BALCOR REALTY INVESTORS 85 SERIES I
10-Q, 1996-08-14
REAL ESTATE
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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                                   FORM 10-Q
                                  (Mark One)

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

For the quarterly period ended June 30, 1996
                               -------------
                                      OR
     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- -----
     EXCHANGE ACT OF 1934.

For the transition period from              to             
                               ------------    ------------
Commission file number 0-14353
                       -------

                    BALCOR REALTY INVESTORS 85-SERIES I
                     A REAL ESTATE LIMITED PARTNERSHIP         
          -------------------------------------------------------
          (Exact name of registrant as specified in its charter)

          Illinois                                      36-3244978    
- -------------------------------                     -------------------
(State or other jurisdiction of                      (I.R.S. Employer  
incorporation or organization)                      Identification No.)

2355 Waukegan Road
Bannockburn, Illinois                                      60015   
- -----------------------------------------           -------------------
(Address of principal executive offices)                (Zip Code)

Registrant's telephone number, including area code (847) 267-1600
                                                   --------------

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes   X    No     
    -----     -----
<PAGE>
                     BALCOR REALTY INVESTORS 85 - SERIES I
                       A REAL ESTATE LIMITED PARTNERSHIP
                      (AN ILLINOIS LIMITED PARTNERSHIP)

                                BALANCE SHEETS
                      June 30, 1996 and December 31, 1995
                                  (UNAUDITED)

                                    ASSETS

                                                1996            1995
                                            --------------  --------------
Cash and cash equivalents                   $   9,691,327   $   2,369,231
Accounts and accrued interest receivable          416,239          19,630
Escrow deposits                                   938,488       1,652,919
Prepaid expenses                                  317,196         158,090
Deferred expenses, net of accumulated
  amortization of $285,374 in 1996 and
  $302,544 in 1995                                764,296       1,027,098
                                            --------------  --------------
                                               12,127,546       5,226,968
                                            --------------  --------------
Investment in real estate:
  Land                                          8,462,011      12,380,326
  Buildings and improvements                   49,827,306      65,940,832
                                            --------------  --------------
                                               58,289,317      78,321,158
  Less accumulated depreciation                22,869,657      28,951,829
                                            --------------  --------------
Investment in real estate, net of
  accumulated depreciation                     35,419,660      49,369,329
                                            --------------  --------------
                                            $  47,547,206   $  54,596,297
                                            ==============  ==============

                  LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)

Accounts payable                            $      92,712   $     218,237
Due to affiliates                                  46,947          24,501
Accrued liabilities, principally
  real estate taxes                               243,417         330,103
Security deposits                                 191,409         262,183
Losses in excess of investments in joint 
  ventures  with affiliates                       399,240         449,476
Mortgage notes payable                         42,099,688      56,466,198
                                            --------------  --------------
     Total liabilities                         43,073,413      57,750,698

Limited Partners' capital (deficit)  
  (82,697 Interests issued and outstanding)     5,079,864      (2,459,643)
General Partner's deficit                        (606,071)       (694,758)
                                            --------------  --------------
                                            $  47,547,206   $  54,596,297
                                            ==============  ==============

The accompanying notes are an integral part of the financial statements.
<PAGE>
                     BALCOR REALTY INVESTORS 85 - SERIES I
                       A REAL ESTATE LIMITED PARTNERSHIP
                      (AN ILLINOIS LIMITED PARTNERSHIP)

                       STATEMENTS OF INCOME AND EXPENSES
                for the six months ended June 30, 1996 and 1995
                                  (UNAUDITED)


                                                 1996            1995
                                            --------------  --------------
Income:
  Rental and service                        $   7,443,329   $   7,626,271
  Interest on short-term investments              117,891         207,776
  Participation in income of joint 
    ventures with affiliates                      163,054         733,561
                                            --------------  --------------
    Total income                                7,724,274       8,567,608
                                            --------------  --------------
Expenses:
  Interest on mortgage notes payable            2,046,463       2,489,338
  Depreciation                                    888,894         962,539
  Amortization of deferred expenses                79,174          72,247
  Property operating                            2,465,601       2,159,216
  Real estate taxes                               429,759         501,860
  Property management fees                        368,429         372,421
  Administrative                                  302,674         271,436
                                            --------------  --------------
    Total expenses                              6,580,994       6,829,057
                                            --------------  --------------
Income before gains on sale of properties 
  and extraordinary items                       1,143,280       1,738,551
Gains on sale of properties                     8,152,710
                                            --------------  --------------
Income before extraordinary items               9,295,990       1,738,551
Extraordinary items:
  Gain on forgiveness of debt                                      41,798
  Debt extinguishment expense                    (427,340)
                                            --------------  --------------
Net income                                  $   8,868,650   $   1,780,349
                                            ==============  ==============
Income before extraordinary items 
  allocated to General Partner              $      92,960   $      17,385
                                            ==============  ==============
Income before extraordinary items 
  allocated to Limited Partners             $   9,203,030   $   1,721,166
                                            ==============  ==============
Income before extraordinary items 
  per Limited Partnership Interest
  (82,697 issued and outstanding)           $      111.29   $       20.81
                                            ==============  ==============
Extraordinary items allocated to
  General Partner                           $      (4,273)  $         418
                                            ==============  ==============
Extraordinary items allocated to
  Limited Partners                          $    (423,067)  $      41,380
                                            ==============  ==============
<PAGE>
Extraordinary items per Limited
  Partnership Interest
  (82,697 issued and outstanding)           $       (5.12)  $        0.50
                                            ==============  ==============
Net income allocated to General Partner     $      88,687   $      17,803
                                            ==============  ==============
Net income allocated to Limited Partners    $   8,779,963   $   1,762,546
                                            ==============  ==============
Net income per Limited Partnership Interest
  (82,697 issued and outstanding)           $      106.17   $       21.31
                                            ==============  ==============
Distributions to Limited Partners           $   1,240,456   $     826,970
                                            ==============  ==============
Distributions per Limited Partnership
  Interest (82,697 issued and outstanding)  $       15.00   $       10.00
                                            ==============  ==============

The accompanying notes are an integral part of the financial statements.
<PAGE>
                     BALCOR REALTY INVESTORS 85 - SERIES I
                       A REAL ESTATE LIMITED PARTNERSHIP
                      (AN ILLINOIS LIMITED PARTNERSHIP)

                       STATEMENTS OF INCOME AND EXPENSES
                 for the quarters ended June 30, 1996 and 1995
                                  (UNAUDITED)

                                                 1996            1995
                                            --------------  --------------
Income:
  Rental and service                        $   3,494,513   $   3,827,995
  Interest on short-term investments               82,804         103,450
  Participation in income (losses) of joint 
    ventures with affiliates                       17,728            (432)
                                            --------------  --------------
    Total income                                3,595,045       3,931,013
                                            --------------  --------------
Expenses:
  Interest on mortgage notes payable              934,046       1,247,669
  Depreciation                                    408,869         481,270
  Amortization of deferred expenses                37,090          37,615
  Property operating                            1,151,523       1,135,139
  Real estate taxes                               196,531         251,404
  Property management fees                        170,064         186,189
  Administrative                                  178,011         137,907
                                            --------------  --------------
    Total expenses                              3,076,134       3,477,193
                                            --------------  --------------
Income before gain on sale of property and
  extraordinary item                              518,911         453,820
Gain on sale of property                        3,525,579
                                            --------------  --------------
Income before extraordinary item                4,044,490         453,820
Extraordinary item:
  Debt extinguishment expense                    (176,336)
                                            --------------  --------------
Net income                                  $   3,868,154   $     453,820
                                            ==============  ==============
Income before extraordinary item 
  allocated to General Partner              $      40,445   $       4,538
                                            ==============  ==============
Income before extraordinary item 
  allocated to Limited Partners             $   4,004,045   $     449,282
                                            ==============  ==============
Income before extraordinary item 
  per Limited Partnership Interest
  (82,697 issued and outstanding)           $       48.42   $        5.43
                                            ==============  ==============
Extraordinary item allocated to
  General Partner                           $      (1,763)           None
                                            ==============  ==============
Extraordinary item allocated to
  Limited Partners                          $    (174,573)           None
                                            ==============  ==============
<PAGE>
Extraordinary item per Limited
  Partnership Interest
  (82,697 issued and outstanding)           $       (2.12)           None
                                            ==============  ==============
Net income allocated to General Partner     $      38,682   $       4,538
                                            ==============  ==============
Net income allocated to Limited Partners    $   3,829,472   $     449,282
                                            ==============  ==============
Net income per Limited Partnership Interest
  (82,697 issued and outstanding)           $       46.30   $        5.43
                                            ==============  ==============
Distribution to Limited Partners            $     620,228   $     413,485
                                            ==============  ==============
Distribution per Limited Partnership
  Interest(82,697 issued and outstanding)   $        7.50   $        5.00
                                            ==============  ==============

The accompanying notes are an integral part of the financial statements.
<PAGE>
                     BALCOR REALTY INVESTORS 85 - SERIES I
                       A REAL ESTATE LIMITED PARTNERSHIP
                      (AN ILLINOIS LIMITED PARTNERSHIP)

                           STATEMENTS OF CASH FLOWS
                for the six months ended June 30, 1996 and 1995
                                  (UNAUDITED)

                                                 1996            1995
                                            --------------  --------------
Operating activities:
  Net income                                $   8,868,650   $   1,780,349
  Adjustments to reconcile net income to net
    cash provided by operating activities:
    Gain on forgiveness of debt                                   (41,798)
    Gains on sale of properties                (8,152,710)
    Debt extinguishment expense                   427,340
    Participation in income of joint
      ventures with affiliates                   (163,054)       (733,561)
    Depreciation of properties                    888,894         962,539
    Amortization of deferred expenses              79,174          72,247
    Net change in:
      Accounts and accrued interest
        receivable                               (396,609)        (22,585)
      Escrow deposits                              80,535        (338,869)
      Prepaid expenses                           (159,106)       (250,245)
      Accounts payable                           (125,525)         19,500
      Due to affiliates                            22,446         (65,857)
      Accrued liabilities                         (86,686)         73,974
      Security deposits                           (70,774)        (21,298)
                                            --------------  --------------
  Net cash provided by operating activities     1,212,575       1,434,396
                                            --------------  --------------
Investing activities:
  Capital contributions to joint ventures
    with affiliates                               (14,533)        (15,749)
  Distributions from joint ventures 
    with affiliates                               127,351         523,340
  Proceeds from sale of real estate            21,585,000
  Payment of selling costs                       (371,515)
                                            --------------  --------------
  Net cash provided by investing activities    21,326,303         507,591
                                            --------------  --------------
Financing activities:
  Distributions to Limited Partners            (1,240,456)       (826,970)
  Repayment of mortgage notes payable         (13,380,064)     (7,786,649)
  Proceeds from issuance of mortgage 
    note payable                                                8,140,000
  Principal payments on mortgage
    notes payable                                (986,446)       (845,561)
  Disbursements from improvement escrows          633,896          32,250
  Payment of prepayment penalties                (243,712)       (240,666)
  Funding of improvement escrows                                 (369,000)
                                            --------------  --------------
  Net cash used in financing activities       (15,216,782)     (1,896,596)
                                            --------------  --------------
<PAGE>
Net change in cash and cash equivalents         7,322,096          45,391
Cash and cash equivalents at 
  beginning of period                           2,369,231       6,475,393
                                            --------------  --------------
Cash and cash equivalents at end of period  $   9,691,327   $   6,520,784
                                            ==============  ==============

The accompanying notes are an integral part of the financial statements.
<PAGE>
                      BALCOR REALTY INVESTORS 85-SERIES I
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (An Illinois Limited Partnership)

                         NOTES TO FINANCIAL STATEMENTS


1. Accounting Policies:

In the opinion of management, all adjustments necessary for a fair presentation
have been made to the accompanying statements for the six months and quarter
ended June 30, 1996, and all such adjustments are of a normal and recurring
nature.

2. Interest Expense:

During the six months ended June 30, 1996 and 1995, the Partnership incurred
and paid interest expense on mortgage notes payable of $2,046,463 and
$2,489,338, respectively. 

