CAPITAL REALTY INVESTORS III LTD PARTNERSHIP, 10QSB, 1999-05-10

CAPITAL REALTY INVESTORS III LTD PARTNERSHIP
10QSB, 1999-05-10
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 March 31, 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 March 31, 1999)
<PAGE>

CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

INDEX TO FORM 10-QSB

FOR THE QUARTER ENDED MARCH 31, 1999

Page
----

PART I. Financial Information

Item 1. Financial Statements

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

Consolidated Statements of Operations and Accumulated
Losses - for the three months ended March 31, 1999
and 1998 . . . . . . . . . . . . . . . . . . . . 2

Consolidated Statements of Cash Flows - for
the three months ended March 31, 1999 and 1998 . 3

Notes to Consolidated Financial Statements -
March 31, 1999 and 1998 . . . . . . . . . . . . 4

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

PART II. Other Information

Item 3. Defaults Upon Senior Securities . . . . . . . . . . 21

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,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Investments in and advances to partnerships $ 21,745,375 $ 21,458,167
Cash and cash equivalents 10,496,258 10,804,306
Investment held in escrow -- 100,000
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $487,005 and $478,988, respectively 475,115 483,132
Property purchase costs, net of accumulated amortization of
$445,782 and $438,256, respectively 457,297 464,823
Other assets 11,769 5,982
------------ ------------

Total assets $ 33,185,814 $ 33,316,410
============ ============

LIABILITIES AND PARTNERS' DEFICIT

Due on investments in partnerships $ 22,135,761 $ 22,179,945
Accrued interest payable 46,762,093 46,337,182
Accounts payable and accrued expenses 91,927 141,849
------------ ------------
Total liabilities 68,989,781 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 (85,562,403) (85,101,002)
------------ ------------
Total partners' deficit (35,803,967) (35,342,566)
------------ ------------
Total liabilities and partners' deficit $ 33,185,814 $ 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
March 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Share of income from partnerships $ 608,303 $ 281,294
------------ ------------
Other revenue and expenses:

Revenue:
Interest and other income 123,060 105,339
------------ ------------
Expenses:
Interest 1,174,853 1,953,594
Management fee 75,000 75,000
General and administrative 70,020 53,560
Professional fees 25,122 26,340
Amortization of deferred costs 15,543 15,825
------------ ------------
1,360,538 2,124,319
------------ ------------
Total other revenue and expenses (1,237,478) (2,018,980)
------------ ------------

Loss before extraordinary gain from extinguishment of debt (629,175) (1,737,686)

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

Net loss (461,401) (1,737,686)

Accumulated losses, beginning of period (85,101,002) (84,251,002)
------------ ------------
Accumulated losses, end of period $(85,562,403) $(85,988,688)
============ ============
Net loss allocated to General Partners (1.51%) $ (6,967) $ (26,239)
============ ============
Net loss allocated to Initial and Special Limited Partners (1.49%) $ (6,875) $ (25,892)
============ ============
Net loss allocated to Additional Limited Partners (97%) $ (447,559) $ (1,685,555)
============ ============
Net loss per unit of Additional Limited Partner
Interest based on 60,000 units outstanding $ (7.46) $ (28.09)
============ ============
</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)
<TABLE>
<CAPTION>
For the three months ended
March 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (461,401) $ (1,737,686)

Adjustments to reconcile net loss to net cash used in
operating activities:
Share of income from partnerships (608,303) (281,294)
Amortization of deferred costs 15,543 15,825
Amortization of discount on purchase money notes 320,297 1,000,841
Payment of purchase money note interest (256,352) (274,491)
Extraordinary gain from extinguishment of debt (167,774) --

Changes in assets and liabilities:
(Increase) decrease in other assets (5,786) 251
Increase in accrued interest payable 854,556 952,753
Decrease in accounts payable and accrued expenses (49,922) (11,485)
Decrease in consulting and fees payable to related parties -- (42,500)
------------ ------------
Net cash used in operating activities (359,142) (377,786)
------------ ------------

Net cash provided by investing activities:
Receipt of distributions from partnerships 321,094 427,880
------------ ------------

Cash flows from financing activities:
Pay-off of purchase money note (370,000) --
Release of investment held in escrow 100,000 --
------------ ------------
Net cash used in financing activities (270,000) --
------------ ------------

Net (decrease) increase in cash and cash equivalents (308,048) 50,094

Cash and cash equivalents, beginning of period 10,804,306 8,268,903
------------ ------------
Cash and cash equivalents, end of period $ 10,496,258 $ 8,318,997
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 256,352 $ 274,491
============ ============

</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

MARCH 31, 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 March 31, 1999, and the results of its operations and its cash flows for
the three months ended March 31, 1999 and 1998. The results of operations for
the interim period ended March 31, 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.

