CAPITAL REALTY INVESTORS III LTD PARTNERSHIP, 10QSB, 1999-11-15

CAPITAL REALTY INVESTORS III LTD PARTNERSHIP
10QSB, 1999-11-15
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 September 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 September 30, 1999)
<PAGE>

CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

INDEX TO FORM 10-QSB

FOR THE QUARTER ENDED SEPTEMBER 30, 1999

Page
----

PART I. Financial Information

Item 1. Financial Statements

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

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

Consolidated Statements of Cash Flows - for
the nine months ended September 30, 1999 and 1998 3

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

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . 19

PART II. Other Information

Item 3. Defaults Upon Senior Securities . . . . . . . . . . 26

Item 5. Other Information . . . . . . . . . . . . . . . . . 29

Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . 30

Signature . . . . . . . . . . . . . . . . . . . . . . . . 31

Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . 32
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------

CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

CONSOLIDATED BALANCE SHEETS

ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Investments in and advances to partnerships $ 22,096,720 $ 21,458,167
Investment in partnership held for sale 22,841 --
Cash and cash equivalents 10,481,707 10,804,306
Investments held in escrow -- 100,000
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $487,243 and $478,988,
respectively 443,256 483,132
Property purchase costs, net of accumulated amortization of
$453,990 and $438,256, respectively 435,589 464,823
Other assets -- 5,982
------------ ------------

Total assets $ 33,480,113 $ 33,316,410
============ ============

LIABILITIES AND PARTNERS' DEFICIT

Due on investments in partnerships $ 24,821,219 $ 23,387,882
Accrued interest payable 45,350,979 45,129,245
Accounts payable and accrued expenses 152,879 141,849
------------ ------------
Total liabilities 70,325,077 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 (86,603,400) (85,101,002)
------------ ------------
Total partners' deficit (36,844,964) (35,342,566)
------------ ------------
Total liabilities and partners' deficit $ 33,480,113 $ 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 nine months ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Share of income from partnerships $ 751,942 $ 1,979,527 $ 1,607,522 $ 7,057,309
------------ ------------ ------------ ------------

Other revenue and expenses:

Revenue:
Interest and other income 129,054 152,509 372,568 380,504
------------ ------------ ------------ ------------
Expenses:
Interest 864,994 1,906,547 2,946,611 5,843,448
Management fee 75,000 75,000 225,000 225,000
General and administrative 58,776 52,943 199,367 158,324
Extension fee 150,000 -- 150,000 --
Professional fees 32,372 21,671 83,015 77,490
Amortization of deferred costs 15,183 15,543 46,269 47,195
------------ ------------ ------------ ------------
1,196,325 2,071,704 3,650,262 6,351,457
------------ ------------ ------------ ------------
Total other revenue and expenses (1,067,271) (1,919,195) (3,277,694) (5,970,953)
------------ ------------ ------------ ------------

(Loss) income before gain on disposition of
investment in partnership (315,329) 60,332 (1,670,172) 1,086,356

Loss on disposition of investments in partnerships -- -- -- (221,727)
------------ ------------ ------------ ------------

(Loss) income before extraordinary gain from
extinguishment of debt (315,329) 60,332 (1,670,172) 864,629

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

Net (loss) income (315,329) 60,332 (1,502,398) 864,629

Accumulated losses, beginning of period (86,288,071) (83,446,705) (85,101,002) (84,251,002)
------------ ------------ ------------ ------------

Accumulated losses, end of period $(86,603,400) $(83,386,373) $(86,603,400) $(83,386,373)
============ ============ ============ ============
</TABLE>
(Continued)

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
(Unaudited)

<TABLE>
<CAPTION> For the three months ended For the nine months ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net (loss) income allocated to General Partners (1.51%) $ (4,762) $ 911 $ (22,686) $ 13,056
============ ============ ============ ============
Net (loss) income allocated to Initial and Special
Limited Partners (1.49%) $ (4,698) $ 899 $ (22,386) $ 12,883
============ ============ ============ ============

Net (loss) income allocated to Additional Limited
Partners (97%) $ (305,869) $ 58,522 $ (1,457,326) $ 838,690
============ ============ ============ ============
Net (loss) income per unit of Additional Limited
Partner Interest based on 60,000 units outstanding $ (5.10) $ 0.98 $ (24.29) $ 13.98
============ ============ ============ ============
</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 nine months ended
September 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (1,502,398) $ 864,629

