CAPITAL REALTY INVESTORS III LTD PARTNERSHIP, 10QSB, 2000-05-11

CAPITAL REALTY INVESTORS III LTD PARTNERSHIP
10QSB, 2000-05-11
REAL ESTATE

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<PAGE>

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

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

For the quarterly period ended March 31, 2000
--------------

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

CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
--------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)

Maryland 52-1311532
- ----------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

11200 Rockville Pike, Rockville, Maryland 20852
- ----------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)

(301) 468-9200
--------------------------------------------------------------------------
(Issuer's telephone number, including area code)

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

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

Not applicable Not applicable
- -------------------------- ---------------------------------------
(Class) (Outstanding at March 31, 2000)
<PAGE>

CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

INDEX TO FORM 10-QSB

FOR THE QUARTER ENDED MARCH 31, 2000

Page
----

PART I. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets - March 31, 2000
and December 31, 1999 . . . . . . . . . . . . . 1

Consolidated Statements of Operations and Accumulated
Losses - for the three months ended March 31, 2000
and 1999 . . . . . . . . . . . . . . . . . . . . 2

Consolidated Statements of Cash Flows - for
the three months ended March 31, 2000 and 1999 . 3

Notes to Consolidated Financial Statements -
March 31, 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>
March 31, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Investments in and advances to partnerships $ 19,860,071 $ 19,683,671
Investment in partnership held for sale 1,425,968 1,285,964
Investment in partnership held in escrow -- 1,267,871
Cash and cash equivalents 9,360,042 10,045,683
Acquisition fees, principally paid to related parties, net
of accumulated amortization of $447,937 and $472,235,respectively 380,440 415,398
Property purchase costs, net of accumulated amortization of
$422,695 and $431,180, respectively 381,259 401,342
Other assets 1,503 --
------------ ------------
Total assets $ 31,409,283 $ 33,099,929
============ ============

LIABILITIES AND PARTNERS' DEFICIT

Due on investments in partnerships $ 19,449,481 $ 21,540,464
Accrued interest payable 46,355,592 49,549,160
Accounts payable and accrued expenses 95,023 168,467
------------ ------------
Total liabilities 65,900,096 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 (83,650,179) (87,317,528)
------------ ------------
Total partners' deficit (34,490,813) (38,158,162)
----------- ------------
Total liabilities and partners' deficit $ 31,409,283 $ 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
March 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Share of income from partnerships $ 801,428 $ 608,303
------------ ------------

Other revenue and expenses:

Revenue:
Interest income 125,841 123,060
------------ ------------
Expenses:
Interest 790,861 1,174,853
Management fee 75,000 75,000
General and administrative 68,645 70,020
Professional fees 41,398 25,122
Amortization of deferred costs 14,057 15,543
------------ ------------
989,961 1,360,538
------------ ------------
Total other revenue and expenses (864,120) (1,237,478)
------------ ------------
Loss before extraordinary gain from extinguishment of debt (62,692) (629,175)

Extraordinary gain from extinguishment of debt 3,730,041 167,774
------------ ------------
Net income (loss) 3,667,349 (461,401)

Accumulated losses, beginning of period (87,317,528) (85,101,002)
------------ ------------
Accumulated losses, end of period $(83,650,179) $(85,562,403)
============ ============
Net income (loss) allocated to General Partners (1.51%) $ 55,377 $ (6,967)
============ ============
Net income (loss) allocated to Initial and Special Limited Partners (1.49%) $ 54,643 $ (6,875)
============ ============
Net income (loss) allocated to Additional Limited Partners (97%) $ 3,557,329 $ (447,559)
============ ============
Net income (loss) per unit of Additional Limited Partnership
Interest based on 60,000 units outstanding $ 59.29 $ (7.46)
============ ============
</TABLE>

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

-2-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------

CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 3,667,349 $ (461,401)

Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Share of income from partnerships (801,428) (608,303)
Amortization of deferred costs 14,057 15,543
Amortization of discount on purchase money notes 8,517 320,297
Extraordinary gain from extinguishment of debt (3,730,041) (167,774)

Changes in assets and liabilities:
Increase in other assets (1,503) (5,786)
Increase in accrued interest payable 782,344 854,556
Payment of purchase money note interest (100,000) (256,352)
Decrease in accounts payable and accrued expenses (73,444) (49,922)
------------ ------------
Net cash used in operating activities (234,149) (359,142)
------------ ------------

Net cash provided by investing activities:
Receipt of distributions from partnerships 526,008 321,094
------------ ------------

