carrying amount of the investment in
and advances to each of the related Local Partnerships. Thus, even a complete
loss of one of these Local Partnership's interest would not have a material
adverse impact on the financial condition of the Partnership. Additionally, in
the event of a foreclosure, the Partnership would lose its investment in the
Local Partnership and, likewise, its share of future cash flow distributed by
the Local Partnership from rental operations, sales or refinancings. Of the 31
Local Partnerships in which the Partnership is invested as of both June 30, 1999
and December 31, 1998, 11 Local Partnerships have associated purchase money
notes which mature through June 30, 2000 and which remain unpaid or unextended
as of August 11, 1999. See further discussions of certain purchase money notes,
below.

The following chart presents information related to purchase money notes
which mature through June 30, 2000, or which have matured and remain unpaid or
unextended as of August 11, 1999. Information for the first quarter of 1999
does not include notes which matured during that quarter and which were paid off
or extended. See further discussions of these purchase money notes, below.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1999 AND 1998

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

Carrying Amount
of Partnership's
Investment in Aggregate Aggregate
and Advances to Principal Accrued
Number of Underlying Local Balance Interest
Purchase Underlying Partnerships as as of Balance as of
Money Note Local Percentage of June Percentage June Percentage June Percentage
(PMN) Maturity Partnerships of Total 30, 1999 of Total 30, 1999 of Total 30, 1999 of Total
- ---------------- ------------ ---------- ---------------- ---------- ----------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1st Quarter 1999 6 19% $ 7,272,025 36% $10,570,000 42% $ 21,308,208 48%
2nd Quarter 1999 1 3% 1,373,212 7% 850,000 3% 1,597,852 4%
3rd Quarter 1999 1 3% 1,170,099 6% 734,500 3% 1,358,443 3%
4th Quarter 1999 3 10% 1,752,333 8% 1,365,000 6% 2,380,301 5%
---- ----- --------------- ----- ----------- ----- ------------- -----
Total through
6/30/2000 11 35% $ 11,567,669 57% $13,519,500 54% $ 26,644,804 60%
==== ===== =============== ===== =========== ===== ============= =====

Total, Local
Partnerships 31 100% $ 20,319,012 100% $24,898,388 100% $ 44,467,545 100%
==== ===== =============== ===== =========== ===== ============= =====

</TABLE>

The Managing General Partner is continuing to investigate possible
alternatives to reduce the Partnership's 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,
refinancing the respective properties' underlying debt or selling the underlying
real estate and using the Partnership's share of the proceeds to pay or buy down
certain purchase money note obligations. Although the Managing General Partner
has had some success applying these strategies in the past, the Managing General
Partner cannot assure that these strategies will always be successful. Based on
preliminary discussions with the holders of purchase money notes maturing
through June 30, 2000, the Managing General Partner anticipates that, at least
in some instances, the noteholders may not be willing to negotiate any extension
or discounted pay off. In such instances, upon maturity of the purchase money
notes, the noteholders may have the right to foreclose on the Partnership's
interest in the related Local Partnerships. In the event of a foreclosure, the
excess of the nonrecourse indebtedness over the carrying amount of the
Partnership's investment in the related Local Partnership would be deemed
cancellation of indebtedness income which would be taxable to Limited Partners
at a federal tax rate of up to 39.6%. Additionally, in the event of a
foreclosure, the Partnership would lose its investment in the Local Partnership
and, likewise, its share of future cash flow distributed by the Local
Partnership from rental operations, sales or refinancings. Of the 31 Local
Partnerships in which the Partnership is invested as of both June 30, 1999 and

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1999 AND 1998

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

December 31, 1998, the 11 Local Partnerships with associated purchase money
notes which mature through June 30, 2000 and which remain unpaid or unextended
as of August 11, 1999, represent the following percentages of the Partnership's
total distributions received from Local Partnerships and share of income from
Local Partnerships.

Percentage of Total Partnership's Share of
For the Six Month Distributions Received Income from
Periods Ending from Local Partnerships Local Partnerships
----------------- ----------------------- ----------------------
<S> <C> <C>
June 30, 1999 28% $ 529,021
June 30, 1998 4% 465,125

</TABLE>

Interest expense on the Partnership's purchase money notes for the three
and six months ended June 30, 1999 was $906,764 and $2,081,617, respectively,
and $1,983,307 and $3,936,901 for the three and six months ended June 30, 1998,
respectively. Amortization of discount on purchase money notes increased
interest expense during the three and six months ended June 30, 1999 by $25,918
and $346,215, respectively, and $1,048,054 and $2,048,895 for the three and six
months ended June 30, 1998, respectively. The accrued interest payable on the
purchase money notes of $44,467,545 and $45,095,269 as of June 30, 1999 and
December 31, 1998, respectively, is due on the respective maturity dates of the
purchase money notes or earlier, in some instances, if (and to the extent of a
portion thereof) the related Local Partnership has distributable net cash flow,
as defined in the relevant Local Partnership agreement.

