<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended September 30,1995
-----------------
Commission file number 0-23766
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CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
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(Exact name of registrant as specified in charter)
Maryland 52-1388957
- ------------------------------------ ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11200 Rockville Pike, Rockville, Maryland 20852
- ----------------------------------------- ------------------------
(Address of principal executive officer) (Zip Code)
(301) 468-9200
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(Registrant's telephone number, including area code)
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 and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at September 30,1995
- -------------------------- --------------------------------------
(Not applicable) (Not applicable)
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30,1995
Page
----
PART I. Financial Information (Unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets - September 30,1995 and
December 31, 1994 . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations - for the three
and nine months ended September 30,1995 and 1994 3
Consolidated Statements of Cash Flows - for the nine
months ended September 30,1995 and 1994 . . . . . 5
Notes to Consolidated Financial Statements . . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . 13
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . 17
Signature . . . . . . . . . . . . . . . . . . . . . . . . . 18
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
(Unaudited)
<S> <C> <C>
Investments in and advances to partnerships $ 3,605,512 $ 3,751,252
Cash and cash equivalents 1,177,768 876,995
Escrow and cash reserves -- 531,069
Acquisition fees, principally paid to
related parties, net of accumulated
amortization of $135,064 and $124,464,
respectively 288,936 299,536
Property purchase costs, net of accumulated
amortization of $135,259 and $124,855,
respectively 280,923 291,327
Other assets 5,742 607
------------- ------------
Total assets $ 5,358,881 $ 5,750,786
============= ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
- 1 -
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS - Continued
LIABILITIES AND PARTNERS' DEFICIT
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
(Unaudited)
<S> <C> <C>
Due on investments in partnerships $ 5,272,600 $ 5,590,900
Accrued interest payable 8,655,040 7,548,895
Accounts payable and accrued expenses 84,468 60,646
------------- ------------
Total liabilities 14,012,108 13,200,441
------------- ------------
Commitments and contingencies
Partners' capital (deficit):
Capital paid-in:
General Partners 2,000 2,000
Limited Partners 21,202,500 21,202,500
------------- ------------
21,204,500 21,204,500
Less:
Offering costs (2,570,535) (2,570,535)
Accumulated losses (27,287,192) (26,083,620)
------------- ------------
Total partners' deficit (8,653,227) (7,449,655)
------------- ------------
Total liabilities and partners'
deficit $ 5,358,881 $ 5,750,786
============= ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
- 2 -
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
September 30,
----------------------------
1995 1994
------------ ------------
<S> <C> <C>
Share of loss from partnerships $ (11,896) $ (76,406)
------------ ------------
Other revenue and expenses:
Revenue:
Interest income 30,890 20,039
------------ ------------
Expenses:
Interest 396,791 354,423
General and administrative 39,028 3,874
Management fee 24,482 24,482
Professional fees 15,794 23,042
Amortization 7,002 7,002
------------ ------------
483,097 412,823
------------ ------------
Total other revenue and expenses (452,207) (392,784)
------------ ------------
Net loss (464,103) (469,190)
Accumulated losses, beginning of period (26,823,089) (25,144,119)
------------ ------------
Accumulated losses, end of period $(27,287,192) $(25,613,309)
============ ============
Loss allocated to General Partners (1.51%) $ (7,008) $ (7,085)
============ ============
Loss allocated to Initial and Special
Limited Partners (2.49%) $ (11,556) $ (11,683)
============ ============
Loss allocated to BAC Holders (96%) $ (445,539) $ (450,422)
============ ============
Loss per BAC based on 21,200 BACs
outstanding $ (21.01) $ (21.25)
============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
- 3 -
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
----------------------------
1995 1994
------------ ------------
<S> <C> <C>
Share of income from partnerships $ 129,595 $ 72,223
------------ ------------
Other revenue and expenses:
Revenue:
Interest income 83,738 55,619
------------ ------------
Expenses:
Interest 1,181,911 1,063,270
General and administrative 93,430 64,685
Management fee 73,447 73,447
Professional fees 47,113 60,406
Amortization 21,004 21,005
------------ ------------
1,416,905 1,282,813
------------ ------------
Total other revenue and expenses (1,333,167) (1,227,194)
------------ ------------
Net loss (1,203,572) (1,154,971)
Accumulated losses, beginning of period (26,083,620) (24,458,338)