Adjustments to reconcile net (loss) income to net cash used
in operating activities:
Share of income from partnerships (1,607,522) (7,057,309)
Amortization of deferred costs 46,269 47,195
Amortization of discount on purchase money notes 351,751 3,029,482
Loss on disposition of investments in partnerships -- 221,727
Extraordinary gain from extinguishment of debt (167,774) --

Changes in assets and liabilities:
Decrease (increase) in other assets 5,982 (16,406)
Increase in accrued interest payable 2,594,860 2,819,485
Payment of purchase money note interest (353,766) (447,575)
Increase in accounts payable and accrued expenses 11,030 19,652
Decrease in consulting fees payable to related parties -- (42,500)
------------ ------------

Net cash used in operating activities (621,568) (561,620)
------------ ------------
Cash flows from investing activities:
Receipt of distributions from partnerships 968,969 6,778,865
Proceeds from disposition of investments in partnerships -- 165,402
------------ ------------
Net cash provided by investing activities 968,969 6,944,267
------------ ------------
Cash flows from financing activities:
Payment of purchase money note principal (400,000) --
Payoff of purchase money notes and related interest (370,000) (3,177,605)
Release of investment held in escrow 100,000 --
------------ ------------
Net cash used in financing activities (670,000) (3,177,605)
------------ ------------
Net (decrease) increase in cash and cash equivalents (322,599) 3,205,042

Cash and cash equivalents, beginning of period 10,804,306 8,268,903
------------ ------------
Cash and cash equivalents, end of period $ 10,481,707 $ 11,473,945
============ ============
</TABLE>
(Continued)

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 - Continued

(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 353,766 $ 964,661
============ ============

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

SEPTEMBER 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 September 30, 1999, and the results of its operations for the three and
nine months ended September 30, 1999 and 1998, and its cash flows for the nine
months ended September 30, 1999 and 1998. The results of operations for the
interim period ended September 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
$24,923,388 (exclusive of unamortized discount on purchase money notes of
$221,713) plus accrued interest of $45,317,003 as of September 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 original
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 the parties are in the process
of negotiating an extension of these notes until 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, and have been extended to June
30, 2000. Purchase money notes in the aggregate principal amount of $734,500
matured on August 1, 1999 and have been extended until January 3, 2000.
Purchase money notes in the aggregate principal amount of $850,000 matured on

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 1999 AND 1998

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

June 30, 1999 and have not been paid or extended. Purchase money notes in the
aggregate principal amount of $1,365,000 matured on October 1, 1999 and have not
been paid or extended. 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 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 the Partnership's
interest in one of these Local Partnerships would not have a material adverse
impact on the financial condition of the Partnership. See further discussion of
certain purchase money notes, below.

The following chart presents information related to purchase money notes
which have matured or are scheduled to mature through September 30, 2000, and
which remain unpaid or unextended as of November 15, 1999. Excluded from the
following chart are purchase money notes which matured through September 30,
1999, and which have been paid off or extended on or before November 15, 1999.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 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 September Percentage September Percentage September 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 7 23% $ 5,132,423 23% $11,345,000 46% $ 23,514,989 52%
2nd Quarter 1999 1 3% 1,393,301 6% 850,000 3% 1,626,535 4%
4th Quarter 1999 3 10% 1,784,338 8% 1,365,000 5% 2,427,556 5%
1st Quarter 2000 1 3% 1,263,818 6% 734,500 3% 1,380,478 3%
2nd Quarter 2000 1 3% 4,885,512 22% 1,275,000 5% 3,450,291 8%
---- ----- --------------- ----- ----------- ----- ------------- -----
Total through
9/30/2000 13 42% $ 14,459,392 65% $15,569,500 62% $ 32,399,849 72%
==== ===== =============== ===== =========== ===== ============= =====

Total, Local
Partnerships 31 100% $ 22,096,720 100% $24,923,388 100% $ 45,317,003 100%
==== ===== =============== ===== =========== ===== ============= =====

</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 be successful. Based on
discussions with the holders of purchase money notes maturing through September
30, 2000, the Managing General Partner can state that, in certain instances, the
noteholders do not appear to be willing to negotiate any extension or discounted
payoff. 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 any future cash flow distributed by the Local Partnership from
rental operations, mortgage debt refinancings, or the sale of the real estate.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 1999 AND 1998