Audubon Towers
--------------

The Partnership defaulted on the purchase money note related to Audubon
Towers Limited Partnership (Audubon Towers) on January 1, 1999 when the note
matured and was not paid. The default amount included principal and accrued
interest of $1,275,000 and $3,272,276, respectively. In July 1999, the
Partnership and the noteholder agreed to extend the maturity date of the
purchase money note to July 15, 2000, in exchange for a partial principal
payment. The maturity date may be further extended through January 1, 2003, in
the event certain economic thresholds are met as a result of the contemplated
refinancing of the property's first mortgage loan.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1999 AND 1998

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

Bartley Manor, Village Green and Village Square
-----------------------------------------------

The Partnership is currently negotiating with the holders of purchase money
notes related to Bartley Manor Limited Partnership (Bartley Manor), Village
Green of Wisconsin Limited (Village Green) and Village Square Limited
Partnership (Village Square) to either pay off the purchase money notes at a
discount or, at the noteholders' option, to sell the Partnership's interests in
the related Local Partnerships to the noteholders for the full principal and
accrued interest outstanding at the time of the exercise of the option. The
purchase money notes are in the aggregate principal amounts of $700,000,
$275,000 and $390,000 for Bartley Manor, Village Green and Village Square,
respectively, and are due to mature on October 1, 1999. There is no assurance
that any agreements will be obtained.

College Park
------------

The Partnership defaulted on its purchase money notes related to College
Park Limited (College Park) on January 1, 1999, when the notes matured and were
not paid. The default amount included aggregate principal and accrued interest
of $880,000 and $1,622,642, respectively. As of August 11, 1999, aggregate
principal and accrued interest of $880,000 and $1,719,710, respectively, were
due. The Partnership attempted to negotiate with the noteholder of record to
extend the maturity dates of the purchase money notes for five years, but
received no response. In March 1999, the Partnership received notice of a
collection action on the purchase money notes by two individuals who claimed to
be the noteholders. The Partnership retained local counsel to defend the
lawsuit. On July 26, 1999, the Partnership received notice that the plaintiffs
have moved to dismiss their lawsuit. No communications have been received
concerning ultimate resolution of the purchase money notes.

Congress Plaza
--------------

The Partnership defaulted on its purchase money note related to Kapetan
Associates Limited Partnership (Congress Plaza) on January 1, 1999 when the note
matured and was not paid. The default amount included principal and accrued
interest of $775,000 and $2,162,200, respectively. On May 19, 1999, the
Partnership and the noteholder agreed to extend the maturity date of the
purchase money note to January 1, 2002, in exchange for a partial principal
payment. Under the extension agreement, documents transferring the
Partnership's interest in Congress Plaza to the noteholder were placed in escrow
to be released to the noteholder upon the earlier of (i) a future default by the
Partnership on the purchase money note, or (ii) the failure to pay the balance
of the purchase money note on or before January 1, 2002.

Due to the possible transfer of the Partnership's interest in the Local
Partnership to the noteholder, the Partnership's basis in the Local Partnership
as of June 30, 1999, which was $1,311,603, has been classified as partnership
interest held in escrow in the accompanying consolidated financial statements.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1999 AND 1998

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

The purchase money note related to Congress Plaza is nonrecourse and
secured solely by the Partnership's interest in the Local Partnership. The
release of the Partnership's purchase money note obligation as a result of the
possible loss of ownership interest in the Local Partnership would result in a
net financial statement gain of approximately $1.4 million.

Glen Agnes
----------

The Partnership defaulted on its purchase money note related to Glen Agnes
Associates (Glen Agnes) on June 30, 1999 when the note matured and was not paid.
The default amount included principal and accrued interest of $850,000 and
$1,597,852, respectively. As of August 11, 1999, principal and accrued interest
of $850,000 and $1,609,963, respectively, were due. The Partnership is
currently negotiating with the noteholder for the noteholder to purchase the
Partnership's interest in the Local Partnership. There is no assurance that an
agreement will be reached.