------------ ------------
Accumulated losses, end of period $(27,287,192) $(25,613,309)
============ ============
Loss allocated to General Partners (1.51%) $ (18,174) $ (17,440)
============ ============
Loss allocated to Initial and Special
Limited Partners (2.49%) $ (29,969) $ (28,759)
============ ============
Loss allocated to BAC Holders (96%) $ (1,155,429) $ (1,108,772)
============ ============
Loss per BAC based on 21,200 BACs
outstanding $ (54.50) $ (52.30)
============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
- 4 -
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
---------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,203,572) $ (1,154,971)
Adjustments to reconcile net loss to
net cash used in operating activities:
Share of income from partnerships (129,595) (72,223)
Increase in accrued interest receivable
on advances to partnerships (17,719) (17,719)
Amortization of deferred costs 21,004 21,005
Payment of purchase money note interest (19,066) (85,176)
Changes in assets and liabilities:
Increase in other assets (5,135) (931)
Increase in accrued interest payable 1,181,911 1,063,270
Increase (decrease) in accounts payable
and accrued expenses 23,822 (5,900)
------------ ------------
Net cash used in operating
activities (148,350) (252,645)
------------ ------------
Cash flows from investing activities:
Decrease (increase) in escrow and cash
reserves 531,069 (12,616)
Receipt of distributions from partnerships 312,334 232,536
Repayment of advances to partnerships 158,699 88,618
Investments in and advances to partnership (177,979) --
------------ ------------
Net cash provided by investing
activities 824,123 308,538
------------ ------------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
- 5 -
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
---------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from financing activities:
Payment of purchase price payable (318,300) --
Payment of interest on purchase price
payable (56,700) --
------------ ------------
Net cash used in financing
activities (375,000) --
------------ ------------
Net increase in cash and cash equivalents 300,773 55,893
Cash and cash equivalents, beginning
of period 876,995 871,533
------------ ------------
Cash and cash equivalents, end of
period $ 1,177,768 $ 927,426
============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
- 6 -
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of C.R.I., Inc. (CRI), the Managing General Partner, the
accompanying unaudited consolidated financial statements contain all adjustments
of a normal recurring nature necessary to present fairly the consolidated
financial position of Capital Realty Investors-85 Limited Partnership (the
Partnership) as of September 30,1995 and December 31, 1994 and its consolidated
results of operations for the three and nine months ended September 30,1995 and
1994 and its consolidated cash flows for the nine months ended September 30,1995
and 1994.
These unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in consolidated financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. While the Managing General Partner believes that
the disclosures presented are adequate to make the information not misleading,
it is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and the notes included in
the Partnership's Annual Report filed on Form 10-K for the year ended
December 31, 1994.
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
As of September 30,1995, the Partnership's obligations with respect to its
investments in Local Partnerships, in the form of purchase money notes of
$5,098,000 plus the accrued interest of $8,579,640, are payable upon the
earliest of: (1) sale or refinancing of the respective Local Partnership's
rental property; (2) payment in full of the respective Local Partnership's
permanent loan; or (3) maturity. Purchase money notes in an aggregate principal
amount of $2,500,000 mature in December 1995, as discussed below. Purchase
money notes in an aggregate principal amount of $230,000 mature in 1996. The
remaining purchase money notes mature from 1999 to 2003. The purchase money
notes are generally secured by the Partnership's interest in the respective
Local Partnership. There is no assurance that the underlying properties will
have sufficient appreciation and equity to enable the Partnership to pay the
purchase money notes' principal and accrued interest when due. If a purchase
money note is not paid in accordance with its terms, the Partnership will either
have to renegotiate the terms of repayment or risk losing its partnership
interest in the Local Partnership. The Managing General Partner is continuing
to investigate possible alternatives to reduce the Partnership's long-term debt
obligations. These alternatives include, among others, retaining the cash
available for distribution to meet the purchase money note requirements, buying
out certain purchase money notes at a discounted price, extending the due dates
of certain purchase money notes, or refinancing the respective properties'
underlying debt and using the Partnership's share of the proceeds to pay off or
buy down certain purchase money note obligations.
