<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
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Commission file number 0-23766
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CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
- -------------------------------------------------------------------------
(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)
Securities registered pursuant to Section 12(d) of the Act:
Name of each exchange on
Title of each class which registered
- --------------------------- ---------------------------------
NONE N/A
Securities registered pursuant to Section 12(g) of the Act:
LIMITED PARTNERSHIP UNITS
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K (X)
The partnership interests of the Registrant are not traded in any market.
Therefore, the partnership interests had neither a market selling price nor an
average bid or asked price within the 60 days prior to the date of this filing.
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
1995 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
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PART I
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Item 1. Business . . . . . . . . . . . . . . . . . . I-1
Item 2. Properties . . . . . . . . . . . . . . . . . I-5
Item 3. Legal Proceedings . . . . . . . . . . . . . . I-5
Item 4. Submission of Matters to a Vote
of Security Holders . . . . . . . . . . . . I-5
PART II
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Item 5. Market for the Registrant's Partnership
Interests and Related Partnership
Matters . . . . . . . . . . . . . . . . . . II-1
Item 6. Selected Financial Data . . . . . . . . . . . II-1
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . II-2
Item 8. Financial Statements and Supplementary
Data . . . . . . . . . . . . . . . . . . . II-9
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . II-9
PART III
--------
Item 10. Directors and Executive Officers
of the Registrant . . . . . . . . . . . . . III-1
Item 11. Executive Compensation . . . . . . . . . . . III-2
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . III-4
Item 13. Certain Relationships and Related
Transactions . . . . . . . . . . . . . . . III-4
PART IV
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Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K . . . . . . . . . . . . IV-1
Signatures . . . . . . . . . . . . . . . . . IV-3
Exhibit Index . . . . . . . . . . . . . . . . IV-31
<PAGE>
PART I
------
ITEM 1. BUSINESS
--------
Capital Realty Investors-85 Limited Partnership (the Partnership) is a
limited partnership which was formed under the Maryland Revised Uniform Limited
Partnership Act on December 26, 1984. On November 11, 1985, the Partnership
commenced offering Beneficial Assignee Certificates (BACs) for 60,000 limited
partnership interests through a public offering which was managed by Merrill
Lynch, Pierce, Fenner and Smith, Incorporated. The Partnership had an initial
closing on December 27, 1985 and closed the offering on July 19, 1986, with a
total of 21,200 BACs.
The General Partners of the Partnership are C.R.I., Inc. (CRI), which is
the Managing General Partner, and current and former shareholders of CRI.
Services for the Partnership are performed by CRI, as the Partnership has no
employees of its own.
The Partnership was formed to invest in real estate, which is the
Partnership's principal business activity, by acquiring and holding a limited
partnership interest in limited partnerships (Local Partnerships). As of
December 31, 1995, the Partnership has invested in eight Local Partnerships.
The original objectives of such investments, not necessarily in order of
importance, were to:
(1) preserve and protect the Partnership's capital;
(2) provide, during the early years of the Partnership's operations,
current tax benefits to the partners in the form of tax losses which
the partners may use to offset income from other sources;
(3) provide capital appreciation through increases in the value of the
Partnership's investments and increased equity through periodic
payments on the indebtedness on the apartment complexes;
(4) provide cash distributions from rental operations; and
(5) provide cash distributions from sale or refinancing of the
Partnership's investments.
See Part II, Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, for a discussion of factors affecting the
original investment objectives.
The Local Partnerships in which the Partnership has invested were organized
by private developers who acquired the sites, or options thereon, and applied
for applicable mortgage loans and mortgage insurance and/or entered into
construction contracts and remain as the local general partners in the Local
Partnerships. The Partnership became the principal limited partner in six of
these Local Partnerships pursuant to negotiations with these developers who act
as the local general partners. However, in the event of non-compliance with the
Local Partnerships' partnership agreements, the local general partner may be
removed and replaced with another local general partner or with an affiliate of
the Partnership's Managing General Partner. As a limited partner, the
Partnership's legal liability for obligations of the Local Partnership is
limited to its investment. In two Local Partnerships, the Partnership has
invested as a limited partner in intermediary partnerships which, in turn, have
invested as limited partners in the Local Partnerships. An affiliate of the
Managing General Partner of the Partnership is also typically a general partner
of the six Local Partnerships and the two intermediary partnerships. In most
cases, the local general partners of the Local Partnerships retain
responsibility for developing, constructing, maintaining, operating and managing
the project. Additionally, the local general partners and affiliates of the
Managing General Partner may operate other apartment complexes which may be in
competition for eligible tenants with the Local Partnerships' apartment
I-1
<PAGE>
PART I
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ITEM 1. BUSINESS - Continued
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complexes.
The following is a schedule of the apartment complexes owned by Local
Partnerships in which the Partnership has an investment:
I-2
<PAGE>
PART I
------
ITEM 1. BUSINESS - Continued
--------
<PAGE>
SCHEDULE OF PROJECTS OWNED BY LOCAL PARTNERSHIPS
IN WHICH CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
HAS AN INVESTMENT(1)
<TABLE>
<CAPTION>
Mortgage
Name and Location Payable at Financed and/or Insured Number of
of Apartment Complex 12/31/95 (2) and/or Subsidized Under Rental Units
- -------------------- ------------ --------------------------------- ------------
<S> <C> <C> <C>
Deerfield $ 3,560,751 Mary R. Wolfe Real Estate Manage- 100
Mehlville, MO ment Company
Devonshire 4,591,084 Pacific Mutual 140
Kirkland, WA
Paradise Foothills 6,011,943 Assigned to HUD/221(d)(4) of NHA 180
Phoenix, AZ
The Pointe 8,185,384 Lincoln National Life Company 238
El Paso, TX
River Place 2,552,709 Highland Mortgage Company/Sec 207 213
Birmingham, AL & 203(f) of the NHA
Semper Village 8,150,000 SRS Insurance Services, Inc. 252
Westminster, CO
Springfield 6,217,694 Pacific Mutual 184
Redmond, WA
Willow Creek 2,900,858 Hartger & Willard Mortgage/221 159
Kalamazoo, MI ------------ (d)(4) of NHA ------------
TOTALS(3)8 $ 42,170,423 1,466
============ ============
</TABLE>
I-3
<PAGE>
SCHEDULE OF PROJECTS OWNED BY LOCAL PARTNERSHIPS
IN WHICH CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
HAS AN INVESTMENT(1) - continued
<TABLE>
<CAPTION>
Average Effective Annual
Units Occupied As Rental Per Unit
Percentage of Total Units for the Years Ended
As of December 31, December 31,
Name and Location --------------------------------- -----------------------------------------------------
of Apartment Complex 1995 1994 1993 1992 1991 1995 1994 1993 1992 1991
- -------------------- ---- ---- ---- ---- ---- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Deerfield 98% 96% 99% 93% 94% $ 6,521 $ 6,265 $ 6,041 $ 5,561 $ 5,714
Mehlville, MO
Devonshire 95% 94% 94% 98% 96% 6,944 6,509 6,605 6,365 5,866
Kirkland, WA
Paradise Foothills 95% 97% 96% 98% 97% 6,340 5,893 5,393 5,063 4,775
Phoenix, AZ
The Pointe 84% 97% 95% 96% 96% 6,403 6,791 6,486 6,265 6,148
El Paso, TX
River Place 99% 99% 100% 97% 99% 6,043 5,823 5,577 5,287 5,177
Birmingham, AL
Semper Village 98% 95% 92% 95% 97% 6,506 6,223 6,009 5,380 4,933
Westminster, CO
Springfield 97% 93% 93% 93% 93% 7,347 6,822 7,190 6,741 6,103
Redmond, WA
Willow Creek 91% 92% 96% 89% 97% 5,934 5,959 5,807 5,725 5,576
Kalamazoo, MI ---- --- ---- ---- ---- -------- -------- -------- -------- --------
TOTALS(3)8 95% 95% 96% 95% 96% $ 6,505 $ 6,286 $ 6,139 $ 5,798 $ 5,537
==== === ==== ==== ==== ======== ======== ======== ======== ========
</TABLE>
(1) All properties are multifamily housing complexes. No single
tenant/resident rents 10% or more of the rentable square footage.
Residential leases are typically one year or less in length, with varying
expiration dates, and substantially all rentable space is for residential
purposes.
(2) The amounts provided are the balances of first mortgage loans payable of
the Local Partnerships as of December 31, 1995.
(3) The totals for the percentage of units occupied and the average effective
annual rental per unit are based on a simple average.
For additional information regarding the real estate of Local Partnerships
in which the Partnership has invested, see Part IV, Schedule III - "Real Estate
and Accumulated Depreciation of Local Partnerships in which Capital Realty
Investors-85 has Invested."
