<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 March 31, 1996
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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 its charter)
Maryland 52-1388957
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11200 Rockville Pike, Rockville, Maryland 20852
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(Address of principal executive offices) (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 March 31, 1996
- -------------------------- --------------------------------------
(Not applicable) (Not applicable)
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1996
Page
----
PART I. Financial Information (Unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1996 and
December 31, 1995 . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations - for the
three months ended March 31, 1996 and 1995 . . . 2
Consolidated Statements of Cash Flows - for the
three months ended March 31, 1996 and 1995 . . . 3
Notes to Consolidated Financial Statements . . . . 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . 11
PART II. Other Information
Item 3. Defaults Upon Senior Securities . . . . . . . . . . 16
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . 16
Signature . . . . . . . . . . . . . . . . . . . . . . . . . 17
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . 18
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
Investments in and advances to partnerships $ 882,219 $ 826,468
Investment in partnership held for sale 1,486,226 2,675,447
Cash and cash equivalents 1,196,243 1,151,683
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $134,411 and $131,928,
respectively 198,126 200,609
Property purchase costs, net of accumulated amortization of
$142,335 and $139,879, respectively 194,003 196,459
Other assets 4,384 3,344
------------- ------------
Total assets $ 3,961,201 $ 5,054,010
============= ============
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in partnerships $ 4,022,600 $ 5,022,600
Accrued interest payable 6,591,147 8,014,144
Accounts payable and accrued expenses 59,397 78,576
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Total liabilities 10,673,144 13,115,320
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Commitments and contingencies
Partners' capital (deficit):
Capital paid-in:
General Partners 2,000 2,000
Limited Partners 21,202,500 21,202,500
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21,204,500 21,204,500
Less:
Offering costs (2,570,535) (2,570,535)
Accumulated losses (25,345,908) (26,695,275)
------------- ------------
Total partners' deficit (6,711,943) (8,061,310)
------------- ------------
Total liabilities and partners' deficit $ 3,961,201 $ 5,054,010
============= ============
</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 STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
-------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Share of income from partnerships $ 178,389 $ 63,400
------------ ------------
Other revenue and expenses:
Revenue:
Interest income 19,268 25,228
------------ ------------
Expenses:
Interest 238,556 388,329
General and administrative 35,054 29,182
Management fee 24,482 24,482
Professional fees 17,591 16,732
Amortization 4,939 7,001
------------ ------------
320,622 465,726
------------ ------------
Total other revenue and expenses (301,354) (440,498)
------------ ------------
Loss before extraordinary gain on disposition of investment in partnership (122,965) (377,098)
Extraordinary gain on disposition of investment in partnership 1,472,332 --
------------ ------------
Net income (loss) 1,349,367 (377,098)
Accumulated losses, beginning of period (26,695,275) (26,083,620)
------------ ------------
Accumulated losses, end of period $(25,345,908) $(26,460,718)
============ ============
Income (loss) allocated to General Partners (1.51%) $ 20,375 $ (5,694)
============ ============
Income (loss) allocated to Initial and Special
Limited Partners (2.49%) $ 33,599 $ (9,390)
============ ============
Income (loss) allocated to BAC Holders (96%) $ 1,295,393 $ (362,014)
============ ============
Income (loss) per BAC based on 21,200 BACs
outstanding $ 61.10 $ (17.08)
============ ============
</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 CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
-------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,349,367 $ (377,098)
Adjustments to reconcile net loss to net cash used in operating
activities:
Share of income from partnerships (178,389) (63,400)
Increase in accrued interest receivable on advances to
partnerships (4,066) (5,906)
Amortization of deferred costs 4,939 7,001
Payment of purchase money note interest -- (19,066)
Extraordinary gain on disposition of investment in partnership (1,472,332) --
Changes in assets and liabilities:
Increase in other assets (1,040) (2,844)
Increase in accrued interest payable 238,556 388,329
Decrease in accounts payable and accrued expenses (19,179) (10,538)
------------ ------------
Net cash used in operating activities (82,144) (83,522)
------------ ------------
Cash flows from investing activities:
Increase in escrow and cash reserves -- (5,728)
Receipt of distributions from partnerships 97,372 196,834
Repayment of advances to partnerships 32,992 97,699
Investments in and advances to partnership (3,660) --
------------ ------------
Net cash provided by investing activities 126,704 288,805
------------ ------------
Net increase in cash and cash equivalents 44,560 205,283
Cash and cash equivalents, beginning of period 1,151,683 876,995
------------ ------------
Cash and cash equivalents, end of period $ 1,196,243 $ 1,082,278
============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
- 3 -
<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 March 31, 1996 and December 31, 1995 and its consolidated
results of operations for the three months ended March 31, 1996 and 1995 and its
consolidated cash flows for the three months ended March 31, 1996 and 1995.