Interest expense on the Partnership's purchase money notes for the three
and nine months ended September 30,1995 was $396,791 and $1,181,911,
respectively, and for the three and nine months ended September 30,1994 was
$354,423 and $1,063,270, respectively. The accrued interest on the purchase
money notes of $8,579,640 and $7,416,795 as of September 30,1995 and December
31, 1994, respectively, is due on the respective maturity dates of the purchase
money notes or earlier if the Local Partnerships have distributable net cash
flow, as defined in the relevant Local Partnership agreements.
-7-
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
As of September 30,1995 and December 31, 1994, the Partnership's
obligations with respect to its investments in Local Partnerships included
$174,600 and $492,900, respectively, due to local general partners, plus accrued
interest on these obligations of $75,400 and $132,100, respectively.
Deerfield Partners Limited Partnership (Deerfield Apartments) was unable to
generate sufficient cash flow to pay its debt service and therefore was unable
to meet its obligations under the terms of the loan documents. The Local
Partnership defaulted on its mortgage loan in 1990, and after negotiations with
the Department of Housing and Urban Development (HUD), submitted a one-year
workout proposal to the local HUD office, effective May 1, 1991, to which HUD
did not respond. On July 1, 1992, a second one-year workout proposal was
submitted, effective September 1, 1992, to which HUD did not respond. On
September 17, 1993, a six-year workout proposal, effective October 1, 1993, was
submitted in accordance with HUD's new workout guidelines. At HUD's request, a
nine-year workout proposal was submitted to HUD on April 15, 1994. This
proposal was rejected by HUD. A new nine-year workout proposal was submitted to
HUD on May 31, 1995. HUD rejected this proposal and notified Deerfield
Apartments that HUD had offered its mortgage loan for sale in September 1995. A
new mortgagee is scheduled to purchase the loan from HUD on November 10, 1995,
and if the sale is completed as scheduled, could foreclose on the property. As
of October 10, 1995, Deerfield Apartments had not been notified as to the
intentions of the potential new mortgagee. The uncertainty about the Local
Partnership's continued ownership of the property does not impact the
Partnership's financial condition because the related purchase money note is
nonrecourse and collateralized solely by the Partnership's interest in the Local
Partnership. Therefore, should the investment in Deerfield Apartments not
produce sufficient value to satisfy the purchase money note related to Deerfield
Apartments, the Partnership's exposure to loss is limited since the amount of
the nonrecourse indebtedness exceeds the carrying amount of the investment in
and advances to the Local Partnership. Thus, even a complete loss of this
investment would not have a material impact on the operations of the
Partnership. Currently, debt service payments are being made from available
cash flow in accordance with the latest proposed workout. During 1989 and
1988, the Partnership loaned a total of $196,746 to the Local Partnership to
fund operating deficits. The Partnership does not expect to advance any
additional funds. The loans do not bear interest and repayment is due upon sale
or refinancing of the property; however, there is no assurance that the Local
Partnership will be able to repay any loans in accordance with the terms.
Mesa Partners Limited Partnership (The Pointe), located in El Paso, Texas,
modified its mortgage loan in 1987. In connection with the loan modification,
the Partnership loaned $262,500 to the Local Partnership in 1987. Repayment of
this loan, with simple interest at 9% per annum, is expected to occur upon sale
or refinancing of the property. As of September 30,1995 and December 31, 1994,
accrued interest was $194,497 and $176,778, respectively.
