QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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Commission file number 0-11962
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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
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(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months, and (2) has
been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
Not applicable Not applicable
-------------------------- ---------------------------------------
(Class) (Outstanding at June 30, 2000)
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
INDEX TO FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 2000
Page
----
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2000
and December 31, 1999............................... 1
Consolidated Statements of Operations and Accumulated
Losses - for the three and six months ended
June 30, 2000 and 1999.............................. 2
Consolidated Statements of Cash Flows - for
the six months ended June 30, 2000 and 1999......... 3
Notes to Consolidated Financial Statements -
June 30, 2000 and 1999.............................. 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......................... 24
Item 5. Other Information....................................... 24
Item 6. Exhibits and Reports on Form 8-K........................ 25
Signature .................................................... 26
Exhibit Index............................................................. 27
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Investments in and advances to partnerships ........................................... $ 16,050,606 $ 19,683,671
Investment in partnerships held for sale .............................................. 4,007,713 1,285,964
Investment in partnership held in escrow .............................................. -- 1,267,871
Cash and cash equivalents ............................................................. 9,599,413 10,045,683
Acquisition fees, principally paid to related parties, net
of accumulated amortization of $374,274 and $472,235,
respectively ........................................................................ 306,322 415,398
Property purchase costs, net of accumulated amortization of
$375,897 and $431,180, respectively ................................................. 330,181 401,342
Other assets .......................................................................... 1,721 --
------------ ------------
Total assets .................................................................... $ 30,295,956 $ 33,099,929
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in partnerships .................................................... $ 16,371,710 $ 21,540,464
Accrued interest payable .............................................................. 36,931,433 49,549,160
Accounts payable and accrued expenses ................................................. 131,769 168,467
------------ ------------
Total liabilities ............................................................... 53,434,912 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 ............................................. (4,687,201) (4,687,201)
Offering costs .................................................................... (6,156,933) (6,156,933)
Accumulated losses ................................................................ (72,298,322) (87,317,528)
------------ ------------
Total partners' deficit ......................................................... (23,138,956) (38,158,162)
------------ ------------
Total liabilities and partners' deficit ......................................... $ 30,295,956 $ 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 six months ended
June 30, June 30,
------------------------------ -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Share of income from partnerships $ 482,658 $ 247,277 $ 1,284,086 $ 855,580
------------ ------------ ------------ ------------
Other revenue and expenses:
Revenue:
Interest and other income 142,039 120,454 267,880 243,514
------------ ------------ ------------ ------------
Expenses:
Interest 733,580 906,764 1,524,441 2,081,617
Management fee 75,000 75,000 150,000 150,000
General and administrative 92,101 70,571 160,746 140,591
Professional fees 41,397 25,521 82,795 50,643
Amortization of deferred costs 11,990 15,543 26,047 31,086
------------ ------------ ------------ ------------
954,068 1,093,399 1,944,029 2,453,937
------------ ------------ ------------ ------------
Total other revenue and expenses (812,029) (972,945) (1,676,149) (2,210,423)
------------ ------------ ------------ ------------
Loss before gain on disposition of
investment in partnership (329,371) (725,668) (392,063) (1,354,843)
Gain on disposition of investment in partnership 4,268,325 - 4,268,325 --
------------ ------------ ------------ ------------
Income (loss) before extraordinary gain from
extinguishment of debt 3,938,954 (725,668) 3,876,262 (1,354,843)
Extraordinary gain from extinguishment of debt 7,412,903 - 11,142,944 167,774
------------ ------------ ------------ ------------
Net income (loss) 11,351,857 (725,668) 15,019,206 (1,187,069)
Accumulated losses, beginning of period (83,650,179) (85,562,403) (87,317,528) (85,101,002)
------------ ------------ ------------ ------------
Accumulated losses, end of period $(72,298,322) $(86,288,071) $(72,298,322) $(86,288,071)
============ ============ ============ ============
Net income (loss) allocated to General Partners (1.51%) $ 171,413 $ (10,958) $ 226,790 $ (17,925)
============ ============ ============ ============
Net income (loss) allocated to Initial and Special
