--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-QSB
------------------
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
------------------
Commission file number 0-11962
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
Organized pursuant to the Laws of the State of Maryland
------------------
Internal Revenue Service - Employer Identification No. 52-1311532
11200 Rockville Pike, Rockville, Maryland 20852
(301) 468-9200
------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes |X| No |_|
The total number of shares of the registrant's Common Stock, outstanding on
September 30, 2000, is not applicable.
--------------------------------------------------------------------------------
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
INDEX TO FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
- September 30, 2000 and December 31, 1999................ 1
Consolidated Statements of Operations and Accumulated Losses
- for the three and nine months ended
September 30, 2000 and 1999............................ 2
Consolidated Statements of Cash Flows
- for the nine months ended September 30, 2000
and 1999............................... ................ 3
Notes to Financial Statements
- September 30, 2000 and 1999............................. 4
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.......... 17
PART II - OTHER INFORMATION
Item 3. Defaults Upon Senior Securities.............................. 22
Item 5. Other Information............................................ 22
Item 6. Exhibits and Reports on Form 8-K............................. 22
Signature .......................................................... 23
Exhibit Index .......................................................... 24
<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,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
Investments in and advances to partnerships ....................................... $ 11,670,177 $ 19,683,671
Investment in partnerships held for sale .......................................... 3,717,969 1,285,964
Investment in partnership held in escrow .......................................... 4,827,829 1,267,871
Cash and cash equivalents ......................................................... 12,420,695 10,045,683
Acquisition fees, principally paid to related parties,
net of accumulated amortization of $361,635 and $472,235, respectively .......... 284,486 415,398
Property purchase costs, net of accumulated amortization
of $353,120 and $431,180, respectively .......................................... 299,202 401,342
Other assets ...................................................................... 4,096 --
------------ ------------
Total assets ................................................................ $ 33,224,454 $ 33,099,929
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in partnerships ................................................ $ 16,605,814 $ 21,540,464
Accrued interest payable .......................................................... 36,683,955 49,549,160
Distribution payable .............................................................. 2,994,350 --
Accounts payable and accrued expenses ............................................. 152,111 168,467
------------ ------------
Total liabilities ........................................................... 56,436,230 71,258,091
------------ ------------
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 ......................................... (7,681,551) (4,687,201)
Offering costs ................................................................ (6,156,933) (6,156,933)
Accumulated losses ............................................................ (69,376,792) (87,317,528)
------------ ------------
Total partners' deficit ..................................................... (23,211,776) (38,158,162)
------------ ------------
Total liabilities and partners' deficit ..................................... $ 33,224,454 $ 33,099,929
============ ============
</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,
----------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Share of income from partnerships ..................... $ 885,752 $ 751,942 $ 2,169,838 $ 1,607,522
------------ ------------ ------------ ------------
Other revenue and expenses:
Revenue:
Interest and other income ......................... 170,204 129,054 438,084 372,568
------------ ------------ ------------ ------------
Expenses:
Interest .......................................... 626,722 864,994 2,151,163 2,946,611
Management fee .................................... 75,000 75,000 225,000 225,000
General and administrative ........................ 58,477 58,776 219,224 199,367
Extension fee ..................................... -- 150,000 -- 150,000
Professional fees ................................. 41,399 32,372 124,193 83,015
Amortization of deferred costs .................... 11,990 15,183 38,037 46,269
------------ ------------ ------------ ------------
813,588 1,196,325 2,757,617 3,650,262
------------ ------------ ------------ ------------
Total other revenue and expenses ................ (643,384) (1,067,271) (2,319,533) (3,277,694)
------------ ------------ ------------ ------------
Income (loss) before gain on disposition
of investments in partnerships ...................... 242,368 (315,329) (149,695) (1,670,172)
Gain on disposition of investments in partnerships .... 2,539,157 -- 6,807,482 --
------------ ------------ ------------ ------------
Income (loss) before extraordinary gain
from extinguishment of debt ......................... 2,781,525 (315,329) 6,657,787 (1,670,172)
Extraordinary gain from extinguishment of debt ........ 140,005 -- 11,282,949 167,774
------------ ------------ ------------ ------------
Net income (loss) ..................................... 2,921,530 (315,329) 17,940,736 (1,502,398)
Accumulated losses, beginning of period ............... (72,298,322) (86,288,071) (87,317,528) (85,101,002)
------------ ------------ ------------ ------------
Accumulated losses, end of period ..................... $(69,376,792) $(86,603,400) $(69,376,792) $(86,603,400)
============ ============ ============ ============
Net income (loss) allocated to General Partners (1.51%) $ 44,115 $ (4,762) $ 270,905 $ (22,686)
============ ============ ============ ============
Net income (loss) allocated to Initial
and Special Limited Partners (1.49%) ................ $ 43,531 $ (4,698) $ 267,317 $ (22,386)
============ ============ ============ ============
Net income (loss) allocated
to Additional Limited Partners (97%) ................ $ 2,833,884 $ (305,869) $ 17,402,514 $ (1,457,326)
============ ============ ============ ============
Net income (loss) per unit of Additional Limited
Partner Interest based on 60,000 units outstanding .. $ 47.23 $ (5.10) $ 290.04 $ (24.29)
============ ============ ============ ============
</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 nine months ended
SEPTEMBER 30,
-----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................................ $ 17,940,736 $ (1,502,398)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Share of income from partnerships .......................................... (2,169,838) (1,607,522)
Amortization of deferred costs ............................................. 38,037 46,269
Amortization of discount on purchase money notes ........................... 19,873 351,751