Greeley Manor
-------------

The Partnership defaulted on its purchase money note related to Greeley
Manor Company (Greeley Manor) on August 1, 1999 when the note matured and was
not paid. The default amount included principal and accrued interest of
$734,500 and $1,365,808, respectively. As of August 11, 1999, principal and
accrued interest of $734,500 and $1,367,740, respectively, were due. The
Partnership is currently negotiating the sale of the Partnership's interest in
Greeley Manor. There is no assurance that a sale will occur.

Heritage Estates I and Heritage Estates II
------------------------------------------

The Partnership defaulted on the purchase money notes related to Heritage
Estates Associates Phase I (Heritage Estates I) and Heritage Estates Associates
Phase II (Heritage Estates II) on January 1, 1999 when the notes matured and
were not paid. The default amounts included aggregate principal and accrued
interest of $2,600,000 and $4,357,413, respectively, for Heritage Estates I and
aggregate principal and accrued interest of $1,800,000 and $2,689,917,
respectively, for Heritage Estates II. As of August 11, 1999, principal and
accrued interest of $2,600,000 and $4,513,313, respectively, for Heritage
Estates I, and $1,800,000 and $2,832,197, respectively, for Heritage Estates II
were due. The Managing General Partner is currently exploring options to
refinance the properties' first mortgage loans and to extend the purchase money
notes related to Heritage Estates I and Heritage Estates II. There is no
assurance that refinancings or extensions will be obtained.

Highland Manor
--------------

The Partnership and the holders of the purchase money notes related to
Highland Manor, Limited (Highland Manor) have extended the maturity date thereof
from January 1, 1999 to January 1, 2004, subject to the noteholders' right to

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1999 AND 1998

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

accelerate the maturity date upon six months' notice. The purchase money notes
are in the aggregate principal amount of $1,760,000. In connection with the
extension, in addition to the payments required to be made to the noteholders by
the Partnership from cash flow distributions from Highland Manor, the
Partnership agreed to make annual payments to the noteholders of $100,000 on
January 15th of each calendar year commencing January 15, 2000. On October 23,
1998, the Partnership made a $100,000 payment of interest, which amount was held
in escrow, along with the purchase money note modification documents, until
January 1999, at which time the funds were released to the noteholders. This
payment has been, and subsequent payments will be, applied first as payment of
accrued interest, and thereafter to principal.

Lakewood Apartments
-------------------

The Partnership defaulted on its purchase money notes related to Eufaula
Apartments, Limited (Lakewood Apartments) on January 1, 1999 when the notes
matured and were not paid. The default amount included aggregate principal and
accrued interest of $364,481 and $169,468, respectively. On February 5, 1999,
the Partnership paid off, at a discount, the purchase money notes related to
Lakewood Apartments. The discounted payoff resulted in extraordinary gain from
extinguishment of debt of approximately $168,000 for financial statement
purposes, and in cancellation of indebtedness income of approximately $180,000
for Federal tax purposes.

Meadow Lanes II
---------------

The Partnership defaulted on its purchase money note related to Meadow
Lanes II Limited Dividend Housing Associates (Meadow Lanes II) on February 28,
1999 when the note matured and was not paid. The default amount included
principal and accrued interest of $650,000 and $1,250,201, respectively. As of
August 11, 1999, principal and accrued interest of $650,000 and $1,290,150,
respectively, were due. The Partnership is currently attempting to negotiate
with the noteholder to extend the maturity date of the purchase money note.
There is no assurance that an extension will be obtained.

Tyee Apartments
---------------

The Partnership defaulted on its purchase money notes related to Tyee
Associates (Tyee Apartments) on February 1, 1999 when the notes matured and were
not paid. The default amount included aggregate principal and accrued interest
of $1,305,000 and $3,312,902, respectively. As of August 11, 1999, aggregate
principal and accrued interest of $1,305,000 and $3,438,154 were due. As of
August 11, 1999, the Partnership had received an oral agreement from one of the
noteholders to extend the maturity date of its purchase money note for one year,
in exchange for a cash payment. Also, the Managing General Partner is currently
exploring options to refinance the mortgage loan associated with Tyee
Apartments. There is no assurance that an extension of the maturity dates of
the purchase money notes or a refinancing of the mortgage loan will be obtained.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1999 AND 1998

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

Victorian Towers
----------------

The Partnership defaulted on its purchase money note related to Victorian
Towers Associates (Victorian Towers) on January 1, 1999 when the note matured
and was not paid. The default amount included principal and accrued interest of
$900,000 and $1,710,560, respectively. As of August 11, 1999, principal and
accrued interest of $900,000 and $1,786,020 were due. The Managing General
Partner has reached an agreement in principle with the noteholder to extend the
maturity date of the purchase money note until January 1, 2004, and is
negotiating the related documents. There is no assurance that an extension of
the maturity date will be finalized.