Limited Partners (1.49%) $ 169,143 $ (10,812) $ 223,786 $ (17,687)
============ ============ ============ ============
Net income (loss) allocated to Additional Limited
Partners (97%) $ 11,011,301 $ (703,898) $ 14,568,630 $ (1,151,457)
============ ============ ============ ============
Net income (loss) per unit of Additional Limited
Partner Interest based on 60,000 units outstanding $ 183.52 $ (11.73) $ 242.81 $ (19.19)
============ ============ ============ ============
</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 six months ended
June 30,
-----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................................ $ 15,019,206 $ (1,187,069)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Share of income from partnerships ...................... (1,284,086) (855,580)
Amortization of deferred costs ......................... 26,047 31,086
Amortization of discount on purchase money notes ....... 17,034 346,215
Gain on disposition of investment in partnership ....... (4,268,325) --
Extraordinary gain from extinguishment of debt ......... (11,142,944) (167,774)
Changes in assets and liabilities:
(Increase) decrease in other assets .................. (1,721) 5,982
Increase in accrued interest payable ................. 1,507,407 1,735,402
Payment of purchase money note interest .............. (266,741) (343,766)
Decrease in accounts payable and accrued expenses .... (36,698) (29,325)
------------ ------------
Net cash used in operating activities .............. (430,821) (464,829)
------------ ------------
Cash flows from investing activities:
Receipt of distributions from partnerships ............... 962,051 705,252
Proceeds from disposition of investment in partnership ... 4,347,122 --
------------ ------------
Net cash provided by investing activities .......... 5,309,173 705,252
------------ ------------
Cash flows from financing activities:
Payment of purchase money note principal ................. -- (425,000)
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) (695,000)
------------ ------------
Net decrease in cash and cash equivalents .................. (446,270) (454,577)
Cash and cash equivalents, beginning of period ............. 10,045,683 10,804,306
------------ ------------
Cash and cash equivalents, end of period ................... $ 9,599,413 $ 10,349,729
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ................. $ 4,735,848 $ 343,766
============ ============
</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
June 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 financial statements reflect all adjustments, consisting
of normal recurring accruals, necessary for a fair presentation of the financial
position of Capital Realty Investors-III Limited Partnership (the Partnership)
as of June 30, 2000, and the results of its operations for the three and six
months ended June 30, 2000 and 1999, and its cash flows for the six months ended
June 30, 2000 and 1999. The results of operations for the interim periods ended
June 30, 2000, are not necessarily indicative of the results to be expected for
the full year.
The accompanying unaudited 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 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, 1999.
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 an aggregate principal
balance of $16,808,596 (exclusive of unamortized discount on purchase money
notes of $556,430) plus aggregate accrued interest of $36,897,457 as of June 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 the 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 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
-4-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 AND 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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, on May 31, 2000. The remaining
purchase money notes mature during 2002 through 2015.
The purchase money notes, which are nonrecourse to the Partnership, are
generally secured by the Partnership's interest in the respective Local
Partnerships. There is no assurance that the underlying properties will have
sufficient appreciation and equity to enable the Partnership to pay the purchase
money notes' principal and accrued interest when due. If a purchase money note
is not paid in accordance with its terms, the Partnership will either have to
renegotiate the terms of repayment or risk losing its partnership interest in
the respective Local Partnership. The Partnership's inability to pay certain of
the purchase money note principal and accrued interest balances when due, and
the resulting uncertainty regarding the Partnership's continued ownership
interest in the related Local Partnerships, does not adversely impact the
Partnership's financial condition because the purchase money notes are
nonrecourse and secured solely by the Partnership's interest in the related
Local Partnerships. Therefore, should the investment in any of the Local
Partnerships with maturing purchase money notes not produce sufficient value to
satisfy the related purchase money notes, the Partnership's exposure to loss is
limited because the amount of the nonrecourse indebtedness of each of the
maturing purchase money notes exceeds the carrying amount of the investment in,
and advances to, each of the related Local Partnerships. Thus, even a complete
loss of 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, have been extended to mature, or are scheduled to
mature, through June 30, 2001, and which remain unpaid or unextended as of
August 10, 2000. Excluded from the following chart are purchase money notes
which matured through June 30, 2000, and which have been paid off, cancelled, or
extended on or before August 10, 2000.