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

Of the 31 Local Partnerships in which the Partnership is invested as of both
September 30, 1999 and December 31, 1998, the 13 Local Partnerships with
associated purchase money notes which mature through September 30, 2000 and
which remain unpaid or unextended as of November 15, 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 Nine Month Distributions Received Income from
Periods Ending from Local Partnerships Local Partnerships
------------------ ----------------------- ----------------------
<S> <C> <C>
September 30, 1999 22% $1,117,514
September 30, 1998 4% 1,044,457

</TABLE>

Interest expense on the Partnership's purchase money notes for the three
and nine months ended September 30, 1999 was $864,994 and $2,946,611,
respectively, and $1,906,547 and $5,843,448 for the three and nine months ended
September 30, 1998, respectively. Amortization of discount on purchase money
notes increased interest expense during the three and nine months ended
September 30, 1999 by $5,536 and $351,751, respectively, and $980,587 and
$3,029,482 for the three and nine months ended September 30, 1998, respectively.
The accrued interest payable on the purchase money notes of $45,317,003 and
$45,095,269 as of September 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 August 1999, the
Partnership and the noteholder agreed to extend the maturity date of the
purchase money note to June 30, 2000, in exchange for payment of a fee not
applicable to the note balance. The maturity date may be further extended
through January 2, 2003, in the event certain additional payments are made.
Under the extension agreement, documents transferring the Partnership's interest
in Audubon Towers 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 at final maturity.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 1999 AND 1998

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

Bartley Manor
-------------

The Partnership defaulted on its purchase money notes related to Bartley
Manor Limited Partnership (Bartley Manor) on October 1, 1999 when the notes
matured and were not paid. The default amount included principal and accrued
interest of $700,000 and $1,251,722, respectively. As of November 15, 1999,
principal and accrued interest of $700,000 and $1,263,673, respectively, were
due. The Partnership is currently negotiating with the holders of the purchase
money notes to either pay off the purchase money notes at a discount or, at the
noteholders' option, to sell the Partnership's interest in the Local Partnership
to the noteholders for the full principal and accrued interest outstanding at
the time of the exercise of the option. There is no assurance that any
agreement 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 November 15, 1999, aggregate
principal and accrued interest of $880,000 and $1,762,754, 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
moved to dismiss their lawsuit. On September 7, 1999, the Partnership received
notice that a new collection action had been filed in the proper jurisdiction of
Mississippi. The purported noteholders have indicated that they will not agree
to settle the action.

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.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 1999 AND 1998

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

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 November 15, 1999, principal and accrued
interest of $850,000 and $1,640,716, 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 obtained.

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. On October 15, 1999, the Partnership and
the noteholder agreed to extend the maturity date of the purchase money note to
January 3, 2000, in exchange for a partial principal payment. Under the
extension agreement, documents transferring the Partnership's interest in
Greeley Manor 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 3, 2000.

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 November 15, 1999, principal and
accrued interest of $2,600,000 and $4,605,774, respectively, for Heritage
Estates I, and $1,800,000 and $2,893,814, 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 maturity dates
of 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 (in the
original principal amount of $1,760,000) 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 upon nine months' notice. The purchase money notes, as extended, are in

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 1999 AND 1998

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

the aggregate principal amount of $3,606,067. 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 on January 15th of each
calendar year commencing January 15, 2000. On October 23, 1998, the Partnership
made a payment of interest, which 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
November 15, 1999, principal and accrued interest of $650,000 and $1,314,317,
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 November 15, 1999, aggregate
principal and accrued interest of $1,305,000 and $3,503,100 were due. As of
November 15, 1999, the parties are negotiating a discounted payoff of these
purchase money notes. Additionally, the local managing general partner has
received an offer for the purchase of the property. There is no assurance that
a negotiated discounted payoff of the purchase money notes or a sale of the
property will occur.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 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 November 15, 1999, principal and
accrued interest of $775,000 and $1,819,482 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 awaiting
execution of the related documents. There is no assurance that an extension of
the maturity date will be finalized.

Village Green
-------------

The Partnership defaulted on its purchase money notes related to
Village Green of Wisconsin Limited (Village Green) on October 1, 1999 when the
notes matured and were not paid. The default amount included principal and
accrued interest of $275,000 and $497,807, respectively. As of November 15,
1999, principal and accrued interest of $275,000 and $502,502, respectively,
were due. The Partnership is currently negotiating with the holders of the
purchase money notes to pay off the purchase money notes at a discount. There
is no assurance that a negotiated discounted payoff of the purchase money notes
will be obtained.