On December 28, 1995 and January 2, 1996, the Partnership sold 9.9% and
39.6% portions, respectively, of the Partnership's 98.99% limited partner
interest in River Place, Ltd. (River Place) pursuant to an option agreement with
the noteholders of the related purchase money notes. The noteholders have an
I-4
<PAGE>
PART I
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ITEM 1. BUSINESS - Continued
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option to purchase the Partnership's remaining 49.49% interest in River Place in
1997. See Part II, Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations and the notes to the consolidated financial
statements for additional information pertaining to the sale.
On February 27, 1996, Deerfield Partners Limited Partnership (Deerfield)
entered into a term sheet agreement with the property's first mortgage
noteholder whereby Deerfield will transfer management and control of the
property to the noteholder on April 1, 1996, and, at the noteholder's election,
will voluntarily transfer ownership of the property to the noteholder no earlier
than January 6, 1997. See Part II, Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations and the notes to the
consolidated financial statements for additional information regarding the
transfer of control and ownership.
ITEM 2. PROPERTIES
----------
Through its ownership of limited partnership interests in Local
Partnerships, Capital Realty Investors-85 Limited Partnership indirectly holds
an interest in the underlying real estate. See Part 1, Item 1 and Schedule III
of Part IV, Item 14 for information pertaining to these properties.
ITEM 3. LEGAL PROCEEDINGS
-----------------
There are no material legal proceedings to which the Partnership is a
party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of 1995.
I-5
<PAGE>
PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP INTERESTS
-------------------------------------------------
AND RELATED PARTNERSHIP MATTERS
-------------------------------
(a) It is not anticipated that there will be any market for resale of
interests in the Partnership. As a result, investors may be unable to
sell or otherwise dispose of their interest in the Partnership.
(b) As of March 8, 1996, there were approximately 1,900 registered
holders of BACs in the Partnership.
(c) No distributions were declared or paid by the Partnership during 1995
or 1994. The Partnership received distributions of $327,334 and
$232,536 from Local Partnerships during 1995 and 1994, respectively.
II-1
<PAGE>
PART II
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Share of income (loss) from
partnerships $ 242,074 $ 3,418 $ (209,453) $ (458,564) $ (569,747)
Interest income 105,874 77,539 70,272 99,661 146,238
Expenses (2,040,088) (1,706,239) (1,650,573) (1,568,552) (1,450,361)
Extraordinary gain on disposition
of investment in partnership or
forgiveness of accrued interest 1,080,485 -- 585,196 -- --
------------ ------------ ------------ ------------ ------------
Net loss $ (611,655) $ (1,625,282) $ (1,204,558) $ (1,927,455) $ (1,873,870)
============ ============ ============ ============ ============
Loss allocated to BAC Holders (96%) $ (587,189) $ (1,560,270) $ (1,156,377) $ (1,850,357) $ (1,798,916)
============ ============ ============ ============ ============
Loss per BAC outstanding $ (27.70) $ (73.60) $ (54.55) $ (87.28) $ (84.85)
============ ============ ============ ============ ============
Cash distributions per BAC
outstanding $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ============
BACs outstanding 21,200 21,200 21,200 21,200 21,200
============ ============ ============ ============ ============
Total assets $ 5,054,010 $ 5,750,786 $ 6,061,831 $ 6,825,161 $ 7,512,191
============ ============ ============ ============ ============
Total remaining amounts due on
investments, including accrued
interest on purchase price,
purchase money notes and
due to local general partners $ 13,036,744 $ 13,139,795 $ 11,807,278 $ 11,371,809 $ 10,204,451
============ ============ ============ ============ ============
</TABLE>
II-2
<PAGE>
PART II
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Financial Condition/Liquidity
-----------------------------
As of December 31, 1995, the Partnership had approximately 1,900 investors,
who subscribed to a total of 21,200 BACs in the original amount of $21,200,000.
The Partnership has made investments in eight Local Partnerships. The
Partnership's liquidity, with unrestricted cash resources of $1,151,683 as of
December 31, 1995, along with anticipated future cash distributions from the
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 Partnership's of $250,000, excluding purchase money notes
and accrued interest, is not in excess of its capital resources. As of March 8,
1996, there are no material commitments for capital expenditures. 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, and has determined
that the carrying amount of its cash and cash equivalents approximates fair
value.
During 1995, 1994 and 1993, the Partnership received cash distributions of
$327,334, $232,536 and $125,175, respectively, from the Local Partnerships.
The acquisition of interests in certain Local Partnerships resulted in
purchase money note obligations of the Partnership. The purchase money notes
are nonrecourse obligations of the Partnership which typically mature ten to
fifteen years from the date of acquisition of the interests in particular Local
Partnerships.
As of December 31,1995, the Partnership's obligations with respect to its
investments in Local Partnerships, in the form of purchase money notes of
$4,848,000 plus the accrued interest of $7,938,744, 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. On December 27, 1995, purchase money notes in
an aggregate principal amount of $2,500,000, which were originally scheduled to
mature on December 31, 1995, were extended to February 1, 1997, as discussed
below. 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.
II-3
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
As of December 31, 1995 and 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. Outstanding purchase price
payable and related accrued interest of $318,300 and $56,700, respectively, were
paid to the local managing general partner of Sheridan West Limited Partnership
during 1995, as discussed below.
Purchase money notes relating to River Place, Ltd. totaling $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 a purchase option
agreement with the noteholders which grants 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 (5.65% at January 1, 1996), compounded annually.
Purchase money note interest of $821,528 which accrued during 1995 has been
forgiven by the noteholders as part of the agreement, and is classified as an
extraordinary gain on the consolidated statement of operations. On December 28,
1995, the noteholders exercised the first option, which entitled the noteholders
to purchase 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 exercised the second option and
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 $1,661,553, 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. On December 28, 1995, the
noteholders paid a fee in 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 78% of the Partnership's investments in and
advances to Local Partnerships as of December 27, 1995. In addition, for the
period ended December 31, 1995, distributions from River Place, Ltd. represented
approximately 51% of total distributions from Local Partnerships. The
Partnership's share of income from River Place, Ltd. for the period ended
December 31, 1995 represented approximately 80% of the total share of income
II-4
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
recognized from Local Partnerships.
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 March 8, 1996, principal
and accrued interest totalling $230,000 and $377,319, respectively, were due.
The Managing General Partner has 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, as discussed below. As of March 8,
1996, the noteholders had not accepted nor rejected the offer, but had expressed
an interest in discussing the offer in more detail with the Managing General
Partner. There is no assurance that the noteholders will reach an agreement of
any kind with the Managing General Partner. 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.
As a result of recurring operating deficits and the discontinuance of the
funding of the deficits by the local general partner, Paradise Foothills
defaulted on its mortgage loan in August 1989. The local general partner failed
at previous attempts to negotiate a workout, and under the terms of the
co-insurance agreement, the loan was assigned to the Department of Housing and
Urban Development (HUD) on July 3, 1991. From May 1992 through April 1994, the
local general partners submitted various workout proposals to HUD. Effective
June 1, 1994, a nine-year workout proposal that was submitted to HUD on April
11, 1994 was approved.
Paradise Foothills was notified by HUD that HUD had sold Paradise
Foothills' mortgage loan in September 1995. A new mortgagee now services the
loan and Paradise Foothills is no longer subject to HUD regulatory requirements.
Paradise Foothills continues to pay the mortgage based on the nine-year workout
approved by HUD.
SFAS 107 requires the disclosure of fair value information about financial
instruments for which it is practicable to estimate that value. 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:
(1) the lack of an active market for this type of financial instrument, (2) the
variable nature of purchase money note interest payments as a result of
fluctuating cash flow distributions received from the related Local
Partnerships, and (3) 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 fair value as a result of the
anticipated foreclosure upon the property by the property's first mortgage
II-5
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
noteholder, as discussed below.
The Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient cash is available for operating requirements.
In 1995, the receipt of distributions from partnerships was adequate to support
operating cash requirements.
In 1994, the receipt of distributions from partnerships and the repayment
of advances to partnerships was adequate to support operating cash requirements.
Results of Operations
---------------------
The Partnership's net loss decreased in 1995 from 1994 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 decrease in net
loss was an increase in share of income from Local Partnerships as a result of
distributions received from one Local Partnership and a repayment of advances to
one Local Partnership which were in excess of the Partnership's basis in the
respective investments. Partially offsetting the decrease in net loss was an
increase in purchase money note interest expense as a result of compounding
interest. Also partially offsetting the decrease in net loss was an increase in
amortization expense due to the write-down of acquisition fees and property
purchase costs relating to Deerfield in order to record the investment at its
net realizable value, as discussed below.