Cash flows from financing activities:
Payoff of purchase money notes and related interest (977,500) (370,000)
Release of investment held in escrow -- 100,000
------------ ------------
Net cash used in financing activities (977,500) (270,000)
------------ ------------

Net decrease in cash and cash equivalents (685,641) (308,048)

Cash and cash equivalents, beginning of period 10,045,683 10,804,306
------------ ------------

Cash and cash equivalents, end of period $ 9,360,042 $ 10,496,258
============ ============

Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 728,272 $ 256,352
============ ============
</TABLE>

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

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<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 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 March 31, 2000, and the results of its operations and its cash flows for
the three months ended March 31, 2000 and 1999. The results of operations for
the interim period ended March 31, 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 $19,894,884 (exclusive of unamortized discount on purchase money
notes of $564,947) plus aggregate accrued interest of $46,321,616 as of March
31, 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, has been extended until January 31, 2001. Purchase money
notes in the aggregate principal amount of $364,481 matured January 1, 1999 and
were paid off, at a discount, on February 5, 1999. Purchase money notes in the
original aggregate principal amount of $1,760,000 matured on January 1, 1999 and
were extended to January 1, 2004. 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 $5,280,000 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 aggregate principal amount of $1,275,000
matured on January 1, 1999, and has been extended to June 30, 2000. A purchase
money note in the aggregate 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

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<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2000 AND 1999

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

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. 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 March 31, 2001, and which remain unpaid or unextended as of May 11,
2000. Excluded from the following chart are purchase money notes which matured
through March 31, 2000, and which have been paid off, cancelled, or extended on
or before May 11, 2000.

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<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2000 AND 1999

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

Carrying Amount
Aggregate of Partnership's
Aggregate Accrued Investment in
Number of Principal Interest and Advances to
Purchase Underlying Balance Balance Underlying Local
Money Note Local Percentage as of March Percentage as of March Percentage Partnerships as Percentage
(PMN) Maturity Partnerships of Total 31, 2000 of Total 31, 2000 of Total March 31, 2000 of Total
- ---------------- ------------ ---------- ----------- ---------- ----------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1st Quarter 1999 6 20% $10,590,000 53% $22,502,482 48% $ 6,722,028 34%
2nd Quarter 1999 1 4% 850,000 4% 1,693,599 4% 1,373,494 7%
2nd Quarter 2000 1 4% 1,275,000 7% 3,576,957 8% 4,857,524 24%
---- ---- ----------- ----- ----------- ----- ------------ -----
Total through
3/31/2001 8 27% (a) $12,715,000 64% $27,773,038 60% $ 12,953,046 65%
==== ==== =========== ===== =========== ===== ============ =====

Total, Local
Partnerships 30 100% $19,894,884 100% $46,321,616 100% $ 19,860,071 100%
==== ==== =========== ===== =========== ===== ============ =====

(a) Does not add due to rounding.

</TABLE>

The Managing General Partner is continuing to investigate possible
alternatives to reduce the Partnership's debt obligations. These alternatives
include, among others, retaining the cash available for distribution to meet the
purchase money note requirements, 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.
Based on preliminary discussions with the holders of purchase money notes
maturing through March 31, 2001, the Managing General Partner anticipates that,
at least in some instances, the noteholders may not be willing to negotiate any
extension or discounted payoff. In such instances, upon maturity of the
purchase money notes, if 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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2000 AND 1999

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

rental operations, mortgage debt refinancings, or the sale of the real estate.
Of the 30 Local Partnerships in which the Partnership is invested as of March
31, 2000, the eight Local Partnerships with associated purchase money notes
which mature through March 31, 2001 and which remain unpaid or unextended as of
May 11, 2000, represent the following percentages of the Partnership's total
distributions received from Local Partnerships and share of income from Local
Partnerships for the previous two calendar years.

Percentage of Total Partnership's Share of
For the Years Distributions Received Income from
Ending from Local Partnerships Local Partnerships
----------------- ----------------------- ----------------------
<S> <C> <C>
December 31, 1999 20% $1,138,683
December 31, 1998 6% $1,203,021

</TABLE>

Interest expense on the Partnership's purchase money notes for the three
months ended March 31, 2000 and 1999 was $790,861 and $1,174,853, respectively.
Amortization of discount on purchase money notes increased interest expense
during the three months ended March 31, 2000 and 1999 by $8,517 and $320,297,
respectively. The accrued interest on the purchase money notes of $46,321,616
and $49,515,184 as of March 31, 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. 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