Winchester Gardens
------------------

The Partnership defaulted on its purchase money notes related to Winchester
Gardens on December 31, 1997 when the notes matured and were not paid. The
default amount included principal and accrued interest of $1,700,000 and
$2,995,648, respectively. On April 7, 1998, the Partnership was served with a
complaint by the holders of the purchase money notes suing the Partnership, the
Managing General Partner and C.R.H.C., Incorporated (C.R.H.C. is an affiliate of
the Managing General Partner), for damages and seeking foreclosure on the
Partnership's interest in the Local Partnership. On July 29, 1998, the parties
agreed to a settlement which extends the maturity date of the purchase money
notes to January 31, 2001. In connection with this settlement, the Partnership
granted the noteholders an option during the period January 1, 2000 through June
30, 2000 to purchase the Partnership's and C.R.H.C.'s interests in the Local
Partnership for an amount equal to the outstanding principal balance of the
purchase money notes plus accrued interest. The option is void if the purchase
money notes and accrued interest are retired prior to exercise of the option.

Woodside Village
----------------

The Partnership defaulted on its purchase money notes related to Woodside
Village on February 1, 1999 when the notes matured and were not paid. The
default amounts included aggregate principal and accrued interest of $3,335,000
and $7,407,102, respectively. As of August 11, 1999, aggregate principal and
accrued interest of $3,335,000 and $7,685,219, respectively, were due. The
Partnership received a notice of default from someone who claimed to be the
current noteholder of the smaller note, but the original noteholder initially
disputed the validity of her claim. The Partnership received a Notice of
Default and U.C.C. Foreclosure of Security Interest on May 10, 1999 with respect
to a scheduled sale of 20% of the Partnership's limited partner interest in
Woodside Village on June 15, 1999. The Partnership has not received any
confirmation that the sale actually took place. The Partnership continues to
negotiate with the second noteholder to extend the maturity date of its purchase
money note for at least one year. There is no assurance that an extension of
the maturity date will be obtained.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1999 AND 1998

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

b. Property matters
----------------

Arboretum Village
-----------------

On April 30, 1998, the local managing general partner of Arboretum Villages
Limited Partnership (Arboretum Village) refinanced the loan secured by a first
mortgage on the property owned by Arboretum Village. A portion of the
refinancing proceeds was used to pay in full the Partnership's purchase money
note obligation totaling $774,325 related to this property. Additionally, the
Partnership received $2,670,000 during 1998 as additional proceeds from the
refinancing. The proceeds received by the Partnership (including the proceeds
paid to the noteholders) were in excess of the Partnership's basis in Arboretum
Village by approximately $3.4 million, and are included in share of income from
partnerships at June 30, 1998.

Greeley Manor
-------------

During the second quarter of 1999, the local managing general partner of
Greeley Manor Company (Greeley Manor) received an offer from a third party to
purchase the property. The local managing general partner rejected this
purchase offer.
Southmoor
---------

On June 30, 1998, the Partnership sold its interest in K-S Apartments
(Southmoor). The sale of the Partnership's interest in Southmoor generated
sufficient cash proceeds to pay in full the Partnership's purchase money note
obligation related to this property. In addition, on July 1, 1998, the
Partnership received cash proceeds of $228,000 from the sale. The sale proceeds
were not sufficient to recover the Partnership's basis in the Local Partnership
and resulted in a net financial statement loss of $221,727. The federal tax
gain was approximately $1.1 million. The Managing General Partner and/or its
affiliates earned net fees of $31,299 relating to this sale, which the
Partnership paid on July 10, 1998.

Tyee Apartments
---------------

The local managing general partner of Tyee Associates (Tyee Apartments)
received an offer from a third party to purchase the property. The local
managing general partner is currently considering the offer.

c. Summarized financial information
--------------------------------

Combined statements of operations for the 31 Local Partnerships in which
the Partnership is invested as of both June 30, 1999 and 1998, respectively,
follow. The combined statements have been compiled from information supplied by
the management agents of the projects and are unaudited.