The Partnership's net loss increased in 1994 from 1993 primarily due to the
forgiveness of accrued interest on The Pointe's purchase money note in 1993.
Contributing to the increase in net loss was 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 share of income from the Local
Partnerships principally due to a decrease in operating expenses at several
properties and an increase in rental revenues at two properties. Also partially
offsetting the increase in net loss was a decrease in general and administrative
expenses primarily due to the payment of 1992 expenses in 1993 and a decrease in
annual report printing costs.
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 years ended December 31,
1995, 1994 and 1993 did not include losses of $610,490, $484,769 and $1,015,327,
respectively. The Partnership's net loss recognized from the Local
Partnerships is generally expected to decrease in subsequent years as the
Partnership's investments in the Local Partnerships are reduced to zero.
Accordingly, excludable losses are generally expected to increase.
Distributions of $56,886 received from one Local Partnership during 1995 was
offset against the year's recorded losses because this amount was in excess of
the Partnership's investment. During 1994 and 1993, no distributions were
received which were in excess of the Partnership's investment.
Deerfield Partners Limited Partnership (Deerfield) was unable to generate
sufficient cash flow to pay its debt service and therefore was unable to meet
II-6
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
its obligations under the terms of the loan documents. The Local Partnership
defaulted on its mortgage loan in 1990, and after negotiations with 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 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 whereby Deerfield will transfer 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. Any
and all future net cash flow generated by the property prior to the transfer of
ownership, as defined in the term sheet agreement, 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 1995,
1994 or 1993. 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 reports of the auditors on the financial statements of Deerfield for
the years ended December 31, 1995, 1994 and 1993 indicate that substantial doubt
exists about the ability of this Local Partnership to continue as a going
concern due to the property's recurring operating deficits and the Local
Partnership's default on its mortgage. 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
II-7
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
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 December 31, 1995 and December 31, 1994,
accrued interest was $200,402 and $176,778, respectively.
Effective July 1, 1993, the Springfield Apartments (Springfield) first
mortgage loan was extended to June 30, 1996. As of 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 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 December 31, 1995 and 1994, non-interest-bearing loans to
Springfield totalled $354,239 and $509,438, 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. As of December 31, 1995, the
Partnership had advanced the funds necessary to cover the lender's closing costs
of $2,293. 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 $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 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 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
II-8
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
31, 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.
Inflation
---------
Inflation allows for increases in rental rates, usually offsetting any
higher operating and replacement costs. Furthermore, inflation generally does
not impact the fixed rate long-term financing under which the real property
investments were purchased. Future inflation could allow for appreciated values
of the Local Partnerships' properties over an extended period of time as rental
revenues and replacement values gradually increase.
II-9
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
The following table reflects the combined rental revenues of the
properties for the five years ended December 31, 1995.
<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Combined Rental
Revenue $ 9,511,594 $ 9,225,786 $ 8,991,603 $ 8,482,322 $ 8,070,737
Annual Percentage
Increase 3.1% 2.6% 6.0% 5.1%
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The information required by this item is contained in Part IV.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
None.
II-10
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
(a), (b) and
(c) The Partnership has no directors, executive officers or
significant employees of its own.
(a), (b), (c)
and (e) The names, ages and business experience of the directors and
executive officers of C.R.I., Inc. (CRI), the Managing General
Partner of the Partnership, are as follows:
William B. Dockser, 59, has been the Chairman of the Board of CRI and a Director
since 1974. Prior to forming CRI, he served as President of Kaufman and Broad
Asset Management, Inc., an affiliate of Kaufman and Broad, Inc., which managed a
number of publicly held limited partnerships created to invest in low and
moderate income multifamily apartment complexes. For a period of 2-1/2 years
prior to joining Kaufman and Broad, he served in various positions at HUD,
culminating in the post of Deputy FHA Commissioner and Deputy Assistant
Secretary for Housing Production and Mortgage Credit, where he was responsible
for all federally insured housing production programs. Before coming to
Washington, Mr. Dockser was a practicing attorney in Boston and also was a
special Assistant Attorney General for the Commonwealth of Massachusetts. He
holds a Bachelor of Laws degree from Yale University Law School and a Bachelor
of Arts degree, cum laude, from Harvard University. He is also Chairman of the
Board of CRIIMI MAE Inc., CRIIMI, Inc. and CRI Liquidating REIT, Inc.
H. William Willoughby, 49, President, Secretary and a Director of CRI since
January 1990 and Senior Executive Vice President, Secretary and a Director of
CRI from 1974 to 1989. He is principally responsible for the financial
management of CRI and its associated partnerships. Prior to joining CRI in
1974, he was Vice President of Shelter Corporation of America and a number of
its subsidiaries dealing principally with real estate development and equity
financing. Before joining Shelter Corporation, he was a senior tax accountant
with Arthur Andersen & Company. He holds a Juris Doctorate degree, a Master of
Business Administration degree and a Bachelor of Science degree in Business
Administration from the University of South Dakota. He is also a Director and
executive officer of CRIIMI MAE Inc., CRIIMI, Inc. and CRI Liquidating REIT,
Inc.
Richard J. Palmer, 44, Senior Vice President-Chief Financial Officer. Prior to
joining CRI in 1983 as Director of Tax Policy, he was a Tax Manager at Grant
Thornton (formerly Alexander Grant & Company). He also served in the Tax and
Audit Departments of Peat, Marwick, Main and Company (formerly Peat, Marwick,
Mitchell and Company) prior to his seven years at Grant Thornton. He holds a
Bachelor of Business Administration degree from the Florida Atlantic University
and is also a Certified Public Accountant.
III-1
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - Continued
--------------------------------------------------
Ronald W. Thompson, 49, Group Executive Vice President-Hotel Asset Management.
Prior to joining CRI in 1985, he was employed at the Hyatt Organization where he
most recently served as the General Manager of the Hyatt Regency in Flint,
Michigan. During his nine year tenure with Hyatt, he held senior management
positions with the Hyatt Regency in Dearborn, Michigan, the Hyatt in Richmond,
Virginia, the Hyatt in Winston-Salem, North Carolina and the Hyatt Regency in
Atlanta, Georgia. Before joining Hyatt, Mr. Thompson worked in London, England
for the English Tourist Board as well as holding management positions in Europe,
Australia, and New Zealand in the hotel industry. Mr. Thompson received his
education in England where he received a business degree in Hotel Administration
from Winston College.
Susan R. Campbell, 37, Senior Vice President-CRI Realty Services. Prior to
joining CRI in March 1985, she was a budget analyst for the B. F. Saul Advisory
Company. She holds a Bachelor of Science degree in General Business from the
University of Maryland.
Melissa Cecil Lackey, 40, Senior Vice President and General Counsel. Prior to
joining CRI in 1990, she was associated with the firms of Zuckerman, Spaeder,
Goldstein, Taylor & Kolker in Washington, D.C. and Hirsch & Westheimer in
Houston, Texas. She holds a Juris Doctorate from the University of Virginia
School of Law and a Bachelor of Arts degree from the College of William & Mary.
(d) There is no family relationship between any of the foregoing directors
and executive officers.
(f) Involvement in certain legal proceedings.
None.
(g) Promoters and control persons.
Not applicable.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
(a), (b), (c) and (d)
The Partnership has no officers or directors. However, in accordance with
the Partnership Agreement, and as disclosed in the public offering, various
kinds of compensation and fees were paid or are payable to the General
Partners and their affiliates. Additional information required in these
sections is included in Notes 3 and 4 to the financial statements contained
in Part IV, Item 14.
Additionally, the General Partners may receive an annual distribution from
the Partnership if there is cash available for distribution, as defined in
the Partnership Agreement. The General Partners are also entitled to the
following payments:
(1) Annual incentive management fee for managing the affairs and business
of the Partnership in an amount not to exceed .50% of equity payments,
including the Partnership's allocable share of the mortgages, payable
in an annual amount equal to $97,930. The incentive management fee
III-2
<PAGE>
PART III
--------
ITEM 11. EXECUTIVE COMPENSATION - Continued
----------------------
for each of the years ended December 31, 1995, 1994 and 1993 amounted
to $97,930.