-5-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 AND 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
<TABLE>
<CAPTION>
Carrying Amount
Aggregate of Partnership's
Aggregate Accrued Investments in
Number of Principal Interest and Advances to
Purchase Underlying Balance Balance Underlying Local
Money Note Local Percentage as of June Percentage as of June Percentage Partnerships as Percentage
(PMN) Maturity Partnerships of Total 30, 2000 of Total 30, 2000 of Total of June 30, 2000 of Total
--------------- ------------ ---------- ----------- ---------- ----------- ---------- ---------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1st Quarter 1999 6 22% $10,590,000 63% $22,894,555 62% $ 6,872,273 34%
2nd Quarter 1999 1 4% 850,000 5% 1,722,126 5% 1,353,632 7%
1st Quarter 2001 1 4% 1,275,000 8% 3,640,465 10% 4,880,223 25%
---- ---- ----------- ----- ----------- ----- ----------- -----
Total through
6/30/2001 8 30% $12,715,000 76% $28,257,146 77% $13,106,128 66%
==== ==== =========== ===== =========== ===== =========== =====
Total, Local
Partnerships 27 100% $16,808,596 (1) 100% $36,897,457 (1) 100% $19,961,274 (2) 100%
==== ==== =========== ===== =========== ===== =========== =====
</TABLE>
(1) Does not include discount, or amounts payable to a local general
partner.
(2) Includes $3,910,668 for two partnerships reported as investment in
partnerships held for sale on the consolidated balance sheet at
June 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, upon maturity of the purchase money notes, in the event that the
purchase money notes remain unpaid, 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 27 Local Partnerships in which the Partnership
is invested as of June 30, 2000, the eight Local Partnerships with associated
purchase money notes which mature through June 30, 2001 and which remain unpaid
or unextended as of August 10, 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.
-6-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 AND 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
<TABLE>
<CAPTION>
Percentage of Total Partnership's Share of
For the Year Distributions Received Income from
Ended from Local Partnerships Local Partnerships
----------------- ----------------------- ----------------------
<S> <C> <C>
December 31, 1999 20% $1,195,030
December 31, 1998 4% $ 959,816
</TABLE>
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.
Interest expense on the Partnership's purchase money notes for the
three and six months ended June 30, 2000 was $733,580 and $1,524,441,
respectively and $906,764 and $2,081,617 for the three and six months ended
June, 1999, respectively. Amortization of discount on purchase money notes
increased interest expense for the three and six months ended June 30, 2000 by
$8,517 and $17,034, respectively, and by $25,918 and $346,215 for the three and
six months ended June 30, 1999, respectively. The accrued interest payable on
the purchase money notes of $36,897,457 and $49,515,184 as of June 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.
-7-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 AND 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
Bartley Manor, Village Square and Village Green
-----------------------------------------------
The Partnership defaulted on its purchase money notes related to
Bartley Manor, Village Square and 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 approximately $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.
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
-8-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 AND 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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 August 10, 2000, principal and accrued interest
of $850,000 and $1,734,979, 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.
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 cancellation of
indebtedness income of approximately $2,816,000 for federal tax purposes in
2000.
-9-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 AND 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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 August 10, 2000,
principal and accrued interest of $2,600,000 and $4,862,156, respectively, for
Heritage Estates I, and $1,800,000 and $3,012,084, respectively, for Heritage
Estates II were due. The Managing General Partner is currently exploring options
to extend the maturity dates of the purchase money notes related to Heritage
Estates I and Heritage Estates II for up to five years. 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.