-14-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1999 AND 1998

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

COMBINED STATEMENTS OF OPERATIONS
(Unaudited)

For the three months ended For the six months ended
June 30, June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Rental $ 7,368,238 $ 7,451,599 $ 14,854,560 $ 14,912,600
Other 113,061 421,779 699,481 783,135
------------ ------------ ------------ ------------
Total revenue 7,481,299 7,873,378 15,554,041 15,695,735
------------ ------------ ------------ ------------
Expenses:
Operating 4,413,787 4,445,168 9,051,108 9,031,369
Interest 1,776,286 1,782,600 3,552,569 3,565,199
Depreciation and amortization 1,329,741 1,295,257 2,659,482 2,590,514
------------ ------------ ------------ ------------
Total expenses 7,519,814 7,523,025 15,263,159 15,187,082
------------ ------------ ------------ ------------
Net (loss) income $ (38,515) $ 350,353 $ 290,882 $ 508,653
============ ============ ============ ============

</TABLE>

As of both June 30, 1999 and December 31, 1998, the Partnership's share of
cumulative losses to date for nine of the 31 Local Partnerships exceeded the
amount of the Partnership's investments in these Local Partnerships by
$9,657,159 and $9,089,320, 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. AFFORDABLE HOUSING LEGISLATION

President Clinton signed the Fiscal Year 1998 HUD appropriations bill into
law effective October 1, 1997. The legislation allowed all Section 8 HAP
contracts with rents at less than 120% of fair market rents which expired
between October 1997 and September 1998 to be renewed for one year. In the case
of Section 8 HAP contracts with rents that exceeded 120% of fair market rents,
these contracts could be renewed for one year, but these rents were reduced to
120% of fair market rents (Mark-to-Market). As of the beginning of Fiscal Year
1999 (October 1, 1998), all expiring contracts with rents exceeding comparable
market rents and whose mortgages are insured by the Federal Housing
Administration (FHA) were subject to the Mark-to-Market legislation.

-15-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1999 AND 1998

(Unaudited)

3. AFFORDABLE HOUSING LEGISLATION - Continued

Thirteen properties in which the Partnership is invested have Section 8 HAP
contracts expiring in 1999 (some of these properties also have related purchase
money notes which either already have matured, or are due to mature in 1999).
The HAP contracts cover substantially all of the apartment units in each
property. Currently rent studies for nine of these properties indicate that the
HAP rents are below fair market rents, therefore, these properties will likely
renew the HAP contracts annually until a global strategy with the purchase money
noteholder(s) is reached. One property entered the Mark-to-Market program in
1998 with a debt adjustment. Rent studies relating to the remaining three
properties are in progress.

The Section 8 HAP contracts for the following properties have expired or
will expire during the government's fiscal year 1998 or 1999 and have been
renewed as indicated.

-16-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1999 AND 1998

(Unaudited)

3. AFFORDABLE HOUSING LEGISLATION - Continued

Units Original Renewed
Authorized for Expiration of Expiration of
Number of Rental Assistance Section 8 Section 8
Property Rental Units Under Section 8 HAP Contract HAP Contract
-------- ------------ ----------------- ------------- --------------
<S> <C> <C> <C> <C>
Bartley Manor 70 69 07/31/98 08/30/99 (1)
Briar Crest I 53 53 06/30/98 06/30/99 (1)
Briar Crest II 49 49 06/30/98 06/30/99 (1)
Briar Hills 50 33 09/30/98 09/30/99
Greeley Manor 128 119 11/01/98 09/30/99
Highland Manor 111 111 02/08/98 (2)
Indian Hills Townhouses 40 24 09/30/98 09/30/99
Lakewood Apartments 50 50 08/01/99 (1)
Tyee Apartments 100 56 07/31/98 11/30/03
Village Green 36 36 09/30/98 09/30/99
Village Square 48 48 09/30/98 10/01/99
Winchester Gardens Apartments 206 202 08/31/98 08/31/99
Woodside Village 180 114 08/31/98 09/30/99
----- ---
Total 1,121 964
===== ===

</TABLE>

(1) The Managing General Partner expects that this Section 8 HAP Contract will
be renewed for one year upon expiration.
(2) This property entered the Mark-to-Market program in May 1998. The Section
8 HAP contract will be renewed annually.

With the uncertainty of continued project-based Section 8 subsidies for
properties with expiring HAP contracts, there is no assurance that these rental
properties will be able to maintain the rental income and occupancy levels
necessary to pay operating costs and debt service. It is difficult to predict
the impact on the Local Partnerships and the resulting impact on the Partnership
at this time.

4. 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 $58,387 and $113,440 for the
three and six months ended June 30, 1999, respectively and $40,125 and $78,452
for the three and six months ended June 30, 1998, 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 the Managing

-17-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1999 AND 1998

(Unaudited)

4. RELATED-PARTY TRANSACTIONS - Continued

General Partner an annual incentive management fee (the Management Fee) after
all other expenses of the Partnership are paid. The Partnership paid the
Managing General Partner a Management Fee of $75,000 and $150,000 for the three
and six months ended June 30, 1999, respectively, and like amounts for the three
and six months ended June 30, 1998, respectively.