3. Transactions with Affiliates:

Fees and expenses paid and payable by the Partnership to affiliates during the
six months and quarter ended June 30, 1996 are:

                                             Paid
                                   -----------------------
                                     Six Months    Quarter      Payable
                                    ------------  ---------    ----------     

   Reimbursement of expenses to
     the General Partner, at cost     $74,861      $50,026       $46,947

         
4. Property Sales:

(a)The Seabrook Apartments was owned by a joint venture (the "Joint Venture")
consisting of the Partnership and an affiliate. The Partnership and the
affiliate hold participating percentages in the joint venture of 15.43% and
84.57%, respectively. In February 1996, the Joint Venture sold the property in
an all cash sale for $5,915,000. From the proceeds of the sale, the Joint
Venture paid $5,081,898 to the third party mortgage holder in full satisfaction
of the first mortgage loan, and paid $190,517 in selling costs. The Joint
Venture recognized a gain of $1,363,431 from the sale of this property, of
which $167,739 is the Partnership's share. 

(b)In March 1996, the Partnership sold the Willowbend Apartments in an all
cash sale for $9,985,000. From the proceeds of the sale, the Partnership paid
$5,790,869 to the third party mortgage holder in full satisfaction of the first
mortgage loan, paid $240,515 in selling costs and paid $243,712 of prepayment
penalties. The basis of the property was $5,117,354, which is net of
accumulated depreciation of $2,613,770. For financial statement purposes, the
Partnership recognized a gain of $4,627,131 from the sale of this property.  
<PAGE>
(c) In June 1996, the Partnership sold the Forest Ridge Apartments in an all
cash sale for $11,600,000. From the proceeds of the sale, the Partnership paid
$7,589,194 to the third party mortgage holder in full satisfaction of the first
mortgage loan, and paid $131,000 in selling costs. The basis of the property
was $7,943,421 which is net of accumulated depreciation of $4,357,296. For
financial statement purposes, the Partnership recognized a gain of $3,525,579
from the sale of this property.

5. Extraordinary Items:

In March and June 1996, the Partnership sold the Willowbend and Forest Ridge
apartment complexes, respectively. In connection with the sales, the
Partnership paid $243,712 of prepayment penalties related to the Willowbend
mortgage loan and fully amortized the remaining deferred financing fees
relating to both properties in the amount of $183,628. These amounts were
recognized as extraordinary items and classified as debt extinguishment
expenses.

6. Subsequent Event:

In July 1996, the Partnership made a distribution of $8,104,306 ($98.00 per
Interest) to the holders of Limited Partnership Interests representing a
regular quarterly distribution of Net Cash Receipts of $8.00 per Interest for
the second quarter of 1996 and a special distribution of $90.00 per Interest
representing Net Cash Proceeds received primarily from the sales of the
Willowbend and Forest Ridge apartment complexes.
<PAGE>
                      BALCOR REALTY INVESTORS 85-SERIES I
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (An Illinois Limited Partnership)

                     MANAGEMENT'S DISCUSSION AND ANALYSIS


Balcor Realty Investors 85 - Series I A Real Estate Limited Partnership (the
"Partnership") was formed in 1983 to invest in and operate income-producing
real property. The Partnership raised $82,697,000 through the sale of Limited
Partnership Interests and utilized these proceeds to acquire ten real property
investments and minority joint venture interests in three additional
properties. During 1996, the Partnership sold one of its minority joint venture
interests and two properties, and, in prior years, sold two properties and one
of its minority joint venture interests and relinquished an additional property
through foreclosure. The Partnership continues to operate the remaining five
real property investments and owns a minority joint venture interest in one
additional property.

Inasmuch as the management's discussion and analysis below relates primarily to
the time period since the end of the last fiscal year, investors are encouraged
to review the financial statements and the management's discussion and analysis
contained in the annual report for 1995 for a more complete understanding of
the Partnership's financial position.

Operations
- ----------

Summary of Operations
- ---------------------

The Partnership recognized gains related to the March and June 1996 sales of
the Willowbend and Forest Ridge apartment complexes, respectively, which was
the primary reason for the increase in net income for the six months and
quarter ended June 30, 1996 as compared to the same periods in 1995. Further
discussion of the Partnership's operations is summarized below.

1996 Compared to 1995
- ---------------------
 
Unless otherwise noted, discussions of fluctuations between 1996 and 1995 refer
to both the six months and quarters ended June 30, 1996 and 1995.

As mentioned above, the Partnership sold the Willowbend and Forest Ridge
apartment complexes in March and June 1996, respectively.  As a result, the
Partnership experienced decreases in rental and service income, interest
expense on mortgage notes payable, depreciation, real estate taxes and property
management fees during 1996 as compared to 1995. These decreases were
partially, or in certain cases, fully offset by the events described below. 

Increased occupancy during 1996 at several of the Partnership's remaining
properties partially offset the decrease in rental and service income, and
consequently, property management fees.
<PAGE>
Due to lower average cash balances, resulting primarily from special
distributions to Limited Partners in the third and fourth quarters of 1995, as
well as lower interest rates, interest income on short-term investments
decreased in 1996 as compared to 1995.

Pinebrook Apartments, in which the Partnership held a minority joint venture
interest, was sold during February 1995. As a result of the gain recognized
during 1995 in connection with the sale, the Partnership recognized a decrease
in participation in income from joint ventures with affiliates during the six
months ended June 30, 1996 when compared to the same period in 1995. The
February 1996 sale of Seabrook Apartments, in which the Partnership held a
minority joint venture interest, resulted in the recognition of a gain in the
first quarter of 1996, which partially offset the above decrease. The gain
recognized on the sale of Seabrook Apartments, which was generating a loss
prior to its sale, was the primary reason the Partnership recognized
participation in income from joint ventures with affiliates during the quarter
ended June 30, 1996 as compared to a loss in 1995.

In May 1995, the Boulder Springs Apartments mortgage loan was refinanced and
the interest rate decreased. This, along with the 1996 property sales discussed
above, resulted in a decrease in interest expense on mortgage notes payable for
1996 as compared to 1995.

In May 1995, the Partnership began to amortize financing fees related to the
refinancing of the Boulder Springs Apartments mortgage loan over the term of
the new loan. This fully offset the decrease in amortization expense related to
the 1996 property sales and resulted in an increase in amortization expense
during the six months ended June 30, 1996 as compared to the same period in
1995 and partially offset the decrease for the quarter ended June 30, 1996 as
compared to the same period in 1995.

In 1996, the Partnership incurred higher exterior repair and maintenance
expenditures at several of the Partnership's properties, which fully offset the
decreases related to the 1996 property sales and resulted in an increase in
property operating expense in 1996 as compared to 1995.

During the second quarter of 1996, the Partnership incurred investor processing
fees, printing and postage costs in connection with its response to the March
1996 tender offer.  As a result, administrative expenses increased during 1996
as compared to 1995.

The Partnership recognized $8,152,710 of gains related to the sales of
Willowbend and Forest Ridge apartment complexes in March and June 1996,
respectively. In addition, the Partnership recognized extraordinary debt
extinguishment expense of $427,340 comprised of a prepayment penalty related to
the Willowbend mortgage loan and the full amortization of deferred financing
fees related to the repayment of the mortgage loans in connection with both
sales. 

During 1995, the Partnership recognized an extraordinary gain on forgiveness of
debt of $41,798 in connection with a settlement reached with the seller of
Templeton Park Apartments.
<PAGE>
Liquidity and Capital Resources
- -------------------------------

The cash position of the Partnership increased by approximately $7,322,000 as
of June 30, 1996 when compared to December 31, 1995 due primarily to the net
proceeds received in connection with the sales of the Willowbend and Forest
Ridge apartment complexes. The Partnership's cash flow provided by operating
activities of approximately $1,213,000, was generated primarily from the
operations of the Partnership's properties, and was partially offset by the
payment of administrative expenses. The Partnership's net cash provided by
investing activities of approximately $21,326,000, consisted primarily of the
net proceeds received from the sale of the Willowbend and Forest Ridge
apartment complexes. Cash was used in the Partnership's financing activities
primarily for the repayment of the Willowbend and Forest Ridge apartment
complexes mortgage loans which totaled approximately $13,380,000, principal
payments on mortgage notes payable of approximately $986,000, and distributions
to Limited Partners of approximately $1,240,000. The Partnership also made a
special distribution to the Limited Partners from sales proceeds in July 1996
as described below. 
       
The Partnership classifies the cash flow performance of its properties as
either positive, a marginal deficit or a significant deficit, each after
consideration of debt service payments unless otherwise indicated. The
Partnership defines cash flow generated from its properties as an amount equal
to the property's revenue receipts less property related expenditures, which
include debt service payments. During 1996 and 1995, all five of the
Partnership's remaining properties generated positive cash flow. The Willowbend
and Forest Ridge apartment complexes which were sold in March and June 1996,
respectively, also generated positive cash flow in 1995 and prior to their
sales in 1996. The remaining property in which the Partnership holds a minority
joint venture interest, North Hill Apartments, generated positive cash flow
during 1996 and 1995. Seabrook Apartments, in which the Partnership held a
minority joint venture interest, was sold in February 1996 and generated  
marginal cash flow deficits in 1996 prior to its sale and during 1995.
Pinebrook Apartments, in which the Partnership held a minority joint venture
interest, was sold in February 1995 and generated a marginal cash flow deficit
in 1995 prior to its sale. As of June 30, 1996, the occupancy rates of the
Partnership's remaining properties ranged from 91% to 99%. 

While the cash flow of certain of the Partnership's properties has improved,
the General Partner continues to pursue a number of actions aimed at improving
the cash flow of the Partnership's remaining properties including improving
operating performance and seeking rent increases where market conditions allow.

The General Partner believes that the market for multifamily housing properties
is favorable to sellers of these properties. During February, March and June
1996, the Partnership sold Seabrook Apartments, in which it held a minority
joint venture interest and the Willowbend and Forest Ridge apartment complexes,
respectively. Currently, the Partnership has entered into contracts to sell the
Forestwood, Boulder Springs and Timberlake apartment complexes for sales prices
of $10,558,000, $15,600,000 and $18,234,637, respectively. In addition, the
General Partner has entered into a contract to sell the North Hill Apartments,
in which the Partnership holds a minority joint venture interest, for a sales
price of $24,000,000. The Partnership is actively marketing its remaining
properties in its portfolio. If current market conditions remain favorable and
the General Partner can obtain appropriate sales prices, the Partnership's
liquidation strategy will be accelerated.
<PAGE>
The Seabrook Apartments were owned by a joint venture consisting of the
Partnership and an affiliate. In February 1996, the joint venture sold the
property in an all cash sale for $5,915,000. From the proceeds of the sale, the
joint venture paid $5,081,898 to the third party mortgage holder in full
satisfaction of the first mortgage loan, and paid $190,517 in selling costs.
The net proceeds of the sale were $642,585, of which $103,770 was the
Partnership's share. Pursuant to the terms of the sale, $250,000 of the
proceeds will be retained by the joint venture until August 1996. The remaining
proceeds received by the Partnership were distributed as part of a special
distribution to the Limited Partners in July 1996. See Note 4 of Notes to
Financial Statements for additional information.  

In March 1996, the Partnership sold the Willowbend Apartments in an all cash
sale for $9,985,000. From the proceeds of the sale, the Partnership paid
$5,790,869 to the third party mortgage holder in full satisfaction of the first
mortgage loan, and paid $484,227 in selling costs which includes $243,712 of
prepayment penalties. The remainder of the proceeds were distributed as part of
a special distribution to the Limited Partners in July 1996. See Note 4 of
Notes to Financial Statements for additional information.

In June 1996, the Partnership sold the Forest Ridge Apartments in an all cash
sale for $11,600,000. From the proceeds of the sale, the Partnership paid
$7,589,194 to the third party mortgage holder in full satisfaction of the first
mortgage loan, and paid $131,000 in selling costs. Pursuant to the terms of the
sale, $500,000 of the proceeds will be retained by the Partnership until
October 1996. The remainder of the proceeds were distributed as part of a
special distribution to the Limited Partners in July 1996. See Note 4 of Notes
to Financial Statements for additional information.