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
$22,269,384 (exclusive of unamortized discount on purchase money notes of
$253,167) plus accrued interest of $46,728,117 as of March 31, 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 amounts of
$8,230,000 and $5,290,000 matured in January and February, 1999, respectively,
and were not paid or extended. Purchase money notes in the aggregate principal
amounts of $850,000, $734,500, and $1,365,000 mature on June 30, 1999, August 1,
1999, and October 1, 1999, respectively. 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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 1999 AND 1998

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

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, except Audubon Towers, 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 Partnerships
would not have a material adverse impact on the financial condition of the
Partnership. In the case of Audubon Towers, the carrying amount of the
Partnership's investment exceeds the amount of the respective nonrecourse
indebtedness related to this Local Partnership. The Partnership's exposure to
loss is limited to this excess, which at March 31, 1999 was approximately
$193,000. See further discussions of certain purchase money notes, below.

The following chart presents information related to purchase money notes
which mature through March 31, 2000, or which have matured and remain unpaid or
unextended as of May 10, 1999. Information for the first quarter 1999 does not
include notes which matured during that quarter and which were paid off or
extended.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 1999 AND 1998

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

Carrying Amount
of Partnership's
Investment in Aggregate
and Advances to Principal Aggregate
Number of Underlying Local Balance Interest
Purchase Underlying Partnerships as as of Balance as of
Money Note Local Percentage of March Percentage March Percentage March Percentage
(PMN) Maturity Partnerships of Total 31, 1999 of Total 31, 1999 of Total 31, 1999 of Total
- ---------------- ------------ ---------- ---------------- ---------- ----------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1st Quarter 1999 9 29% $ 12,982,233 60% $13,520,000 61% $ 28,184,755 60%
2nd Quarter 1999 1 3% 1,378,726 6% 850,000 4% 1,569,146 3%
3rd Quarter 1999 1 3% 1,255,205 6% 734,500 3% 1,336,408 3%
4th Quarter 1999 3 10% 1,773,505 8% 1,365,000 6% 2,364,318 5%
---- ----- --------------- ----- ----------- ----- ------------- -----
Total through
3/31/2000 14 45% $ 17,389,669 80% $16,469,500 74% $ 33,454,627 71%
==== ===== =============== ===== =========== ===== ============= =====

Total, all PMNs 31 100% $ 21,745,375 100% $22,269,384 100% $ 46,728,117 100%
==== ===== =============== ===== =========== ===== ============= =====
</TABLE>

The above chart does not include a purchase money note in the amount of
$364,481, which matured on January 1, 1999 and was paid off, at a discount, on
February 5, 1999. Please see below for information pertaining to these purchase
money notes.

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 March 31, 2000, the Managing General Partner anticipates that, at least
in some instances, the noteholders may not be willing to negotiate using any of
the strategies mentioned above. In such instances, upon maturity of the
purchase money notes, the noteholders 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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 1999 AND 1998

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

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 March 31, 1999 and
December 31, 1998, the 14 Local Partnerships with associated purchase money
notes which mature through March 31, 2000 and remain unpaid or unextended as of
May 10, 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 Three Month Distributions Received Income from
Periods Ending from Local Partnerships Local Partnerships
------------------- ----------------------- ----------------------
<S> <C> <C>
March 31, 1999 29% $ 296,353
March 31, 1998 22% 280,429

</TABLE>

Interest expense on the Partnership's purchase money notes for the three
months ended March 31, 1999 and 1998 was $1,174,853 and $1,953,594,
respectively. Amortization of discount on purchase money notes increased
interest expense during the three months ended March 31, 1999 and 1998 by
$320,297 and $1,000,841, respectively. The accrued interest on the purchase
money notes of $46,728,117 and $46,303,206 as of March 31, 1999 and December 31,
1998, respectively, is due on the respective maturity dates of the purchase
money notes or earlier, in some instances, if 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. As of May 10, 1999,
principal and accrued interest of $1,275,000 and $3,360,451, respectively, were
due. The Partnership is currently negotiating with the noteholder to extend the
maturity date of the purchase money note for an interim period of up to four
years. There is no assurance that an extension will be obtained.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 1999 AND 1998

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

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 May 10, 1999, aggregate
principal and accrued interest of $880,000 and $1,677,984, respectively, were
due. The Partnership has attempted to negotiate with the noteholder to extend
the maturity dates of the purchase money notes for five years, but has received
no response. In March 1999, the Partnership received notice of a collection and
foreclosure action on the purchase money notes by two individuals who claim to
be the noteholders. The Partnership has retained local counsel to defend the
lawsuit. There is no assurance that the defense will be successful.

