<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 June 30, 1995
--------------
Commission file number 0-23766
--------------
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
------------------------------------------------------------------------------
(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
------------------------------------------------------------------------------
(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 June 30, 1995
- -------------------------- --------------------------------------
(Not applicable) (Not applicable)
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1995
Page
----
PART I. Financial Information (Unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1995 and
December 31, 1994 . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations - for the three
and six months ended June 30, 1995 and 1994 . . . 3
Consolidated Statements of Cash Flows - for the six
months ended June 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>
June 30, December 31,
1995 1994
------------ ------------
(Unaudited)
<S> <C> <C>
Investments in and advances to partnerships $ 3,576,023 $ 3,751,252
Cash and cash equivalents 1,081,053 876,995
Escrow and cash reserves 543,458 531,069
Acquisition fees, principally paid to
related parties, net of accumulated
amortization of $131,530 and $124,464,
respectively 292,470 299,536
Property purchase costs, net of accumulated
amortization of $131,791 and $124,855,
respectively 284,391 291,327
Other assets 3,034 607
------------ ------------
Total assets $ 5,780,429 $ 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>
June 30, December 31,
1995 1994
------------ ------------
(Unaudited)
<S> <C> <C>
Due on investments in partnerships $ 5,590,900 $ 5,590,900
Accrued interest payable 8,314,949 7,548,895
Accounts payable and accrued expenses 63,704 60,646
------------ ------------
Total liabilities 13,969,553 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 (26,823,089) (26,083,620)
------------ ------------
Total partners' deficit (8,189,124) (7,449,655)
------------ ------------
Total liabilities and partners'
deficit $ 5,780,429 $ 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 For the six months ended
June 30, June 30,
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Share of income
from partner-
ships $ 78,091 $ 75,846 $ 141,491 $ 148,629
------------ ------------ ------------ ------------
Other revenue and
expenses:
Revenue:
Interest income 27,620 22,553 52,848 35,580
------------ ------------ ------------ ------------
Expenses:
Interest 396,791 354,423 785,120 708,847
General and
administrative 25,220 30,644 54,402 60,811
Management fee 24,483 24,483 48,965 48,965
Professional
fees 14,587 20,069 31,319 37,364
Amortization 7,001 7,002 14,002 14,003
------------ ------------ ------------ ------------
468,082 436,621 933,808 869,990
------------ ------------ ------------ ------------
Total other
revenue and
expenses (440,462) (414,068) (880,960) (834,410)
------------ ------------ ------------ ------------
Net loss (362,371) (338,222) (739,469) (685,781)
Accumulated losses,
beginning of
period (26,460,718) (24,805,897) (26,083,620) (24,458,338)
------------ ------------ ------------ ------------
</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 - Continued
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Accumulated
losses, end
of period $(26,823,089) $(25,144,119) $(26,823,089) $(25,144,119)
============ ============ ============ ============
Loss allocated to
General Partners
(1.51%) $ (5,472) $ (5,107) $ (11,166) $ (10,355)
============ ============ ============ ============
Loss allocated to
Initial and Special
Limited Partners
(2.49%) $ (9,023) $ (8,422) $ (18,413) $ (17,076)
============ ============ ============ ============
Loss allocated to
BAC Holders (96%)$ (347,876) $ (324,693) $ (709,890) $ (658,350)
============ ============ ============ ============
Loss per BA based
on 21,200
BACs outstanding $ (16.41) $ (15.32) $ (33.49) $ (31.05)
============ ============ ============ ============
</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 six months ended
June 30,
---------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (739,469) $ (685,781)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Share of income from
partnerships (141,491) (148,629)
Increase in accrued interest
receivable on advances to
partnerships (11,813) (11,813)
Amortization of deferred costs 14,002 14,003
Payment of purchase money note
interest (19,066) (85,176)
Changes in assets and liabilities:
Increase in other assets (2,427) (1,215)
Increase in accrued interest
payable 785,120 708,847
Increase in accounts payable
and accrued expenses 3,058 6,155
------------ ------------
Net cash used in operating
activities (112,086) (203,609)
------------ ------------
Cash flows from investing activities:
Increase in escrow and cash reserves (12,389) (8,064)
Receipt of distributions from
partnerships 196,834 232,536
Repayment of advances to
partnerships 131,699 51,618
------------ ------------
Net cash provided by
investing activities 316,144 276,090
------------ ------------
</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 six months ended
June 30,
---------------------------
1995 1994
------------ ------------
<S> <C> <C>
Net increase in cash and cash
equivalents 204,058 72,481
Cash and cash equivalents, beginning
of period 876,995 871,533
------------ ------------
Cash and cash equivalents, end of
period $ 1,081,053 $ 944,014
============ ============
</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 June 30, 1995 and December 31, 1994 and its consolidated
results of operations for the three and six months ended June 30, 1995 and 1994
and its consolidated cash flows for the six months ended June 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 June 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 $8,182,849, 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 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 six months ended June 30, 1995 was $396,791 and $785,120, respectively, and
for the three and six months ended June 30, 1994 was $354,423 and $708,847,
respectively. The accrued interest on the purchase money notes of $8,182,849
and $7,416,795 as of June 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 June 30, 1995 and December 31, 1994, the Partnership's obligations
with respect to its investments in Local Partnerships included $492,900 due to
local general partners, plus accrued interest on these obligations of $132,100.