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.
-10-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 AND 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
Meadow Lanes II
---------------
The Partnership defaulted on its purchase money note related to Meadow
Lanes II Limited Dividend Housing Associates (Meadow Lanes II) on February 28,
1999 when the note matured and was not paid. The default amount included
principal and accrued interest of $650,000 and $1,250,201, respectively. As of
August 10, 2000, principal and accrued interest of $650,000 and $1,380,503,
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.
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 payoff, 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 $734,988 for financial
statement purposes in 2000, and in total income of $8,661,478 for federal tax
purposes in 2000. The Managing General Partner of the Partnership and/or its
affiliates will 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. As of August 10, 2000, aggregate
principal and accrued interest of $1,305,000 and $3,680,966 were due. As of
August 10, 2000, the parties are negotiating a discounted payoff of these
purchase money notes. Additionally, the local managing general partner has
entered into a contract for the sale of the property. There is no assurance that
either a negotiated discounted payoff of the purchase money notes or a sale of
the property will occur.
-11-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 AND 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
Due to the impending and likely sale of the property related to the
Partnership's investment in Tyee Apartments, the investment in and advances to
partnerships plus net unamortized amounts of acquisition fees and property
purchase costs related to Tyee Apartments, which totaled $625,086, were
reclassified to investment in partnerships held for sale as of June 30, 2000.
For the year ended December 31, 1999, distributions from Tyee Apartments
represented approximately 0 percent of total distributions from Local
Partnerships. The Partnership's share of income from Tyee Apartments was $96,889
and $139,977 for the three and six months ended June 30, 2000, respectively, and
$51,938 and $95,783 for the three and six months ended June 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 August 10, 2000,
principal and accrued interest of $900,000 and $1,911,124 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 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 granted the noteholders an option during
the period January 1, 2000 through June 30, 2000 to purchase the Partnership's
and C.R.H.C.'s interests in the Local Partnership for an amount equal to the
outstanding principal balance of the purchase money notes plus accrued interest.
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.
-12-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 AND 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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. As of
August 10, 2000, aggregate principal and accrued interest of $3,335,000 and
$8,224,371, respectively, were due. The Partnership received a notice of default
from an individual 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 noteholder
of the larger note. Additionally, the local managing general partner has entered
into a contract for the sale of the property. There is no assurance that a
negotiated discounted payoff of the purchase money notes or that a sale of the
property will occur.
Due to the impending and likely sale of the property related to the
Partnership's investment in Woodside Village, the investment in and advances to
partnerships plus net unamortized amounts of acquisition fees and property
purchase costs related to Woodside Village, which totaled $3,359,785, were
reclassified to investment in partnerships held for sale as of June 30, 2000.
For the year ended December 31, 1999, distributions from Woodside Village
represented approximately 30 percent of total distributions from Local
Partnerships. The Partnership's share of income from Woodside Village was
$133,265 and $266,531 for the three and six months ended June 30, 2000,
respectively, and $88,429 and $166,365 for the three and six months ended June
30, 1999, respectively.
b. Property matters
----------------
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
investment in partnership of approximately $2,539,000 and in extraordinary gain
on extinguishment of debt of approximately $280,000 for financial statement
-13-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 AND 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
purposes in 2000, and in a total gain of approximately $4,415,000 for federal
tax purposes in 2000.
Due to the 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 $22,842, were reclassified to
investment in partnerships held for sale as of December 31, 1999. For the year
ended December 31, 1999, distributions from O'Farrell represented approximately
three percent of total distributions from Local Partnerships. The Partnership's
share of income from O'Farrell was $0 for the six months ended June 30, 2000 and
1999.