(2) 12% in the aggregate to the General Partners and the Initial Limited
Partner, and 3% to the Special Limited Partner of sale and refinancing
proceeds remaining after (i) the investors have received a return of
all their capital contributions; (ii) the Special Limited Partner has
received 1% of the sale and refinancing proceeds calculated on the
amount available prior to the return of capital contributions to the
investors; (iii) the investors have received an additional amount
equal to a cumulative noncompounded annual 6% return per annum on the
Assignor Limited Partner's and any Beneficial Assignee Certificate
Holders' capital contribution commencing in 1987, as may be adjusted
by the Tax Bracket Adjustment Factor, reduced by prior distributions
of net cash flow to the investors; (iv) the General Partners and the
Special Limited Partner have received the property disposition fees
described below; and (v) the General Partners, Initial Limited Partner
and the Special Limited Partner have received an amount equal to any
unpaid Deferred Cash Flow Return. The General Partners, Initial
Limited Partner and Special Limited Partner also will receive a return
of their capital contributions and the General Partners will receive
repayment of any loans made to the Partnership. No sale or
refinancing proceeds were paid to the General Partners during the
years ended December 31, 1995, 1994 and 1993.
(3) 1% of the aggregate selling prices including any amounts previously
unpaid upon prior sales of all Local Partnership interests or
substantially all of the Local Partnership interest or the apartment
complexes, payable after the limited partners have received a return
of all their capital contributions. Property disposition fees and any
other commissions or fees payable upon the sale of apartment complexes
shall not in the aggregate exceed the lesser of the competitive rate
or 6% of the sales price of the apartment complexes. No such amounts
were paid to the General Partners during the years ended December 31,
1995, 1994 and 1993.
(e) Termination of employment and change in control arrangements.
None.
III-3
<PAGE>
PART III
--------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------
MANAGEMENT
----------
(a) Security ownership of certain beneficial owners.
No person or "group", as that term is used in Section 13(d)(3) of the
Securities Exchange Act of 1934, is known by the Partnership to be the
beneficial owner of more than 5% of the issued and outstanding BACs at
December 31, 1995.
(b) Security ownership of management.
The following table sets forth certain information concerning all BACs
beneficially owned, as of December 31, 1995, by each director and by
all directors and officers as a group of the Managing General Partner
of the Partnership's General Partner.
Name of Amount and Nature % of total
Beneficial Owner of Beneficial Ownership Units issued
---------------- ----------------------- ------------
William B. Dockser None 0%
H. William Willoughby None 0%
All Directors and Officers
as a Group (6 persons) None 0%
(c) Changes in control.
There exists no arrangement known to the Partnership, the operation of
which may, at a subsequent date, result in a change in control of the
Partnership. There is a provision in the Limited Partnership
Agreement which allows, under certain circumstances, the ability to
change control.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
(a) Transactions with management and others.
The Partnership has no directors or officers. In addition, the
Partnership has had no transactions with individual officers or
directors of the Managing General Partner of the Partnership other
than any indirect interest such officers and directors may have in the
amounts paid to the Managing General Partner or its affiliates by
virtue of their stock ownership in CRI. Item 11 of this report, which
contains a discussion of the fees and other compensation paid or
accrued by the Partnership to the General Partners or their
affiliates, is incorporated herein by reference. Note 3 of the notes
to consolidated financial statements, which contains disclosure of
related party transactions, is also incorporated herein by reference.
III-4
<PAGE>
PART III
--------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Continued
(b) Certain business relationships.
The Partnership's response to Item 13(a) is incorporated herein by
reference. In addition, the Partnership has no business relationship
with entities of which the officers and directors of the Managing
General Partner of the Partnership are officers, directors or equity
owners other than as set forth in the Partnership's response to Item
13(a).
(c) Indebtedness of management.
None.
(d) Transactions with promoters.
Not applicable.
III-5
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
-------------------------------------------------------
FORM 8-K
--------
(a) 1. Financial Statements Page
-------------------- ----
Report of Independent Certified Public
Accountants - Capital Realty Investors-85
Limited Partnership IV-4
Reports of Independent Certified Public
Accountants - Local Partnerships in which
Capital Realty Investors-85 Limited Part-
nership has invested IV-5
Consolidated Balance Sheets as of December 31,
1995 and 1994 IV-6
Consolidated Statements of Operations for
the years ended December 31, 1995, 1994
and 1993 IV-7
Consolidated Statements of Changes in
Partners' Deficit for the years ended
December 31, 1995, 1994 and 1993 IV-8
Consolidated Statements of Cash Flows for
the years ended December 31, 1995, 1994
and 1993 IV-9
Notes to Consolidated Financial Statements IV-10
(a) 2. Financial Statement Schedules
-----------------------------
Included in Part IV of this report are the following schedules for the
year ended December 31, 1995, which are applicable to the Local
Partnerships in which Capital Realty Investors-85 Limited Partnership
has invested:
Report of Independent Certified Public Accountants
on Financial Statement Schedule IV-27
Schedule III - Real Estate and Accumulated
Depreciation IV-28
The remaining schedules are omitted because the required
information is included in the financial statements and notes thereto
or they are not applicable or not required.
IV-1
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
-------------------------------------------------------
FORM 8-K - Continued
--------
(a) 3. Exhibits (listed according to the number assigned in the table
in Item 601 of Regulation S-K).
Exhibit No. 3. - Articles of Incorporation and bylaws.
a. Certificate of Limited Partnership of Capital Realty Investors-85
Limited Partnership. (Incorporated by reference from Exhibit 4 to
Registrant's Registration Statement on Form S-11, as amended,
dated June 12, 1985).
Exhibit No. 4. - Instruments defining the rights of security
holders, including indentures.
a. Limited Partnership Agreement of Capital Realty Investors-85
Limited Partnership. (Incorporated by reference from Exhibit 4 to
Registrant's Registration Statement on Form S-11, as amended,
dated June 12, 1985).
Exhibit No. 10. - Material contracts
a. Management Services Agreement between CRI and Capital Realty
Investors-85 Limited Partnership. (Incorporated by reference
from Exhibit 10B to Registrant's Registration Statement on Form
S-11, as amended, dated June 12, 1985).
Exhibit No. 27 - Financial Data Schedule
Exhibit No. 99 - Additional Exhibits
a. Prospectus of the Partnership, dated November 11, 1985.
(Incorporated by reference to the Registrant's Registration
Statement on Form S-11, as amended, dated June 12, 1985).
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the quarter ended December
31, 1995.
(c) Exhibits
--------
The list of Exhibits required by Item 601 of Regulation S-K is
included in Item (a) 3., above.
(d) Financial Statement Schedules
-----------------------------
See Item (a) 2., above.
IV-2
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this Annual Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Capital Realty Investors-85
Limited Partnership
By: C.R.I., Inc.
General Partner
March 26, 1996 /s/ William B. Dockser
- --------------------------- --------------------------------
DATE William B. Dockser, Director
Chairman of the Board and
Treasurer and Principal
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
March 26, 1996 /s/ H. William Willoughby
- --------------------------- --------------------------------
DATE H. William Willoughby
Director, President and
Secretary
March 26, 1996 /s/ Richard J. Palmer
- --------------------------- --------------------------------
DATE Richard J. Palmer
Senior Vice President,
Chief Financial Officer,
Principal Financial and
Principal Accounting Officer
IV-3
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
-------------------------------
PUBLIC ACCOUNTANTS
------------------
To the Partners
Capital Realty Investors-85
Limited Partnership
We have audited the consolidated balance sheets of Capital Realty
Investors-85 Limited Partnership as of December 31, 1995 and 1994, and the
related consolidated statements of operations, changes in partners' deficit and
cash flows for the years ended December 31, 1995, 1994 and 1993. These
financial statements are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the financial statements for six of the Local
Partnerships in 1995, 1994 and 1993, which are accounted for as described in
Note 1d. The financial statements of these Local Partnerships were audited by
other auditors whose reports have been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for these Local
Partnerships, is based solely upon the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based upon our audits and the reports of the other
auditors, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Capital Realty
Investors-85 Limited Partnership as of December 31, 1995 and 1994, and the
consolidated results of its operations, changes in partners' deficit and cash
flows for the years ended December 31, 1995, 1994 and 1993, in conformity with
generally accepted accounting principles.
Grant Thornton LLP
Vienna, VA
March 8, 1996
IV-4
<PAGE>
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS -
LOCAL PARTNERSHIPS IN WHICH
CAPITAL REALTY INVESTORS - 85 LIMITED PARTNERSHIP
HAS INVESTED*
* The reports of independent certified public accountants - Local
Partnerships in which Capital Realty Investors-85 Limited Partnership has
invested were filed in paper format under Form SE on March 26, 1996, in
accordance with the Securities and Exchange Commission's continuing
hardship exemption granted December 21, 1995.