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. As of May 10, 1999,
principal and accrued interest of $775,000 and $2,218,384, respectively, were
due. The Partnership has reached an agreement in principle with the noteholder
to extend the maturity date of the purchase money note for three years and
reduce its interest rate. As of May 10, 1999, documentation to implement the
settlement is being revised.

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 amount 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 May 10, 1999, principal and
accrued interest of $2,600,000 and $4,479,084, respectively, for Heritage
Estates I, and $1,800,000 and $2,771,036, 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 a restructuring or an extension will be obtained.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 1999 AND 1998

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

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
accelerate the maturity date to any prior January 1 upon not less than 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 has agreed to make annual
payments to the noteholders on January 15th of each calendar year commencing
January 15, 2000. On October 23, 1998, the Partnership made a 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 interest, then to 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 $370,000 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 pay off resulted in extraordinary gain from
extinguishment of debt of approximately $168,000 during 1999.

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 $1,235,651, respectively. As of
May 10, 1999, principal and accrued interest of $650,000 and $1,266,723,
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.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 1999 AND 1998

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

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

The Partnership defaulted on its purchase money note related to Tyee
Associates (Tyee Apartments) on February 1, 1999 when the note matured and was
not paid. The default amount included principal and accrued interest of
$1,305,000 and $3,291,695, respectively. As of May 10, 1999, principal and
accrued interest of $1,305,000 and $3,375,197 were due. As of May 10, 1999, the
Partnership had received an oral agreement from the noteholders to extend the
maturity date of the purchase money note for one year. 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 date or a refinancing will be obtained.

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 May 10, 1999, principal and
accrued interest of $900,000 and $1,753,583 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 obtained.

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

The Partnership defaulted on its purchase money notes relating 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., Inc. (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
----------------

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 1999 AND 1998

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

respectively. As of May 10, 1999, principal and accrued interest of $3,335,000
and $7,545,425, respectively, were due. The Partnership received a notice of
default from someone who claims to be the current noteholder, but the original
noteholder disputes the validity of her claim. Accordingly, the Partnership is
trying to resolve the respective rights of the parties. The Partnership will
then negotiate with the proper 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.

b. Summarized financial information
--------------------------------

Combined statements of operations for the 31 and 32 Local Partnerships in
which the Partnership is invested as of March 31, 1999 and 1998, respectively,
follow. The combined statements have been compiled from information supplied by
the management agents of the projects and are unaudited.

COMBINED STATEMENTS OF OPERATIONS

(Unaudited)

For the three months ended
March 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenue:
Rental $ 7,486,322 $ 7,461,001
Other 586,420 361,356
------------ ------------
Total revenue 8,072,742 7,822,357
------------ ------------
Expenses:
Operating 4,637,321 4,586,201
Interest 1,776,283 1,782,599
Depreciation and amortization 1,329,741 1,295,257
------------ ------------
Total expenses 7,743,345 7,664,057
------------ ------------
Net income $ 329,397 $ 158,300
============ ============

</TABLE>

As of March 31, 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 and advances to those Local
Partnerships by $9,373,238 and $9,089,320, respectively. As the Partnership has

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 1999 AND 1998

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

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.

Mark-to-Market implementation will reduce rental income at properties which
are currently subsidized at higher-than-market rental rates, and will therefore
lower cash flow available to meet mortgage payments and operating expenses.
Each affected property will undergo debt restructuring according to terms
determined by an individual property and operations evaluation. This will
involve reducing the first mortgage loan balance to an amount supportable by the
property, taking into account the property's operating expenses and reduced
income. The balance of the amount written down from the first mortgage will be
converted to a non-performing but accruing (soft) second mortgage.

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.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 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
Briar Crest I 53 53 06/30/98 06/30/99
Briar Crest II 49 49 06/30/98 06/30/99
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 05/12/99
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.

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.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 1999 AND 1998

(Unaudited)

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 $55,054 and $38,327 for the
three months ended March 31, 1999 and 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
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 for each of the three-month
periods ended March 31, 1999 and 1998.

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.

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

Capital Realty Investors-III Limited Partnership's (the Partnership)
Management's Discussion and Analysis of Financial Condition and Results of
Operations 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,
the Internal Revenue Service issued a ruling in July 1998 that concluded that

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

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 cash resources of $10,496,258 (or
approximately $169.69 per Additional Limited Partner unit) and $10,804,306 (or
approximately $174.67 per Additional Limited Partner unit) as of March 31, 1999
and December 31, 1998, respectively, along with anticipated future cash
distributions from the Local Partnerships, is expected to meet its current and
anticipated operating cash needs. However, see the discussion below regarding
the upcoming maturity of many of the Partnership's purchase money notes. As of
May 10, 1999, there were no material commitments for capital expenditures.