Each of the Partnership's properties is owned through the use of third-party
mortgage loan financing and, therefore, the Partnership is subject to the
financial obligations required by such loans. As a result of the General
Partner's efforts to obtain loan refinancings, the Partnership has no
third-party financing which matures before 2001. 

In July 1996, the Partnership made a distribution of $8,104,306 ($98.00 per
Interest) to the holders of Limited Partnership Interests representing a
distribution of Net Cash Receipts of $8.00 per Interest for the second quarter
of 1996 and a special distribution of $90.00 per Interest representing Net Cash
Proceeds received from property sales. The quarterly distribution level
increased compared to the first quarter of 1996 due to improved operations at
the Partnership's remaining properties. Including the July 1996 distribution,
Limited Partners have received cumulative cash distributions of $195.50 per
$1,000 Interest as well as certain tax benefits. Of this amount, $76.50 has
been from Net Cash Receipts and $119.00 has been from Net Cash Proceeds. Future
quarterly distributions from cash flow are expected to continue until the
properties are sold. As the properties are sold, the Partnership will
distribute the proceeds. In light of results to date and current market
conditions, the General Partner does not anticipate that investors will recover
all of their original investment. 

Inflation has several types of potentially conflicting impacts on real estate
investments. Short-term inflation can increase real estate operating costs
which may or may not be recovered through increased rents and/or sales prices,
depending on general or local economic conditions. In the long-term, inflation
can be expected to increase operating costs and replacement costs and may lead
to increased rental revenues and real estate values.
<PAGE>
                      BALCOR REALTY INVESTORS 85-SERIES I
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (An Illinois Limited Partnership)

                          PART II - OTHER INFORMATION


Item 5. Other Information
- -------------------------

Forestwood Apartments 
- ---------------------

As previously reported, the Partnership contracted to sell the Forestwood
Apartments, East Baton Rouge Parish, Louisiana for a sale price of $10,558,000
to an unaffiliated party and the closing was scheduled to occur August 15,
1996. On July 23, 1996 the agreement of sale was amended pursuant to which the
closing was postponed until September 19, 1996. 

North Hill Apartments
- ---------------------

In 1985, North Hill Apartments, DeKalb County, Georgia, was acquired by a
limited partnership (the "Joint Venture") the general partner of which was a
joint venture between the Partnership and an affiliate. The limited partner of
the Joint Venture was an affiliate of the seller. The Partnership contributed
approximately $1,924,275 and the affiliate contributed approximately $5,772,000
from their respective offering proceeds towards the purchase of the property. 
The property was purchased subject to $18,700,000 of first mortgage financing.
In 1986, the limited partner assigned its interest in the Joint Venture to the
Partnership and affiliate which hold interests of 25% and 75%, respectively, in
the Joint Venture. In 1994, the Joint Venture repaid the first mortgage loan
with proceeds from a new first mortgage loan of $16,795,600, proceeds of a
$1,350,000 note (the "Note"), each from an unaffiliated party, and Joint
Venture cash reserves. The Note is non-interest bearing and will be repaid only
to the extent that the net proceeds from the sale of the property exceed a
certain predetermined level.

On July 15, 1996, the Joint Venture contracted to sell the property for a sale
price of $24,000,000 to an unaffiliated party, Jupiter Realty Corporation, an
Illinois corporation. The purchase price may be reduced pursuant to an agreed
upon formula based on whether or not the occupancy rate of the property exceeds
92% at closing, scheduled for September 19, 1996. The current occupancy rate of
the property is 97%. The closing may be extended to a date no later than
October 21, 1996 upon notice by the Joint Venture or the purchaser to the other
party on or before September 12, 1996.  
<PAGE>
The purchaser has deposited $175,000 into an escrow account as earnest money
and is obligated to deposit an additional $175,000 on or before August 29,
1996. The purchaser is expected to purchase the property subject to the first
mortgage loan, which is expected to have an outstanding principal balance of
approximately $16,558,000, at closing. The purchaser will also assume all the
obligations of the Joint Venture under the tax-exempt bonds which fund the
mortgage loan. The remaining $7,442,000 of the sale price will be paid by the
purchaser at closing. From the proceeds of the sale, the Joint Venture will pay
$240,000 to an unaffiliated party as a brokerage commission and a $180,000 fee
to an affiliate of the third party providing property management services for
the property for services rendered in connection with the sale. The net sales
proceeds will not exceed the level required in order for the holder of the Note
to receive any proceeds with the result that the Note will not be repaid but
will be canceled by the holder. The Joint Venture will receive the remaining
proceeds of approximately $7,022,000, less closing costs, which will be
distributed among the Partnership and the affiliate in accordance with their
participating percentages in the Joint Venture. The Partnership is expected to
receive approximately $1,755,500, less closing costs. Neither the General
Partner nor any affiliate will receive a brokerage commission in connection
with the sale of the property. The General Partner will be reimbursed by the
Joint Venture for actual expenses incurred in connection with the sale.

The closing is subject to the satisfaction of numerous terms and conditions,
including the consent of various parties relating to the first mortgage loan.
There can be no assurance that all of the terms and conditions will be complied
with and, therefore, it is possible the sale of the property may not occur.<PAGE>



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

(a) Exhibits:

(4) The Subscription Agreement as set forth as Exhibit 4.1 to Amendment No. 1
to Registrant's Registration Statement on Form S-11 dated November 29, 1984
(Registration No. 2-92777) and Form of Confirmation regarding Interests in the
Partnership as set forth as Exhibit 4.2 to the Registrant's Report on Form 10-Q
for the quarter ended June 30, 1995 (Commission File No. 0-14353) are
incorporated herein by reference.

(10)(a)(i) Agreement of Sale relating to Forestwood Apartments, East Baton
Rouge Parish, Louisiana previously filed as Exhibit (2)(a) to the Partnership's
Current Report on Form 8-K dated June 28, 1996 is incorporated herein by
reference.

(ii) Amendment to Agreement of Sale and Escrow Agreement dated July 2, 1996
relating to Forestwood Apartments, East Baton Rouge Parish, Louisiana
previously filed as Exhibit (2)(b) to the Partnership's Current Report on Form
8-K dated June 28, 1996 is incorporated herein by reference.

(iii) Second Amendment to Agreement of Sale and Escrow Agreement dated July 23,
1996 relating to Forestwood Apartments, East Baton Rouge Parish, Louisiana is
attached hereto.

(b)(i) Agreement of Sale and attachments thereto relating to Forest Ridge
Apartments, Phase I, Arlington, Texas previously filed as Exhibit (2) to the
Partnership's Current Report on Form 8-K dated April 23, 1996 is incorporated
herein by reference.

(ii) Master Amendment and Agreement dated May 22, 1996 relating to the sale of
Forest Ridge Apartments, Phase I, Dallas, Texas previously filed as Exhibit
(99)(a) to the Partnership's Current Report on Form 8-K dated June 28, 1996 is
incorporated herein by reference.

(iii) Master Amendment and Agreement #2 dated May 22, 1996 relating to the sale
of Forest Ridge Apartments, Phase I, Dallas, Texas previously filed as Exhibit
(99)(b) to the Partnership's Current Report on Form 8-K dated June 28, 1996 is
incorporated herein by reference.

(27) Financial Data Schedule of the Registrant for the six months ending June
30, 1996 is attached hereto.

(b) Reports on Form 8-K: A Current Report on Form 8-K dated April 23, 1996 was
filed reporting the execution of a contract for the sale of Forest Ridge
Apartments - Phase I, Arlington, Texas and a Current Report on Form 8-K dated
June 28, 1996 was filed reporting the sale of Forest Ridge Apartments - Phase
I, Arlington, Texas and the execution of a contract for the sale of Forestwood
Apartments, East Baton Rouge Parish, Louisiana.

(99) Agreement of Sale and attachments thereto relating to the sale of North
Hill Apartments, DeKalb County, Georgia is attached hereto.
<PAGE>
SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.


                        BALCOR REALTY INVESTORS 85-SERIES I
                        A REAL ESTATE LIMITED PARTNERSHIP



                        By:   /s/Thomas E. Meador
                              --------------------------------
                              Thomas E. Meador
                              President and Chief Executive Officer (Principal
                              Executive Officer) of Balcor Equity Partners-I,
                              the General Partner



                        By:   /s/Brian D. Parker
                              --------------------------------
                              Brian D. Parker
                              Senior Vice President, and Chief Financial
                              Officer (Principal Accounting and Financial
                              Officer) of Balcor Equity Partners-I, the
                              General Partner


Date: August 14, 1996
      -------------------------
<PAGE>

          SECOND AMENDMENT TO AGREEMENT OF SALE AND ESCROW AGREEMENT

     THIS SECOND AMENDMENT TO AGREEMENT OF SALE AND ESCROW AGREEMENT (this
"Amendment") is made and entered into as of the 23rd day of July, 1996, by and
among FORESTWOOD PARTNERS LIMITED PARTNERSHIP, an Illinois limited partnership
("Seller"), BH TFL, INC. ("Purchaser") and TICOR TITLE SERVICES ("Escrow
Agent")

                                  WITNESSETH:

     WHEREAS, Seller and Purchaser are parties to that certain Agreement of
Sale entered into as of June 28, 1996 (the "Original Agreement"), pursuant to
which Seller agreed to sell to Purchaser, and Purchaser agreed to purchase from
Seller, the "Property" (as defined in the Original Agreement);

     WHEREAS, pursuant to the Original Agreement Seller, Purchaser and Escrow
Agent entered into that certain Escrow Agreement, dated June 28, 1996 (the
"Escrow Agreement");

     WHEREAS, the Original Agreement and the Escrow Agreement were amended by
that certain Amendment to Agreement of Sale and Escrow Agreement dated as of
July 2, 1996 among Seller, Purchaser and Escrow Agent (the "First Amendment");
and

     WHEREAS, Seller and Purchaser now desire to further amend the Original
Agreement and the Escrow Agreement pursuant to the terms and provisions set
forth herein.

     NOW, THEREFORE, for and in consideration of the premises and mutual
agreements contained herein, in payment of Ten and NO/100 Dollars ($10.00) and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Seller, Purchaser and Escrow Agent agree that the Original
Agreement, the Escrow Agreement, and the First Amendment are hereby amended as
follows:

1.  All capitalized terms used in this Amendment, to the extent not otherwise
expressly defined herein, shall have the same meaning ascribed to such terms in
the Original Agreement

2.  Notwithstanding anything to the contrary contained in Paragraph 3(b) of the
Original Agreement, Purchaser shall have until August 1, 1996 to deliver the
Title Notice to Seller.

3.  The reference to July 23, 1996 in Paragraph 7a(i) of the Original Agreement
and Paragraph 2 of the Escrow Agreement, both as amended by the First
Amendment, are hereby deleted and "August 9, 1996" is hereby substituted in
their place.

4.  The reference to August 15, 1996 in Paragraph 8 of the Original Agreement
and Paragraph 3 of the Escrow Agreement are hereby deleted and "September 19,
1996" is hereby substituted in their place.
<PAGE>
5.  Notwithstanding anything to the contrary contained in the Original
Agreement, the Escrow Agreement or the First Amendment, the Deposit shall be
delivered by Purchaser to Escrow Agent on or before August 9, 1996 in the event
Purchaser does not elect to terminate the Original Agreement pursuant to
Paragraph 7a of the Original Agreement and Paragraph 2 of the Escrow Agreement,
both as amended by the First Amendment.

6.  Except as amended herein, the terms and conditions of the Original
Agreement and the Escrow Agreement, both as amended by the First Amendment,
shall continue in full force and effect and are hereby ratified in their
entirety.

7.  This Amendment may be executed in multiple counterparts, each of which
shall be deemed to be an original, but all of which together shall constitute
one and the same agreement.

            [THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
<PAGE>
          Executed as of the date first written above.

                    SELLER:

                    FORESTWOOD PARTNERS LIMITED PARTNERSHIP
                    an Illinois limited partnership


                    By:  Forestwood Partners, Inc., an Illinois corporation

                         By:   /s/Phillip Schechter
                              --------------------------------------
                         Name: Phillip Schechter
                              --------------------------------------
                         Its:  Authorized Agent
                              --------------------------------------

                    PURCHASER:

                    BH TFL, INC.