IV-5
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
1995 1994
------------ ------------
<S> <C> <C>
Investments in and advances to partnerships $ 826,468 $ 3,751,252
Investment in partnership held for sale 2,675,447 --
Cash and cash equivalents 1,151,683 876,995
Escrow and cash reserves -- 531,069
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $131,928 and $124,464 respectively 200,609 299,536
Property purchase costs, net of accumulated amortization of
$139,879 and $124,855, respectively 196,459 291,327
Other assets 3,344 607
------------ ------------
Total assets $ 5,054,010 $ 5,750,786
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in partnerships $ 5,022,600 $ 5,590,900
Accrued interest payable 8,014,144 7,548,895
Accounts payable and accrued expenses 78,576 60,646
------------ ------------
Total liabilities 13,115,320 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 loss (26,695,275) (26,083,620)
------------ ------------
Total partners' deficit (8,061,310) (7,449,655)
------------ ------------
Total liabilities and partners' deficit $ 5,054,010 $ 5,750,786
============ ============
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
IV-6
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Share of income (loss) from partnerships $ 242,074 $ 3,418 $ (209,453)
----------- ----------- -----------
Other revenue and expenses:
Revenue
Interest income 105,874 77,539 70,272
----------- ----------- -----------
Expenses
Interest 1,668,558 1,417,693 1,320,665
General and administrative 122,172 92,920 142,920
Professional fees 72,368 69,689 61,051
Management fee 97,930 97,930 97,930
Amortization 79,060 28,007 28,007
----------- ----------- -----------
2,040,088 1,706,239 1,650,573
----------- ----------- -----------
Total other revenue and expenses (1,934,214) (1,628,700) (1,580,301)
----------- ----------- -----------
Net loss before extraordinary gain on disposition of
investment in partnership or forgiveness of accrued
interest (1,692,140) (1,625,282) (1,789,754)
----------- ----------- -----------
Extraordinary gain on disposition of investment in
partnership or forgiveness of accrued interest 1,080,485 -- 585,196
----------- ----------- -----------
Net loss $ (611,655) $(1,625,282) $(1,204,558)
=========== =========== ===========
Loss allocated to General Partners (1.51%) $ (9,236) $ (24,542) $ (18,188)
=========== =========== ===========
Loss allocated to Initial and Special Limited
Partners (2.49%) $ (15,230) $ (40,470) $ (29,993)
=========== =========== ===========
Loss allocated to BAC Holders (96%) $ (587,189) $(1,560,270) $(1,156,377)
=========== =========== ===========
Loss per BAC based on 21,200 BACs outstanding $ (27.70) $ (73.60) $ (54.55)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
IV-7
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
For the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Initial and
Special Additional
General Limited Limited
Partners Partners Partners Total
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Partners' deficit
January 1, 1993 $ (349,132) $ (576,519) $ (3,694,164) $ (4,619,815)
Net loss (18,188) (29,993) (1,156,377) (1,204,558)
----------- ----------- ------------ ------------
Partners' deficit
December 31, 1993 (367,320) (606,512) (4,850,541) (5,824,373)
Net loss (24,542) (40,470) (1,560,270) (1,625,282)
----------- ----------- ------------ ------------
Partners' deficit
December 31, 1994 (391,862) (646,982) (6,410,811) (7,449,655)
Net loss (9,236) (15,230) (587,189) (611,655)
----------- ----------- ------------ ------------
Partners' deficit
December 31, 1995 $ (401,098) $ (662,212) $ (6,998,000) $ (8,061,310)
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
IV-8
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (611,655) $ (1,625,282) $ (1,204,558)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Share of (income) loss from partnerships (242,074) (3,418) 209,453
Increase in accrued interest receivable on advances
to partnerships (23,625) (23,625) (23,625)
Payment of purchase money note interest (19,066) (85,176) (300,000)
Amortization of deferred costs 79,060 28,007 28,007
Extraordinary gain on forgiveness of accrued interest -- -- (585,196)
Extraordinary gain on disposition of investment
in partnership (1,080,485) -- --
Changes in assets and liabilities:
(Increase) decrease in other assets (2,737) 945 3,806
Increase in accrued interest payable 1,668,558 1,417,693 1,320,665
Increase (decrease) in accounts payable and accrued
expenses 17,930 (18,280) 5,759
------------ ------------ ------------
Net cash used in operating activities (214,094) (309,136) (545,689)
------------ ------------ ------------
Cash flows from investing activities:
Receipt of distributions from partnerships 327,334 232,536 125,175
Decrease (increase) in deposits and cash reserves 531,069 (17,556) 123,164
Repayment of advances to partnerships 216,950 99,618 (108,544)
Investments in and advances to partnerships (211,571) -- --
Sale of short-term investments, net -- -- 700,000
------------ ------------ ------------
Net cash provided by investing activities 863,782 314,598 839,795
------------ ------------ ------------
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 274,688 5,462 294,106
Cash and cash equivalents, beginning of year 876,995 871,533 577,427
------------ ------------ ------------
Cash and cash equivalents, end of year $ 1,151,683 $ 876,995 $ 871,533
============ ============ ============
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
IV-9
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization
------------
Capital Realty Investors-85 Limited Partnership (the Partnership) was
formed under the Maryland Revised Uniform Limited Partnership Act on
December 26, 1984 and shall continue until December 31, 2039, unless sooner
dissolved in accordance with the Partnership Agreement. The Partnership was
formed to invest in real estate by acquiring and holding a limited
partnership interest in limited partnerships (Local Partnerships) which own
and operate apartment complexes.
The General Partners of the Partnership are C.R.I., Inc. (CRI), which
is the Managing General Partner, and current and former shareholders of
CRI. The Initial Limited Partner is Rockville Pike Associates Limited
Partnership-V, a limited partnership which includes certain officers and
former employees of CRI. The Special Limited Partner is Two Broadway
Associates, a limited partnership which includes an affiliate and employees
of Merrill Lynch, Pierce, Fenner & Smith, Incorporated.
The Partnership sold 21,200 BACs at $1,000 per BAC through a public
offering. The offering period was terminated on July 19, 1986.
b. Method of accounting
--------------------
The financial statements of the Partnership are prepared on the
accrual basis of accounting in accordance with generally accepted
accounting principles.
c. Principles of consolidation
---------------------------
These financial statements include the accounts of two intermediary
limited partnerships which have invested in two Local Partnerships which
own and operate apartment complexes.
d. Investments in and advances to partnerships
-------------------------------------------
The investments in and advances to Local Partnerships (see Note 2) are
accounted for by the equity method because the Partnership is a limited
partner in the Local Partnerships. Under this method, the carrying amount
of the investments in and advances to Local Partnerships is (i) reduced by
distributions received and (ii) increased or reduced by the Partnership's
share of earnings or losses, respectively, of the Local Partnerships. As
of December 31, 1995 and 1994, the Partnership's share of the cumulative
losses of six of the Local Partnerships exceeds the amount of the
Partnership's investment in and advances to those Local Partnerships by
$6,386,262 and $6,405,470, respectively. Since the Partnership has no
further obligation to advance funds or provide financing to these Local
Partnerships, except as described herein, the excess losses have not been
reflected in the accompanying consolidated financial statements. As of
December 31, 1995 and 1994, cumulative cash distributions of $79,315 and
$22,429, respectively, have been received from the Local Partnerships for
which the Partnership's carrying value is zero. These distributions are
recorded as increases in the Partnership's share of income from
partnerships.
IV-10
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Costs incurred in connection with acquiring these investments have
been capitalized and are being amortized using the straight-line method
over the estimated useful lives of the properties owned by the Local
Partnerships, with exception to those costs relating to River Place, Ltd.
which are no longer being amortized as a result of its classification as an
asset held for sale as of December 31, 1995. Those costs relating to
Deerfield Partners Limited Partnership have been fully amortized as of
December 31, 1995, as discussed below.
e. Fair value of financial instruments
-----------------------------------
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.
f. Cash and cash equivalents
-------------------------
Cash and cash equivalents consist of all money market funds,time and
demand deposits, repurchase agreements and commercial paper with original
maturities of three months or less. The Partnership has determined that
the carrying amount of its cash and cash equivalents approximates fair
value.
g. Offering costs
--------------
The Partnership incurred certain costs in connection with the offering
and selling of BACs. Such costs were recorded as a reduction of partners'
capital when incurred.
h. Income taxes
------------
For federal and state income tax purposes, each partner reports on his
personal income tax return his share of the Partnership's income or loss as
determined for tax purposes. Accordingly, no provision (credit) has been
made for income taxes in these consolidated financial statements.
IV-11
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
i. Use of estimates
----------------
In preparing financial statements in conformity with generally
accepted accounting principles, the Partnership is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from those estimates.
j. Assets held for sale
--------------------
On December 27, 1995, the Managing General Partner entered into a
purchase option agreement for the sale of the Partnership's 98.99% limited
partnership interest in River Place, Ltd. The sale is expected to be
completed by February 1, 1997, as discussed below. Accordingly, the
investment in this Local Partnership was classified as an investment held
for sale on the balance sheet as of December 31, 1995. Assets held for
sale are not recorded in excess of their estimated net realizable value.