The Partnership's obligations with respect to its investments in Local
Partnerships, in the form of purchase money notes having a principal balance of
$22,269,384 (exclusive of unamortized discount on purchase money notes of
$253,167) plus accrued interest of $46,728,117 as of March 31, 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 amounts of
$8,230,000 and $5,290,000 matured in January and February, 1999, respectively,
and were not paid or extended. Purchase money notes in the aggregate principal
amounts of $850,000, $734,500, and $1,365,000 mature on June 30, 1999, August 1,
1999, and October 1, 1999, respectively. The remaining purchase money notes
mature during 2002 through 2015. See the notes to the consolidated financial
statements for additional information pertaining to these purchase money notes.

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

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, except Audubon Towers, 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 Partnerships
would not have a material adverse impact on the financial condition of the
Partnership. In the case of Audubon Towers, the carrying amount of the
Partnership's investment exceeds the amount of the respective nonrecourse
indebtedness related to this Local Partnership. The Partnership's exposure to
loss is limited to this excess, which at March 31, 1999 was approximately
$193,000. See further discussions of certain purchase money notes, below.

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

Total, all PMNs 31 100% $ 21,745,375 100% $22,269,384 100% $ 46,728,117 100%
==== ===== =============== ===== =========== ===== ============= =====
</TABLE>

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

notes which mature through March 31, 2000 and remain unpaid or unextended as of
May 10, 1999, represent the following percentages of the Partnership's total
distributions received from Local Partnerships and share of income from Local
Partnerships.

</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 three months ended March 31, 1999 and 1998, the receipt of distributions
from Local Partnerships was adequate to support operating cash requirements.
Cash and cash equivalents decreased during the three months ended March 31, 1999
primarily due to the discounted payoff of a purchase money note, as discussed in
the notes to the consolidated financial statements.

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

The Partnership's net loss for the three months ended March 31, 1999
decreased from the corresponding period in 1998 primarily due to a decrease in
interest expense due to less amortization of discount on purchase money notes,
and an increase in share of income from partnerships due to higher other income
earned at one property. Also contributing to the decrease in the Partnership's
net loss was 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 1999, and an increase in interest and other
income due to higher investment balances. Slightly offsetting the previous
items was an increase in general and administrative expenses due to higher
payroll costs.

For financial reporting purposes, the Partnership, as a limited partner in
the Local Partnerships, does not record losses from the Local Partnerships in
excess of its investment to the extent that the Partnership has no further
obligation to advance funds or provide financing to the Local Partnerships. As
a result, the Partnership's share of income from partnerships for the three
months ended March 31, 1999 did not include losses of $283,918, compared to
excluded losses of $123,393 for the three months ended March 31, 1998.

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

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

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 June 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 June 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.

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

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

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

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

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 amount 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 May 10, 1999, principal and
accrued interest of $2,600,000 and $4,479,084, respectively, for Heritage
Estates I, and $1,800,000 and $2,771,036, 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 a restructuring or an extension will be obtained.

-21-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Continued
-------------------------------

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

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

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

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

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

The Partnership defaulted on its purchase money note related to Woodside
Village on February 1, 1999 when the note matured and was not paid. The default
amount included principal and accrued interest of $3,335,000 and $7,407,102,
respectively. As of May 10, 1999, principal and accrued interest of $3,335,000
and $7,545,425, respectively, were due. The Partnership received a notice of
default from someone who claims to be the current noteholder, but the original

-22-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Continued
-------------------------------

noteholder disputes the validity of her claim. Accordingly, the Partnership is
trying to resolve the respective rights of the parties. The Partnership will
then negotiate with the proper 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.

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 March 31, 1999.

All other items are not applicable.

-23-
<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

May 10, 1999 by: /s/ Michael J. Tuszka
- ----------------- ----------------------------------------
DATE Michael J. Tuszka
Vice President
and Chief Accounting Officer
(Principal Financial Officer
and Principal Accounting Officer)

-24-
<PAGE>

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

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

27 Financial Data Schedule Filed herewith electronically

-25-

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

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 10,496,258
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 33,185,814
<CURRENT-LIABILITIES> 0
<BONDS> 68,897,854
0
0
<COMMON> 0
<OTHER-SE> (35,803,967)
<TOTAL-LIABILITY-AND-EQUITY> 33,185,814
<SALES> 0
<TOTAL-REVENUES> 731,363
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 185,685
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,174,853
<INCOME-PRETAX> (629,175)
<INCOME-TAX> 0
<INCOME-CONTINUING> (629,175)
<DISCONTINUED> 0
<EXTRAORDINARY> 167,774
<CHANGES> 0
<NET-INCOME> (461,401)
<EPS-PRIMARY> (7.46)
<EPS-DILUTED> (7.46)

</TABLE>