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, 1995.
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
As of March 31, 1996, the Partnership's obligations with respect to its
investments in Local Partnerships, in the form of purchase money notes of
$3,848,000 plus the accrued interest of $6,515,747, are payable upon the
earliest of: (i) sale or refinancing of the respective Local Partnership's
rental property; (ii) payment in full of the respective Local Partnership's
permanent loan; or (iii) maturity. Purchase money notes in an aggregate
principal amount of $230,000 matured on January 30, 1996 but have not been paid,
as discussed below. The remaining purchase money notes mature from 1997 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
months ended March 31, 1996 and 1995 was $238,556 and $388,329, respectively.
The accrued interest on the purchase money notes of $6,515,747 and $7,938,744 as
of March 31, 1996 and December 31, 1995, 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.
As of March 31, 1996 and December 31, 1995, the Partnership's obligations
with respect to its investments in Local Partnerships included $174,600 due to
local general partners, plus accrued interest on these obligations of $75,400.
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<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
Purchase money notes relating to River Place, Ltd. totalling $2,500,000
plus accrued interest were originally scheduled to mature on December 31, 1995.
On December 27, 1995, the Managing General Partner entered into an agreement
with the noteholders which granted the noteholders three options to purchase the
Partnership's 98.99% limited partner interest in River Place, Ltd. over a two-
year period. Under the terms of the agreement, the purchase money note maturity
dates have been extended to February 1, 1997, with interest to accrue from
January 1, 1996 to February 1, 1997 at the Applicable Federal Rate for short-
term obligations in effect at January 1, 1996 (5.65%), compounded annually.
Purchase money note interest of $821,528 which accrued during 1995 has been
forgiven by the noteholders as part of the agreement. On December 31, 1995, the
noteholders purchased a 9.9% interest in River Place, Ltd. from the Partnership
in exchange for the forgiveness of purchase money note principal and accrued
interest of $250,000 and $306,015, respectively, resulting in a net financial
statement gain and a net tax gain of $258,957 and $470,855, respectively, in
1995. On January 2, 1996, the noteholders purchased an additional 39.6%
interest in River Place, Ltd. from the Partnership in exchange for the
forgiveness of purchase money note principal and accrued interest of $1,000,000
and $1,661,542, respectively, resulting in a net financial statement gain and a
net tax gain of $1,472,332 and $2,320,873, respectively, in 1996. The
noteholders have one additional option remaining as part of the agreement,
pursuant to which they may purchase the Partnership's remaining interest in
River Place, Ltd. in exchange for the forgiveness of the remaining purchase
money note principal in the aggregate amount of $1,250,000, plus the related
accrued interest. The remaining option must be exercised, if at all, between
January 3, 1997 and February 1, 1997. If the noteholders exercise their final
option prior to its expiration, the Partnership would no longer have an
ownership interest in the Local Partnership, and in accordance with the purchase
option agreement, CRHC, Inc., an affiliate of the Managing General Partner,
would transfer its .01% general partner interest in River Place, Ltd. to the
noteholders and/or their assignees. Also as part of the agreement, any future
cash flow distributions received by the Partnership from River Place, Ltd. will
be applied towards any unforgiven purchase money note interest accrued prior to
December 31, 1994. Pursuant to the agreement, the noteholders or an affiliate
will pay a fee into escrow to the Partnership of $35,000, which will be released
to the Partnership upon the execution or expiration of the final option by the
noteholders. There is no assurance that the noteholders will exercise the final
option prior to its expiration date. The investment in River Place, Ltd.
represented approximately 63% and 76% of the Partnership's investments in and
advances to Local Partnerships as of March 31, 1996 and December 31, 1995,
respectively. In addition, for the three months ended March 31, 1996 and 1995,
distributions from River Place, Ltd. represented approximately 0% and 85%,
respectively, of total distributions from Local Partnerships. The Partnership's
share of income from River Place, Ltd. for the three months ended March 31, 1996
and 1995 represented approximately 30% and 100%, respectively, of the total
share of income recognized from Local Partnerships for the respective periods.