The Managing General Partner and/or its affiliates may receive a fee of not
more than 2% of the sales price of an investment in a Local Partnership or the
property it owns, payable under certain conditions upon the sale of an
investment in a Local Partnership or the property it owns. The payment of the
fee is subject to certain restrictions, including the achievement of a certain
level of sales proceeds and making certain minimum distributions to limited
partners. The Managing General Partner and/or its affiliates earned net fees
for services relating to the sale of Park Heights of $117,028 on February 2,
1996. On March 25, 1998, the remaining balance of $42,500 was paid by the
Partnership. Also, the Managing General Partner and/or its affiliates earned
net fees for services relating to the sale of Southmoor of $31,299 on June 30,
1998. On July 10, 1998, these fees were paid by the Partnership.

-18-
<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 section contains information that may be considered forward looking,
including statements regarding the effect of governmental regulations. Actual
results may differ materially from those described in the forward looking
statements and will be affected by a variety of factors including national and
local economic conditions, the general level of interest rates, terms of
governmental regulations that affect the Partnership and interpretations of
those regulations, the competitive environment in which the Partnership
operates, and the availability of working capital.

General
-------

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

Some of the rental properties owned by the Local Partnerships are dependent
on the receipt of project-based rental Housing Assistance Payments (HAP)
provided by the U.S. Department of Housing and Urban Development (HUD) pursuant
to Section 8 HAP contracts. President Clinton signed the Fiscal Year 1998 HUD
appropriations bill into law effective October 1, 1997. The legislation allowed
all Section 8 contracts with rents at less than 120% of fair market rents which
expired between October 1997 and September 1998 to be renewed for one year. In
the case of Section 8 HAP contracts with rents that exceeded 120% of fair market
rents, these contracts could be renewed for one year, but these rents were
reduced to 120% of fair market rents (Mark-to-Market). At the beginning of
Fiscal Year 1999 (October 1, 1998), all expiring contracts with rents exceeding
comparable market rents and whose mortgages are insured by the Federal Housing
Administration (FHA) were subject to the Mark-to-Market legislation.

Under current law, the write down of an FHA-insured mortgage under Mark-to
Market would trigger cancellation of indebtedness income to the partners, a
taxable event, even though no actual cash is received. Additionally, the newly
created second mortgage will accrue interest at a below-market rate; however,

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

the Internal Revenue Service issued a ruling in July 1998 that concluded that
the below-market rate of interest will not generate additional ordinary income.
Each property subject to Mark-to-Market will be affected in a different manner,
and it is very difficult to predict the exact form of restructuring, or
potential tax liabilities to the limited partners, at this time.

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

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

The Partnership's liquidity, with unrestricted cash resources of
$10,349,729 ($167.32 per Additional Limited Partner unit) and $10,804,306
($174.67 per Additional Limited Partner unit) as of June 30, 1999 and December
31, 1998, respectively, along with anticipated future cash distributions from
the Local Partnerships, are expected to be adequate to meet its current and
anticipated operating cash needs. However, as the discussion below indicates,
the upcoming maturity of many of the Partnership's purchase money notes could
put a strain on the liquidity of the Partnership. As of August 11, 1999 there
were no material commitments for capital expenditures.

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

2015. See the notes to the consolidated financial statements for additional
information pertaining to these purchase money notes.

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

<TABLE>
<CAPTION>
Carrying Amount
of Partnership's
Investment in Aggregate Aggregate
and Advances to Principal Accrued
Number of Underlying Local Balance Interest
Purchase Underlying Partnerships as as of Balance as of
Money Note Local Percentage of June Percentage June Percentage June Percentage
(PMN) Maturity Partnerships of Total 30, 1999 of Total 30, 1999 of Total 30, 1999 of Total
- ---------------- ------------ ---------- ---------------- ---------- ----------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1st Quarter 1999 6 19% $ 7,272,025 36% $10,570,000 42% $ 21,308,208 48%
2nd Quarter 1999 1 3% 1,373,212 7% 850,000 3% 1,597,852 4%
3rd Quarter 1999 1 3% 1,170,099 6% 734,500 3% 1,358,443 3%
4th Quarter 1999 3 10% 1,752,333 8% 1,365,000 6% 2,380,301 5%
---- ----- --------------- ----- ----------- ----- ------------- -----
Total through
6/30/2000 11 35% $ 11,567,669 57% $13,519,500 54% $ 26,644,804 60%
==== ===== =============== ===== =========== ===== ============= =====

Total, Local
Partnerships 31 100% $ 20,319,012 100% $24,898,388 100% $ 44,467,545 100%
==== ===== =============== ===== =========== ===== ============= =====
</TABLE>

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

</TABLE>

The Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient cash is available for operating requirements.
For the six months ended June 30, 1999 and 1998, the receipt of distributions
from Local Partnerships was adequate to support operating cash requirements.
Cash and cash equivalents decreased during the six months ended June 30, 1999
primarily due to the discounted payoff of a purchase money note, and the partial
paydown of two purchase money notes, as discussed in the notes to the
consolidated financial statements.