Village Square
--------------

The Partnership defaulted on its purchase money notes related to Village
Square Limited Partnership (Village Square) on October 1, 1999 when the notes
matured and were not paid. The default amount included principal and accrued
interest of $390,000 and $678,156, respectively. As of November 15, 1999,
principal and accrued interest of $390,000 and $684,815, respectively, were due.
The Partnership is currently negotiating with the holders of the purchase money
notes to pay off the purchase money notes at a discount. There is no assurance
that a negotiated discounted payoff of the purchase money notes will be
obtained.

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 extended the maturity date of the purchase money
notes to January 31, 2001. In connection with this settlement, the Partnership

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 1999 AND 1998

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

granted the noteholders an option during the period January 1, 2000 through
September 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 November 15, 1999, aggregate principal and
accrued interest of $3,335,000 and $7,829,428, 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 a discounted payoff with the first and second noteholders.
Additionally, the local managing general partner has received an offer for the
purchase of the property. There is no assurance that a negotiated discounted
payoff of the purchase money notes or a sale of the property will occur.

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 later in 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 September 30, 1998.

O'Farrell
---------

The local managing general partner of O'Farrell Towers Associates
(O'Farrell) has received an offer for the purchase of the property, and the
parties have executed a sales contract dated as of October 8, 1999, with a
projected closing date in December, 1999. Proceeds received by the Partnership
from the sale of this property would be used to pay off, at a discount, the

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 1999 AND 1998

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

purchase money notes related to O'Farrell. The contract is subject to customary
contingencies. Accordingly, there is no assurance that a sale or the payoff of
the purchase money notes will occur. In the event of a sale of this property,
the Partnership's investment in and advances to partnerships would be reduced
accordingly. Of the 31 Local Partnerships in which the Partnership had invested
as of September 30, 1999 and December 31, 1998, O'Farrell represented
approximately 0% and 0%, respectively, of the total investment in and advances
to partnerships. For the nine months ended September 30, 1999 and 1998,
distributions from O'Farrell represented approximately 3% and 1%, respectively,
of total distributions from Local Partnerships. The Partnership's share of
income from O'Farrell was $0 and $0 for the three and nine months ended
September 30, 1999, respectively, and $0 and $0 for the three and nine months
ended September 30, 1998, respectively.

Due to the impending and likely sale of the property related to the
Partnership's investment in O'Farrell, the net unamortized amounts of
acquisition fees and property purchase costs related to O'Farrell, which totaled
$22,841, have been reclassified to investment in partnership held for sale in
the accompanying balance sheet at September 30, 1999.

Rolling Green - Milford
-----------------------

The Managing General Partner successfully negotiated an extension of the
maturity date of the purchase money notes related to Roberts Milford Associates
(Rolling Green) to February 28, 2001. These notes have an aggregate original
principal amount of $2,250,000; the maturity date had been August 31, 1998.
Pursuant to the agreement, the maturity date was further extended to August 31,
2003 because the Local Partnership refinanced its mortgage loan prior to the
expiration of the first extension. This was a contingency which was outlined in
the original purchase money note modification agreement. The refinancing of the
property's mortgage loan closed on July 31, 1998. The Partnership's share of
the refinancing proceeds, which was $1,525,000, was applied against the purchase
money note principal. These proceeds were in excess of the Partnership's basis
in Rolling Green and were included in share of income from partnerships during
the three and nine months ended September 30, 1998.

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.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 1999 AND 1998

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

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

Combined statements of operations for the 31 Local Partnerships in which
the Partnership is invested as of both September 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.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 1999 AND 1998

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

COMBINED STATEMENTS OF OPERATIONS
(Unaudited)

<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Rental $ 7,650,941 $ 7,223,759 $ 22,505,501 $ 22,136,359
Other 424,233 314,772 1,123,714 1,097,907
------------ ------------ ------------ ------------
Total revenue 8,075,174 7,538,531 23,629,215 23,234,266
------------ ------------ ------------ ------------