The Partnership defaulted on its purchase money notes relating to Paradise
Associates, L.P. (Paradise Foothills), when the notes matured on January 30,
1996 and were not paid. The default amount included principal and accrued
interest of $230,000 and $371,288, respectively. As of April 23, 1996,
principal and accrued interest totalling $230,000 and $385,142, respectively,
were due. The Managing General Partner had made an offer to the noteholders to
extend the maturity dates to coincide with the completion of the property's
-5-
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
nine-year mortgage workout agreement on May 31, 2003. The noteholders rejected
the offer and, on March 28, 1996, proposed a one-year extension. As of April
17, 1996, the Managing General Partner is negotiating the terms of the
agreement. There is no assurance that the Managing General Partner will reach
an agreement of any kind with the noteholders. Therefore, there can be no
assurance that the Partnership will be able to retain its interest in the Local
Partnership. The uncertainty about the continued ownership of the Partnership's
interest in the related Local Partnership does not impact the Partnership's
financial condition because the related purchase money note is nonrecourse and
secured solely by the Partnership's interest in the Local Partnership.
Therefore, should the investment in Paradise Foothills not produce sufficient
value to satisfy the purchase money note related to Paradise Foothills, 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.
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" (SFAS 107), requires the disclosure of fair
value information about financial instruments for which it is practicable to
estimate that value. The Partnership implemented SFAS 107 in 1995. The
Partnership has determined that the carrying amount of its cash and cash
equivalents approximates fair value due to the short-term nature of the related
financial instruments. With the exception of the purchase money note relating
to Deerfield Apartments, the Partnership has determined that it is not
practicable to estimate the fair value of the purchase money notes, either
individually or in the aggregate, due to: (i) the lack of an active market for
this type of financial instrument, (ii) the variable nature of purchase money
note interest payments as a result of fluctuating cash flow distributions
received from the related Local Partnerships, and (iii) the excessive costs
associated with an independent appraisal of the purchase money notes. The
purchase money note relating to Deerfield Apartments is estimated to have no
value as a result of the anticipated foreclosure upon the property by the
property's first mortgage noteholder, as discussed below.
Deerfield Partners Limited Partnership (Deerfield) 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, 1995. 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 that HUD had
offered its mortgage loan for sale in September 1995. A new mortgagee purchased
the loan from HUD on November 16, 1995. On November 16, 1995, the Local
Partnership received a notice of default, acceleration and assignment of rents
from the new mortgagee. The new mortgagee was scheduled to foreclose on the
property on December 21, 1995. In order to protect its assets, the Local
Partnership filed for bankruptcy protection under Chapter 11 in the State of
-6-
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
Maryland on December 20, 1995. The new mortgagee filed motions with the
bankruptcy court for dismissal and for relief from stay. A hearing on these
motions was originally scheduled for January 23, 1996, however, a continuance
was granted as the Local Partnership and the new mortgagee discussed settlement
options. On February 27, 1996, Deerfield entered into a term sheet agreement
with the new mortgagee pursuant to which Deerfield transferred management and
control of the property to the new mortgagee on April 1, 1996, and, at the new
mortgagee's election, will voluntarily transfer ownership of the property to the
new mortgagee no earlier than January 6, 1997, without further consideration.