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
a. Due on investment in partnerships
---------------------------------
As of December 31, 1995, the Partnership had acquired limited
partnership interests in eight Local Partnerships, which were organized to
develop, construct, own, maintain and operate multifamily apartment
complexes. The remaining principal amounts due on investments in the Local
Partnerships as of December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Due to local general partners $ 174,600 $ 492,900
Purchase money notes due:
1995 -- 2,500,000
1996 230,000 230,000
1997 2,500,000 250,000
1998 -- --
1999 -- --
2000 -- --
Thereafter 2,118,000 2,118,000
------------ ------------
$ 5,022,600 $ 5,590,900
============ ============
</TABLE>
The amounts due to local general partners of $174,600 plus accrued
interest of $75,400 will be paid upon the occurrence of certain specified
events, as outlined in the respective Local Partnerships' partnership
agreements. The purchase money notes have stated interest rates ranging
from 9% to 14%, compounded annually. The purchase money notes are payable
IV-12
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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. On December 27, 1995,
purchase money notes in an aggregate principal amount of $2,500,000, which
were originally scheduled to mature on December 31, 1995, were extended to
February 1, 1997, as discussed below. 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 and unpaid
purchase price for the years ended December 31, 1995, 1994 and 1993 was
$1,668,558, $1,417,693 and $1,320,665, respectively. The accrued interest
on the purchase money notes of $7,938,744 and $7,416,795 as of December 31,
1995 and 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 respective Local Partnership
agreements.
Purchase money notes relating to River Place, Ltd. totaling $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 a
purchase option agreement with the noteholders which grants 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 (5.65% at
January 1, 1996), compounded annually. Purchase money note interest of
$821,528 which accrued during 1995 has been forgiven by the noteholders as
part of the agreement, and is classified as an extraordinary gain on the
consolidated statement of operations. On December 28, 1995, the
noteholders exercised the first option, which entitled the noteholders to
purchase 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 exercised the
second option and 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 $1,661,553,
respectively, resulting in a net financial statement gain and a net tax
IV-13
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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. On December 28,
1995, the noteholders paid a fee in 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 78% of the
Partnership's investments in and advances to Local Partnerships as of
December 27, 1995. In addition, for the period ended December 31, 1995,
distributions from River Place, Ltd. represented approximately 51% of total
distributions from Local Partnerships. The Partnership's share of income
from River Place, Ltd. for the period ended December 31, 1995 represented
approximately 80% of the total share of income reorganized from Local
Partnerships.
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 March
8, 1996, principal and accrued interest totalling $230,000 and $377,319,
respectively, were due. The Managing General Partner has 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, as discussed below. As of March 8, 1996, the noteholders had not
accepted nor rejected the offer, but had expressed an interest in
discussing the offer in more detail with the Managing General Partner.
There is no assurance that the noteholders will reach an agreement of any
kind with the Managing General Partner. 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.
As a result of recurring operating deficits and the discontinuance of
the funding of the deficits by the local general partner, Paradise
Foothills defaulted on its mortgage loan in August 1989. The local general
IV-14
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
partner failed at previous attempts to negotiate a workout, and under the
terms of the co-insurance agreement, the loan was assigned to the
Department of Housing and Urban Development (HUD) on July 3, 1991. From
May 1992 through April 1994, the local general partners submitted various
workout proposals to HUD. Effective June 1, 1994, a nine-year workout
proposal that was submitted to HUD on April 11, 1994 was approved.
Paradise Foothills was notified by HUD that HUD had sold Paradise
Foothills' mortgage loan in September 1995. A new mortgagee now services
the loan and Paradise Foothills is no longer subject to HUD regulatory
requirements. Paradise Foothills continues to pay the mortgage based on
the nine-year workout approved by HUD.
SFAS 107 requires the disclosure of fair value information about
financial instruments for which it is practicable to estimate that value.
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: (1) the lack of an active market for this type
of financial instrument, (2) the variable nature of purchase money note
interest payments as a result of fluctuating cash flow distributions
received from the related Local Partnerships, and (3) 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.
b. Interests in profits, losses and cash distributions
---------------------------------------------------
With the exception of the Partnership's investment in River Place,
Ltd., as discussed above, the Partnership has a 97.99% to 98.99% interest
in profits, losses and cash distribution of each Local Partnership. An
affiliate of the General Partners of the Partnership is also a general
partner of each Local Partnership or the intermediary partnership which
invests in the Local Partnership. As stipulated by the Local Partnerships'
partnership agreements, six of the Local Partnerships are required to make
annual cash distributions from surplus cash flow, if any. As of December
31, 1995, two of the Local Partnerships had surplus cash, as defined by the
respective partnership agreement, in the amount of $351,845. During 1995,
1994 and 1993, the Partnership received cash distributions from rental
operations of the Local Partnerships of $327,334, $232,536 and $125,175,
respectively.
Upon sale, refinancing or liquidation of each Local Partnership, the
proceeds from the sale, refinancing or liquidation shall be distributed in
accordance with the provisions of each Local Partnership's partnership
agreement. In accordance with such provisions, the Partnership would
receive from such proceeds its respective percentage interest of any
remaining proceeds, after payment of: (1) all debts and liabilities of the
Local Partnership and certain other items, (2) the Partnership's capital
contributions plus certain specified preferred returns to the Partnership
and (3) certain special distributions to general partners and related
entities of the Local Partnership.
IV-15
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
c. Property matters
----------------
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 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 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 whereby Deerfield will transfer 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.
Any and all future net cash flow generated by the property prior to the
transfer of ownership, as defined in the term sheet agreement, 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 1995, 1994 or 1993. 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 reports of the auditors on the financial statements of Deerfield
for the years ended December 31, 1995, 1994 and 1993 indicate that
substantial doubt exists about the ability of this Local Partnership to
continue as a going concern due to the property's recurring operating
deficits and the Local Partnership's default on its mortgage. 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
IV-16
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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 December
31, 1995 and December 31, 1994, accrued interest was $200,402 and $176,778,
respectively.
Effective July 1, 1993, the Springfield Apartments (Springfield) first
mortgage loan was extended to June 30, 1996. As of 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 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 December 31, 1995 and 1994, non-interest-bearing loans
to Springfield totalled $354,239 and $509,438, 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. As of December 31, 1995, the
Partnership had advanced the funds necessary to cover the lender's closing
costs of $2,293. 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 $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 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.
IV-17
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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 31, 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.
d. Summarized financial information
--------------------------------
Summarized financial information for the Local Partnerships as of
December 31, 1995 and 1994 and for the years ended December 31, 1995, 1994
and 1993 is as follows:
IV-18
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
<TABLE>
<CAPTION>
COMBINED BALANCE SHEETS
December 31,
1995 1994
------------ ------------
<S> <C> <C>
Rental property, at cost, net of accumulated depreciation of
$20,289,128 and $18,558,558, respectively $ 31,606,503 $ 32,889,559
Land 7,481,137 7,481,137
Other assets 3,954,222 4,987,871
------------ ------------
Total assets $ 43,041,862 $ 45,358,567
============ ============
Mortgage notes payable $ 42,170,423 $ 44,786,779
Due to general partners 1,087,008 633,711
Other liabilities 6,212,214 6,013,421
------------ ------------
Total liabilities 49,469,645 51,433,911
Partners' deficit (6,427,783) (6,075,344)
------------ ------------
Total liabilities and partners' deficit $ 43,041,862 $ 45,358,567
============ ============
</TABLE>
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF OPERATIONS
For the years ended December 31,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Rental $ 9,511,594 $ 9,225,786 $ 8,991,603
Interest 75,437 90,411 63,640
Other 1,597,231 361,085 286,873
------------ ------------ ------------
Total revenue 11,184,262 9,677,282 9,342,116
------------ ------------ ------------
Expenses:
Operating 5,591,002 4,945,267 5,144,975
Interest 3,746,952 3,195,793 3,482,546
Depreciation 1,737,018 1,744,793 1,715,647
Amortization 57,329 37,665 65,092
------------ ------------ ------------
Total expenses 11,132,301 9,923,518 10,408,260
------------ ------------ ------------
Net income (loss) $ 51,961 $ (246,236) $ (1,066,144)
============ ============ ============
</TABLE>
IV-19
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
e. Reconciliation of the Local Partnerships' financial statement
-------------------------------------------------------------
net loss to income tax loss
---------------------------
For federal income tax purposes, the Local Partnerships report on a
basis whereby: (1) certain revenue and the related assets are recorded
when received rather than when earned; (2) certain costs are expensed when
paid or incurred rather than capitalized and amortized over the period of
benefit; and (3) a shorter life is used to compute depreciation of the
property for tax purposes as permitted by Internal Revenue Service (IRS)
Regulations. These returns are subject to audit and, therefore, possible
adjustment by the IRS.