Expenses:
Operating 4,503,329 4,129,003 13,554,437 13,160,372
Interest 1,776,275 1,782,734 5,328,844 5,347,933
Depreciation and amortization 1,329,734 1,295,839 3,989,216 3,886,353
------------ ------------ ------------ ------------
Total expenses 7,609,338 7,207,576 22,872,497 22,394,658
------------ ------------ ------------ ------------
Net income $ 465,836 $ 330,955 $ 756,718 $ 839,608
============ ============ ============ ============
</TABLE>

As of both September 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 $9,941,083 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 100% 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 100% of fair market rents,
these contracts could be renewed for one year, but these rents were reduced to
100% 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 properties with mortgage loans insured by the Federal Housing
Administration (FHA), were subject to the Mark-to-Market legislation.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 1999 AND 1998

(Unaudited)

3. AFFORDABLE HOUSING LEGISLATION - Continued

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 loan
will be converted to a non-performing but accruing (soft) second mortgage loan.

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.

-18-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 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 05/31/00
Briar Crest I 53 53 06/30/98 06/30/00
Briar Crest II 49 49 06/30/98 06/30/00
Briar Hills 50 33 09/30/98 09/30/00
Greeley Manor 128 119 11/01/98 03/30/00
Highland Manor 111 111 02/08/98 (1)
Indian Hills Townhouses 40 24 09/30/98 09/30/00
Lakewood Apartments 50 50 08/01/99 07/31/00
Tyee Apartments 100 56 07/31/98 11/30/03
Village Green 36 36 09/30/98 04/30/00
Village Square 48 48 09/30/98 04/30/00
Winchester Gardens Apartments 206 202 08/31/98 09/30/00
Woodside Village 180 114 08/31/98 09/30/00
----- ---
Total 1,121 964
===== ===

</TABLE>

(1) 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. As a result, it is not
possible to predict the impact on the Local Partnerships and the resulting
impact on the Partnership at this time.

There is a new HUD-sponsored initiative known as the Emergency Initiative
to Preserve Below-Market Project Based Section 8 Multifamily Housing Stock
("Mark-up-to-Market"). Under this initiative, properties with expiring Section
8 contracts which are located in high-rent areas as defined by HUD are eligible
for rent increases which would be necessary to bring Section 8 rents in line
with market rate rents. For properties with subsidized FHA loans, the market
rents are reduced to take into account the benefits the property is already
receiving from the below-market rate interest rate by means of a HUD determined
Interest Subsidy Adjustment Factor. The purpose of this initiative is to
incentivize owners of properties with expiring Section 8 contracts not to
convert these properties to market rate housing.

In return for receiving market rate rents under Mark-up-to-Market, the
property owner must enter into a five year conditional Section 8 contract with

-19-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 1999 AND 1998

(Unaudited)

3. AFFORDABLE HOUSING LEGISLATION - Continued

HUD, subject to the annual availability of funding by Congress. In addition,
property owners who enter into the Mark-up-to-Market program will receive a
waiver from the cash flow restriction imposed on the property by the limited
dividend limitation.

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 $36,915 and $150,355 for the
three and nine months ended September 30, 1999, respectively and $31,963 and
$110,415 for the three and nine months ended September 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 General Partner an annual incentive management fee (the Management Fee)
after all other expenses of the Partnership are paid. The Partnership paid the
Managing General Partner a Management Fee of $75,000 and $225,000 for the three
and nine months ended September 30, 1999, respectively, and like amounts for the
three and nine months ended September 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.

-20-
<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, governmental
regulations affecting 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. 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 Section 8 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 100% 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
100% of fair market rents, these contracts could be renewed for one year, but
these rents will be reduced to 100% 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 properties with mortgage loans
insured by the Federal Housing Administration (FHA), were subject to the Mark-
to-Market legislation.

In many instances, the Mark-to-Market rental rate restructuring may require
the write down of an FHA-insured mortgage loan, which would trigger cancellation
of indebtedness income to the partners, a taxable event, even though no actual
cash is received. Additionally, if the existing first mortgage loan is
bifurcated into a second mortgage loan, the newly created second mortgage loan

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

will accrue interest at a below-market rate; however, 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.

In return for receiving market rate rents under Mark-up-to-Market, the
property owner must enter into a five year conditional Section 8 contract with
HUD, subject to the annual availability of funding by Congress. In addition,
property owners who enter into the Mark-up-to-Market program will receive a
waiver from the cash flow restriction imposed on the property by the limited
dividend limitation.