Paradise Associates Limited Partnership (Paradise) was notified by HUD that
HUD planned to offer Paradise's mortgage loan for sale in the Fall of 1995. If
the mortgage was sold by HUD, a new mortgagee would service the loan and
Paradise would no longer be subject to HUD regulatory requirements. As of
October 10, 1995, Paradise had not been notified by HUD as to the status of the
loan sale.
-8-
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
Debt service on Springfield Apartments (Springfield) is due to the lender
on the first day of each month with no "grace period" and substantial late
payment penalties. Therefore, prior to February 1994, the Partnership had
advanced approximately $65,000 per month to Springfield in the form of a bridge
loan which was to be repaid by the fifteenth of the following month. The
February 1994 advance to Springfield was held by the Local Partnership to
establish a one-month debt service reserve to eliminate the need for a monthly
bridge loan from the Partnership. Springfield began repaying a portion of the
non-interest-bearing advances made by the Partnership in April 1994. As of
September 30,1995 and December 31, 1994, non-interest-bearing loans to
Springfield totalled $381,239 and $509,438, respectively.
Debt service on Devonshire Apartments (Devonshire) is due to the lender on
the first day of each month with no "grace period" and substantial late payment
penalties. Therefore, prior to February 1994, the Partnership had advanced
approximately $10,000 per month to Devonshire in the form of a bridge loan which
was to be repaid by the fifteenth of the following month. The February 1994
advance to Devonshire was held by the Local Partnership to establish a one-month
debt service reserve to eliminate the need for a monthly bridge loan from the
Partnership. Devonshire began repaying a portion of the non-interest-bearing
advances made by the Partnership in July 1994. As of December 31, 1994, non-
interest-bearing loans to Devonshire totalled $30,500. Devonshire paid off the
balance of its loans in January 1995.
The letter of credit and mortgage loan on Sheridan West Limited Partnership
(Semper Village) originally matured on December 20, 1994. Pursuant to an
agreement dated January 1, 1995, the Resolution Trust Corporation (RTC), acting
as receiver for the original mortgagee, assumed the note in lieu of mandatory
redemption by drawing on the letter of credit. The RTC extended the maturity
date of the letter of credit and mortgage loan to September 1, 1995. On August
30, 1995, the local general partners refinanced the existing mortgage loan with
SRS Insurance Services, Inc. In connection with the refinancing, the local
general partners executed a settlement agreement with the RTC to pay off the
existing $10,230,000 loan for $7,855,000 plus the release of the $980,000 Bond
Reserve Fund. The breakeven reserve and the operating deficit reserve, which
had been held in escrow, were released at closing to the local managing general
partner (who was replaced at closing, as discussed below), who in turn loaned
the reserves to Semper Village to pay the refinancing closing costs. The
remaining operating funds at the property were used to repay previous operating
deficit loans from the local managing general partner pursuant to the local
partnership agreement. The Partnership's release of the $552,979 balance in the
breakeven reserve represents payment of the outstanding purchase price payable
of $318,300 and related interest of $56,700. The remaining $177,979 represents
an additional investment in the Local Partnership. In addition, at closing the
local managing general partner was replaced with an affiliate of the Managing
General Partner.
Purchase money notes relating to River Place totaling $2,500,000 plus
accrued interest mature December 31, 1995. The Managing General Partner has
commenced discussions with the noteholders regarding an extension and
modification of purchase money note due dates. There is no assurance that any
such agreement will be reached with the noteholders. Should the noteholders
begin foreclosure proceedings on the Partnership's interest in the related Local
Partnership, the Partnership intends to vigorously defend any action by the
-9-
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
noteholders. However, there is no assurance that the Partnership will be able
to retain its interest in the Local Partnership. The purchase money note is
nonrecourse and collateralized solely by the Partnership's interest in the Local
Partnership. The amount of nonrecourse indebtedness exceeds the carrying amount
of the investments in and advances to the Local Partnership; however, the
investment in River Place represents approximately 78% of the Partnership's
investments in and advances to Local Partnerships as of September 30,1995. In
addition, for the nine months ended September 30,1995, distributions from River
Place represented approximately 53% of total distributions from Local
Partnerships. The Partnership's share of income from River Place for the nine
months ended September 30,1995 was approximately $147,000, and the Partnership's
recognized share of income from partnerships for the nine months ended September
30, 1995 was $129,595.