                    By:  /s/Harry Bookey
                         ----------------------------------
                         Harry Bookey
                         President

                    ESCROW AGENT:

                    TICOR TITLE SERVICES


                    By:  ______________________________________________

                    Its: ______________________________________________
<PAGE>

                               AGREEMENT OF SALE

     THIS AGREEMENT OF SALE (this "Agreement"), is entered into as of the 15th
day of July, 1996, by and between Jupiter Realty Corporation, an Illinois
corporation ("Purchaser"), and N.H. Associates, an Illinois limited partnership
("Seller").

                             W I T N E S S E T H:

1.   PURCHASE AND SALE.  Purchaser agrees to purchase and Seller agrees to sell
at the price, subject to the terms of Paragraph 29 of this Agreement, of
Twenty-Four Million And No/100 Dollars ($24,000,000.00) (the "Purchase Price")
that certain property commonly known as North Hill Apartments, Atlanta,
Georgia, a 420 unit apartment complex legally described on Exhibit A attached
hereto, together with all improvements and fixtures thereon and appurtenances
thereto belonging (the "Property").  Included in the Purchase Price is all of
the personal property set forth on Exhibit B attached hereto (the "Personal
Property").

2.   PURCHASE PRICE.  The Purchase Price shall be paid by Purchaser as follows:

     2.1.Upon the execution of this Agreement, the sum of One Hundred
Seventy-Five Thousand and No/100 Dollars ($175,000.00) (the "Original Earnest
Money") to be held in escrow by and in accordance with the provisions of the
Escrow Agreement ("Escrow Agreement") attached hereto as Exhibit C;

     2.2.On or before 2:00 p.m. Chicago time on August 29, 1996, Purchaser
shall deliver to Escrow Agent funds in the amount of One Hundred Seventy-Five
Thousand and No/100 Dollars ($175,000.00) (the "Additional Earnest Money",
together with the Original Earnest Money, the "Earnest Money"), provided that
Purchaser has not terminated this Agreement pursuant to Paragraph 7;

     2.3.The assumption by Purchaser of the obligations relating to the
current financing encumbering the Property evidenced by Purchaser accepting
title to the Property subject to the obligations of Seller, as "Owner" under
the Existing Bond and Mortgage Documents (hereinafter defined); and

     2.4.On the "Closing Date" (hereinafter defined), the balance of the
Purchase Price (i.e., $24,000,000.00 less (a) the then outstanding principal
amount of the Bonds (hereinafter defined) and (b) the amount of the Earnest
Money), adjusted in accordance with Section 12 of this Agreement, by federally
wired "immediately available" funds, on or before 11:00 a.m Chicago time.
<PAGE>
3.   TITLE COMMITMENT AND SURVEY.

     3.1.Attached hereto as Exhibit D is a copy of a title commitment for an
owner's standard title insurance policy issued by First American Title
Insurance Company dated February 21, 1996 for the Property (the "Title
Commitment").  For purposes of this Agreement, "Permitted Exceptions" shall
mean:  (a) rights of tenants in possession, as tenants only, under unrecorded
leases listed on the rent roll attached hereto as Exhibit L; (b) general real
estate taxes, association assessments, special assessments, special district
taxes and related charges not yet due and payable; (c) matters shown on the
"Survey" (hereinafter defined); (d) matters caused by the actions of Purchaser;
(e) the Existing Bond and Mortgage Documents including, without limitation, the
Regulatory Agreement (hereinafter defined); and (f) the title exceptions set
forth in Schedule B, Part II of the Title Commitment as Numbers 7 and 10
through 18 inclusive, to the extent that same affect the Property.  All other
exceptions to title shall be referred to as "Unpermitted Exceptions".  On the
Closing Date, Near North National Title Corporation, as agent for First
American Title Insurance Company (hereinafter referred to as "Title Insurer")
shall deliver to Purchaser a standard title policy in conformance with the
previously delivered Title Commitment, subject to Permitted Exceptions and
Unpermitted Exceptions waived by Purchaser (the "Title Policy").  Purchaser
shall pay for the costs of the Title Commitment and Title Policy and Purchaser
shall pay for the cost of any endorsements to, or extended coverage on, the
Title Policy.

     3.2.Purchaser has received an updated survey of the Property prepared by
Construction Engineering Associates recertified April 12, 1996 (the "Survey").
Purchaser shall pay for all costs relating to the Survey of the Property.

     3.3.The obligation of Purchaser to pay various costs set forth in
Paragraphs 3.1 and 3.2 shall survive the termination of this Agreement.

4.   PAYMENT OF CLOSING COSTS.  Seller shall pay for the costs of the transfer
tax to be paid with reference to the "Deed" (hereinafter defined).  In addition
to the costs set forth in Paragraphs 3.1 and 3.2, Purchaser shall pay for the
costs of all other stamps, intangible, transfer, documentary, recording, sales
tax and surtax imposed by law with reference to any other sale documents
delivered in connection with the sale of the Property to Purchaser and all
other charges of the Title Insurer in connection with this transaction.  Each
party shall pay for its respective attorney's fees.

5.   CONDITION OF TITLE.

     5.1.Within ten (10) business days after the date of this Agreement,
Purchaser shall obtain a date-down to the Title Commitment to Purchaser.  If
this date-down to the Title Commitment, any update to the Survey, or any other
date-down to the Title Commitment prior to "Closing" (as hereinafter defined)
discloses any new Unpermitted Exception, Seller shall have thirty (30) days
from the date of the respective date-down to the Title Commitment or updated
Survey, at Seller's expense, to (i) bond over, cure and/or have any Unpermitted
Exceptions which, in the aggregate, do not exceed $25,000.00, removed from the
Title Commitment or to have the Title Insurer commit to insure against loss or
<PAGE>
damage that may be occasioned by such Unpermitted Exceptions, or (ii) have the
right, but not the obligation, to bond over, cure and/or have any Unpermitted
Exceptions which, in the aggregate, equal or exceed $25,000.00, removed from
the Title Commitment or to have the Title Insurer commit to insure against loss
or damage that may be occasioned by such Unpermitted Exceptions.  In such
event, the time of Closing shall be delayed, if necessary, to give effect to
said aforementioned time periods.  If Seller fails to cure or have said
Unpermitted Exception removed or have the Title Insurer commit to insure as
specified above within said thirty (30) day period or if Seller elects not to
exercise its rights under  (ii)  in the preceding sentence, Purchaser may
terminate this Agreement upon notice to Seller within five (5) days after the
expiration of said thirty (30) day period.  Absent notice from Purchaser to
Seller in accordance with the preceding sentence, Purchaser shall be deemed to
have elected to take title subject to said Unpermitted Exception.  If Purchaser
terminates this Agreement in accordance with the terms of this Paragraph 5.1,
this Agreement shall become null and void without further action of the parties
and all Earnest Money theretofore deposited into the escrow by Purchaser
together with any interest accrued thereon, shall be returned to Purchaser, and
neither party shall have any further liability to the other, except for
Purchaser's obligation to indemnify Seller and restore the Property, as more
fully set forth in Paragraph 7.

     5.2.Seller agrees to convey fee simple title to the Property to Purchaser
by limited  warranty deed (the "Deed") in recordable form subject only to the
Permitted Exceptions and any Unpermitted Exceptions waived by Purchaser.

6.   CONDEMNATION, EMINENT DOMAIN, DAMAGE AND CASUALTY.

     6.1.Except as provided in the indemnity provisions contained in Paragraph
7.1 of this Agreement, Seller shall bear all risk of loss with respect to the
Property up to the earlier of the dates upon which either possession or title
is transferred to Purchaser in accordance with this Agreement.  Notwithstanding
the foregoing, in the event of damage to the Property by fire or other casualty
prior to the Closing Date, repair of which would cost less than or equal to
$100,000.00 (as determined by Purchaser and Seller in good faith) Purchaser
shall not have the right to terminate its obligations under this Agreement by
reason thereof, but Seller shall, at Purchaser's discretion, either repair and
restore the Property prior to Closing in a manner satisfactory to Purchaser (in
which case the Closing Date shall be extended until completion of such
restoration, but in no event longer than sixty (60) days after the Closing
Date) or to assign and transfer to Purchaser on the Closing Date all of
Seller's right, title and interest in and to all insurance proceeds paid or
payable to Seller on account of such fire or casualty.  If Purchaser elects to
take an assignment of all insurance claims as provided for in this Paragraph 6,
Purchaser shall receive at Closing a credit against the Purchase Price in an
amount equal to any deductible(s) and uninsured amounts applicable thereto.
Seller shall promptly notify Purchaser in writing of any such fire or other
casualty and Seller's determination of the cost to repair the damage caused
thereby.  In the event of damage to the Property by fire or other casualty
prior to the Closing Date, repair of which would cost in excess of $100,000.00
(as determined by Purchaser and Seller in good faith), then this Agreement may
be terminated at the option of Purchaser, which option shall be exercised, if
at all, by Purchaser's written notice thereof to Seller within five (5)
<PAGE>
business days after Purchaser receives written notice of such fire or other
casualty and Seller's determination of the amount of such damages, and upon the
exercise of such option by Purchaser this Agreement shall become null and void,
the Earnest Money deposited by Purchaser shall be returned to Purchaser
together with interest thereon, and neither party shall have any further
liability or obligations hereunder.  In the event that Purchaser does not
exercise the option set forth in the preceding sentence, the Closing shall take
place on the Closing Date and Seller shall assign and transfer to Purchaser on
the Closing Date all of Seller's right, title and interest in and to all
insurance proceeds paid or payable to Seller on account of the fire or
casualty.

     6.2.If between the date of this Agreement and the Closing Date, any
condemnation or eminent domain proceedings are initiated which might result in
the taking of any part of the Property or the taking or closing of any right of
access to the Property, Seller shall immediately notify Purchaser of such
occurrence.  In the event that the taking of any part of the Property shall:
(i) materially impair access to the Property; (ii) cause any material
non-compliance with any applicable law, ordinance, rule or regulation of any
federal, state or local authority or governmental agencies having jurisdiction
over the Property or any portion thereof; or (iii) materially and adversely
impair the use of the Property as it is currently being operated (hereinafter
collectively referred to as a "Material Event"), Purchaser may:

         6.2.1.   terminate this Agreement by written notice to Seller, in
which event the Earnest Money deposited by Purchaser, together with interest
thereon, shall be returned to Purchaser and all rights and obligations of the
parties hereunder with respect to the closing of this transaction will cease;
or

         6.2.2.   proceed with the Closing, in which event Seller shall assign
to Purchaser all of Seller's right, title and interest in and to any award made
in connection with such condemnation or eminent domain proceedings.

     6.3.Purchaser shall then notify Seller, within ten (10) business days
after Purchaser's receipt of Seller's notice, whether Purchaser elects to
exercise its rights under Paragraph 6.2.1 or Paragraph 6.2.2.  Closing shall be
delayed, if necessary, until Purchaser makes such election.  If Purchaser fails
to make an election within such ten (10) business day period, Purchaser shall
be deemed to have elected to exercise its rights under Paragraph 6.2.2.  If
between the date of this Agreement and the Closing Date, any condemnation or
eminent domain proceedings are initiated which do not constitute a Material
Event, Purchaser shall be required to proceed with the Closing, in which event
Seller shall assign to Purchaser all of Seller's right, title and interest in
and to any award made in connection with such condemnation or eminent domain
proceedings.

7.   INSPECTION AND AS-IS CONDITION.

     7.1.During the period commencing on the date of the execution of this
Agreement and ending at 5:00 p.m. Chicago time August 29, 1996 (said period
being herein referred to as the "Inspection Period"), Purchaser and the agents,
engineers, employees, contractors and surveyors retained by Purchaser may enter
upon the Property, at any reasonable time and upon reasonable prior notice to
<PAGE>
Seller, to inspect the Property.  In connection with Purchaser's review of the
Property, Seller agrees to deliver to Purchaser copies of the current rent roll
for the Property, the most recent tax and insurance bills, utility account
numbers, service contracts, and unaudited year end 1995 and year-to-date 1996
operating statements. 