Gain on disposition of investments in partnerships ......................... (6,807,482) --
Extraordinary gain from extinguishment of debt ............................. (11,282,949) (167,774)
Changes in assets and liabilities:
(Increase) decrease in other assets ...................................... (4,096) 5,982
Increase in accrued interest payable ..................................... 2,131,290 2,594,860
Payment of purchase money note interest .................................. (416,832) (353,766)
(Decrease) increase in accounts payable and accrued expenses ............. (16,356) 11,030
------------ ------------
Net cash used in operating activities .................................. (567,617) (621,568)
------------ ------------
Cash flows from investing activities:
Receipt of distributions from partnerships ................................... 1,708,129 968,969
Proceeds from disposition of investments in partnerships ..................... 6,559,122 --
------------ ------------
Net cash provided by investing activities .............................. 8,267,251 968,969
------------ ------------
Cash flows from financing activities:
Payment of purchase money note principal ..................................... -- (400,000)
Payoff of purchase money notes and related interest .......................... (5,324,622) (370,000)
Release of investment held in escrow ......................................... -- 100,000
------------ ------------
Net cash used in financing activities .................................. (5,324,622) (670,000)
------------ ------------
Net increase (decrease) in cash and cash equivalents ........................... 2,375,012 (322,599)
Cash and cash equivalents, beginning of period ................................. 10,045,683 10,804,306
------------ ------------
Cash and cash equivalents, end of period ....................................... $ 12,420,695 $ 10,481,707
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ..................................... $ 4,885,939 $ 353,766
============ ============
</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
SEPTEMBER 30, 2000 AND 1999
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of C.R.I., Inc. (CRI), the Managing General Partner, the
accompanying unaudited consolidated 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, 2000, and the results of its
operations for the three and nine months ended September 30, 2000 and 1999, and
its cash flows for the nine months ended September 30, 2000 and 1999. The
results of operations for the interim periods ended September 30, 2000, are not
necessarily indicative of the results to be expected for the full year.
The accompanying unaudited consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States and with the instructions to Form 10-QSB. Certain information and
accounting policies and footnote disclosures normally included in financial
statements prepared in conformity with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to such
instructions. These condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Partnership's annual report on Form 10-KSB at December 31, 1999.
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
a. DUE ON INVESTMENTS IN PARTNERSHIPS AND ACCRUED INTEREST PAYABLE
---------------------------------------------------------------
The Partnership's obligations with respect to its investments in Local
Partnerships, in the form of purchase money notes having an aggregate principal
balance of $16,486,270 plus aggregate accrued interest of $36,649,979 as of
September 30, 2000, 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. A
purchase money note in the principal amount of $1,700,000, which originally
matured on December 31, 1997, had been extended until January 31, 2001; however,
in June 2000, the noteholder purchased the Partnership's interest in an amount
equal to the outstanding principal plus accrued interest balance of the purchase
money note. 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. A purchase
money note in the principal amount of $900,000 matured on January 1, 1999 and
the parties are in the process of negotiating an extension of this note until
January 1, 2004. Purchase money notes in the aggregate principal amounts of
$4,400,000 and $5,290,000 matured in January and February, 1999, respectively,
and were not paid or extended. A purchase money note in the original principal
amount of $775,000 matured on January 1, 1999, was partially paid, and has been
extended to January 1, 2002. A purchase money note in the original principal
amount of $1,275,000 matured on January 1, 1999, and has been extended to
January 15, 2001. A purchase money note in the principal amount of $734,500
matured on August 1, 1999 and had been extended until January 3, 2000, at which
time the Partnership's interest in the related Local Partnership was transferred
to the noteholders in exchange for the cancellation of all principal and accrued
interest due under the note. A purchase money note in the principal amount of
$850,000 matured on June 30, 1999 and has not been paid or extended. Purchase
money notes in the aggregate principal amount of $1,365,000 matured on
-4-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
October 1, 1999 and were paid off at a discount in January 2000. A purchase
money note in the original principal amount of $2,250,000, with an extended
maturity of August 31, 2003, was paid off, at a discount, when the property was
sold on May 31, 2000. A purchase money note in the principal amount of $332,326,
with a maturity of November 1, 2015, was paid off, at a discount, when the
property was sold in July 2000. The remaining purchase money notes, in the
aggregate amount of $1,511,270, mature on January 1, 2002.
The purchase money notes, which are nonrecourse to the Partnership, are
generally secured by the Partnership's interest in the respective Local
Partnerships. There is no assurance that the underlying properties will have
sufficient appreciation and equity to enable the Partnership to pay the purchase
money notes' principal and accrued interest when due. If a purchase money note
is not paid in accordance with its terms, the Partnership will either have to
renegotiate the terms of repayment or risk losing its partnership interest in
the respective Local Partnership. The Partnership's inability to pay certain of
the purchase money note principal and accrued interest balances when due, and
the resulting uncertainty regarding the Partnership's continued ownership
interest in the related Local Partnerships, does not adversely impact the
Partnership's financial condition because the purchase money notes are
nonrecourse and secured solely by the Partnership's interest in the related
Local Partnerships. Therefore, should the investment in any of the Local
Partnerships with maturing purchase money notes not produce sufficient value to
satisfy the related purchase money notes, the Partnership's exposure to loss is
limited because the amount of the nonrecourse indebtedness of each of the
maturing purchase money notes exceeds the carrying amount of the investment in,
and advances to, each of the related Local Partnerships. Thus, even a complete
loss of the Partnership's interest in one of these Local Partnerships would not
have a material adverse impact on the financial condition of the Partnership.