A reconciliation of the Local Partnerships' financial statement net
loss reflected above to the income tax loss for the years ended December
31, 1995, 1994 and 1993 is as follows:
IV-20
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Financial statement net income (loss) $ 51,961 $ (246,236) $ (1,066,144)
Adjustments:
Additional tax depreciation using accelerated methods,
net of depreciation on construction period expenses
capitalized for financial statement purposes (481,007) (449,745) (640,334)
Amortization for financial statement purposes not
deducted for tax purposes 460,907 52,524 52,524
Forgiveness of debt and related accrued interest
taxable for income tax purposes -- -- 379,152
Miscellaneous, net 23,168 (17,213) 40,629
------------ ------------ ------------
Income tax income (loss) $ 55,029 $ (660,670) $ (1,234,173)
============ ============ ============
</TABLE>
3. RELATED-PARTY TRANSACTIONS
In accordance with the Partnership Agreement, the Partnership paid the
Managing General Partner a fee for services in connection with the review,
selection, evaluation, negotiation and acquisition of the interests in the Local
Partnerships and a fee for its services in connection with the initial
management of the Partnership through 1989. The Partnership paid $424,000 in
acquisition fees. The acquisition fees were capitalized and are being amortized
over a thirty-year period using the straight-line method, with exceptions as
discussed in Note 1(d).
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. For the
years ended December 31, 1995, 1994 and 1993, the Partnership paid $86,907,
$68,747 and $72,915, 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.
The amount of the Management Fee shall be equal to .50% of equity payments,
as defined in the Partnership Agreement, and shall be payable from the
Partnership's cash available for distribution, as defined in the Partnership
Agreement, as of the end of each calendar year on a monthly basis as an
operating expense before any distributions to limited partners in the amount
computed as described in the Partnership Agreement, provided that such amount
shall not exceed $97,930. The Partnership paid the Managing General Partner a
Management Fee of $97,930 for each of the years ended December 31, 1995, 1994
and 1993.
IV-21
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. RELATED-PARTY TRANSACTIONS - Continued
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
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. Fees paid or accrued were $62,204, $45,116 and $4,610, respectively, for
the year ended December 31, 1993. 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.
4. PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS
All profits and losses prior to the first date on which the first BAC
Holders were admitted were allocated to affiliates of the General Partners.
Upon admission of the first BAC Holder, such interests were reduced. The BAC
Holders own 96% of the Partnership. The net proceeds resulting from the
liquidation of the Partnership or the Partnership's share of the net proceeds
from any sale or refinancing of the projects or their rental properties shall be
distributed and applied as follows:
(i) to the payment of debts and liabilities of the Partnership
(including all expenses of the Partnership incident to the sale
or refinancing) other than loans or other debts and liabilities
of the Partnership to any partner or any affiliate, such debts
and liabilities, in the case of a nonliquidating distribution, to
be only those which are then required to be paid or, in the
judgment of the Managing General Partner, required to be provided
for;
(ii) to the establishment of any reserves which the Managing General
Partner deems reasonably necessary for contingent, unmatured or
unforeseen liabilities or obligations of the Partnership;
(iii) except in the case of a refinancing, to each partner in an amount
equal to the positive balance in his capital account as of the
date of the sale, adjusted for operations and distributions to
that date, but before allocation of any profits for tax purposes
realized from such sale or refinancing and allocated pursuant to
the Partnership Agreement;
(iv) to the Assignees and BAC Holders an aggregate amount of proceeds
from sale or refinancing and all prior sales or refinancings
equal to their capital contributions, without reduction for prior
cash distributions other than prior distributions of sale and
refinancing proceeds;
(v) to the Special Limited Partner an amount equal to 1% of the sum
of the sale and refinancing proceeds less the amounts set forth
above;
(vi) to the Assignees and BAC Holders, an amount for each fiscal year
after 1986, equal to a noncompounded cumulative return of 6% per
annum of the capital contribution paid by each Assignee and each
BAC Holder, which additional amount may be increased by a Tax
Bracket Adjustment Factor, and reduced, but not below zero, by
distributions of net cash flow to each Assignee and BAC Holder;
and to the Special and Initial Limited Partners, in the amount of
their capital contributions, respectively;
IV-22
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS - Continued
(vii) to the repayment of any unrepaid loans theretofore made by any
partner or any affiliate to the Partnership for Partnership
obligations and to the payment of any unpaid amounts owing to the
General Partners pursuant to the Partnership Agreement;
(viii) to the General Partners in the amount of their capital
contributions;
(ix) thereafter, in equal shares to the General Partners for services
to the Partnership and to the Special Limited Partner whether or
not any is then a general partner or special limited partner (or
their designees), an aggregate fee of 1% of the gross proceeds
resulting from (A) such sale (if the proceeds are from a sale
rather than a refinancing) and (B) any prior sales from which
such 1% fee was not paid to the General Partners or the Special
Limited Partner or their designees;
(x) to the General Partners, the Initial Limited Partner and the
Special Limited Partner an amount equal to the total of all
accrued but unpaid portions of the Deferred Cash Flow Return
which were previously deferred; and
(xi) the remainder, 12% in the aggregate to the General Partners and
the Initial Limited Partner (or their assignees) (11.51% to the
General Partners and .49% to the Initial Limited Partner), 85% in
the aggregate to the Assignees and BAC Holders, as a group (or
their assignees) and 3% to the Special Limited Partner.
Fees payable to the General Partners and the Special Limited Partner (or
their designees) under (ix) above, together with all other property disposition
fees and any other commissions or fees payable upon the sale of apartment
complexes, shall not in the aggregate exceed the lesser of the competitive rate
or 6% of the sales price of the apartment complexes.
If there are insufficient funds to make payment in full of all amounts, the
funds then available for payment shall be allocated proportionately among the
persons entitled to payment pursuant to such subsection of the Partnership
Agreement. Pursuant to the Partnership Agreement, all cash available for
distribution, as defined, shall be accrued at 89% to the Assignees and to the
BAC Holders (other than the Initial Limited Partner and Special Limited
Partner), 2.5% to the Special Limited Partner, .49% to the Initial Limited
Partner and 8.01% to the General Partners after payment of the Management Fee
(see Note 6a), as specified in the Partnership Agreement. All cash available
for distribution, as defined, shall be distributed, not less frequently than
annually, as follows:
a. 1% to the Special Limited Partner; and
b. 89% to the Assignees and to the BAC Holders and 10% to the General
Partners, Special Limited Partner,and Initial Limited Partner, except
that the 10% to the General Partners, Special Limited Partner, and
Initial Limited Partner shall be subordinated to the Preferred Cash
Flow Return to the Assignees which is calculated to be 7.332% based on
the Tax Reform Act of 1986.
The Partnership had cash available for distribution, as defined in the
Partnership Agreement, prior to the establishment of any reserves deemed
necessary by the Managing General Partner and after payment of the Management
Fee, of approximately $100,000, $0 and $0 for the years ended December 31, 1995,
1994 and 1993, respectively. No distributions were declared or paid during the
IV-23
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS - Continued
years ended December 31, 1995, 1994 and 1993.
5. RECONCILIATION OF THE PARTNERSHIP'S FINANCIAL STATEMENT NET LOSS TO
INCOME TAX LOSS
For federal income tax purposes, the Partnership reports on a basis
whereby: (1) certain expenses are amortized rather than expensed when incurred;
(2) certain costs are amortized over a shorter period for tax purposes, as
permitted by IRS Regulations; and (3) certain costs are amortized over a longer
period for tax purposes. The Partnership records its share of losses from its
investments in limited partnerships for federal income tax purposes as reported
on the Local Partnerships' federal income tax returns (see Note 2e), including
losses in excess of related investments amounts. These returns are subject to
audit and, therefore, possible adjustment by the IRS.