Rolling Green at Milford
------------------------
On May 31, 2000, Rolling Green at Milford was sold. See Note 2.a. of
the notes to financial statements 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 do 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. The
arbitration is scheduled for September 2000. As the properties' mortgage lender
has refused to consent to prepayment of the mortgages to permit the sales
proposed by the LMGP, it is not clear to the Partnership at this time what the
LMGP hopes to gain from the arbitration, but the LMGP's counsel has not
responded to written or telephonic queries.
-14-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 AND 1999
(Unaudited)
c. Summarized financial information
--------------------------------
Combined statements of operations for the 27 and 31 Local Partnerships
in which the Partnership was invested as of June 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.
The combined statements of operations for the three and six months ended June
30, 2000 include information for Rolling Green at Milford through the date of
sale.
COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
------------------------------ ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Rental $ 6,974,692 $ 7,368,238 $ 14,460,091 $ 14,854,560
Other 349,416 113,061 782,431 699,481
------------ ------------ ------------ ------------
Total revenue 7,324,108 7,481,299 15,242,522 15,554,041
------------ ------------ ------------ ------------
Expenses:
Operating 4,007,253 4,413,787 8,622,597 9,051,108
Interest 1,776,747 1,776,286 3,575,443 3,552,569
Depreciation and amortization 1,273,235 1,329,741 2,570,852 2,659,482
------------ ------------ ------------ ------------
Total expenses 7,057,235 7,519,814 14,768,892 15,263,159
------------ ------------ ------------ ------------
Net income (loss) $ 266,873 $ (38,515) $ 473,630 $ 290,882
============ ============ ============ ============
</TABLE>
As of June 30, 2000 and 1999, the Partnership's share of cumulative
losses to date for seven and nine, respectively, of the 27 and 31 Local
Partnerships, respectively, exceeded the amount of the Partnership's investments
in and advances to those Local Partnerships by $9,382,528 and $9,657,159,
respectively. Since 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
-15-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 AND 1999
(Unaudited)
3. AFFORDABLE HOUSING LEGISLATION - Continued
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.
Eleven properties in which the Partnership is invested have Section 8
HAP contracts expiring in 2000 (some of these properties also have related
purchase money notes which have matured). The HAP contracts cover substantially
all of the apartment units in each property. During the first half of 2000,
three properties renewed their HAP contracts for one year, thereby extending the
maturity dates to April and May 2001. Two properties entered into four-year
contract renewals with either budget based rent increases or operating cost
adjustment increases. Two properties are under contract to be sold in the second
half of 2000. 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.
-16-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 AND 1999
(Unaudited)
3. AFFORDABLE HOUSING LEGISLATION - Continued
The Section 8 HAP contracts for the following properties initially
expired during the government's fiscal year 1998 or 1999, and have been renewed
as indicated.
<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 05/31/01 (5)
Briar Crest I 53 53 06/30/98 09/30/00 (3)
Briar Crest II 49 49 06/30/98 09/30/00 (3)
Briar Hills 50 33 09/30/98 09/30/00 (2)
Highland Manor 111 111 02/08/98 05/12/04 (1)
Indian Hills Townhouses 40 24 09/30/98 09/30/00 (2)
Lakewood Apartments 50 50 08/01/99 07/31/04 (4)
Tyee Apartments 100 40 07/31/98 07/31/00 (6)
Village Green 36 36 09/30/98 04/30/01 (5)
Village Square 48 48 09/30/98 04/30/01 (5)
Woodside Village 180 114 08/31/98 08/31/00 (6)
----- ---
Total 787 627
===== ===
</TABLE>
(1) This property entered the Mark-to-Market program in May 1998.
The Section 8 HAP contract was renewed for four years on
05/12/00 to 05/12/04 at current rents with an operating cost
adjustment factor.
(2) The Managing General Partner expects that these Section 8 HAP
contracts will be renewed for one year upon expiration.
(3) Three month renewal, property has applied for Mark-up-to-
Market.
(4) Renewed for four years with budget based rent increases.