     Purchaser shall have the right to verify, inspect, investigate and review,
in the Purchaser's sole discretion:  (i) documentation of any covenants,
conditions and restrictions and other exceptions of title of record, (ii) the
condition of title to the Property and the Survey, as the same may be updated,
(iii) physical inspection of the Property including engineering investigation,
(iv) the Existing Bond and Mortgage Documents, (v) the leases and service
contracts, (vi) environmental condition of the Property, and (vii) any and all
other documentation or evidence relating to the ownership, zoning, financing,
value, income, expense, operation, leasing and maintenance and repair of the
Property.  In addition, during the Inspection Period, Purchaser shall have the
right, at its sole cost, to have a licensed termite exterminator conduct an
inspection of the Property to determine whether there is a visible, active
termite infestation.  From the date of this Agreement through Closing,
Purchaser and its agents, engineers, surveyors, appraisers, auditors and other
representatives shall have the right to enter upon the Property to inspect,
examine, survey, obtain engineering inspections, appraise, and otherwise do
that which, in the opinion of Purchaser, is necessary to determine the
boundaries, acreage and condition of the Property and to determine the
suitability of the Property for the uses intended by Purchaser (including
without limitation, inspect, review and copy any and all documents in the
possession or control of Seller, its agents, contractors or employees, and
which pertain to the construction, ownership, use, occupancy or operation of
the Property or any part thereof).  Any inspection of units shall be made
during ordinary business hours after reasonable advance notice to Seller,
subject to the terms of the existing leases and with minimal interference to
the tenants.  Also during such time period, Seller shall make all of Seller's
books, files and records, including without limitation, the current rent roll
for the Property, tax and insurance bills, utility account numbers and service
contracts relating in any way to the Property available for examination by
Purchaser and Purchaser's agents and representatives, who shall have the right,
all at Purchaser's expense, to make copies of such books, files and records and
to extract therefrom such information as they may desire, and who shall have
the right to audit and have certified by the auditors, thoroughly and
completely, all income and expenses, profits and losses, and operational
results of the Property for the calendar years 1993-1995 and for the current
calendar year to date, with delivery of an audit letter by Seller in the form
of Exhibit O attached hereto.

     All of the foregoing tests, investigations and studies to be conducted
under this Paragraph 7.1 by Purchaser shall be at Purchaser's sole cost and
expense and Purchaser shall restore the Property as near as reasonably possible
to the condition existing prior to the performance of such tests or
investigations by or on behalf of Purchaser.  Purchaser shall defend, indemnify
and hold Seller and any affiliate, parent of Seller, and all shareholders,
employees, officers and directors of Seller or Seller's affiliate or parent
(hereinafter collectively referred to as "Affiliate of Seller") harmless from
any and all liability, cost and expense (including without limitation,
<PAGE>
reasonable attorney's fees, court costs and costs of appeal) suffered or
incurred by Seller or Affiliates of Seller for injury to persons or property
caused by Purchaser's investigations and inspection of the Property.  Purchaser
shall undertake its obligation to defend set forth in the preceding sentence
using attorneys reasonably acceptable to Seller.

     Prior to commencing any such tests, studies and investigations, Purchaser
shall furnish to Seller a certificate of insurance evidencing comprehensive
general public liability insurance insuring the person, firm or entity
performing such tests, studies and investigations and listing Seller and
Purchaser as additional insureds thereunder.

     If Purchaser is dissatisfied with the results of the tests, studies or
investigations performed or information received pursuant to this Paragraph
7.1, Purchaser shall have the right to terminate this Agreement by giving
written notice of such termination to Seller at any time prior to the
expiration of the Inspection Period.  If written notice is not received by
Seller pursuant to this Paragraph 7.1 prior to the expiration of the Inspection
Period, then the right of Purchaser to terminate this Agreement pursuant to
this Paragraph 7.1 shall be waived.  If Purchaser terminates this Agreement by
written notice to Seller prior to the expiration of the Inspection Period: (i)
Purchaser shall promptly deliver to Seller copies of all studies, reports and
other investigations obtained by Purchaser in connection with its due diligence
during the Inspection Period; and (ii) the Earnest Money deposited by Purchaser
shall be immediately paid to Purchaser, together with any interest earned
thereon, and neither Purchaser nor Seller shall have any right, obligation or
liability under this Agreement, except for Purchaser's obligation to indemnify
Seller and restore the Property, as more fully set forth in this Paragraph 7.1.
Notwithstanding anything contained herein to the contrary, the terms of this
Paragraph 7.1, shall survive the Closing and the delivery of the Deed and  
termination of this Agreement.

     7.2.Seller makes no representations or warranties relating to the
condition of the Property or the Personal Property, except as specifically set
forth herein.  Purchaser acknowledges and agrees that it will be purchasing the
Property and the Personal Property based solely upon its inspections and
investigations of the Property and the Personal Property, and that Purchaser
will be purchasing the Property and the Personal Property "AS IS" and "WITH ALL
FAULTS", based upon the condition of the Property and the Personal Property as
of the date of this Agreement, wear and tear and loss by fire or other casualty
or condemnation excepted.  Without limiting the foregoing, Purchaser
acknowledges that, except as may otherwise be specifically set forth elsewhere
in this Agreement, neither Seller nor its consultants, brokers or agents have
made any representations or warranties of any kind upon which Purchaser is
relying as to any matters concerning the Property or the Personal Property,
including, but not limited to, the condition of the land or any improvements
comprising the Property, the existence or non-existence of "Hazardous
Materials" (as hereinafter defined), economic projections or market studies
concerning the Property, any development rights, taxes, bonds, covenants,
conditions and restrictions affecting the Property, water or water rights,
topography, drainage, soil, subsoil of the Property, the utilities serving the
Property or any zoning or building laws, rules or regulations or "Environmental
Laws" (hereinafter defined) affecting the Property.  Seller makes no
<PAGE>
representation or warranty that the Property complies with Title III of the
Americans with Disabilities Act or any fire code or building code.  Purchaser,
any affiliate, parent of Purchaser, all shareholders, employees, officers and
directors of Purchaser or Purchaser's affiliate or parent, and their respective
successors and assigns covenant not to sue Seller or the Affiliates of Seller,
and hereby agree not to bring, assert or maintain any action or claim for
contribution, cost recovery or otherwise, against Seller or the Affiliates of
Seller, relating directly or indirectly to the existence of asbestos or
Hazardous Materials on, or environmental conditions of, the Property, whether
known or unknown, or any liability associated therewith.  As used herein,
"Environmental Laws" means all federal, state and local statutes, codes,
regulations, rules, ordinances, orders, standards, permits, licenses, policies
and requirements (including consent decrees, judicial decisions and
administrative orders) relating to the protection, preservation, remediation or
conservation of the environment or worker health or safety, all as amended or
reauthorized, or as hereafter amended or reauthorized, including without
limitation, the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), 42 U.S.C. Section 9601 et seq., the Resource
Conservation and Recovery Act of 1976 ("RCRA"), 42 U.S.C. Section 6901 et seq.,
the Emergency Planning and Community Right-to-Know Act ("Right-to-Know Act"),
42 U.S.C. Section 11001 et seq., the Clean Air Act ("CAA"), 42 U.S.C. Section
7401 et seq., the Federal Water Pollution Control Act ("Clean Water Act"), 33
U.S.C. Section 1251 et seq., the Toxic Substances Control Act ("TSCA"), 15
U.S.C. Section 2601 et seq., the Safe Drinking Water Act ("Safe Drinking Water
Act"), 42 U.S.C. Seciton 300f et seq., the Atomic Energy Act ("AEA"), 42 U.S.C.
Section 2011 et seq., the Occupational Safety and Health Act ("OSHA"),
29 U.S.C. Section 651 et seq., and the Hazardous Materials Transportation Act
(the "Transportation Act"), 49 U.S.C. Section 1802 et seq.  As used herein,
"Hazardous Materials" means: (1) "hazardous substances," as defined by CERCLA;
(2) "hazardous wastes," as defined by RCRA; (3) any radioactive material
including, without limitation, any source, special nuclear or by-product
material, as defined by AEA; (4) asbestos in any form or condition; (5)
polychlorinated biphenyls; and (6) any other material, substance or waste to
which liability or standards of conduct may be imposed under any Environmental
Laws.  Notwithstanding anything contained herein to the contrary, the terms of
this Paragraph 7.2 shall survive the Closing and the delivery of the Deed and
termination of this Agreement.

     7.3.Seller has provided to Purchaser certain unaudited historical
financial information regarding the Property relating to certain periods of
time in which Seller owned the Property.  Seller and Purchaser hereby
acknowledge that such information has been provided to Purchaser at Purchaser's
request solely as illustrative material.  Seller makes no representation or
warranty that such material is complete or accurate or that Purchaser will
achieve similar financial or other results with respect to the operations of
the Property, it being acknowledged by Purchaser that Seller's operation of the
Property and allocations of revenues or expenses may be vastly different than
Purchaser may be able to attain.  Purchaser acknowledges that it is a
sophisticated and experienced purchaser of real estate and further that
Purchaser has relied upon its own investigation and inquiry with respect to the
operation of the Property and releases Seller and the Affiliates of Seller from
any liability with respect to such historical information.  Notwithstanding
<PAGE>
anything contained herein to the contrary, the terms of this Paragraph 7.3
shall survive the Closing and the delivery of the Deed and termination of this
Agreement.

     7.4.Seller has provided to Purchaser the following existing report:
Environmental/Industrial Hygiene Assessment Report prepared by Comprehensive
Environmental Assessments for the Lender (hereinafter defined), dated July 11,
1994 ("Existing Report").   Seller makes no representation or warranty
concerning the accuracy or completeness of the Existing Report.  Purchaser
hereby releases Seller and the Affiliates of Seller from any liability
whatsoever with respect to the Existing Report, or, including, without
limitation, the matters set forth in the Existing Report, and the accuracy
and/or completeness of the Existing Report.  Furthermore, Purchaser
acknowledges that it will be purchasing the Property with all faults disclosed
in the Existing Report.  Notwithstanding anything contained herein to the
contrary, the terms of this Paragraph 7.4 shall survive the Closing and the
delivery of the Deeds and termination of this Agreement.

8.   CLOSING.
     8.1.The closing of this transaction (the "Closing") shall be September
19, 1996 (the "Closing Date"), subject to extension in accordance with the
terms of Paragraphs 5 and 6 of this Agreement, at the office of Title Insurer
in Atlanta, Georgia, or Chicago, Illinois, as the parties agree, at which time
Seller shall deliver possession of the Property to Purchaser.  This transaction
shall be closed through an escrow with Title Insurer, in accordance with the
general provisions of the usual and customary form of deed and money escrow for
similar transactions in Georgia, or at the option of either party, the Closing
shall be a "New York style" closing at which the Purchaser shall wire the
Purchase Price to Title Insurer on the Closing Date and prior to the release of
the Purchase Price to Seller, Purchaser shall receive the Title Policy or
marked up commitment dated the date of the Closing Date.  In the event of a New
York style closing, Seller shall deliver to Title Insurer any customary
affidavit in connection with a New York style closing.

     8.2.On the Closing Date, the Purchaser shall assume all obligations of
the Seller under the Existing Bond and Mortgage Documents accruing from and
after the Closing Date as evidenced and/or secured by, among other items, the
Indenture (hereinafter defined), the Financing Agreement (hereinafter defined),
the Regulatory Agreement, the Guaranty (hereinafter defined), Multifamily Note
(hereinafter defined) and the Multifamily Deed to Secure Debt (hereinafter
defined), which Bonds will have an outstanding principal balance of
approximately $16,675,000.00 as of July 1, 1996.  In addition, Purchaser or
Purchaser's affiliate shall assume all obligations accruing from and after the
Closing Date of the "Key Principal" under the terms of the Multifamily Note and
the Multifamily Deed of Trust.  Seller hereby authorizes Purchaser to discuss
any and all issues relating to the Bonds and the Existing Bond and Mortgage
Documents with Fannie Mae, the Issuer, the Trustee, the Lender (all such terms,
hereinafter defined) and any other interested parties.  Seller will reasonably
cooperate with Purchaser in facilitating such discussions.
<PAGE>
9.   CLOSING DOCUMENTS.
     9.1.On the Closing Date, Seller and Purchaser shall execute and deliver
to one another a joint closing statement.  In addition, Purchaser shall deliver
to Seller the balance of the Purchase Price, plus or minus prorations under
this Agreement, an assumption of the documents set forth in Paragraphs 9.2.3,
9.2.4 and 9.2.13 and such other documents as may be reasonably required by the
Title Insurer in order to consummate the transaction as set forth in this
Agreement.