The following chart presents information related to purchase money
notes which have matured, have been extended to mature, or are scheduled to
mature, through September 30, 2001, and which remain unpaid or unextended as of
November 9, 2000. Excluded from the following chart are purchase money notes
which matured through September 30, 2000, and which have been paid off,
cancelled, or extended on or before November 9, 2000.
<TABLE>
<CAPTION>
Aggregate Carrying Amount
Aggregate Accrued of Partnership's
Principal Interest Investments in
Number of Balance Balance and Advances to
Purchase Underlying as of as of Underlying Local
Money Note Local Percentage September Percentage September Percentage Partnerships as of Percentage
(PMN) MATURITY PARTNERSHIPS OF TOTAL 30, 2000 OF TOTAL 30, 2000 OF TOTAL SEPTEMBER 30, 2000 OF TOTAL
-------------- ------------ ---------- ----------- --------- ---------- ---------- ------------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1st Quarter 1999 6 23% $10,590,000 64% $23,212,311 63% $ 6,710,818 33%
2nd Quarter 1999 1 4% 850,000 5% 1,751,123 5% 1,385,556 7%
1st Quarter 2001 1 4% 1,275,000 8% 3,666,464 10% 4,787,006 24%
---- --- ----------- ----- ----------- ----- ----------- -----
Total through
9/30/2001 8 31% $12,715,000 77% $28,629,898 78% $12,883,380 64%
==== === =========== ===== =========== ===== =========== =====
Total, Local
Partnerships 26 100% $16,486,270(1) 100% $36,649,979(1) 100% $20,100,948(2) 100%
==== === =========== ===== =========== ==== =========== ======
</TABLE>
-5-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
(1) Does not include amounts payable to a local general partner.
(2) Includes the aggregate carrying amount of $3,643,765 for two
partnerships reported as investment in partnerships held for sale and
the carrying amount of $4,787,006 for one partnership reported as
investment in partnership held in escrow on the consolidated balance
sheet at September 30, 2000.
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, paying off 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 in the future. If
the Managing General Partner is unable to negotiate an extension or discounted
payoff, in the event that the purchase money notes remain unpaid upon maturity,
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.
Of the 26 Local Partnerships in which the Partnership is invested as of
September 30, 2000, the eight Local Partnerships with associated purchase money
notes which mature through September 30, 2001 and which remain unpaid or
unextended as of November 9, 2000, represent the following percentages of the
Partnership's total distributions received from Local Partnerships and share of
income from Local Partnerships for the immediately preceding two calendar years.
Percentage of Total Partnership's Share of
For the Year Distributions Received Income from
ENDED FROM LOCAL PARTNERSHIPS LOCAL PARTNERSHIPS
----------------- ----------------------- ----------------------
December 31, 1999 20% $1,195,030
December 31, 1998 4% $ 959,816
The Managing General Partner continues to address the maturity and
impending maturity of its debt obligations and to seek strategies which will
provide the most favorable outcome to the limited partners. However, there can
be no assurance that these strategies will be successful.
-6-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
Interest expense on the Partnership's purchase money notes for the
three and nine months ended September 30, 2000 was $626,722 and $2,151,163,
respectively and $864,994 and $2,946,611 for the three and nine months ended
September, 1999, respectively. Amortization of discount on purchase money notes
increased interest expense for the three and nine months ended September 30,
2000 by $2,839 and $19,873, respectively, and $5,536 and $351,751 for the three
and nine months ended September 30, 1999, respectively. The accrued interest
payable on the purchase money notes of $36,649,979 and $49,515,184 as of
September 30, 2000 and December 31, 1999, 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. In June 2000, the Partnership made a payment,
applicable to the purchase money note balance, extending the maturity date to
January 15, 2001. 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.
Due to the possible transfer of the Partnership's interest in the Local
Partnership to the noteholders, the Partnership's basis in the Local
Partnership, along with net unamortized acquisition fees and property purchase
costs, which totaled $4,827,829 as of September 30, 2000, has been reclassified
to investment in partnership held in escrow in the accompanying consolidated
balance sheet at September 30, 2000.
BARTLEY MANOR, VILLAGE SQUARE AND VILLAGE GREEN
The Partnership defaulted on its purchase money notes related to
Bartley Manor Limited Partnership (Bartley Manor), Village Square Limited
Partnership (Village Square) and Village Green of Wisconsin Limited (Village
Green) on October 1, 1999, when the notes, as extended, reached maturity and
were not paid. The default amounts included aggregate principal and accrued
interest of $1,365,000 and $2,427,685. Aggregate accrued interest at December
31, 1999 was $2,474,810. In January 2000, the Partnership paid off the notes at
a discount. The discounted payoff resulted in extraordinary gain from
extinguishment of debt of $2,865,417 for financial statement purposes in 2000,
and in cancellation of indebtedness income of approximately $3.0 million for
federal tax purposes in 2000.
-7-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
(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. 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
indicated that they would not agree to settle the action. Accordingly, to avoid
the expense of further litigation, in May 2000, the Partnership transferred its
interests in the Local Partnership to the noteholders in exchange for
cancellation of the indebtedness. The release of the Partnership's purchase
money note obligation as a result of the Partnership's loss of ownership
interest in College Park resulted in extraordinary gain from extinguishment of
debt of $1,444,511 for financial statement purposes in 2000, and in total income
of $3,234,342 for federal tax purposes in 2000.
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.
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 9, 2000, principal and accrued interest
of $850,000 and $1,763,506, respectively, were due.