The Managing General Partner is considering new strategies to deal with the
ever changing environment of affordable housing policy. The Section 236 and
Section 221(d)(3) mortgage loans may be eligible for pre-payment in their 18th
year or later. 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 existing mortgage loans of
these types 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.

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

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

The Partnership's liquidity, with unrestricted cash resources of
$10,481,707 ($169.45 per Additional Limited Partner unit) and $10,804,306
($174.67 per Additional Limited Partner unit) as of September 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
November 15, 1999 there were no material commitments for capital expenditures.

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

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 the Partnership's
interest in one of these Local Partnerships would not have a material adverse
impact on the financial condition of the Partnership. See further discussions
of certain purchase money notes in the notes to the consolidated financial
statements.

-24-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------

Total, Local
Partnerships 31 100% $ 22,096,720 100% $24,923,388 100% $ 45,317,003 100%
==== ===== =============== ===== =========== ===== ============= =====

</TABLE>

-25-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------

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 nine months ended September 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 nine months ended
September 30, 1999 primarily due to cash used for the discounted payoff of a
purchase money note, and for the partial paydown of two purchase money notes, as
discussed in the notes to the consolidated financial statements.

The Partnership made a cash distribution of $600,000 ($10.00 per Additional
Limited Partner unit) to the Additional Limited Partners from cash resources
accumulated from operations and distributions from partnerships on November 12,
1999, to holders of record as of October 1, 1999. The Managing General Partner
intends to retain all of the Partnership's remaining undistributed cash for the
possible repayment, prepayment or retirement of the Partnership's outstanding
purchase money notes related to the Local Partnerships.

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

The Partnership recognized a net loss for the three months ended September
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 the first
mortgage on Rolling Green - Milford in July 1998, as discussed in the notes to
the consolidated financial statements, and an extension fee incurred during 1999
related to one of the purchase money note extensions. Contributing to the loss
were a decrease in interest income due to decreased cash and cash equivalent
balances, an increase in professional fees due to increased audit fees, and an
increase in general and administrative expenses due to higher reimbursed payroll
costs. Offsetting the Partnership's net loss was a decrease in interest expense
due to less amortization of discount on purchase money notes during 1999.

The Partnership recognized a net loss for the nine months ended September
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 refinancings of the loans secured by first

-26-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------

mortgages on Arboretum Village and Rolling Green - Milford in April 1998 and
July 1998, respectively. Contributing to the loss was an extension fee and an
increase in general and administrative expenses, both as discussed above.
Offsetting the Partnership's net loss were a decrease in interest expense, as
discussed above, 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 an 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
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 nine months
ended September 30, 1999 did not include losses of $283,924 and $851,763,
respectively, compared to excluded losses of $126,267 and $373,054,
respectively, for the three and nine months ended September 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

-27-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------

systems has begun and completion is expected by December 1999. Additionally,
the Managing General Partner is currently working with third party vendors,
service providers, Local Partnership managing general partners, and Local
Partnership property managers, to verify their Y2K compliance, with completion
expected by December 1999. The Testing Phase, which includes 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.

-28-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------

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

Bartley Manor
-------------

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

-29-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Continued
-------------------------------

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

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

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

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

-30-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Continued
-------------------------------

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

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

Village Green
-------------

Village Square
--------------

-31-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Continued
-------------------------------

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

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.

-32-
<PAGE>
PART II. OTHER INFORMATION
-----------------
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 September 30, 1999.

All other items are not applicable.

-33-
<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

November 15, 1999 by: /s/ Michael J. Tuszka
- ----------------- ----------------------------------------
DATE Michael J. Tuszka
Vice President
and Chief Accounting Officer
(Principal Financial Officer
and Principal Accounting Officer)

-34-
<PAGE>

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

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

27 Financial Data Schedule Filed herewith electronically

-35-

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

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 10,481,707
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 33,480,113
<CURRENT-LIABILITIES> 0
<BONDS> 70,172,198
0
0
<COMMON> 0
<OTHER-SE> (36,844,964)
<TOTAL-LIABILITY-AND-EQUITY> 33,480,113
<SALES> 0
<TOTAL-REVENUES> 1,980,090
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 703,651
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,946,611
<INCOME-PRETAX> (1,670,172)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,670,172)
<DISCONTINUED> 0
<EXTRAORDINARY> 167,774
<CHANGES> 0
<NET-INCOME> (1,502,398)
<EPS-BASIC> (24.29)
<EPS-DILUTED> (24.29)

</TABLE>