MARCH 31, 2000 AND 1999

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

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

In September 1995, the Partnership modified purchase money notes totaling
$1,365,000 relating to Bartley Manor, Village Square and Village Green. In
accordance with the modification agreement, the Partnership paid a sum
applicable to accrued interest, and the maturity dates for the notes were
extended from February 1995 to July 1, 1998. On July 1, 1998, the Partnership
defaulted on the purchase money notes relating to these Local Partnerships when
the notes matured and were not paid. The default amount included principal and
accrued interest aggregating $1,365,000 and $2,185,356, respectively. During
1998, the Managing General Partner and the purchase money noteholders reached an
agreement to extend the purchase money notes until October 1, 1999. In
connection with the extension agreements, in August 1998, the Partnership made
interest payments to the purchase money noteholders related to 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 $2,865,000 for financial statement purposes in 2000, and in
cancellation of indebtedness income of approximately $3 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. As of May 11, 2000, aggregate
principal and accrued interest of $880,000 and $1,840,054, respectively, were
due. The Partnership attempted to negotiate with the noteholder of record to
extend the maturity dates of the purchase money notes for five years, but
received no response. In March 1999, the Partnership received notice of a
collection action on the purchase money notes by two individuals who claimed to
be the noteholders. The Partnership retained local counsel to defend the
lawsuit. On July 26, 1999, the Partnership received notice that the plaintiffs
moved to dismiss their lawsuit. On September 7, 1999, the Partnership received
notice that a new collection action had been filed in the proper jurisdiction of
Mississippi. The purported noteholders indicated that they would not agree to
settle the action. Accordingly, to avoid the expense of further litigation, in
April 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 will result in
extraordinary gain from extinguishment of debt of approximately $1.4 million for
financial statement purposes in 2000, and in cancellation of indebtedness income
of approximately $3.2 million for federal tax purposes in 2000.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2000 AND 1999

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

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 May 11, 2000, principal and accrued interest of
$850,000 and $1,706,452, respectively, were due.

In November 1999, the noteholder filed an action to foreclose on the
Partnership's interest in the Local Partnership. In the meantime, an affiliate
of the noteholder has offered to purchase the Partnership's interest in the
Local Partnership for a payment of $25,000 to the Partnership. 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
approximately $865,000 for financial statement purposes in 2000, and in

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2000 AND 1999

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

cancellation of indebtedness 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 May 11, 2000, principal and
accrued interest of $2,600,000 and $4,775,140, respectively, for Heritage
Estates I, and $1,800,000 and $2,954,078, 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 first 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 approximately $168,000 for financial statement
purposes, and in cancellation of indebtedness income of approximately $180,000
for federal tax purposes.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 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
May 11, 2000, principal and accrued interest of $650,000 and $1,358,123,
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 have 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.

The local managing general partner of Rolling Green has received an offer
for the purchase of the property, and the parties have executed a sales contract
dated as of February 18, 2000. See Note 2.b. for further information concerning
this 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 May 11, 2000, aggregate
principal and accrued interest of $1,305,000 and $3,620,824 were due. As of May
11, 2000, the parties are negotiating a discounted payoff of these purchase
money notes. Additionally, the local managing general partner has received two
offers for the purchase 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.

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

The Partnership defaulted on its purchase money note related to Victorian
Towers Associates (Victorian Towers) on January 1, 1999 when the note matured
and was not paid. The default amount included principal and accrued interest of
$900,000 and $1,710,560, respectively. As of May 11, 2000, principal and
accrued interest of $900,000 and $1,880,137 were due. The Managing General

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2000 AND 1999

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

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 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. As of May 11, 2000, the noteholders
had not exercised this option. The option is void if the purchase money notes
are satisfied prior to exercise of the option.

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

The Partnership defaulted on its purchase money notes related to Woodside
Village on February 1, 1999 when the notes matured and were not paid. The
default amount included aggregate principal and accrued interest of $3,335,000
and $7,407,102, respectively. As of May 11, 2000, aggregate principal and
accrued interest of $3,335,000 and $8,090,828, 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 first noteholder. Additionally, the local
managing general partner has received two offers for the purchase 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.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2000 AND 1999

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

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

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

The local managing general partner of O'Farrell Towers Associates
(O'Farrell) has received an offer for the purchase of the property, and the
parties have executed a sales contract dated as of October 12, 1999, with a
revised projected closing date of May or June, 2000. Proceeds received by the
Partnership from the sale of this property would be used to pay off, at a
discount, the purchase money notes related to O'Farrell. The contract is
subject to customary contingencies. Accordingly, there is no assurance that a
sale or the payoff of the purchase money notes will occur.

Due to the impending and likely sale of the property related to the
Partnership's investment in O'Farrell, the net unamortized amounts of
acquisition fees and property purchase costs related to O'Farrell, which totaled
$22,842, were reclassified to investment in partnership 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 three months ended March 31, 2000 and 1999.