In November 1999, the noteholder filed an action to foreclose on the
Partnership's interest in the Local Partnership. Counsel for the noteholder have
refused to respond to the Partnership's queries, but have taken no further
action in the litigation. In the meantime, an affiliate of the noteholder
offered to purchase the Partnership's interest in the Local Partnership for a
combination of cash and the assumption of the purchase money note. Any transfer
of the Partnership's interest in the Local Partnership would have to be approved
by the California Housing Finance Agency. There is no assurance that such
approval will be obtained, or that a transfer will take place.
-8-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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. In January 2000, the documents were
released from escrow and the Partnership's interest in Greeley Manor was
transferred to the noteholder. The release of the Partnership's purchase money
note obligation as a result of the Partnership's loss of ownership interest in
Greeley Manor resulted in extraordinary gain from extinguishment of debt of
$864,624 for financial statement purposes in 2000, and in total income of
approximately $2,816,000 for federal tax purposes in 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 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 November 9, 2000,
principal and accrued interest of $2,600,000 and $4,868,392, respectively, for
Heritage Estates I, and $1,800,000 and $3,070,090, respectively, for Heritage
Estates II were due. The Managing General Partner and the purchase money
noteholders have agreed in principle to extend the maturity dates of the
purchase money notes related to Heritage Estates I and Heritage Estates II to
January 1, 2004, and they are currently reviewing documents to implement the
extensions. There is no assurance that 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. 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 to payment of accrued interest, and thereafter to principal.
In January 2000, the Partnership made the annual payment as agreed under the
extension documents.
-9-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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 $167,774 for financial statement purposes in
1999, and in cancellation of indebtedness income of approximately $180,000 for
federal tax purposes in 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 $1,250,201, respectively. As of
November 9, 2000, principal and accrued interest of $650,000 and $1,402,882,
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.
O'FARRELL
The local managing general partner of O'Farrell Towers Associates
(O'Farrell) received an offer for the purchase of the property, and the parties
executed a sales contract dated as of October 12, 1999, with a closing date of
August 4, 2000. Proceeds received by the Partnership from the sale of this
property were used to pay off, at a discount, the purchase money notes related
to O'Farrell. The sale of O'Farrell resulted in gain on disposition of
investments in partnerships of $2,539,157, extraordinary gain from
extinguishment of debt of $280,096 for financial statement purposes in 2000, and
total income of approximately $4,415,000 for federal tax purposes in 2000.
ROLLING GREEN AT 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) from August 31, 1999 to February 28, 2001. These
notes had an aggregate original principal amount of $2,250,000. 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,
which further extension was provided for in the extension agreement. The
Partnership's share of the proceeds from the refinancing of the property's first
mortgage loan was applied against the purchase money note principal.
On May 31, 2000, Rolling Green at Milford was sold. The entire sales
proceeds to the Partnership were used to pay off, at a discount, the
Partnership's purchase money note obligation related to this property. The sale
resulted in gain on disposition of investment in partnership of $4,268,325 and
in extraordinary gain from extinguishment of debt of $594,897 for financial
statement purposes in 2000, and in total income of $8,676,478 for federal tax
purposes in 2000.
-10-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
(A distribution of surplus cash was made by the local managing general partner
subsequent to the sale date, in September 2000. Substantially all of the
distribution was applied to the purchase money note obligation with the effect
of reducing the extraordinary gain from extinguishment of debt previously
recognized.) The Managing General Partner of the Partnership and/or its
affiliates did not receive any fees relating to the sale.
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. On October 13, 2000, Tyee Apartments
was sold. A portion of the sales proceeds were used to pay off, at a discount,
the Partnership's purchase money note obligations related to this property. The
sale resulted in estimated gain on disposition of investments in partnerships of
$2.9 million and in estimated extraordinary gain from extinguishment of debt of
approximately $2.8 million for financial statement purposes in 2000, and in
estimated total income of approximately $5 million for federal tax purposes in
2000. Once the distribution of the proceeds is received by the Partnership, the
Managing General Partner of the Partnership will receive a fee equal to 1.16% of
the sale price, or $48,900, relating to the sale.
Due to the sale of the property related to the Partnership's investment
in Tyee Apartments, the Partnership's basis in the Local Partnership, along with
net unamortized acquisition fees and property purchase costs, which totaled
$607,943 as of September 30, 2000, has been reclassified to investment in
partnerships held for sale in the accompanying consolidated balance sheet at
September 30, 2000. For the year ended December 31, 1999, distributions from
Tyee Apartments represented none of the distributions from Local Partnerships; a
distribution of $70,000 was received in September 2000. The Partnership's share
of income from Tyee Apartments was $52,890 and $192,867 for the three and nine
months ended September 30, 2000, respectively, and $27,087 and $122,870 for the
three and nine months ended September 30, 1999, respectively.
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 9, 2000,
principal and accrued interest of $900,000 and $1,942,111 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.
WINCHESTER GARDENS
The Partnership defaulted on its purchase money notes related to New
Winchester Gardens, Ltd. (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
-11-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
the purchase money notes suing the Partnership, the Managing General Partner and
CRHC, Incorporated (CRHC) (CRHC 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 granted the
noteholders an option during the period January 1, 2000 through June 30, 2000 to
purchase the Partnership's and CRHC's interests in the Local Partnership for an
amount equal to the outstanding principal balance of the purchase money notes
plus accrued interest. On June 23, 2000, pursuant to the option agreement, the
noteholder purchased the interests in Winchester Gardens in exchange for
purchase money note principal and accrued interest of $1,700,000 and $3,579,026,
respectively, resulting in extraordinary gain from extinguishment of debt of
$5,233,404 for financial statement purposes in 2000, and in total income of
$7,406,388 for federal tax purposes in 2000.