The following are combined statements of operations for the Local
Partnerships in which the Partnership has invested. The statements are compiled
from information supplied by the management agents of the projects and are
unaudited.
-10-
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Rental revenue $ 2,334,691 $ 2,245,663 $ 6,957,963 $ 6,769,144
Other 188,510 85,154 417,478 260,573
------------ ------------ ------------ ------------
2,523,201 2,330,817 7,375,441 7,029,717
------------ ------------ ------------ ------------
Expenses:
Operating 1,425,651 1,376,740 3,809,662 3,862,970
Interest 987,095 870,637 2,946,988 2,611,912
Depreciation and
amortization 445,614 445,185 1,336,845 1,335,556
------------ ------------ ------------ ------------
2,858,360 2,692,562 8,093,495 7,810,438
------------ ------------ ------------ ------------
Net loss $ (335,159) $ (361,745) $ (718,054) $ (780,721)
============ ============ ============ ============
</TABLE>
As of September 30,1995 and December 31, 1994, the Partnership's share of
cumulative losses to date for five and six, respectively, of the eight Local
Partnerships exceeds the amount of the Partnership's investments in and advances
to those Local Partnerships by $7,246,666 and $6,405,470, respectively. As the
Partnership has no further obligation to advance funds or provide financing to
these Local Partnerships, the excess losses have not been reflected in the
accompanying consolidated financial statements.
3. RELATED-PARTY TRANSACTIONS
In accordance with the terms of the Partnership Agreement, the Partnership
is obligated to reimburse the Managing General Partner for its direct expenses
in managing the Partnership and to pay an annual incentive management fee (the
Management Fee) after all other expenses of the Partnership are paid. The
Partnership paid $28,655 and $64,979 for the three and nine months ended
September 30,1995, respectively, and $15,476 and $50,265 for the three and nine
months ended September 30,1994, respectively, as direct reimbursement of
expenses incurred on behalf of the Partnership. Additionally, the Partnership
paid the Managing General Partner a Management Fee of $24,482 and $73,447 for
the three and nine months, respectively, ended September 30,1995 and 1994.
From January 1991 through January 1994, CRICO Management Northwest, Inc.
(CRICO Northwest), an affiliate of the Managing General Partner, provided
property management services to Springfield and Devonshire. CRICO Management
-11-
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. RELATED-PARTY TRANSACTIONS - Continued
Corporation (CRICO), an affiliate of the Managing General Partner, provided
consulting, accounting and other services to Deerfield from November 1993
through January 1994. Fees paid or accrued to CRICO Northwest or CRICO amounted
to $5,470, $3,770 and $2,275, respectively, for the month ended January 31,
1994. On February 1, 1994, CRICO Northwest and CRICO contributed their property
management or consulting contracts and personnel to CAPREIT Residential
Corporation (CAPREIT). CAPREIT was formed by CRI but is not currently owned or
controlled by CRI and/or its affiliates. On April 12, 1995, HUD approved
CAPREIT as the new Deerfield management agent.
-12-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Financial Condition/Liquidity
-----------------------------
Capital Realty Investors-85 Limited Partnership's (the Partnership)
liquidity, with unrestricted cash resources of $1,177,768 and $876,995 as of
September 30,1995 and December 31, 1994, respectively, along with future cash
distributions from Local Partnerships, is expected to meet its current and
anticipated operating cash needs. The Partnership's remaining obligations with
respect to its investment in Local Partnerships of $250,000, excluding purchase
money notes and accrued interest, is not in excess of its capital resources. As
of October 10, 1995, there are no material commitments for capital expenditures.