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

The Partnership recognized a net loss for the three months ended June 30,
1999, as compared to net income during the corresponding period in 1998,
primarily due to a decrease in share of income from partnerships related to the
receipt of proceeds from the refinancing of the loan secured by a first mortgage
on Arboretum Villages Limited Partnership (Arboretum Village) in April 1998.
Contributing to the loss was an increase in general and administrative expenses
due to higher reimbursed payroll costs. Offsetting the Partnership's net loss
were a decrease in interest expense due to less amortization of discount on
purchase money notes, and a loss on disposition of investment in partnership
related to the sale of the Partnership's investment in K-S Apartments
(Southmoor) in June 1998.

The Partnership recognized a net loss for the six months ended June 30,
1999, as compared to net income during the corresponding period in 1998,
primarily due to a decrease in share of income from partnerships related to the
receipt of proceeds from the refinancing of the loan secured by a first mortgage
on Arboretum Villages Limited Partnership (Arboretum Village) in April 1998.
Contributing to the loss was an increase in general and administrative expenses
due to higher payroll costs during the second quarter of 1999 as compared to
1998. Offsetting the Partnership's net loss were an increase in interest income
due to higher investment balances during the first quarter of 1999 as compared
to 1998, a decrease in interest expense due to less amortization of discount on
purchase money notes, a loss on disposition of investment in partnership related
to the sale of the Partnership's investment in K-S Apartments (Southmoor) in
June 1998, and extraordinary gain from extinguishment of debt as a result of the
discounted payoff of a purchase money note related to Eufaula Apartments Limited
(Lakewood Apartments) in February, 1999.

For financial reporting purposes, the Partnership, as a limited partner in
the Local Partnerships, does not record losses from the Local Partnerships in

-23-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------

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 recognized losses for the three and six months ended
June 30, 1999 did not include losses of $283,921 and $567,839, respectively,
compared to excluded losses of $123,394 and $246,787, respectively, for the
three and six months ended June 30, 1998.

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

Year 2000 Computer Issue
------------------------

The Year 2000 ("Y2K") computer issue refers to the inability of many
computer systems in use today to recognize "00" in the date field as the year
2000 and to recognize the year 2000 as a leap year. The Y2K problem arose
because, for many years, computer software programs, including programs embedded
in hardware, utilized only the last two digits to specify the year with the
assumption that the first two digits were "19." As a result, such programs may
not be able to recognize and process dates beyond 1999; rather they may
recognize and process "00," "01," "02,", etc., incorrectly as 1900, 1901, 1902,
instead of as 2000, 2001, 2002. In the opinion of computer experts, this could
cause such programs to create erroneous results, malfunction, or fail completely
unless corrective measures are taken.

The Partnership utilizes software and related computer technologies
essential to its operations that will be affected by the Y2K issue. To address
the issue, the Managing General Partner has developed and is currently
implementing a plan (the "Y2K Project") designed to ensure that the Y2K date
change will not have an adverse impact on the Partnership's operations. The Y2K
Project is on schedule and the Managing General Partner expects completion by
the end of 1999. The Y2K Project consists of four phases -- Planning,
Assessment, Implementation and Testing. The Planning Phase began early in 1998
and is complete. Under the Planning Phase, the Managing General Partner
conducted an inventory of all internal hardware and software systems, data
interfaces, business operations and non-information technology functions which
may be susceptible to the Y2K issue. This phase was completed at the end of
November, 1998. Under the next phase, the Assessment Phase, all applications
and functions identified in the Planning Phase were analyzed to determine Y2K
compliance and the materiality of each identified risk. In the event of
noncompliance, for material risks, timetables for corrective action, as well as
estimated costs to achieve compliance, were determined. This phase was
completed during the first quarter of 1999. The Implementation Phase is now
underway. Renovation and replacement of existing internal hardware and software
systems has begun and completion is expected by August 1999. Additionally, the
Managing General Partner is currently working with some third party vendors,
service providers, Local Partnership managing general partners, and Local
Partnership property managers to verify their Y2K compliance, with completion
expected by August 1999. The Testing Phase, which will include testing of
internal applications as well as some third party systems, began during January
1999 and will continue throughout 1999. Contingency planning commenced during
the fourth quarter 1998 and will be completed by year-end 1999. The Managing
General Partner does not expect the expense associated with the Y2K Project to
be material.