WOODSIDE VILLAGE
The Partnership defaulted on its two purchase money notes related to
Woodside Village Limited Partnership (Woodside Village) on February 1, 1999 when
the notes matured and were not paid. The default amount included aggregate
principal and accrued interest of $3,335,000 and $7,407,102, respectively. On
October 13, 2000, Woodside Village was sold. A portion of the sales proceeds
were used to pay off, at a discount, the Partnership's purchase money note
obligations related to this property. The sale resulted in estimated gain on
disposition of investments in partnerships of approximately $5.1 million and in
estimated extraordinary gain from extinguishment of debt of approximately $5.8
million for financial statement purposes in 2000, and in estimated total income
of approximately $12 million for federal tax purposes in 2000. Once the
distribution of proceeds is received by the Partnership, the Managing General
Partner of the Partnership will receive a fee equal to 1.75% of the sale price,
or $151,200, relating to the sale.
Due to the sale of the property related to the Partnership's investment
in Woodside Village, the Partnership's basis in the Local Partnership, along
with net unamortized acquisition fees and property purchase costs, which totaled
$3,110,026 as of September 30, 2000, has been reclassified to investment in
partnerships held for sale in the accompanying consolidated balance sheet at
September 30, 2000. For the year ended December 31, 1999, distributions from
Woodside Village represented none of the distributions from Local Partnerships;
a distribution of $258,000 was received in September 2000. The Partnership's
share of income from Woodside Village was $8,379 and $274,910 for the three and
nine months ended September 30, 2000, respectively, and $162,511 and $328,876
for the three and nine months ended September 30, 1999, respectively.
-12-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
b. PROPERTY MATTERS
O'FARRELL
On August 4, 2000, O'Farrell was sold. See Note 2.a. hereof for
further information concerning this sale.
ROLLING GREEN AT MILFORD
On May 31, 2000, Rolling Green at Milford was sold. See Note 2.a.
hereof for further information concerning this sale.
TYEE APARTMENTS
On October 13, 2000, Tyee Apartments was sold. See Note 2.a. hereof
for further information concerning this sale.
VILLA MIRAGE I AND VILLA MIRAGE II
The Partnership's affiliate, C.R.H.C., Incorporated (CRHC), removed the
Local Managing General Partner (LMGP) of both Villa Mirage I and Villa Mirage II
in December 1999, due to its failure to address problems identified in the 1998
audited financial statements of those lower tier partnerships, including
overpayments to itself and its affiliated property management company. The
removed LMGP and its shareholder and another unrelated local general partner
filed lawsuits against the Partnership and CRHC with respect to both Villa
Mirage I and II seeking, among other things, an accounting and dissolution of
the partnerships and damages for alleged breaches of the respective partnership
agreements (for refusal to approve proposed sales of the properties). The
lawsuits did not purport to enjoin or reverse the removals of the LMGP.
Subsequently, the same plaintiffs filed injunction actions seeking to compel the
sales of the properties owned by Villa Mirage I and II. CRHC and the Partnership
moved to have both lawsuits stayed while the disputes are resolved by
arbitration in accordance with the respective Local Partnership agreements.
After several hearings, CRHC and the Partnerships' motions were granted. In
August, 2000, the plaintiffs dismissed their litigation and arbitration claims
without prejudice, but CRHC and the Partnership maintained their arbitration
claims. The arbitration is scheduled for January 2001.
WOODSIDE VILLAGE
On October 13, 2000, Woodside Village was sold. See Note 2.a.
hereof for further information concerning this sale.
c. SUMMARIZED FINANCIAL INFORMATION
Combined statements of operations for the 26 and 31 Local Partnerships
in which the Partnership was invested as of September 30, 2000 and 1999,
respectively, follow. The combined statements have been compiled from
information supplied by the management agents of the projects and are unaudited.
-13-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
(Unaudited)
COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2000 1999 2000 1999
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Rental ...................... $ 6,441,518 $ 7,650,941 $20,901,609 $22,505,501
Other ....................... 296,260 424,233 1,078,692 1,123,714
----------- ----------- ----------- -----------
Total revenue ............. 6,737,778 8,075,174 21,980,301 23,629,215
----------- ----------- ----------- -----------
Expenses:
Operating ................... 3,714,492 4,503,329 12,337,089 13,554,437
Interest .................... 1,445,203 1,776,275 5,020,646 5,328,844
Depreciation and amortization 1,060,171 1,329,734 3,631,023 3,989,216
----------- ----------- ----------- -----------
Total expenses ............ 6,219,866 7,609,338 20,988,758 22,872,497
----------- ----------- ----------- -----------
Net income .................... $ 517,912 $ 465,836 $ 991,543 $ 756,718
=========== =========== =========== ===========
</TABLE>
As of September 30, 2000 and 1999, the Partnership's share of
cumulative losses to date for six and nine, respectively, of the 26 and 31 Local
Partnerships, respectively, exceeded the amount of the Partnership's investments
in and advances to those Local Partnerships by $8,276,548 and $9,941,083,
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
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. Current legislation allows all
expired Section 8 HAP contracts with rents at less than 100% of fair market
rents to be renewed for one year. Expiring Section 8 HAP contracts with rents
that exceed 100% of fair market rents could be renewed for one year, but at
rents reduced to 100% of fair market rents (Mark-to-Market). All expiring
Section 8 HAP contracts with rents exceeding comparable market rents, and
properties with mortgage loans insured by the Federal Housing Administration
(FHA), became subject to the Mark-to-Market legislation.