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. As of July 14, 1995, no response to the new proposal had
been received from HUD. If the workout proposal is not accepted and another
alternative is not found, then HUD could foreclose on the property. Deerfield
Apartments has been notified by HUD that HUD plans to offer Deerfield
Apartment's mortgage loan for sale in September 1995. If the mortgage is sold
by HUD, a new mortgagee would service the defaulted loan and could foreclose on
the property. 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. There is no assurance that an acceptable
workout proposal will be approved to allow the Local Partnership to retain
ownership of Deerfield Apartments. 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 June 30, 1995 and December 31, 1994,
accrued interest was $188,591 and $176,778, respectively.
Paradise Associates Limited Partnership (Paradise) has been notified by HUD
that HUD plans to offer Paradise's mortgage loan for sale in the Fall of 1995.
If the mortgage is sold by HUD, a new mortgagee would service the loan and
Paradise would no longer be subject to HUD regulatory requirements.
-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 June
30, 1995 and December 31, 1994, non-interest-bearing loans to Springfield
totalled $408,239 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) 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 June 30, 1995. On June 5, 1995, the local
general partners signed an application to refinance 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. Closing must occur by September 1, 1995. The Partnership
anticipates that the breakeven reserve and the operating deficit reserve, which
have been held in escrow, will be released at closing to the local managing
general partner, who will in turn loan the reserves to Semper Village to pay the
refinancing closing costs. Any remaining operating funds at the property will
be used to repay previous operating deficit loans from the local managing
general partner pursuant to the local partnership agreement. In addition, at
closing the current local managing general partner will be replaced with an
affiliate of the Managing General Partner. If a refinancing or payoff does not
occur and an alternative is not found, the mortgage lender could foreclose on
the property. The uncertainty about the Local Partnership's continued ownership
of the property does not impact the Partnership's financial condition because
the Partnership's exposure to loss is limited since the carrying amount of the
investment in the Local Partnership has been reduced to zero for financial
statement purposes. Thus, even a complete loss of this investment would not
have a material impact on the operations of the Partnership.
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
-9-
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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
noteholder. 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 June 30, 1995. In
addition, for the six months ended June 30, 1995, distributions from River Place
represented approximately 85% of total distributions from Local Partnerships.
The Partnership's share of income from River Place for the six months ended June
30, 1995 was approximately 86% of income from partnerships.
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 six months ended
June 30, June 30,
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Rental revenue $ 2,321,330 $ 2,258,624 $ 4,623,272 $ 4,523,481
Other 115,292 88,021 228,968 175,419
------------ ----------- ------------ -----------
2,436,622 2,346,645 4,852,240 4,698,900
------------ ----------- ------------ -----------
Expenses:
Operating 1,195,051 1,238,762 2,384,011 2,486,230
Interest 979,946 870,637 1,959,893 1,741,275
Depreciation and
amortization 445,615 445,186 891,231 890,371
------------ ----------- ------------ -----------
2,620,612 2,554,585 5,235,135 5,117,876
------------ ----------- ------------ -----------
Net loss $ (183,990) $ (207,940) $ (382,895) $ (418,976)
============ =========== ============ ===========
</TABLE>
As of June 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 $6,926,636 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 $16,984 and $36,324 for the three and six months ended June 30,
1995, respectively, and $20,660 and $34,789 for the three and six months ended
June 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 $24,483 and $48,965 for the three and six
months, respectively, ended June 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 $1,081,053 and $876,995 as of
June 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 $625,000, excluding purchase
money notes and accrued interest, is not in excess of its capital resources. As
of July 14, 1995, there are no material commitments for capital expenditures.