-24-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------

Audubon Towers
--------------

College Park
------------

Congress Plaza
--------------

-25-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Continued
-------------------------------

Glen Agnes
----------

Greeley Manor
-------------

Heritage Estates I and Heritage Estates II
------------------------------------------

Lakewood Apartments
-------------------

Meadow Lanes II
---------------

The Partnership defaulted on its purchase money note related to Meadow
Lanes II Limited Dividend Housing Associates (Meadow Lanes II) on February 28,

-26-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Continued
-------------------------------

1999 when the note matured and was not paid. The default amount included
principal and accrued interest of $650,000 and $1,250,201, respectively. As of
August 11, 1999, principal and accrued interest of $650,000 and $1,290,150,
respectively, were due. The Partnership is currently attempting to negotiate
with the noteholder to extend the maturity date of the purchase money note.
There is no assurance that an extension will be obtained.

Tyee Apartments
---------------

Victorian Towers
----------------

Woodside Village
----------------

The Partnership defaulted on its purchase money notes related to Woodside
Village on February 1, 1999 when the notes matured and were not paid. The
default amounts included aggregate principal and accrued interest of $3,335,000
and $7,407,102, respectively. As of August 11, 1999, aggregate principal and
accrued interest of $3,335,000 and $7,685,219, respectively, were due. The
Partnership received a notice of default from someone who claimed to be the
current noteholder of the smaller note, but the original noteholder initially
disputed the validity of her claim. The Partnership received a Notice of
Default and U.C.C. Foreclosure of Security Interest on May 10, 1999 with respect
to a scheduled sale of 20% of the Partnership's limited partner interest in
Woodside Village on June 15, 1999. The Partnership has not received any
confirmation that the sale actually took place. The Partnership continues to
negotiate with the second noteholder to extend the maturity date of the purchase
money note for at least one year. There is no assurance that an extension of
the maturity date will be obtained.

-27-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 5. OTHER INFORMATION
-----------------

The Partnership's investment units are not publicly traded on any
registered stock exchange but can be traded on an informal secondary market.
During 1999, a number of investors sold their investment units in the
Partnership to other investors. If more than 5% of the total outstanding
investment units in the Partnership are transferred in any one calendar year
(not counting certain exempt transfers), the Partnership could be taxed as a
"publicly traded partnership," with potentially severe tax implications for the
Partnership and its investors. Specifically, the Partnership would be taxed as
a corporation and the income and losses from the Partnership would no longer be
considered a passive activity. From January 1, 1999 through June 1, 1999,
approximately 4.9% of outstanding investment units were sold. Accordingly, to
remain within the 5% safe harbor, effective June 1, 1999, the General Partner of
the Partnership halted recognition of any transfers that exceed the safe harbor
limit through December 31, 1999. As a result, transfers of investment units due
to sales transactions will not be recognized by the Partnership until after
December 31, 1999.

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

a. None

b. No Reports on Form 8-K were filed with the Commission during the
quarter ended June 30, 1999.

All other items are not applicable.

-28-
<PAGE>

SIGNATURE

In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
------------------------------------------------
(Registrant)

by: C.R.I., Inc.
--------------------------------------------
Managing General Partner

August 11, 1999 by: /s/ Michael J. Tuszka
- ----------------- ----------------------------------------
DATE Michael J. Tuszka
Vice President
and Chief Accounting Officer
(Principal Financial Officer
and Principal Accounting Officer)

-29-
<PAGE>

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

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

27 Financial Data Schedule Filed herewith electronically

-30-

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

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 10,349,729
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 32,875,093
<CURRENT-LIABILITIES> 0
<BONDS> 69,292,204
0
0
<COMMON> 0
<OTHER-SE> (36,529,635)
<TOTAL-LIABILITY-AND-EQUITY> 32,875,093
<SALES> 0
<TOTAL-REVENUES> 1,099,094
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 372,320
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,081,617
<INCOME-PRETAX> (1,354,843)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,354,843)
<DISCONTINUED> 0
<EXTRAORDINARY> 167,774
<CHANGES> 0
<NET-INCOME> (1,187,069)
<EPS-BASIC> (19.19)
<EPS-DILUTED> (19.19)

</TABLE>