     9.2. Except as otherwise provided in this Paragraph 9.2, no later than two
(2) business days prior to the Closing Date, Seller shall deliver to Purchaser
an original or draft of the following:

          9.2.1.  the Deed (in the form of Exhibit E attached hereto), subject
     to Permitted Exceptions and those Unpermitted Exceptions waived by 
     Purchaser;

          9.2.2.  a special warranty bill of sale conveying the Personal 
     Property (in the form of Exhibit F attached hereto);

          9.2.3.  assignment and assumption of intangible property (in the 
     form attached hereto as Exhibit G), including, without limitation, the 
     service contracts listed in Exhibit H;

          9.2.4.  an assignment and assumption of leases and security deposits
     (in the form attached hereto as Exhibit I);

          9.2.5.  non-foreign affidavit (in the form of Exhibit J attached 
     hereto);

          9.2.6.  original, or if original is not available, certified to the 
     best of Seller's knowledge to be true and correct copies thereof, leases, 
     certificates of occupancy, plans and specifications, contracts, permits, 
     guarantees and warranties affecting the Property in Seller's possession, 
     to be delivered at the Property;

          9.2.7.  all documents and instruments reasonably required by the 
     Title Insurer to issue the Title Policy;

          9.2.8.  possession of the Property to Purchaser subject to terms of 
     the leases;

          9.2.9.  evidence of the termination of the management agreement;

          9.2.10. notice to the tenants of the Property of the transfer of 
     title and assumption by Purchaser of the landlord's obligation under the 
     leases and the obligation to refund the security deposits (in the form of 
     Exhibit K);

          9.2.11. an updated rent roll in a form similar to Exhibit L attached
     hereto certified by Seller to be true, accurate and complete as of the 
     date of the rent roll;
<PAGE>
          9.2.12. originals, to the extent in Seller's possession or control, 
     or copies of Existing Bond and Mortgage Documents;

          9.2.13. an assignment and assumption of Existing Bond and Mortgage 
     Documents (in the form of Exhibit M);

          9.2.14. an opinion of bond counsel satisfying the requirements of 
     Paragraph 18.2.2 below;

          9.2.15. on the Closing Date, the Title Policy (or marked-up 
     commitment therefor) insuring fee simple title to the Property in 
     Purchaser (or Purchaser's assignee, if applicable) in the amount of the 
     Purchase Price subject only to the Permitted Exceptions and the 
     Unpermitted Exceptions waived by Purchaser;

          9.2.16. to the extent in the possession or control of Seller, all 
     keys for the Property, with identification of the locks to which each such
     key relates;

          9.2.17. a certificate from Seller in form and substance satisfactory
     to bond counsel to enable bond counsel to render a standard opinion as to 
     the tax-exempt status of the Bonds, such form to be agreed upon by the 
     parties prior to the end of the inspection period; and

          9.2.18. a properly completed transfer tax form, if required.

10.  PURCHASER'S DEFAULT.  ALL EARNEST MONEY DEPOSITED INTO THE ESCROW IS TO
SECURE THE TIMELY PERFORMANCE BY PURCHASER OF ITS OBLIGATIONS AND UNDERTAKINGS
UNDER THIS AGREEMENT.  IN THE EVENT OF A DEFAULT OF THE PURCHASER UNDER THE
PROVISIONS OF THIS AGREEMENT, SELLER SHALL RETAIN ALL OF THE EARNEST MONEY AND
THE INTEREST THEREON AS SELLER'S SOLE RIGHT TO DAMAGES OR ANY OTHER REMEDY,
EXCEPT FOR PURCHASER'S OBLIGATIONS TO INDEMNIFY SELLER AND RESTORE THE PROPERTY
AS SET FORTH IN PARAGRAPH 7.1 HEREOF.  THE PARTIES HAVE AGREED THAT SELLER'S
ACTUAL DAMAGES, IN THE EVENT OF A DEFAULT BY PURCHASER, WOULD BE EXTREMELY
DIFFICULT OR IMPRACTICAL TO DETERMINE.  THEREFORE, BY PLACING THEIR INITIALS
BELOW, THE PARTIES ACKNOWLEDGE THAT THE EARNEST MONEY HAS BEEN AGREED UPON,
AFTER NEGOTIATION, AS THE PARTIES' REASONABLE ESTIMATE OF SELLER'S DAMAGES.
11.  SELLER'S DEFAULT.  IF THIS SALE IS NOT COMPLETED BECAUSE OF SELLER'S
DEFAULT, PURCHASER'S SOLE REMEDY SHALL BE THE RETURN OF ALL EARNEST MONEY
TOGETHER WITH ANY INTEREST ACCRUED THEREON, AND THIS AGREEMENT SHALL THEN
BECOME NULL AND VOID AND OF NO EFFECT AND THE PARTIES SHALL HAVE NO FURTHER
LIABILITY TO EACH OTHER AT LAW OR IN EQUITY, EXCEPT FOR PURCHASER'S OBLIGATIONS
TO INDEMNIFY SELLER AND RESTORE THE PROPERTY AS SET FORTH MORE FULLY IN
PARAGRAPH 7 AND PURCHASER'S RIGHT TO RECEIVE FROM SELLER ITS ACTUAL, DOCUMENTED
THIRD PARTY EXPENSES INCURRED IN THE PERFORMANCE OF ITS DUE DILIGENCE HEREUNDER
AND IN THE PREPARATION OF THIS AGREEMENT, NOT TO EXCEED $50,000.00 IN THE
AGGREGATE.  NOTWITHSTANDING ANYTHING CONTAINED HEREIN TO THE CONTRARY, IF
SELLER'S DEFAULT IS ITS WILLFUL REFUSAL TO DELIVER THE DEED, THEN PURCHASER
WILL BE ENTITLED TO SUE FOR SPECIFIC PERFORMANCE.
<PAGE>
12.  PRORATIONS.
     12.1.     Rents (exclusive of delinquent rents, but including prepaid
rents); prepaid associations dues, refundable security deposits (which will be
assigned to and assumed by Purchaser and credited to Purchaser at Closing);
water and other utility charges; fuels; prepaid operating expenses; prepaid or
accrued (as the case may be) interest on the Existing Bond and Mortgage
Documents; management fees if and to the extent payable to a third party
manager for rent received and prorated for the month of Closing; real and
personal property taxes; and other similar items shall be adjusted ratably as
of 11:59 p.m. on the Closing Date, and credited against the balance of the cash
due at Closing.  To the extent any escrows or bond repayment deposits
established in connection with the Bonds or Existing Bond and Mortgage
Documents are not refunded to Seller at Closing, the proceeds in said escrows
shall be assigned to Purchaser and the amounts thereof shall be a credit to
Seller at the Closing.  Assessments payable in installments which are due
subsequent to the Closing Date shall be paid by Purchaser.  If the amount of
any of the items to be prorated is not then ascertainable, the adjustments
thereof shall be on the basis of the most recent ascertainable data.  All
prorations will be final except as to delinquent rent referred to in Paragraph
12.2 below.

     12.2.     All basic rent paid following the Closing Date by any tenant of
the Property who is indebted under a lease for basic rent for any period prior
to and including the Closing Date after the payment to Purchaser of all current
basic rent shall be deemed a "Post-Closing Receipt" until such time as all such
indebtedness is paid in full.  Within ten (10) days following each receipt by
Purchaser of a Post-Closing Receipt, Purchaser shall pay such Post-Closing
Receipt to Seller.  Purchaser shall use commercially reasonable efforts to
collect all amounts which, upon collection, would constitute Post-Closing
Receipts hereunder.  Within 120 days after the Closing Date, Purchaser shall
deliver to Seller a reconciliation statement of Post-Closing Receipts through
the first 90 days after the Closing Date.  Upon the delivery of the
Post-Closing Receipts reconciliation, Purchaser shall deliver to Seller any
Post-Closing Receipts owing to Seller and not previously delivered to Seller in
accordance with the terms hereof.  Seller retains the right to conduct an
audit, at reasonable times and upon reasonable notice, of Purchaser's books and
records to verify the accuracy of the Post-Closing Receipts reconciliation
statement and upon the verification of additional funds owing to Seller,
Purchaser shall pay to Seller said additional Post-Closing Receipts and the
cost of performing Seller's audit.  Paragraph 12.2 of this Agreement shall
survive the Closing and the delivery and recording of the deed.

13.  RECORDING.  Neither this Agreement nor a memorandum thereof shall be
recorded and the act of recording by Purchaser shall be an act of default
hereunder by Purchaser and subject to the provisions of Paragraph 10 hereof.

14.  ASSIGNMENT.  The Purchaser shall not have the right to assign its interest
in this Agreement without the prior written consent of the Seller.  Any
assignment or transfer of, or attempt to assign or transfer, Purchaser's
interest in this Agreement shall be an act of default hereunder by Purchaser
and subject to the provisions of Paragraph 10 hereof.  Notwithstanding the
foregoing, Purchaser may assign its interest in this Agreement without the
<PAGE>
consent of Seller to any entity affiliated with Purchaser, or the principals of
Purchaser, or to any fund sponsored by Purchaser or its affiliate, provided
that Purchaser remains liable for and the assignee assumes the obligations of
Purchaser hereunder.  If any assignee of Purchaser under this Agreement
petitions or applies for relief in bankruptcy or Assignee is adjudicated as a
bankrupt or insolvent, or Assignee files any petition, application for relief
or answer-seeking or acquiescing in any reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief for
itself under any present or future federal, state or other statute, law, code
or regulation relating to bankruptcy, insolvency, or other relief for debtors
(collectively, a "Bankruptcy Filing") on or before the Closing Date, said
Bankruptcy Filing shall be a default under this Agreement and Purchaser shall
indemnify Seller for all costs, attorney's fees and expenses of Seller
resulting from Seller's efforts to obtain the Earnest Money as liquidated
damages and to clear title to the Property from any encumbrance resulting from
the Bankruptcy Filing.

15.  BROKER.  The parties hereto represent and warrant that no broker
commission or finder fee is due and payable in connection with this transaction
other than to Apartment Realty Advisors ("ARA") (to be paid by Seller) of the
Property in the event the transaction set forth herein closes.  Purchaser and
Seller shall indemnify, defend and hold the other party hereto harmless from
any claim whatsoever (including without limitation, reasonable attorney's fees,
court costs and costs of appeal) from anyone claiming by or through the
indemnifying party any fee, commission or compensation on account of this
Agreement, its negotiation or the sale hereby contemplated other than to ARA.
The indemnifying party shall undertake its obligations set forth in this
Paragraph 15 using attorneys selected by the indemnifying party and reasonably
acceptable to the indemnified party.  The provisions of this Paragraph 15 will
survive the Closing and delivery of the Deed.

16.  REPRESENTATIONS, WARRANTIES AND COVENANTS.
     16.1.     Any reference herein to Seller's knowledge or notice of any
matter or thing shall only mean such knowledge or notice that has actually been
received by Daniel Charleston or Mike Becker, Asset Manager of the Property,
(the "Seller's Representative"), and any representation or warranty of the
Seller is based upon those matters of which the Seller's Representative has
actual knowledge.  Any knowledge or notice given, had or received by any of
Seller's agents, servants or employees shall not be imputed to Seller, the
general partner or limited partners of Seller, the subpartners of the general
partner or limited partners of Seller or Seller's Representative.