Mark-to-Market implementation will reduce rental income at properties
that 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 may undergo debt restructuring according to
terms determined by an individual property and operations evaluation. This may
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.
-14-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
(Unaudited)
3. AFFORDABLE HOUSING LEGISLATION - Continued
Seven properties in which the Partnership is invested as of November 9,
2000, may be affected by the Mark-to-Market program, since they have Section 8
HAP contracts expiring in 2000 or 2001. The HAP contracts cover all or
substantially all of the apartment units in each property. During the first nine
months of 2000, three properties renewed their HAP contracts for one year,
thereby extending the maturity dates to 2001. Two properties have applied to
participate in the Mark-up-to-Market program discussed further herein. Rents
studies on two properties whose HAP contracts expire in 2000 indicate HAP rents
are in excess of fair market rents, and therefore these properties will most
likely apply for a one-year renewal of their respective HAP contracts.
The Section 8 HAP contracts for the following properties initially
expired during the government's fiscal year 1998, and have been renewed as
indicated, with the renewal expiring in 2000 or 2001.
<TABLE>
<CAPTION>
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 07/31/01 (2)
Briar Crest I 53 53 06/30/98 09/30/00 (1)
Briar Crest II 49 49 06/30/98 09/30/00 (1)
Briar Hills 50 33 09/30/98 09/30/00 (2)
Indian Hills Townhouses 40 24 09/30/98 09/30/00 (2)
Village Green 36 36 09/30/98 04/30/01 (2)
Village Square 48 48 09/30/98 04/30/01 (2)
----- -----
Total 346 312
===== =====
</TABLE>
(1) Three month renewal, property has applied for Mark-up-to-Market.
(2) Renewed/expected to be renewed in 2000 for one year.
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' operations and the
resulting impact on the Partnership's investments in and advances to Local
Partnerships at this time. As of September 30, 2000, the carrying amount of the
Partnership's investments in and advances to Local Partnerships with Section 8
HAP contracts expiring in 2000 or 2001 was $4,664,984.
There is a new HUD-sponsored program generally referred to as
"Mark-up-to-Market." Under this program, properties with expiring Section 8
contracts that 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 that enter the program and have interest rate
subsidized FHA loans, the rents are adjusted to take into account the benefits
the property is already receiving from the below-market interest rate by means
of a HUD determined Interest Subsidy Adjustment Factor. The purpose of this
program is to incentivize owners of properties with expiring Section 8 contracts
not to convert these properties to market rate housing.
-15-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
(Unaudited)
3. AFFORDABLE HOUSING LEGISLATION - Continued
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
increased cash flow, as the limited dividend will be increased in an amount
equal to the increase in gross revenues.
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 connection with managing the Partnership. The Partnership
paid $48,339 and $199,568 for the three and nine month periods ended September
30, 2000, respectively, and $36,915 and $150,355 for the three and nine month
periods ended September 30, 1999, respectively, to the Managing General Partner
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.
In accordance with the terms of the Partnership Agreement, the
Partnership is obligated to pay the Managing General Partner an annual incentive
management fee (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 each of the three and nine month periods ended
September 30, 2000 and 1999, respectively.
The Managing General Partner and/or its affiliates may receive a fee of
not more than two percent 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. No such fees were earned by the Managing General Partner or
its affiliates for the nine month period ended September 30, 1999. The Managing
General Partner was paid a disposition fee of $244,000 for the sale of O'Farrell
on August 4, 2000. The Managing General Partner will be paid fees for the sales
of Tyee ($48,900) and Woodside ($151,200) when proceeds are collected.
-16-
<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 sold or
refinanced, and will continue 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. Current legislation allows all
expired Section 8 HAP contracts with rents at less than 100% of fair market
rents to be renewed for one year. Expiring Section 8 HAP contracts with rents
that exceed 100% of fair market rents could be renewed for one year, but at
rents reduced to 100% of fair market rents (Mark-to-Market). All expiring
Section 8 HAP contracts with rents exceeding comparable market rents, and
properties with mortgage loans insured by the Federal Housing Administration
(FHA), became subject to the Mark-to-Market legislation.
Mark-to-Market implementation will reduce rental income at properties
that 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 may undergo debt restructuring according to
terms determined by an individual property and operations evaluation. This may
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.
Seven properties in which the Partnership is invested as of November 9,
2000, may be affected by the Mark-to-Market program, since they have Section 8
HAP contracts expiring in 2000 or 2001. The HAP contracts cover all or
substantially all of the apartment units in each property. During the first nine
months of 2000, three properties renewed their HAP contracts for one year,
thereby extending the maturity dates to 2001. Two properties have applied to
participate in the Mark-up-to-Market program discussed further herein. Rents
studies on two properties whose HAP contracts expire in 2000 indicate HAP rents
are in excess of fair market rents, and therefore these properties will most
likely apply for a one-year renewal of their respective HAP contracts.
-17-
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Continued
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 first and second mortgage loan, the newly created
second mortgage loan 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.
There is a new HUD-sponsored program generally referred to as
"Mark-up-to-Market." Under this program, properties with expiring Section 8
contracts that 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 that enter the program and have interest rate
subsidized FHA loans, the rents are adjusted to take into account the benefits
the property is already receiving from the below-market interest rate by means
of a HUD determined Interest Subsidy Adjustment Factor. The purpose of this
program 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
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
increased cash flow, as the limited dividend will be increased in an amount
equal to the increase in gross revenues.
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.