(5) Renewed in 2000 for one year.
(6) Property under contract for sale in September 2000.
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 June 30, 2000, the carrying amount of the
Partnership's investments in and advances to Local Partnerships with Section 8
HAP contracts expiring in 2000 was $8,610,196.
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 necessary to bring Section 8 rents in line with market rate
rents. For properties that enter the program and have 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.
-17-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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 managing the Partnership. The Partnership paid $75,225 and
$151,228 for the three and six month periods ended June 30, 2000, respectively,
and $58,387 and $113,440 for the three and six month periods ended June 30,
1999, 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.
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 $150,000 for each of the three and six month periods ended June 30,
2000 and 1999, 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. No such fees were earned by the Managing General Partner or its
affiliates for the three and six month periods ended June 30, 2000 or 1999. The
Managing General Partner was paid a disposition fee of $244,000 for the sale of
O'Farrell on August 4, 2000.
-18-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Capital Realty Investors-III Limited Partnership's (the Partnership)
Management's Discussion and Analysis of Financial Condition and Results of
Operations section contains information that may be considered forward looking,
including statements regarding the effect of governmental regulations. Actual
results may differ materially from those described in the forward looking
statements and will be affected by a variety of factors including national and
local economic conditions, the general level of interest rates, 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.
Eleven properties in which the Partnership is invested have Section 8
HAP contracts expiring in 2000 (some of these properties also have related
purchase money notes which have matured). The HAP contracts cover substantially
all of
-19-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
the apartment units in each property. During the first half of 2000, three
properties renewed their HAP contracts for one year, thereby extending the
maturity dates to April and May 2001. Two properties entered into four-year
contract renewals with either budget based rent increases or operating cost
adjustment increases. Two properties are under contract to be sold in the second
half of 2000. 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.
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 necessary to bring Section 8 rents in line with market rate
rents. For properties that enter the program and have 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.
-20-
<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
$9,599,413 as of June 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 August 10, 2000, there were no material
commitments for capital expenditures.
The Partnership's obligations with respect to its investments in Local
Partnerships, in the form of purchase money notes having an aggregate principal
balance of $16,808,596 (exclusive of unamortized discount on purchase money
notes of $556,430) plus aggregate accrued interest of $36,897,457 as of June 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 the amount equal to the
outstanding principal plus accrued interest balance of the purchase money note.
Purchase money notes in the 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 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 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, on May 31, 2000. The remaining purchase money notes mature during 2002
through 2015. 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
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<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
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.
See further discussion of certain purchase money notes in the notes to the
consolidated financial statements.
The following chart presents information related to purchase money
notes which have matured, have been extended to mature, or are scheduled to
mature, through June 30, 2001, and which remain unpaid or unextended as of
August 10, 2000. Excluded from the following chart are purchase money notes
which matured through June 30, 2000, and which have been paid off, cancelled, or
extended on or before August 10, 2000.
<TABLE>
<CAPTION>
Carrying Amount
Aggregate of Partnership's
Aggregate Accrued Investments in
Number of Principal Interest and Advances to
Purchase Underlying Balance Balance Underlying Local
Money Note Local Percentage as of June Percentage as of June Percentage Partnerships as Percentage
(PMN) Maturity Partnerships of Total 30, 2000 of Total 30, 2000 of Total of June 30, 2000 of Total
--------------- ------------ ---------- ----------- ---------- ----------- ---------- ---------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1st Quarter 1999 6 22% $10,590,000 63% $22,894,555 62% $ 6,872,273 34%
2nd Quarter 1999 1 4% 850,000 5% 1,722,126 5% 1,353,632 7%
1st Quarter 2001 1 4% 1,275,000 8% 3,640,465 10% 4,880,223 25%
---- ---- ----------- ----- ----------- ----- ----------- -----
Total through
6/30/2001 8 30% $12,715,000 76% $28,257,146 77% $13,106,128 66%
==== ==== =========== ===== =========== ===== =========== =====
Total, Local
Partnerships 27 100% $16,808,596 (1) 100% $36,897,457 (1) 100% $19,961,274 (2) 100%
==== ==== =========== ===== =========== ===== =========== =====
</TABLE>
(1) Does not include discount, or amounts payable to a local general
partner.