     16.2.     Subject to the limitations set forth in Paragraph 16.1, Seller
hereby makes the following representations and warranties as of the date of
this Agreement and the Closing Date subject to Paragraph 16.4 of this
Agreement, which representations and warranties are made to Seller's knowledge
and which shall not survive Closing:  (i) Seller has no knowledge of any
pending or threatened litigation, claim, cause of action or administrative
proceeding concerning the Property; (ii) Seller has the power to execute and
deliver this Agreement and consummate the transactions contemplated herein;
(iii) the rent roll attached hereto as Exhibit L which Seller will update as of
the Closing Date is accurate as of the date set forth thereon; (iv) a true and
<PAGE>
correct list of the Existing Bond and Mortgage Documents is attached as
Exhibit N; (v) Seller has not received any written notice that Seller or Balcor
Realty Investors 85-Series III is in default under any of the Existing Bond and
Mortgage Documents to which they are a party; (vi) Seller has not taken any
action (or failed to take any required action under the Existing Bond and
Mortgage Documents) the effect of which is to cause the Bonds to be "arbitrage
bonds" within the meaning of Section 148 of the Internal Revenue Code of 1986,
as amended (and the regulations thereunder), or to otherwise cause the interest
on the Bonds not to be excluded from gross income for federal income tax
purposes; (vii) Seller has no employees at the Property; (viii) Seller has not
entered into any agreement concerning the sale of the Property which conflicts
with the terms of this Agreement; (ix) the list of service contracts attached
hereto as Exhibit H is complete as of the date noted on Exhibit H, and Seller
has no knowledge of any material default by Seller under the terms of any said
service contracts; (x) Seller has no knowledge of any material default by
Seller under any lease for the Property; (xi) except as may be set forth in the
Existing Report, Seller has not received any notice from any governmental
authority having jurisdiction over the Property of any uncured violation of any
Environmental Law with respect to the Property; (xii) Seller has not received
any notice from any person of any claim of a default on the part of any party
to any of the Existing Bond and Mortgage Documents which questions the
authority of the Issuer to execute and deliver the Bonds or the validity or
enforceability of the Existing Bond and Mortgage Documents; (xiii) Seller has
not received any written notice of any fire or building code violations with
respect to the Property; and (xiv) Seller has no knowledge of any additional
environmental reports of the Property commissioned by Seller since June 1,
1994.

     16.3.     Purchaser hereby represents and warrants to Seller that
Purchaser has the full right, power and authority to execute and deliver this
Agreement and consummate the transactions contemplated herein.

     16.4.     If at any time after the execution of this Agreement either
Purchaser or Seller becomes aware of information which causes a representation
or warranty contained in this Agreement to become untrue in any material
respect, said party shall promptly disclose that information to the other party
hereto.  Provided the party making the representation or warranty did not take
any deliberate action to cause the representation or warranty in question to
become untrue in any material respect, said party shall not be in default under
this Agreement and the sole remedy of the other party shall be to terminate
this Agreement.  Notwithstanding anything contained herein to the contrary, if
the status of tenancies changes between the date of the rent roll attached
hereto and the date of the rent roll delivered at Closing, provided the change
in status is not caused by a breach of Seller's covenants contained in
Paragraphs 16.2 or 16.6 herein, the Purchaser shall not have the right to
terminate this Agreement or make any claim for a breach of a representation or
warranty hereunder involving the rent roll or tenancies thereunder.  Purchaser
and Seller are prohibited from making any claims against the other party hereto
after the Closing with respect to any breaches of the other party's
representations and warranties contained in this Agreement of which the
claiming party has actual knowledge prior to the Closing.
<PAGE>
     16.5.     The parties agree that the representations contained herein
shall survive Closing for a period of one hundred twenty (120) days (i.e., the
claiming party shall have no right to make any claims against the other party
for a breach of a representation or warranty after the expiration of one
hundred twenty (120) days immediately following Closing).

     16.6.     Seller covenants to operate and manage the Property in the same
manner that it has managed, maintained and operated the Property during the
period of Seller's ownership, subject to reasonable wear and tear and casualty,
including maintaining casualty insurance for the Property.

17.  LIMITATION OF LIABILITY.

     17.1.     Neither any Affiliate of Seller, nor any of their or Seller's
respective beneficiaries, shareholders, partners, directors, officers, agents
or employees, heirs, successors or assigns shall have any personal liability of
any kind or nature for or by reason of any matter or thing whatsoever under, in
connection with, arising out of or in any way related to this Agreement and the
transactions contemplated herein, and Purchaser hereby waives for itself and
anyone who may claim by, through or under Purchaser any and all rights to sue
or recover on account of any such alleged personal liability.

     17.2.     Notwithstanding anything contained herein to the contrary,
Purchaser hereby agrees that the maximum aggregate liability of Seller for
damages in connection with or arising out of or in any way related to a breach
by Seller under this Agreement or any document or conveyance agreement in
connection with the transaction set forth herein after the Closing shall be
$300,000.00.  Purchaser hereby waives for itself and anyone who may claim by,
through or under Purchaser any and all right to sue or recover from Seller any
amount greater than said limit.

18.  CONDITIONS PRECEDENT.

     18.1.     The Property is currently encumbered by those certain
Multifamily Housing Revenue Refunding Bonds, (North Hill Apartments Project)
Series 1994 in the original aggregate principal amount of $16,880,000.00 (the
"Bonds") as evidenced and/or secured by, among other items, the following
documents (collectively with any other documents made in connection with the
Bonds and the financing and/or refinancing relating thereto with respect to the
Property are hereinafter referred to as the "Existing Bond and Mortgage
Documents"):  (a) the Multifamily Note (the "Note") made by Seller for the
benefit of Issuer, endorsed by Issuer to Lender, and endorsed by Lender to the
Federal National Mortgage Association ("Fannie Mae"); (b) that certain
Indenture of Trust dated as of December 1, 1994 (the "Indenture") between the
Housing Authority of the County of DeKalb, Georgia, a public body corporate and
politic of the State of Georgia (the "Issuer") and Bank South N.A., Atlanta,
Georgia, a national banking association (the "Trustee"); (c) the Financing
Agreement dated as of December 1, 1994 (the "Financing Agreement") pursuant to
which the proceeds of the Bonds were loaned to Seller, by and among the Issuer,
the Trustee, the Seller and Washington DUS, Inc., a Delaware corporation (the
"Lender"); (d) the Second Amended and Restated Land Use Restriction Agreement
dated as of December 1, 1994 (the "Regulatory Agreement") by and among the
Issuer, the Seller and the Trustee; (e) the Multifamily Deed to Secure Debt,
<PAGE>
Assignment of Rents and Security Agreement made by Seller for the benefit of
Issuer; (f) the Replacement Reserve and Security Agreement dated December 1,
1994 (the "Replacement Reserve") by and between Seller and Lender; and (g) the
Guaranty Agreement dated December 1, 1994 (the "Guaranty") by and between
Balcor Realty Investors 85-Series III, a Real Estate Limited Partnership, an
Illinois limited partnership, and the Issuer; and (h) those documents listed on
Exhibit N attached hereto.

     18.2.     Purchaser and Seller agree that the performance of their
obligations under this Agreement shall be subject to the party(ies) (as
specified below) unconditionally procuring, using commercially reasonable
efforts, on or before the Closing Date the following:

          18.2.1. Seller and Purchaser obtaining, on terms acceptable to 
     Purchaser and Seller in their sole and absolute discretion, the written 
     consent of Issuer, Trustee, Lender and Fannie Mae and any other applicable
     parties to (a) the assignment to and assumption by Purchaser of the Bonds 
     and the Existing Bond and Mortgage Documents and (b) the sale of the 
     Property to Purchaser;

          18.2.2. Purchaser and Seller satisfying all other conditions to the 
     transfer of the Bonds arising out of the Existing Bond and Mortgage 
     Documents upon terms reasonably acceptable to Purchaser including, without
     limitation, any bond counsel's opinion or opinion of Purchaser's counsel 
     required by such transfer;

          18.2.3. Seller obtaining, on terms acceptable to Seller in Seller's 
     sole and absolute discretion, the written acknowledgment of Issuer, 
     Trustee, Lender and Fannie Mae to the release of Seller and Seller's 
     affiliated entities in connection with any and all liabilities and 
     obligations arising out of the Bonds and Existing Bond and Mortgage 
     Documents;

          18.2.4. Seller shall have executed and delivered to bond counsel a 
     certificate in form and substance sufficient to enable bond counsel to 
     render a standard opinion as to the tax-exempt status of the Bonds; and

          18.2.5. Bond counsel shall have committed to issuing its opinion as 
     required under the Existing Bond and Mortgage Documents.

The foregoing conditions set forth in Paragraphs 18.2.1, 18.2.2, 18.2.3, 18.2.4
and 18.2.5 shall hereinafter be referred to as the "Conditions Precedent".
Both Seller and Purchaser shall fully cooperate with each other and use good
faith efforts to satisfy the Conditions Precedent, including, but not limited
to, Purchaser submitting to Issuer, Trustee, Lender and Fannie Mae all
reasonably requested financial and other information.

     18.3.     In the event any of the Conditions Precedent are not satisfied
or waived on or before the Closing Date, then this Agreement shall be
terminated, and the Earnest Money shall be immediately paid to Purchaser,
together with any interest earned thereon, and neither Seller nor Purchaser
shall have any right, obligation or liability under this Agreement, except for
the indemnities set forth in Paragraphs 7 and 15 of this Agreement.
<PAGE>
19.  TIME OF ESSENCE.  Time is of the essence of this Agreement.

20.  NOTICES.  Any notice or demand which either party hereto is required or
may desire to give or deliver to or make upon the other party shall be in
writing and may be personally delivered or given or made by overnight courier
such as Federal Express, by facsimile transmission or made by United States
registered or certified mail addressed as follows:

          TO SELLER:     N.H. Associates
                         c/o The Balcor Company
                         Bannockburn Lake Office Plaza
                         2355 Waukegan Road
                         Suite A-200
                         Bannockburn, Illinois  60015
                         Attention:  Ilona Adams

     with copies to:     The Balcor Company
                         Bannockburn Lake Office Plaza
                         2355 Waukegan Road
                         Suite A-200
                         Bannockburn, Illinois  60015
                         Attention:  Alan Lieberman
                         (847) 317-4360
                         (847) 317-4462 (FAX)

     and to:             Katten Muchin & Zavis
                         525 West Monroe Street
                         Suite 1600
                         Chicago, Illinois  60661-3693
                         Attention:  Daniel J. Perlman, Esq.
                         (312) 902-5532
                         (312) 902-1061 (FAX)

          TO PURCHASER:  Jupiter Realty Corporation
                         1050  17th Street
                         Suite 1000
                         Denver, Colorado  80265
                         Attention:  Greg Davine
                         (303) 893-7073
                         (303) 893-7001 (FAX)

     and to:             Jupiter Realty Corporation
                         92 Broad Street
                         Charleston, South Carolina  29401
                         Attention:     Jay Luzuriaga
                         (803) 853-1255
                         (803) 853-1257 (FAX)

     and one copy to:    Jenner & Block
                         330 North Wabash
                         Chicago, Illinois  60611
                         Attention:  Donald Resnick, Esq.
                         (312) 222-9350
                         (312) 527-0484 (FAX)
<PAGE>
subject to the right of either party to designate a different address for
itself by notice similarly given.  Any notice or demand so given shall be
deemed to be delivered or made on the next business day if sent by overnight
courier, or the same day as given if sent by facsimile transmission and
received by 5:00 p.m. Chicago time or on the 4th business day after the same is
deposited in the United States Mail as registered or certified matter,
addressed as above provided, with postage thereon fully prepaid.  Any such
notice, demand or document not given, delivered or made by registered or
certified mail, by overnight courier or by facsimile transmission as aforesaid
shall be deemed to be given, delivered or made upon receipt of the same by the
party to whom the same is to be given, delivered or made.  Copies of all
notices shall be served upon the Escrow Agent.

21.  EXECUTION OF AGREEMENT AND ESCROW AGREEMENT.  Purchaser will execute two
(2) copies of this Agreement and three (3) copies of the Escrow Agreement and
forward them to Seller for execution, accompanied with the Earnest Money
payable to the Escrow Agent set forth in the Escrow Agreement.  Seller will
forward one (1) copy of the executed Agreement to Purchaser and will forward
the following to the Escrow Agent:

     (A)  Earnest Money;

     (B)  One (1) fully executed copy of this Agreement; and

     (C)  Three (3) copies of the Escrow Agreement signed by the parties with a
direction to execute two (2) copies of the Escrow Agreement and deliver a fully
executed copy to each of the Purchaser and the Seller.