On March 20, 1996, the bankruptcy court dismissed the bankruptcy case, with the
acquiescence of the Local Partnership, subject to the provisions of the term
sheet agreement. Any and all future net cash flow generated by the property
prior to the transfer of ownership will be applied towards outstanding accrued
interest on the defaulted first mortgage loan. There were no cash distributions
received by the Partnership from the property during the three months ended
March 31, 1996 or 1995. During 1989 and 1988, the Partnership loaned a total of
$196,746 to the Local Partnership to fund operating deficits. The Partnership
advanced net funds of $2,341 and $3,659 in December 1995 and February 1996,
respectively, to fund operating deficits while the Local Partnership was seeking
bankruptcy protection. The Partnership does not expect to advance any
additional funds. The loans do not bear interest and repayment is due upon the
disposition of the property; however, there is no assurance that the Local
Partnership will be able to repay any loans in accordance with the terms.
The anticipated transfer of the Local Partnership's ownership of the
property does not impact the Partnership's financial condition because the
related purchase money note is nonrecourse and secured solely by the
Partnership's interest in the related Local Partnership. The Partnership's
investment in Deerfield had previously been reduced to zero as a result of
losses from the Local Partnership during prior years. Acquisition fees and
property purchase costs relating to Deerfield were fully amortized as of
December 31, 1995 in order to record the investment at its net realizable value.
Therefore, since the investment in Deerfield is not expected to produce
sufficient value to satisfy the related purchase money note, 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, the complete loss of this investment will not have a
material impact on the operations of the Partnership.
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 March 31, 1996 and December 31, 1995,
accrued interest was $204,470 and $200,402, respectively.
Effective July 1, 1993, the Springfield Apartments (Springfield) first
mortgage loan was extended to June 30, 1996. As of March 31, 1996 and December
31, 1995, the Partnership had advanced the funds necessary to cover the lender's
closing costs of $4,022 and property painting costs required by the lender of
$34,000. Further, debt service 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
-7-
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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 March 31, 1996 and December 31, 1995, non-
interest-bearing loans to Springfield totalled $321,247 and $354,239,
respectively. The Local Partnership is currently investigating its refinancing
options in connection with the expiration of the first mortgage loan extension.
There is no assurance that Springfield will be able to repay any loans in
accordance with the terms, or that new financing will be obtained upon
expiration of the first mortgage loan extension.
Effective August 1, 1993, the Devonshire Apartments (Devonshire) first
mortgage loan was extended to July 31, 1996. The Local Partnership is currently
investigating its refinancing options in connection with the expiration of the
first mortgage loan extension. There is no assurance that Devonshire will be
able to obtain new financing upon expiration of the first mortgage loan
extension.
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.
COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
1996 1995
------------ ------------
<S> <C> <C>
Revenue:
Rental revenue $ 2,378,404 $ 2,301,942
Other 111,274 113,676
------------ ------------
2,489,678 2,415,618
------------ ------------
Expenses:
Operating 1,266,659 1,188,960
Interest 827,641 979,947
Depreciation and amortization 448,587 445,616
------------ ------------
2,542,887 2,614,523
------------ ------------
Net loss $ (53,209) $ (198,905)
============ ============
</TABLE>
-8-
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
As of March 31, 1996 and December 31, 1995, the Partnership's share of
cumulative losses to date for six of the eight Local Partnerships exceeds the
amount of the Partnership's investments in and advances to those Local
Partnerships by $6,545,376 and $6,386,262, 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 $33,228 and $19,340 for the three months ended March 31, 1996
and 1995, respectively, as direct reimbursement of expenses incurred on behalf
of the Partnership. Such expenses are included in the consolidated statements
of operations as general and administrative expenses. Additionally, the
Partnership paid the Managing General Partner a Management Fee of $24,482 for
each of the three-month periods ended March 31, 1996 and 1995.
-9-
<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 $1,196,243 and $1,151,683 as of
March 31, 1996 and December 31, 1995, 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 April 17, 1996, there are no material commitments for capital expenditures.
As of March 31, 1996, the Partnership's obligations with respect to its
investments in Local Partnerships, in the form of purchase money notes of
$3,848,000 plus the accrued interest of $6,515,747, 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 $230,000 matured on January 30, 1996 but have not been paid, as
discussed below. The remaining purchase money notes mature from 1997 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.
As of March 31, 1996 and December 31, 1995, the Partnership's obligations
with respect to its investments in Local Partnerships included $174,600 due to
local general partners, plus accrued interest on these obligations of $75,400.