(2) Includes $3,910,668 for two partnerships reported as investment in
partnerships held for sale on the consolidated balance sheet at
June 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
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<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
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, upon maturity of the purchase money notes, in
the event that the purchase money notes remain unpaid, 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 27 Local Partnerships in
which the Partnership is invested as of June 30, 2000, the six Local
Partnerships with associated purchase money notes which mature through June 30,
2001 and which remain unpaid or unextended as of August 10, 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.
<TABLE>
<CAPTION>
Percentage of Total Partnership's Share of
For the Year Distributions Received Income from
Ended from Local Partnerships Local Partnerships
----------------- ----------------------- ----------------------
<S> <C> <C>
December 31, 1999 20% $1,195,030
December 31, 1998 4% $ 959,816
</TABLE>
The Partnership closely monitors its cash flow and liquidity position
in an effort to ensure that sufficient cash is available for operating
requirements. For the six month periods ended June 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
decreased during the six month period ended June 30, 2000 as net cash used in
operating activities and cash used to pay off three purchase money notes
exceeded cash distributions from Local Partnerships and cash proceeds from
disposition of investment in partnership.
Results of Operations
---------------------
The Partnership recognized net income for the three month period ended
June 30, 2000, as compared to net loss during the corresponding period in 1999,
primarily due to extraordinary gain from extinguishment of debt from the
transfer of interest to the noteholders of New Winchester Gardens, Ltd.
(Winchester Gardens) and College Park Ltd. (College Park) and also the gain on
disposition of investment in partnership related to the sale of Robert Milford
Associates (Rolling Green at Milford) as discussed in the notes to the
consolidated financial statements. Contributing to net income were an increase
of share of income from partnerships due to lower operating expenses at one
property and of the exclusion from share of income in 2000 of five properties
which had accumulated unallowable losses, a decrease in interest expense
-23-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
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 interest rates in 2000. Partially offsetting the increase in the
Partnership's net income were 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, and an increase in general and administrative
expenses due to higher reimbursed payroll costs.
The Partnership recognized net income for the six month period ended
June 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 noteholders related to Greeley Manor Company
(Greeley Manor), College Park and Winchester Gardens, and the gain on
disposition of investment in partnership from Rolling Green at Milford, all as
discussed in the notes to the consolidated financial statements. Contributing to
the increase in income were a decrease in interest expense, an increase in share
of income and an increase in interest, income, as discussed above. Partially
offsetting the increase in the Partnership's net income were an increase in
professional fees and general and administrative expenses, as discussed above
and in the notes to the consolidated financial statements.
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
six month periods ended June 30, 2000 did not include losses of $116,158 and
$332,385, respectively, compared to excluded losses of $283,921 and $567,839 for
the three and six month periods ended June 30, 1999, respectively.
No other significant changes in the Partnership's operations have taken
place during this period.
-24-
<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 purchase money notes.
ITEM 5. OTHER INFORMATION
-----------------
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. 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 in addition to the tender offer by Peachtree. Due to the limited
markets, however, investors may be unable to sell or otherwise dispose of their
Units in the Partnership.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a. None
b. No Reports on Form 8-K were filed with the Commission during
the quarter ended June 30, 2000.
All other items are not applicable.
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<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
------------------------------------------------
(Registrant)
by: C.R.I., Inc.
--------------------------------------------
Managing General Partner
August 10, 2000 by: /s/ Michael J. Tuszka
----------------- ----------------------------------------
DATE Michael J. Tuszka
Vice President
and Chief Accounting Officer
(Principal Financial Officer
and Principal Accounting Officer)
-26-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
-27-