As of June 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 $8,182,849, 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 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
noteholder. 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 June 30, 1995. In
addition, for the six months ended June 30, 1995, distributions from River Place
represented approximately 85% of total distributions from Local Partnerships.
The Partnership's share of income from River Place for the six months ended June
30, 1995 was approximately 86% of income from partnerships.
-13-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
As of June 30, 1995 and December 31, 1994, the Partnership's obligations
with respect to its investments in Local Partnerships included $492,900 due to
local general partners, plus accrued interest on these obligations of $132,100.
The Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient cash is available for operating requirements.
For the six months ended June 30, 1995, the receipt of distributions from Local
Partnerships and the repayment of advances to Local Partnerships was adequate to
support operating cash requirements.
Results of Operations
---------------------
The Partnership's net loss for the three and six months ended June 30, 1995
increased from the corresponding periods in 1994 primarily due to an increase in
purchase money note interest expense as a result of compounding interest.
Partially offsetting the increase in net loss was an increase in interest income
resulting from higher yields on investments and higher cash balances as compared
to the same periods in 1994. Also partially offsetting the increase in the
Partnership's net loss was a decrease in general and administrative expenses
primarily due to a decrease in annual report printing costs, as well as a
decrease in professional fees due to lower legal expenses.
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 six months ended
June 30, 1995 did not include losses of $260,584 and $521,166, respectively,
compared to excluded losses of $281,116 and $562,236 for the three and six
months ended June 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
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. As of July 14, 1995, no response to the new proposal had
been received from HUD. If the workout proposal is not accepted and another
alternative is not found, then HUD could foreclose on the property. Deerfield
Apartments has been notified by HUD that HUD plans to offer Deerfield
Apartment's mortgage loan for sale in September 1995. If the mortgage is sold
by HUD, a new mortgagee would service the defaulted loan and could foreclose on
the property. 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
-14-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
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. There is no assurance that an acceptable
workout proposal will be approved to allow the Local Partnership to retain
ownership of Deerfield Apartments. 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 June 30, 1995 and December 31, 1994,
accrued interest was $188,591 and $176,778, respectively.
Paradise Associates Limited Partnership (Paradise) has been notified by HUD
that HUD plans to offer Paradise's mortgage loan for sale in the Fall of 1995.
If the mortgage is sold by HUD, a new mortgagee would service the loan and
Paradise would no longer be subject to HUD regulatory requirements.
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 June
30, 1995 and December 31, 1994, non-interest-bearing loans to Springfield
totalled $408,239 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) 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
-15-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
letter of credit and mortgage loan to June 30, 1995. On June 5, 1995, the local
general partners signed an application to refinance 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. Closing must occur by September 1, 1995. The Partnership
anticipates that the breakeven reserve and the operating deficit reserve, which
have been held in escrow, will be released at closing to the local managing
general partner, who will in turn loan the reserves to Semper Village to pay the
refinancing closing costs. Any remaining operating funds at the property will
be used to repay previous operating deficit loans from the local managing
general partner pursuant to the local partnership agreement. In addition, at
closing the current local managing general partner will be replaced with an
affiliate of the Managing General Partner. If a refinancing or payoff does not
occur and an alternative is not found, the mortgage lender could foreclose on
the property. The uncertainty about the Local Partnership's continued ownership
of the property does not impact the Partnership's financial condition because
the Partnership's exposure to loss is limited since the carrying amount of the
investment in the Local Partnership has been reduced to zero for financial
statement purposes. Thus, even a complete loss of this investment would not
have a material impact on the operations of the Partnership.
No other significant changes in the Partnership's operations have taken
place during this period.
-16-
<PAGE>
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 June 30, 1995.
All other items are not applicable.
-17-
<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
July 20, 1995 /s/Richard J. Palmer
- ------------------------- ---------------------------------
Date Richard J. Palmer
Senior Vice President/Finance
Signing on behalf of the
Registrant and as Principal
Accounting Officer
-18-
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE SECOND QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START) JAN-01-1995
<PERIOD-END> JUN-01-1995
<CASH> 1,081,053
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,780,429
<CURRENT-LIABILITIES> 0
<BONDS> 13,905,849
<COMMON> 0
0
0
<OTHER-SE> (8,189,124)
<TOTAL-LIABILITY-AND-EQUITY> 5,780,429
<SALES> 0
<TOTAL-REVENUES> 194,339
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 148,688
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 785,120
<INCOME-PRETAX> (739,469)
<INCOME-TAX> 0
<INCOME-CONTINUING> (739,469)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (739,469)
<EPS-PRIMARY> (33.49)
<EPS-DILUTED> (33.49)
</TABLE>