Purchase money notes relating to River Place, Ltd. totalling $2,500,000
plus accrued interest were originally scheduled to mature on December 31, 1995.
On December 27, 1995, the Managing General Partner entered into an agreement
with the noteholders which granted the noteholders three options to purchase the
Partnership's 98.99% limited partner interest in River Place, Ltd. over a two-
year period. Under the terms of the agreement, the purchase money note maturity
dates have been extended to February 1, 1997, with interest to accrue from
January 1, 1996 to February 1, 1997 at the Applicable Federal Rate for short-
term obligations in effect at January 1, 1996 (5.65%), compounded annually.
Purchase money note interest of $821,528 which accrued during 1995 has been
forgiven by the noteholders as part of the agreement. On December 31, 1995, the
noteholders purchased a 9.9% interest in River Place, Ltd. from the Partnership
in exchange for the forgiveness of purchase money note principal and accrued
interest of $250,000 and $306,015, respectively, resulting in a net financial
statement gain and a net tax gain of $258,957 and $470,855, respectively, in
1995. On January 2, 1996, the noteholders purchased an additional 39.6%
interest in River Place, Ltd. from the Partnership in exchange for the
-10-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
forgiveness of purchase money note principal and accrued interest of $1,000,000
and $1,661,542, respectively, resulting in a net financial statement gain and a
net tax gain of $1,472,332 and $2,320,873, respectively, in 1996. The
noteholders have one additional option remaining as part of the agreement,
pursuant to which they may purchase the Partnership's remaining interest in
River Place, Ltd. in exchange for the forgiveness of the remaining purchase
money note principal in the aggregate amount of $1,250,000, plus the related
accrued interest. The remaining option must be exercised, if at all, between
January 3, 1997 and February 1, 1997. If the noteholders exercise their final
option prior to its expiration, the Partnership would no longer have an
ownership interest in the Local Partnership, and in accordance with the purchase
option agreement, CRHC, Inc., an affiliate of the Managing General Partner,
would transfer its .01% general partner interest in River Place, Ltd. to the
noteholders and/or their assignees. Also as part of the agreement, any future
cash flow distributions received by the Partnership from River Place, Ltd. will
be applied towards any unforgiven purchase money note interest accrued prior to
December 31, 1994. Pursuant to the agreement, the noteholders or an affiliate
will pay a fee into escrow to the Partnership of $35,000, which will be released
to the Partnership upon the execution or expiration of the final option by the
noteholders. There is no assurance that the noteholders will exercise the final
option prior to its expiration date. The investment in River Place, Ltd.
represented approximately 63% and 76% of the Partnership's investments in and
advances to Local Partnerships as of March 31, 1996 and December 31, 1995,
respectively. In addition, for the three months ended March 31, 1996 and 1995,
distributions from River Place, Ltd. represented approximately 0% and 85%,
respectively, of total distributions from Local Partnerships. The Partnership's
share of income from River Place, Ltd. for the three months ended March 31, 1996
and 1995 represented approximately 30% and 100%, respectively, of the total
share of income recognized from Local Partnerships for the respective periods.
The Partnership defaulted on its purchase money notes relating to Paradise
Associates, L.P. (Paradise Foothills), when the notes matured on January 30,
1996 and were not paid. The default amount included principal and accrued
interest of $230,000 and $371,288, respectively. As of April 23, 1996,
principal and accrued interest totalling $230,000 and $385,142, respectively,
were due. The Managing General Partner had made an offer to the noteholders to
extend the maturity dates to coincide with the completion of the property's
nine-year mortgage workout agreement on May 31, 2003. The noteholders rejected
the offer and, on March 28, 1996, proposed a one-year extension. As of April
17, 1996, the Managing General Partner is negotiating the terms of the
agreement. There is no assurance that the Managing General Partner will reach
an agreement of any kind with the noteholders. Therefore, there can be no
assurance that the Partnership will be able to retain its interest in the Local
Partnership. The uncertainty about the continued ownership of the Partnership's
interest in the related Local Partnership does not impact the Partnership's
financial condition because the related purchase money note is nonrecourse and
secured solely by the Partnership's interest in the Local Partnership.