As of September 30,1995, the Partnership's obligations with respect to its
investments in Local Partnerships, in the form of purchase money notes of
$5,098,000 plus the accrued interest of $8,579,640, are payable upon the
earliest of: (1) sale or refinancing of the respective Local Partnership's
rental property; (2) payment in full of the respective Local Partnership's
permanent loan; or (3) maturity. Purchase money notes in an aggregate principal
amount of $2,500,000 mature in December 1995, as discussed below. Purchase
money notes in an aggregate principal amount of $230,000 mature in 1996. The
remaining purchase money notes mature from 1999 to 2003. The purchase money
notes are generally secured by the Partnership's interest in the respective
Local Partnership. There is no assurance that the underlying properties will
have sufficient appreciation and equity to enable the Partnership to pay the
purchase money notes' principal and accrued interest when due. If a purchase
money note is not paid in accordance with its terms, the Partnership will either
have to renegotiate the terms of repayment or risk losing its partnership
interest in the Local Partnership. The Managing General Partner is continuing
to investigate possible alternatives to reduce the Partnership's long-term debt
obligations. These alternatives include, among others, retaining the cash
available for distribution to meet the purchase money note requirements, buying
out certain purchase money notes at a discounted price, extending the due dates
of certain purchase money notes, or refinancing the respective properties'
underlying debt and using the Partnership's share of the proceeds to pay off or
buy down certain purchase money note obligations.
Purchase money notes relating to River Place totaling $2,500,000 plus
accrued interest mature December 31, 1995. The Managing General Partner has
commenced discussions with the noteholders regarding an extension and
modification of purchase money note due dates. There is no assurance that any
such agreement will be reached with the noteholders. Should the noteholders
begin foreclosure proceedings on the Partnership's interest in the related Local
Partnership, the Partnership intends to vigorously defend any action by the
noteholders. However, there is no assurance that the Partnership will be able
to retain its interest in the Local Partnership. The purchase money note is
nonrecourse and collateralized solely by the Partnership's interest in the Local
Partnership. The amount of nonrecourse indebtedness exceeds the carrying amount
of the investments in and advances to the Local Partnership; however, the
investment in River Place represents approximately 78% of the Partnership's
investments in and advances to Local Partnerships as of September 30,1995. In
addition, for the nine months ended September 30,1995, distributions from River
Place represented approximately 53% of total distributions from Local
Partnerships. The Partnership's share of income from River Place for the nine
months ended September 30,1995 was approximately $147,000, and the Partnership's
recognized share of income from partnerships for the nine months ended September
30, 1995 was $129,595.
-13-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
As of September 30,1995 and December 31, 1994, the Partnership's
obligations with respect to its investments in Local Partnerships included
$174,600 and $492,900, respectively, due to local general partners, plus accrued
interest on these obligations of $75,400 and $132,100, respectively.
The Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient cash is available for operating requirements.
For the nine months ended September 30,1995, the receipt of distributions from
Local Partnerships was adequate to support operating cash requirements.
Results of Operations
---------------------
The Partnership's net loss for the three months ended September 30, 1995
did not change significantly from the corresponding period in 1994. However,
the Partnership's share of loss from Local Partnerships decreased for the three
months ended September 30, 1995 as compared to the corresponding period in 1994
primarily due to decreased interest expense at two properties as well as
increased rental income and decreased operating expense at one property, which
was partially offset by an increase in interest expense at another property.
Interest income for the Partnership increased as a result of higher yields on
investments and higher cash balances as compared to the same three-month period
in 1994. Professional fees incurred by the Partnership decreased due to lower
legal expenses. Offsetting these decreases in the Partnership's net loss was an
increase in purchase money note interest expense as a result of compounding
interest, as well as an increase in general and administrative expenses
primarily due to the recognition in the third quarter of 1994 of decreased
annual report printing costs.