FINANCIAL CONDITION/LIQUIDITY
The Partnership's liquidity, with unrestricted cash resources of
$12,420,695 as of September 30, 2000, along with anticipated future cash
distributions from the Local Partnerships, is expected to be adequate to meet
its current and anticipated operating cash needs. As of November 9, 2000, there
were no material commitments for capital expenditures. On November 6, 2000, the
Partnership made a cash distribution of $2,994,350 ($50.00 per Unit) to
Additional Limited Partners, to holders of record as of September 30, 2000; this
distribution was accrued in the consolidated balance sheet at September 30,
2000.
The Partnership's obligations with respect to its investments in Local
Partnerships, in the form of purchase money notes having an aggregate principal
balance of $16,486,270 plus aggregate accrued interest of $36,649,979 as of
September 30, 2000, 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. A
purchase money note in the principal amount of $1,700,000, which originally
matured on December 31, 1997, had been extended until January 31, 2001; however,
in June 2000, the noteholder purchased the Partnership's interest in an amount
equal to the outstanding principal plus accrued interest balance of the purchase
money note. 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.
-18-
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Continued
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. A purchase
money note in the principal amount of $900,000 matured on January 1, 1999 and
the parties are in the process of negotiating an extension of this note until
January 1, 2004. Purchase money notes in the aggregate principal amounts of
$4,400,000 and $5,290,000 matured in January and February, 1999, respectively,
and were not paid or extended. A purchase money note in the original principal
amount of $775,000 matured on January 1, 1999, was partially paid, and has been
extended to January 1, 2002. A purchase money note in the original principal
amount of $1,275,000 matured on January 1, 1999, and has been extended to
January 15, 2001. A purchase money note in the principal amount of $734,500
matured on August 1, 1999 and had been extended until January 3, 2000, at which
time the Partnership's interest in the related Local Partnership was transferred
to the noteholders in exchange for the cancellation of all principal and accrued
interest due under the note. A purchase money note in the principal amount of
$850,000 matured on June 30, 1999 and has not been paid or extended. Purchase
money notes in the aggregate principal amount of $1,365,000 matured on October
1, 1999 and were paid off at a discount in January 2000. A purchase money note
in the original principal amount of $2,250,000, with an extended maturity of
August 31, 2003, was paid off, at a discount, when the property was sold on May
31, 2000. A purchase money note in the principal amount of $332,326, with a
maturity of November 1, 2015, was paid off, at a discount, when the property was
sold in July 2000. The remaining purchase money notes, in the aggregate amount
of $1,511,270, mature on January 1, 2002. See the notes to the consolidated
financial statements for additional information concerning these purchase money
notes.
The purchase money notes, which are nonrecourse to the Partnership, are
generally secured by the Partnership's interest in the respective Local
Partnerships. There is no assurance that the underlying properties will have
sufficient appreciation and equity to enable the Partnership to pay the purchase
money notes' principal and accrued interest when due. If a purchase money note
is not paid in accordance with its terms, the Partnership will either have to
renegotiate the terms of repayment or risk losing its partnership interest in
the respective Local Partnership. The Partnership's inability to pay certain of
the purchase money note principal and accrued interest balances when due, and
the resulting uncertainty regarding the Partnership's continued ownership
interest in the related Local Partnerships, does not adversely impact the
Partnership's financial condition because the purchase money notes are
nonrecourse and secured solely by the Partnership's interest in the related
Local Partnerships. Therefore, should the investment in any of the Local
Partnerships with maturing purchase money notes not produce sufficient value to
satisfy the related purchase money notes, the Partnership's exposure to loss is
limited because the amount of the nonrecourse indebtedness of each of the
maturing purchase money notes exceeds the carrying amount of the investment in,
and advances to, each of the related Local Partnerships. Thus, even a complete
loss of the Partnership's interest in one of these Local Partnerships would not
have a material adverse impact on the financial condition of the Partnership.
The following chart presents information related to purchase money
notes which have matured, have been extended to mature, or are scheduled to
mature, through September 30, 2001, and which remain unpaid or unextended as of
November 9, 2000. Excluded from the following chart are purchase money notes
which matured through September 30, 2000, and which have been paid off,
cancelled, or extended on or before November 9, 2000.
-19-
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Continued
<TABLE>
<CAPTION>
Aggregate Carrying Amount
Aggregate Accrued of Partnership's
Principal Interest Investments in
Number of Balance Balance and Advances to
Purchase Underlying as of as of Underlying Local
Money Note Local Percentage September Percentage September Percentage Partnerships as of Percentage
(PMN) MATURITY PARTNERSHIPS OF TOTAL 30, 2000 OF TOTAL 30, 2000 OF TOTAL SEPTEMBER 30, 2000 OF TOTAL
-------------- ------------ ---------- ----------- --------- ---------- ---------- ------------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1st Quarter 1999 6 23% $10,590,000 64% $23,212,311 63% $ 6,710,818 33%
2nd Quarter 1999 1 4% 850,000 5% 1,751,123 5% 1,385,556 7%
1st Quarter 2001 1 4% 1,275,000 8% 3,666,464 10% 4,787,006 24%
---- --- ----------- ----- ----------- ----- ----------- -----
Total through
9/30/2001 8 31% $12,715,000 77% $28,629,898 78% $12,883,380 64%
==== === =========== ===== =========== ===== =========== =====
Total, Local
Partnerships 26 100% $16,486,270(1) 100% $36,649,979(1) 100% $20,100,948(2) 100%
==== === =========== ===== =========== ==== =========== ======
</TABLE>
(1) Does not include amounts payable to a local general partner.
(2) Includes the carrying amount of $3,643,765 for two partnerships
reported as investment in partnerships held for sale and the carrying
amount of $4,787,006 for one partnership reported as investment in
partnership held in escrow on the consolidated balance sheet at
September 30, 2000.