Therefore, should the investment in Paradise Foothills not produce sufficient
value to satisfy the purchase money note related to Paradise Foothills, 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.
The Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient cash is available for operating requirements.
-11-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
For the three months ended March 31, 1996, the receipt of distributions from
Local Partnerships was adequate to support operating cash requirements.
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" (SFAS 107), requires the disclosure of fair
value information about financial instruments for which it is practicable to
estimate that value. The Partnership implemented SFAS 107 in 1995. The
Partnership has determined that the carrying amount of its cash and cash
equivalents approximates fair value due to the short-term nature of the related
financial instruments. With the exception of the purchase money note relating
to Deerfield Apartments, the Partnership has determined that it is not
practicable to estimate the fair value of the purchase money notes, either
individually or in the aggregate, due to: (i) the lack of an active market for
this type of financial instrument, (ii) the variable nature of purchase money
note interest payments as a result of fluctuating cash flow distributions
received from the related Local Partnerships, and (iii) the excessive costs
associated with an independent appraisal of the purchase money notes. The
purchase money note relating to Deerfield Apartments is estimated to have no
value as a result of the anticipated foreclosure upon the property by the
property's first mortgage noteholder, as discussed below.
Results of Operations
---------------------
The Partnership's net income for the three months ended March 31, 1996
increased from the corresponding period in 1995 primarily due to the
extraordinary gain on disposition of a portion of the Partnership's investment
in River Place, Ltd., as discussed above. Contributing to the increase in net
income was a decrease in interest expense as a result of the forgiveness of a
portion of the purchase money note principal in exchange for a portion of the
Partnership's investment in River Place, Ltd., as discussed above. Also
contributing to the increase in net income was an increase in share of income
from Local Partnerships as a result of distributions received from one Local
Partnership which was in excess of the Partnership's basis in the respective
investment.
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 months ended March
31, 1996 did not include losses of $159,114, compared to excluded losses of
$260,582 for the three months ended March 31,1995.
Deerfield Partners Limited Partnership (Deerfield) 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, 1995. This proposal was
rejected by HUD. A new nine-year workout proposal was submitted to HUD on May
-12-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
31, 1995. HUD rejected this proposal and notified Deerfield that HUD had
offered its mortgage loan for sale in September 1995. A new mortgagee purchased
the loan from HUD on November 16, 1995. On November 16, 1995, the Local
Partnership received a notice of default, acceleration and assignment of rents
from the new mortgagee. The new mortgagee was scheduled to foreclose on the
property on December 21, 1995. In order to protect its assets, the Local
Partnership filed for bankruptcy protection under Chapter 11 in the State of
Maryland on December 20, 1995. The new mortgagee filed motions with the
bankruptcy court for dismissal and for relief from stay. A hearing on these
motions was originally scheduled for January 23, 1996, however, a continuance
was granted as the Local Partnership and the new mortgagee discussed settlement
options. On February 27, 1996, Deerfield entered into a term sheet agreement
with the new mortgagee pursuant to which Deerfield transferred management and
control of the property to the new mortgagee on April 1, 1996, and, at the new
mortgagee's election, will voluntarily transfer ownership of the property to the
new mortgagee no earlier than January 6, 1997, without further consideration.
On March 20, 1996, the bankruptcy court dismissed the bankruptcy case, with the
acquiescence of the Local Partnership, subject to the provisions of the term
sheet agreement. Any and all future net cash flow generated by the property
prior to the transfer of ownership will be applied towards outstanding accrued
interest on the defaulted first mortgage loan. There were no cash distributions
received by the Partnership from the property during the three months ended
March 31, 1996 or 1995. During 1989 and 1988, the Partnership loaned a total of
$196,746 to the Local Partnership to fund operating deficits. The Partnership
advanced net funds of $2,341 and $3,659 in December 1995 and February 1996,
respectively, to fund operating deficits while the Local Partnership was seeking
bankruptcy protection. The Partnership does not expect to advance any
additional funds. The loans do not bear interest and repayment is due upon the
disposition of the property; however, there is no assurance that the Local
Partnership will be able to repay any loans in accordance with the terms.