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

The local managing general partner of Roberts Milford Associates (Rolling
Green) has received an offer for the purchase of the property, and the parties
have executed a sales contract dated as of February 18, 2000, with a projected
closing date of June 30, 2000. Proceeds received by the Partnership from the
sale of this property would be used to pay off, at a discount, the purchase
money notes related to Rolling Green. The contract is subject to customary
contingencies. Accordingly, there is no assurance that a sale of the property
or a payoff of the purchase money notes will occur. In the event of a sale of
this property, the Partnership's investment in and advances to partnerships
would be reduced accordingly. Of the Local Partnerships in which the
Partnership was invested as of March 31, 2000 and December 31, 1999, Rolling
Green represented approximately 5% and 4%, respectively, of total investments in
and advances to partnerships. For the calendar years ended December 31, 1999,
and 1998, distributions from Rolling Green represented approximately 0% of total
distributions from Local Partnerships. The Partnership's share of income from
Rolling Green was $0 for the three months ended March 31, 2000 and 1999.

Due to the impending and likely sale of the property related to the
Partnership's investment in Rolling Green, the investment in and advances to
partnerships plus net unamortized amounts of acquisition fees and property
purchase costs related to Rolling Green, which totaled $140,004, have been
reclassified to investment in partnerships held for sale in the accompanying
consolidated balance sheet at March 31, 2000.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2000 AND 1999

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

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. The Partnership has
engaged local counsel and intends to defend against the actions vigorously.
CRHC has moved to have both lawsuits stayed while the disputes are resolved by
arbitration in accordance with the respective Local Partnership agreements.

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

Combined statements of operations for the 30 and 31 Local Partnerships in
which the Partnership is invested as of March 31, 2000 and 1999, respectively,
follow. The combined statements have been compiled from information supplied by
the management agents of the projects and are unaudited.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2000 AND 1999

(Unaudited)

2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

COMBINED STATEMENTS OF OPERATIONS

(Unaudited)

For the three months ended
March 31,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenue:
Rental $ 7,485,399 $ 7,486,322
Other 433,015 586,420
----------- -----------
Total revenue 7,918,414 8,072,742
----------- -----------

Expenses:
Operating 4,615,344 4,637,321
Interest 1,798,696 1,776,283
Depreciation and amortization 1,297,617 1,329,741
----------- -----------
Total expenses 7,711,657 7,743,345
----------- -----------
Net income $ 206,757 $ 329,397
=========== ===========

</TABLE>

As of March 31, 2000 and 1999, the Partnership's share of cumulative losses
to date for eight and nine, respectively, of the Local Partnerships exceeded the
amount of the Partnership's investments in and advances to those Local
Partnerships by $9,976,360 and $9,373,238, 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 rents reduced to
100% of fair market rents (Mark-to-Market). All expiring Section 8 HAP

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2000 AND 1999

(Unaudited)

3. AFFORDABLE HOUSING LEGISLATION - Continued

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 which
are currently subsidized at higher-than-market rental rates, and will therefore
lower cash flow available to meet mortgage payments and operating expenses.
Each affected property 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.

Twelve 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. Currently, rent studies for seven of
these properties indicate that the current HAP rents are below fair market
rents, and therefore these properties will likely renew the HAP contracts
annually until a comprehensive solution is reached with the respective purchase
money noteholders. Two of these properties have been, or may be, transferred to
the purchase money noteholders in 2000. One property entered the Mark-to-Market
program in 1998 with a debt adjustment. Rent studies relating to the remaining
three properties are in progress.

The Section 8 HAP contracts for the following properties initially expired
during the government's fiscal year 1998 or 1999, and their renewals expire
during the year 2000.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2000 AND 1999

(Unaudited)

3. AFFORDABLE HOUSING LEGISLATION - Continued

<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 05/31/00
Briar Crest I 53 53 06/30/98 06/30/00
Briar Crest II 49 49 06/30/98 06/30/00
Briar Hills 50 33 09/30/98 09/30/00
Highland Manor 111 111 02/08/98 05/12/00 (1)
Indian Hills Townhouses 40 24 09/30/98 09/30/00
Lakewood Apartments 50 50 08/01/99 07/31/00
Tyee Apartments 100 40 07/31/98 07/31/00
Village Green 36 36 09/30/98 04/30/00
Village Square 48 48 09/30/98 04/30/00
Winchester Gardens Apartments 206 202 08/31/98 10/05/00
Woodside Village 180 114 08/31/98 08/31/00
----- ---
Total 993 829
===== ===

</TABLE>

(1) This property entered the Mark-to-Market program in May 1998. The
Section 8 HAP contract will be renewed annually.