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, paying off 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 in the future. If
the Managing General Partner is unable to negotiate an extension or discounted
payoff, in the event that the purchase money notes remain unpaid upon maturity,
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.
Of the 26 Local Partnerships in which the Partnership is invested as of
September 30, 2000, the eight Local Partnerships with associated purchase money
notes which mature through September 30, 2001 and which remain unpaid or
unextended as of November 9, 2000, represent the following percentages of the
Partnership's total distributions received from Local Partnerships and share of
income from Local Partnerships for the immediately preceding two calendar years.
Percentage of Total Partnership's Share of
For the Year Distributions Received Income from
ENDED FROM LOCAL PARTNERSHIPS LOCAL PARTNERSHIPS
----------------- ----------------------- ----------------------
December 31, 1999 20% $1,195,030
December 31, 1998 4% $ 959,816
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 month periods ended September 30, 2000 and 1999, the
receipt of distributions from Local Partnerships and existing cash resources
were adequate to support operating cash requirements. Cash and cash equivalents
increased during the nine month period ended September 30, 2000 as the receipt
of distributions
-20-
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Continued
from partnerships was in excess of net cash used in operating activities, and as
proceeds from disposition of investments in partnerships was in excess of cash
used to pay off three purchase money notes.
RESULTS OF OPERATIONS
The Partnership recognized net income for the three month period ended
September 30, 2000, as compared to net loss during the corresponding period in
1999, primarily due to gain on disposition of investment in partnership and
extraordinary gain from extinguishment of debt related to the sale of O'Farrell
Towers Associates (O'Farrell) as discussed in the notes to the consolidated
financial statements. Contributing to net income was an increase in share of
income from partnerships as a result of higher distributions received from three
properties, and higher rental income at two properties partially offset by
increased operating expenses at two properties, a decrease in rental income at
another, and the exclusion of income from Greeley Manor Company (Greeley Manor)
which was transferred to the noteholder in January 2000. Also contributing to
net income were a decrease in interest expense related to lower purchase money
note balances as a result of payments and the extinguishment of debt and an
increase in interest income due to generally higher balances and interest rates
in 2000, and an extension fee which was paid in 1999 but not in 2000. Offsetting
the increase in the Partnership's net income was an increase in professional
fees related to legal fees for the Villa Mirage I and II litigation, as
discussed in the notes to the consolidated financial statements.
The Partnership recognized net income for the nine month period ended
September 30, 2000, as compared to net loss during the corresponding period in
1999, primarily due to extraordinary gain from extinguishment of debt related to
the discounted payoffs of purchase money notes for Bartley Manor Limited
Partnership (Bartley Manor), Village Green of Wisconsin, Ltd. (Village Green),
Village Square Limited (Village Square) and Rolling Green at Milford, the
transfers of partnership interests to the purchase money noteholders related to
Greeley Manor, College Park and Winchester Gardens, and the gain on disposition
of investments in partnerships from Rolling Green at Milford and O'Farrell, all
as discussed in the notes to the consolidated financial statements. Contributing
to the increase in net income were a decrease in interest expense and an
increase in interest income, as discussed above, and an extension fee which was
paid in 1999 but not in 2000. Also contributing to the increase in net income
was an increase in share of income from partnerships due to higher distributions
received from four properties, higher rental income at three properties and
lower operating expenses at one property. Partially offsetting the increase in
share of income from partnerships were an increase in operating expenses at
three properties and a decrease in rental income at one property. Offsetting the
increase in the Partnership's net income were an increase in professional fees,
as discussed above, and an increase in general and administrative expenses due
to higher reimbursed 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 and
nine month periods ended September 30, 2000 did not include losses of $27,677
and $360,062, respectively, compared to excluded losses of $283,924 and $851,763
for the three and nine month periods ended September 30, 1999, respectively.
No other significant changes in the Partnership's operations have taken
place during this period.
-21-
<PAGE>
Part II. OTHER INFORMATION
Item 3. Defaults upon Senior Securities
See Note 2.a. of the notes to consolidated financial statements
contained in Part I, Item 1, hereof, for information concerning the
Partnership's defaults on certain purchase money notes.
Item 5. Other Information
a. On April 2, 2000, Peachtree Partners (Peachtree) initiated an
unregistered tender offer to purchase approximately 2,900 of the
outstanding units of additional limited partnership interest (Units)
in the Partnership at a price of $40 per Unit. The offer expired in
May 2000. Peachtree is unaffiliated with the Managing General Partner.
The price offered was determined solely at the discretion of Peachtree
and does not necessarily represent the fair market value of each Unit.
There is no established market for the purchase and sale of Units in
the Partnership, although various informal secondary market services
exist. Due to the limited markets, however, investors may be unable to
sell or otherwise dispose of their Units in the Partnership.
b. On November 6, 2000, the Partnership made a cash distribution of
$2,994,350 ($50.00 per Unit) to Additional Limited Partners, to
holders of record as of September 30, 2000. The distribution was a
result of the sales of O'Farrell, Tyee Apartments and Woodside
Village.
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, 2000.
All other items are not applicable.
-22-
<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 9, 2000 by: /S/ MICHAEL J. TUSZKA
---------------- -------------------------------------
DATE Michael J. Tuszka
Vice President
and Chief Accounting Officer
(Principal Financial Officer
and Principal Accounting Officer)
-23-
<PAGE>
EXHIBIT INDEX
EXHIBIT METHOD OF FILING
------- ------------------------------
27 Financial Data Schedule Filed herewith electronically
-24-