The anticipated transfer of the Local Partnership's ownership of the
property does not impact the Partnership's financial condition because the
related purchase money note is nonrecourse and secured solely by the
Partnership's interest in the related Local Partnership. The Partnership's
investment in Deerfield had previously been reduced to zero as a result of
losses from the Local Partnership during prior years. Acquisition fees and
property purchase costs relating to Deerfield were fully amortized as of
December 31, 1995 in order to record the investment at its net realizable value.
Therefore, since the investment in Deerfield is not expected to produce
sufficient value to satisfy the related purchase money note, 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, the complete loss of this investment will not have a
material impact on the operations of the Partnership.
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 March 31, 1996 and December 31, 1995,
accrued interest was $204,470 and $200,402, respectively.
Effective July 1, 1993, the Springfield Apartments (Springfield) first
mortgage loan was extended to June 30, 1996. As of March 31, 1996 and December
31, 1995, the Partnership had advanced the funds necessary to cover the lender's
-13-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
closing costs of $4,022 and property painting costs required by the lender of
$34,000. Further, debt service 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 March 31, 1996 and December 31, 1995, non-
interest-bearing loans to Springfield totalled $321,247 and $354,239,
respectively. The Local Partnership is currently investigating its refinancing
options in connection with the expiration of the first mortgage loan extension.
There is no assurance that Springfield will be able to repay any loans in
accordance with the terms, or that new financing will be obtained upon
expiration of the first mortgage loan extension.
Effective August 1, 1993, the Devonshire Apartments (Devonshire) first
mortgage loan was extended to July 31, 1996. The Local Partnership is currently
investigating its refinancing options in connection with the expiration of the
first mortgage loan extension. There is no assurance that Devonshire will be
able to obtain new financing upon expiration of the first mortgage loan
extension.
No other significant changes in the Partnership's operations have taken
place during this period.
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
The Partnership defaulted on its purchase money notes relating to Paradise
Associates, L.P. (Paradise Foothills), when the notes matured on January 30,
1996 and were not paid. The default amount included principal and accrued
interest of $230,000 and $371,288, respectively. As of April 23, 1996,
principal and accrued interest totalling $230,000 and $385,142, respectively,
were due. The Managing General Partner had made an offer to the noteholders to
extend the maturity dates to coincide with the completion of the property's
nine-year mortgage workout agreement on May 31, 2003. The noteholders rejected
the offer and, on March 28, 1996, proposed a one-year extension. As of April
17, 1996, the Managing General Partner is negotiating the terms of the
agreement. There is no assurance that the Managing General Partner will reach
an agreement of any kind with the noteholders. Therefore, there can be no
assurance that the Partnership will be able to retain its interest in the Local
Partnership. The uncertainty about the continued ownership of the Partnership's
interest in the related Local Partnership does not impact the Partnership's
financial condition because the related purchase money note is nonrecourse and
secured solely by the Partnership's interest in the Local Partnership.
Therefore, should the investment in Paradise Foothills not produce sufficient
value to satisfy the purchase money note related to Paradise Foothills, 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.
-14-
<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 March 31, 1996.
All other items are not applicable.
-15-
<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
April 23, 1996 By: /s/Richard J. Palmer
- ------------------------- ---------------------------------
Date Richard J. Palmer
Senior Vice President/Finance
Signing on behalf of the
Registrant and as Principal
Accounting Officer
-16-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
- ------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FIRST QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,196,243
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,961,201
<CURRENT-LIABILITIES> 0
<BONDS> 10,613,747
0
0
<COMMON> 0
<OTHER-SE> (6,711,943)
<TOTAL-LIABILITY-AND-EQUITY> 3,961,201
<SALES> 0
<TOTAL-REVENUES> 197,657
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 82,066
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 238,556
<INCOME-PRETAX> (122,965)
<INCOME-TAX> 0
<INCOME-CONTINUING> (122,965)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,472,332
<CHANGES> 0
<NET-INCOME> 1,349,367
<EPS-PRIMARY> 61.10
<EPS-DILUTED> 61.10
</TABLE>