With the uncertainty of continued project-based Section 8 subsidies for
properties with expiring HAP contracts, there is no assurance that these rental
properties will be able to maintain the rental income and occupancy levels
necessary to pay operating costs and debt service. As a result, it is not
possible to predict the impact on the Local Partnerships' operations and the
resulting impact on the Partnership's investments in and advances to Local
Partnerships at this time. As of March 31, 2000, the carrying amount of the
Partnership's investments in and advances to Local Partnerships with Section 8
HAP contracts expiring in 2000 was $8,519,505.

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 with 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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2000 AND 1999

(Unaudited)

3. AFFORDABLE HOUSING LEGISLATION - Continued

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

4. RELATED-PARTY TRANSACTIONS

In accordance with the terms of the Partnership Agreement, the Partnership
is obligated to reimburse the Managing General Partner for its direct expenses
in managing the Partnership. The Partnership paid $76,003 and $55,054 for the
three months ended March 31, 2000 and 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
for each of the three-month periods ended March 31, 2000 and 1999.

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
affiliate for the three months ended March 31, 2000 or 1999.

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

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

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

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 which enter the program and which 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 a
waiver from the cash flow restriction imposed on the property by the limited
dividend limitation.

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

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

The Partnership's liquidity, with unrestricted cash resources of $9,360,042
as of March 31, 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 May 11, 2000, there were no material
commitments for capital expenditures.

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

negotiating an extension of this note until January 1, 2004. Purchase money
notes in the principal amounts of $5,280,000 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 aggregate principal amount of $1,275,000 matured on
January 1, 1999, and has been extended to June 30, 2000. A purchase money note
in the aggregate 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. 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.

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

Total, Local
Partnerships 30 100% $19,894,884 100% $46,321,616 100% $ 19,860,071 100%
==== ==== =========== ===== =========== ===== ============ =====

(a) Does not add due to rounding.

</TABLE>

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

as of May 11, 2000, represent the following percentages of the Partnership's
total distributions received from Local Partnerships and share of income from
Local Partnerships for the previous two calendar years.

</TABLE>

The Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient cash is available for operating requirements.
For the three months ended March 31, 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
three months ended March 31, 2000 as cash used to pay off three purchase money
notes exceeded net cash available from distributions from partnerships.

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

The Partnership recognized net income for the three month period ended
March 31, 2000, compared to net loss for the corresponding period in 1999,
primarily due to extraordinary gain from extinguishment of debt related to the
discounted payoffs of purchase money notes related to Bartley Manor, Village
Green and Village Square, and the release of the purchase money note obligation
related to Greeley Manor, as discussed in the notes to the consolidated
financial statements. Contributing to the increase in the Partnership's net
income were an increase in share of income from partnerships due to cash
distributions received from four Local Partnerships in which the Partnership's
investment had been previously reduced to zero, and a decrease in interest
expense due to a decrease in amortization of discount on purchase money notes.
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.

For financial reporting purposes, the Partnership, as a limited partner in
the Local Partnerships, does not record losses from the Local Partnerships in
excess of its investment to the extent that the Partnership has no further
obligation to advance funds or provide financing to the Local Partnerships. As
a result, the Partnership's share of income from partnerships for the three
months ended March 31, 2000 did not include losses of $216,227, compared to
excluded losses of $283,918 for the three months ended March 31, 1999.

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

-23-
<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
current 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 March 31, 2000.

All other items are not applicable.

-24-
<PAGE>

SIGNATURE

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

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

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

May 11, 2000 by: /s/ Michael J. Tuszka
- ----------------- ----------------------------------------
DATE Michael J. Tuszka
Vice President
and Chief Accounting Officer
(Principal Financial Officer
and Principal Accounting Officer)

-25-
<PAGE>

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

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

27 Financial Data Schedule Filed herewith electronically

-26-

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

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 9,360,042
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 31,409,283
<CURRENT-LIABILITIES> 0
<BONDS> 65,805,073
0
0
<COMMON> 0
<OTHER-SE> (34,490,813)
<TOTAL-LIABILITY-AND-EQUITY> 31,409,283
<SALES> 0
<TOTAL-REVENUES> 927,269
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 199,100
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 790,861
<INCOME-PRETAX> (62,692)
<INCOME-TAX> 0
<INCOME-CONTINUING> (62,692)
<DISCONTINUED> 0
<EXTRAORDINARY> 3,730,041
<CHANGES> 0
<NET-INCOME> 3,667,349
<EPS-BASIC> 59.29
<EPS-DILUTED> 59.29

</TABLE>