22.  GOVERNING LAW.  The provisions of this Agreement shall be governed by the
laws of the State of Georgia, except that with respect to the retainage of the
Earnest Money as liquidated damages the laws of the State of Illinois shall
govern.

23.  ENTIRE AGREEMENT.  This Agreement constitutes the entire agreement between
the parties and supersedes all other negotiations, understandings and
representations made by and between the parties and the agents, servants and
employees.

24.  COUNTERPARTS.  This Agreement may be executed in multiple counterparts,
each of which shall be deemed an original but all of which shall constitute one
and the same instrument.

25.  CAPTIONS.  Paragraph titles or captions contained herein are inserted as a
matter of convenience and for reference, and in no way define, limit, extend or
describe the scope of this Agreement or any provision hereof.

26.  SERVICE CONTRACTS.  Attached hereto as Exhibit H is a list of service
contracts affecting the Property.  Seller shall assign the service contracts to
Purchaser at Closing, and Purchaser shall assume responsibility and obligations
under the service contracts accruing from and after the Closing Date.  Seller
agrees not to enter into any other service contracts affecting the Property,
except for service contracts which are terminable on not more than thirty (30)
days notice.  Seller agrees to terminate any and all management agreements
affecting the Property as of the Closing Date.
<PAGE>
27.  PROPERTY EXCHANGE.  At Purchaser's election, the Property will be used by
Purchaser to constitute replacement property, in an exchange under Section 1031
of the Internal Revenue Code, for certain property which Purchaser or its
affiliates currently owns (the "Relinquished Property").  Seller will cooperate
with Purchaser (at no cost to Seller) in effecting such an exchange in
compliance with the Internal Revenue Code and applicable treasury regulations,
to the extent that Seller will consent to and acknowledge an assignment of
Purchaser's rights under this Agreement to the Title Company, or to another
qualified intermediary designated by Purchaser for purposes of acquiring the
Property with proceeds from the disposition of the Relinquished Property.
Seller will not be responsible for the tax consequences to Purchaser of the
transactions contemplated under this Agreement and under the agreement to sell
the Relinquished Property.  Seller will not be required to accept title to the
Relinquished Property and will have no obligations whatsoever to the owner of
the Relinquished Property.  The assignment by Purchaser of its rights hereunder
to the Title Company, or to another qualified intermediary, for purposes of
effecting such an exchange, will not relieve Purchaser of any of its
obligations under this Agreement.

28.  ATTORNEYS' FEES.  In the event of a default by either party of its
obligations under this Agreement, the prevailing party in any action or
proceeding in any court in connection therewith shall be entitled to recover
from such other party its costs and expenses, including reasonable legal fees
and associated court costs, subject to the maximum aggregate liability of
Seller under Paragraph 17.2 of this Agreement.

29.  PHYSICAL OCCUPANCY REQUIREMENT.  If the rent roll delivered at Closing in
accordance with Paragraph 9.2.11 of this Agreement indicates a physical
occupancy rate for the Property of less than ninety-two percent (92%), then the
Purchase Price shall be reduced by an amount equal to the product of (a) Six
Thousand and No/100 Dollars ($6000.00) multiplied by (b) the amount by which
ninety-two percent (92%) exceeds the actual percentage of physical occupancy
for the Property multiplied by 100 (rounded to the nearest whole number).  For
example, if the rent roll delivered at Closing reflects a physical occupancy
rate of ninety-five percent (95%), then there will be no reduction in the
Purchase Price.  If the rent roll delivered at Closing reflects a physical
occupancy rate of ninety and 40/100 percent (90.40%), then the Purchase Price
will be reduced by $12,000 (i.e., 92% minus 90.4% equals 1.6%, rounded to the
nearest whole number equals 2%, times 100 equals 2, times $6000.00 equals
$12,000.00).

30.  SEVERABILITY.  If any provision of this Agreement conflicts with
applicable law, such conflict shall not affect other provisions of which can be
given effect without the conflicting provisions, and to this end the provisions
of this Agreement are declared to be severable.
<PAGE>
     IN WITNESS WHEREOF, the parties hereto have put their hand and seal as of
the date first set forth above.


PURCHASER:

JUPITER REALTY CORPORATION, 
an Illinois corporation


By:  /s/Gregory R. Davine
     ---------------------------
Name:   Gregory R. Davine
     ---------------------------
Its:    Vice President
     ---------------------------



SELLER:

N.H. Associates, an Illinois limited partnership

By:  North Hill Partners, an Illinois joint venture, its general partner

     By:  Thornhill Limited Partnership, an Illinois limited partnership, 
          a joint venture partner

          By:  Balcor Partners-XVI, an Illinois general partnership, 
               its general partner

               By:  RGF-Balcor Associates-II, an Illinois general partnership, 
                    a partner

                    By:  The Balcor Company, a Delaware corporation, 
                         a general partner

                         By:  /s/Phillip A. Schechter
                              ----------------------------
                         Name:   Phillip A. Schechter
                              ----------------------------
                         Its:    Authorized Agent
                              ----------------------------
<PAGE>
_________________ of Apartment Realty Advisors ("Seller's Broker") executed
this Agreement in its capacity as a real estate broker and acknowledges that
the fee or commission due it from Seller as a result of the transaction
described in this Agreement is as set forth in that certain Listing Agreement,
dated December 5, 1995 between Seller and Seller's Broker (the "Listing
Agreement").  Seller's Broker also acknowledges that payment of the aforesaid
fee or commission is conditioned upon the Closing and the receipt of the
Purchase Price by the Seller.  Seller's Broker agrees to deliver a receipt to
the Seller at the Closing for the fee or commission due Seller's Broker and a
release in the appropriate form stating that no other fees or commissions are
due to it from Seller or Purchaser.



                              APARTMENT REALTY ADVISORS



                              By:
                                   ------------------------------
                              Name: 
                                   ------------------------------
                              Its: 
                                   ------------------------------
<PAGE>
                                   Exhibits

A    -    Legal

B    -    Personal Property

C    -    Escrow Agreement

D    -    Title Commitment

E    -    Deed

F    -    Bill of Sale

G    -    Assignment and Assumption of Intangible Property

H    -    Service Contracts

I    -    Assignment and Assumption of Leases and Security Deposits

J    -    FIRPTA Statement

K    -    Notice to Tenants

L    -    Rent Roll

M    -    Assignment and Assumption of Existing Bond and Mortgage Documents

N    -    Additional Existing Bond and Mortgage Documents

O    -    Audit Letter
<PAGE>
                                N.H. ASSOCIATES

                                 July 15, 1996

Jupiter Realty Corporation
1050  17th Street
Suite 1000
Denver, Colorado  80265

Attention:  Greg Devine

     Re:  North Hill Apartments, Atlanta, Georgia

Dear Mr. Devine:

     Reference is hereby made to that certain Agreement of Sale (the
"Agreement") dated July 15, 1996 by and between N.H. Associates, an Illinois
limited partnership ("Seller") and Jupiter Realty Corporation, an Illinois
corporation ("Purchaser").  All capitalized terms which are used herein but
which are not otherwise defined herein shall have the meanings ascribed to such
terms in the Agreement.

     Paragraph 18 of the Agreement provides that the performance of Purchaser's
and Seller's obligations under the Agreement shall be subject to the parties
having satisfied the Conditions Precedent on or before the Closing Date.  If
any Condition Precedent has not been satisfied in accordance with the terms of
Paragraph 18.2, then Seller or Purchaser may deliver notice ("Extension
Notice") to the other party on or before September 12, 1996 extending the date
for the satisfaction of the Conditions Precedent until October 14, 1996, in
which event the Closing of this transaction shall be extended to the date which
is five (5) business days after the satisfaction of the Conditions Precedent,
but in no event later than October 21, 1996.  The receiving party shall
acknowledge the Extension Notice and forward a copy of the acknowledged
Extension Notice to the Title Company as evidence of the parties' intent to
extend the Closing Date.  In the event any of the Conditions Precedent are not
satisfied on or before September 12, 1996, and Seller or Purchaser does not
deliver an Extension Notice in accordance with the terms hereof, then the
Agreement shall be terminated, and the Earnest Money shall be immediately paid
to Purchaser, together with any interest earned thereon, and neither Seller nor
Purchaser shall have any right, obligation or liability under the Agreement
except for the indemnities set forth in Paragraphs 7 and 15 of the Agreement.
In the event Seller or Purchaser elects to extend the date for satisfying the
Conditions Precedent in accordance with the terms of this letter and the
Conditions Precedent have not been satisfied on or before October 14, 1996,
then the Agreement shall be terminated, and the Earnest Money shall be
immediately paid to Purchaser, together with any interest earned thereon, and
neither Seller nor Purchaser shall have any right, obligation or liability
under the Agreement, except for the indemnity set forth herein in Paragraphs 7
and 15 of the Agreement.

     Purchaser hereby agrees to pay all costs and expenses associated with
procuring and satisfying the Conditions Precedent, including, but not limited
to, any opinion of counsel required under the Existing Bond Documents and any
assumption or transfer fee or related fees due Issuer, Trustee, Lender or
<PAGE>
Fannie Mae in connection with the sale of the Property to Purchaser or the
assignment to and assumption of the Existing Bond and Mortgage Documents by
Purchaser.  In the event of a termination of the Agreement under either the
terms of Paragraph 7 of the Agreement or the terms of this letter, all expenses
incurred in association with procuring and satisfying the Conditions Precedent
shall be deducted from the Earnest Money and paid.  The balance of the Earnest
Money, together with any interest earned thereon, shall then be paid to
Purchaser.

     In the event of an inconsistency between the terms of this letter and the
terms of the Agreement, the terms of this letter shall govern and control.
Please acknowledge your agreement to the foregoing by executing a copy of this
letter and returning it to the undersigned.

Very truly yours,

N.H. Associates, an Illinois limited partnership

By:  North Hill Partners, an Illinois joint venture, its general partner

     By:  Thornhill Limited Partnership, an Illinois limited partnership, a 
          joint venture partner

          By:  Balcor Partners-XVI, an Illinois general partnership, its 
               general partner

               By:  RGF-Balcor Associates-II, an Illinois general partnership, 
                    a partner

                    By:  The Balcor Company, a Delaware corporation, a general 
                         partner

                         By:  /s/ Phillip A. Schechter
                              -----------------------------------
                         Name:    Phillip A. Schechter
                              -----------------------------------
                         Its:     Authorized Agent
                              -----------------------------------



ACCEPTED AND AGREED TO this    day of July, 1996.

JUPITER REALTY CORPORATION,
an Illinois, corporation

By:  /s/Gregory R. Davine
     ---------------------------------
Name:   Gregory R. Davine
     ---------------------------------
Its:    Vice President
     ---------------------------------
<PAGE>

<TABLE> <S> <C>

<ARTICLE> 5
<MULTIPLIER> 1000
       
<S>                             <C>
<PERIOD-TYPE>                   6-MOS
<FISCAL-YEAR-END>                          DEC-31-1996
<PERIOD-END>                               JUN-30-1996
<CASH>                                            9691
<SECURITIES>                                         0
<RECEIVABLES>                                      416
<ALLOWANCES>                                         0
<INVENTORY>                                          0
<CURRENT-ASSETS>                                 11363
<PP&E>                                           58289
<DEPRECIATION>                                   22870
<TOTAL-ASSETS>                                   47547
<CURRENT-LIABILITIES>                              574
<BONDS>                                          42100
                                0
                                          0
<COMMON>                                             0
<OTHER-SE>                                        4474
<TOTAL-LIABILITY-AND-EQUITY>                     47547
<SALES>                                              0
<TOTAL-REVENUES>                                 15877
<CGS>                                                0
<TOTAL-COSTS>                                     3264
<OTHER-EXPENSES>                                  1271
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                2046
<INCOME-PRETAX>                                   9296
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                               9296
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                  (427)
<CHANGES>                                            0
<NET-INCOME>                                      8869
<EPS-PRIMARY>                                   106.17
<EPS-DILUTED>                                   106.17
        

</TABLE>


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