The Partnership's net loss for the nine months ended September 30, 1995
increased from the corresponding period in 1994 primarily due to an increase in
purchase money note interest expense and an increase in general and
administrative expenses, as discussed above. Partially offsetting the increase
in net loss was an increase in share of income from Local Partnerships, an
increase in interest income and a decrease in professional fees, as discussed
above.
For financial reporting purposes, the Partnership, as a limited partner in
the Local Partnerships, does not record losses from the Local Partnerships in
excess of its investment to the extent that the Partnership has no further
obligation to advance funds or provide financing to the Local Partnerships. As
a result, the Partnership's recognized losses for the three and nine months
ended September 30,1995 did not include losses of $320,030 and $841,196,
respectively, compared to excluded losses of $281,120 and $843,356 for the three
and nine months ended September 30,1994, respectively.
Deerfield Partners Limited Partnership (Deerfield Apartments) was unable to
generate sufficient cash flow to pay its debt service and therefore was unable
to meet its obligations under the terms of the loan documents. The Local
Partnership defaulted on its mortgage loan in 1990, and after negotiations with
the Department of Housing and Urban Development (HUD), submitted a one-year
workout proposal to the local HUD office, effective May 1, 1991, to which HUD
did not respond. On July 1, 1992, a second one-year workout proposal was
submitted, effective September 1, 1992, to which HUD did not respond. On
September 17, 1993, a six-year workout proposal, effective October 1, 1993, was
-14-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
submitted in accordance with HUD's new workout guidelines. At HUD's request, a
nine-year workout proposal was submitted to HUD on April 15, 1994. This
proposal was rejected by HUD. A new nine-year workout proposal was submitted to
HUD on May 31, 1995. HUD rejected this proposal and notified Deerfield
Apartments that HUD had offered its mortgage loan for sale in September 1995. A
new mortgagee is scheduled to purchase the loan from HUD on November 10, 1995,
and if the sale is completed as scheduled, could foreclose on the property. As
of October 10, 1995, Deerfield Apartments had not been notified as to the
intentions of the potential new mortgagee. The uncertainty about the Local
Partnership's continued ownership of the property does not impact the
Partnership's financial condition because the related purchase money note is
nonrecourse and collateralized solely by the Partnership's interest in the Local
Partnership. Therefore, should the investment in Deerfield Apartments not
produce sufficient value to satisfy the purchase money note related to Deerfield
Apartments, the Partnership's exposure to loss is limited since the amount of
the nonrecourse indebtedness exceeds the carrying amount of the investment in
and advances to the Local Partnership. Thus, even a complete loss of this
investment would not have a material impact on the operations of the
Partnership. Currently, debt service payments are being made from available
cash flow in accordance with the latest proposed workout. During 1989 and
1988, the Partnership loaned a total of $196,746 to the Local Partnership to
fund operating deficits. The Partnership does not expect to advance any
additional funds. The loans do not bear interest and repayment is due upon sale
or refinancing of the property; however, there is no assurance that the Local
Partnership will be able to repay any loans in accordance with the terms.
Mesa Partners Limited Partnership (The Pointe), located in El Paso, Texas,
modified its mortgage loan in 1987. In connection with the loan modification,
the Partnership loaned $262,500 to the Local Partnership in 1987. Repayment of
this loan, with simple interest at 9% per annum, is expected to occur upon sale
or refinancing of the property. As of September 30,1995 and December 31, 1994,
accrued interest was $194,497 and $176,778, respectively.
Paradise Associates Limited Partnership (Paradise) was notified by HUD that
HUD planned to offer Paradise's mortgage loan for sale in the Fall of 1995. If
the mortgage was sold by HUD, a new mortgagee would service the loan and
Paradise would no longer be subject to HUD regulatory requirements. As of
October 10, 1995, Paradise had not been notified by HUD as to the status of the
loan sale.
Debt service on Springfield Apartments (Springfield) is due to the lender
on the first day of each month with no "grace period" and substantial late
payment penalties. Therefore, prior to February 1994, the Partnership had
advanced approximately $65,000 per month to Springfield in the form of a bridge
loan which was to be repaid by the fifteenth of the following month. The
February 1994 advance to Springfield was held by the Local Partnership to
establish a one-month debt service reserve to eliminate the need for a monthly
bridge loan from the Partnership. Springfield began repaying a portion of the
non-interest-bearing advances made by the Partnership in April 1994. As of
September 30,1995 and December 31, 1994, non-interest-bearing loans to
Springfield totalled $381,239 and $509,438, respectively.
Debt service on Devonshire Apartments (Devonshire) is due to the lender on
the first day of each month with no "grace period" and substantial late payment
penalties. Therefore, prior to February 1994, the Partnership had advanced
approximately $10,000 per month to Devonshire in the form of a bridge loan which
-15-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
was to be repaid by the fifteenth of the following month. The February 1994
advance to Devonshire was held by the Local Partnership to establish a one-month
debt service reserve to eliminate the need for a monthly bridge loan from the
Partnership. Devonshire began repaying a portion of the non-interest-bearing
advances made by the Partnership in July 1994. As of December 31, 1994, non-
interest-bearing loans to Devonshire totalled $30,500. Devonshire paid off the
balance of its loans in January 1995.
The letter of credit and mortgage loan on Sheridan West Limited Partnership
(Semper Village) originally matured on December 20, 1994. Pursuant to an
agreement dated January 1, 1995, the Resolution Trust Corporation (RTC), acting
as receiver for the original mortgagee, assumed the note in lieu of mandatory
redemption by drawing on the letter of credit. The RTC extended the maturity
date of the letter of credit and mortgage loan to September 1, 1995. On August
30, 1995, the local general partners refinanced the existing mortgage loan with
SRS Insurance Services, Inc. In connection with the refinancing, the local
general partners executed a settlement agreement with the RTC to pay off the
existing $10,230,000 loan for $7,855,000 plus the release of the $980,000 Bond
Reserve Fund. The breakeven reserve and the operating deficit reserve, which
had been held in escrow, were released at closing to the local managing general
partner (who was replaced at closing, as discussed below), who in turn loaned
the reserves to Semper Village to pay the refinancing closing costs. The
remaining operating funds at the property were used to repay previous operating
deficit loans from the local managing general partner pursuant to the local
partnership agreement. The Partnership's release of the $552,979 balance in the
breakeven reserve represents payment of the outstanding purchase price payable
of $318,300 and related interest of $56,700. The remaining $177,979 represents
an additional investment in the Local Partnership. In addition, at closing the
local managing general partner was replaced with an affiliate of the Managing
General Partner.
No other significant changes in the Partnership's operations have taken
place during this period.
PART II. OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
No Reports on Form 8-K were filed with the Commission during the quarter
ended September 30,1995.
All other items are not applicable.
-16-
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CAPITAL REALTY INVESTORS-85
LIMITED PARTNERSHIP
(Registrant)
By: C.R.I., Inc.
Managing General Partner
October 17, 1995 By: /s/Richard J. Palmer
- ------------------------- ---------------------------------
Date Richard J. Palmer
Senior Vice President/Finance
Signing on behalf of the
Registrant and as Principal
Accounting Officer
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE THIRD QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 1,177,768
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,358,881
<CURRENT-LIABILITIES> 0
<BONDS> 13,927,640
<COMMON> 0
0
0
<OTHER-SE> (8,653,227)
<TOTAL-LIABILITY-AND-EQUITY> 5,358,881
<SALES> 0
<TOTAL-REVENUES> 213,333
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 234,994
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,181,911
<INCOME-PRETAX> (1,203,572)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,203,572)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,203,572)
<EPS-PRIMARY> (54.50)
<EPS-DILUTED> (54.50)
</TABLE>