A reconciliation of the Partnership's financial statement net loss to the
income tax loss for the years ended December 31, 1995, 1994 and 1993 is as
follows:
IV-24
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. RECONCILIATION OF THE PARTNERSHIP'S FINANCIAL STATEMENT NET LOSS TO
INCOME TAX LOSS - Continued
<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Financial statement net loss $ (611,655) $ (1,625,282) $ (1,204,558)
Adjustments:
Differences between the income tax losses and financial
statement losses related to the Partnership's
equity in the Local Partnerships' losses
(see Note 2e) 601,244 (715,775) (1,277,967)
Amortization for financial statements purposes not
deducted for income tax purposes 20,535 (23,526) (23,702)
Difference in gain on disposition of investment in
partnership (609,630) -- --
------------ ------------ ------------
Income tax loss $ (599,506) $ (2,364,583) $ (2,506,227)
============ ============ ============
</TABLE>
6. COMMITMENTS
Deposit held by escrow agent
----------------------------
The Partnership established an escrow for Semper Village from the
Partnership's outstanding capital contributions, purchase price and
purchase price interest, with respect to its investment in the Local
Partnership. In connection to the refinancing of the property's first
mortgage, as previously discussed, the balance of the escrow of $552,979
was released to the Local Partnership on August 30, 1995. The deposit held
by the escrow agent, including interest earned on the funds, amounted to
$531,069 as of December 31, 1994. No funds were released to the Local
Partnership during 1994 and 1993.
IV-25
<PAGE>
FINANCIAL STATEMENT SCHEDULE
IV-26
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
ON FINANCIAL STATEMENT SCHEDULE
-------------------------------
To the Partners
Capital Realty Investors-85
Limited Partnership
In connection with our audit of the consolidated financial statements of
Capital Realty Investors-85 Limited Partnership referred to in our report dated
March 8, 1996, which is included in this Form 10-K, we have also audited
Schedule III as of December 31, 1995, 1994 and 1993. We did not audit the
financial statements for six of the Local Partnerships in 1995, 1994 and 1993,
which are accounted for as described in Note 1d. In our opinion, this schedule
presents fairly, in all material respects, the information required to be set
forth therein.
Grant Thornton LLP
Vienna, VA
March 8, 1996
IV-27
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION OF
LOCAL PARTNERSHIPS IN WHICH CAPITAL REALTY INVESTORS-85 LIMITED
PARTNERSHIP HAS INVESTED
December 31, 1995
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D
- -------------------- ------- ------------------------------- --------------------------------
Initial Costs Capitalized
Cost to Local Subsequent
Partnership to Acquisition
-------------------------------- --------------------------------
Building
Description Encum- and Improvements Carrying
Operating Properties brances Land Improvements (Adjustments) Costs (B)
- -------------------- ------- ----------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
Deerfield Apartments (A) $ 224,125 $ 4,605,052 $ (419,797) $ --
Mehlville, MO
(100 units-family
apartment complex)
Devonshire (A) 836,846 4,686,649 71,632 --
Kirkland, WA
(140 units-family
apartment complex)
Paradise Foothills (A) 1,390,853 5,103,391 29,639 --
Phoenix, AZ
(180 units-family
apartment complex)
River Place (A) 543,080 6,360,680 195,631 --
Birmingham, AL
(213 units-family
apartment complex)
Semper Village (A) 1,468,152 6,788,578 198,944 --
Westminster, CO
(252 units-family
apartment complex)
Springfield Apartments (A) 1,143,644 6,572,213 371,322 --
Redmond, WA
(184 units-family
apartment complex)
The Pointe (A) 984,058 10,392,750 199,893 --
El Paso, TX
(238 units-family
apartment complex)
</TABLE>
IV-28
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION OF
LOCAL PARTNERSHIPS IN WHICH CAPITAL REALTY INVESTORS-85 LIMITED
PARTNERSHIP HAS INVESTED - Continued
December 31, 1995
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D
- -------------------- ------- ------------------------------- --------------------------------
Initial Costs Capitalized
Cost to Local Subsequent
Partnership to Acquisition
-------------------------------- --------------------------------
Building
Description Encum- and Improvements Carrying
Operating Properties brances Land Improvements (Adjustments) Costs (B)
- -------------------- ------- ----------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
Willow Creek II (A) 5,000 3,018,599 4,605,834 --
Kalamazoo, MI ----------- ------------ ------------ -----------
(159 units-family
apartment complex)
Total $ 6,595,758 $ 47,527,912 $ 5,253,098 $ --
=========== ============ ============ ===========
</TABLE>
IV-29
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION OF
LOCAL PARTNERSHIPS IN WHICH CAPITAL REALTY INVESTORS-85 LIMITED
PARTNERSHIP HAS INVESTED - Continued
December 31, 1995
<TABLE>
<CAPTION>
COL. A COL. E COL. F COL. G COL. H COL. I
- -------------------- ------------------------------------------- ------------ ------- ------- ----------------
Gross amount at which Life upon
carried at close of period which dep-
------------------------------------------- Date reciation in
Building Accumulated of latest income
Description and depreciation Const- Date statement is
Operating Properties Land Improvements Total (C) (D) (D) ruction Acquired computed (years)
- -------------------- ----------- ------------ ------------- ------------ ------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Deerfield Apartments $ 392,044 $ 4,017,336 $ 4,409,380 $ (1,461,657) 1985 12/85 10-40
Mehlville, MO
(100 units-family
apartment complex)
Devonshire 836,846 4,758,281 5,595,127 (1,362,985) 1985 5/86 5-40
Kirkland, WA
(140 units-family
apartment complex)
Paradise Foothills 1,390,853 5,133,030 6,523,883 (2,411,957) 1985 12/85 5-25
Phoenix, AZ
(180 units-family
apartment complex)
River Place 644,224 6,455,167 7,099,391 (2,108,615) 1985 12/85 3-30
Birmingham, AL
(213 units-family
apartment complex)
Semper Village 1,468,152 6,987,522 8,455,674 (3,004,874) 1985 12/85 5-25
Westminster, CO
(252 units-family
apartment complex)
Springfield Apartments 1,143,644 6,943,535 8,087,179 (1,932,717) 1985 4/86 5-40
Redmond, WA
(184 units-family
apartment complex)
The Pointe 984,058 10,592,643 11,576,701 (3,804,288) 1985 12/85 10-30
El Paso, TX
(238 units-family
apartment complex)
</TABLE>
IV-30
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION OF
LOCAL PARTNERSHIPS IN WHICH CAPITAL REALTY INVESTORS-85 LIMITED
PARTNERSHIP HAS INVESTED - Continued
December 31, 1995
<TABLE>
<CAPTION>
COL. A COL. E COL. F COL. G COL. H COL. I
- -------------------- ------------------------------------------- ------------ ------- ------- ----------------
Gross amount at which Life upon
carried at close of period which dep-
------------------------------------------- Date reciation in
Building Accumulated of latest income
Description and depreciation Const- Date statement is
Operating Properties Land Improvements Total (C) (D) (D) ruction Acquired computed (years)
- -------------------- ----------- ------------ ------------- ------------ ------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Willow Creek II 621,316 7,008,117 7,629,433 (4,202,035) 1985 12/85 5-40
Kalamazoo, MI ----------- ------------ ------------- ------------
(159 units-family
apartment complex)
Total $ 7,481,137 $ 51,895,631 $ 59,376,768 $(20,289,128)
=========== ============ ============ ============
</TABLE>
IV-31
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
OF LOCAL PARTNERSHIPS IN WHICH
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP HAS INVESTED
December 31, 1995
(A) Secured by mortgage loans.
(B) The aggregate cost of land for federal income tax purposes is $6,992,126
and the aggregate cost of buildings and improvements for federal income tax
purposes is $51,841,272. The total of the above-mentioned items is
$58,833,398.
(C) Reconciliation of real estate
-----------------------------
IV-32
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
OF LOCAL PARTNERSHIPS IN WHICH
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP HAS INVESTED
December 31, 1995
<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of period $ 58,929,254 $ 58,617,621 $ 58,474,568
Additions during the year:
Acquisitions 456,137 317,359 127,940
Improvements -- -- 15,113
Deletions (8,623) (5,726) --
------------ ------------ ------------
Balance at end of period $ 59,376,768 $ 58,929,254 $ 58,617,621
============ ============ ============
</TABLE>
Reconciliation of accumulated depreciation
------------------------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of period $ 18,558,558 $ 16,819,491 $ 15,103,844
Depreciation expense for the period 1,737,018 1,744,793 1,715,647
Deletions (6,448) (5,726) --
------------ ------------ ------------
Balance at end of period $ 20,289,128 $ 18,558,558 $ 16,819,491
============ ============ ============
</TABLE>
IV-33
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
- ------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
IV-34
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,151,683
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,054,010
<CURRENT-LIABILITIES> 0
<BONDS> 13,036,744
0
0
<COMMON> 0
<OTHER-SE> (8,061,310)
<TOTAL-LIABILITY-AND-EQUITY> 5,054,010
<SALES> 0
<TOTAL-REVENUES> 347,948
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 371,530
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,668,558
<INCOME-PRETAX> (611,655)
<INCOME-TAX> 0
<INCOME-CONTINUING> (611,655)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (611,655)
<EPS-PRIMARY> (27.70)
<EPS-DILUTED> (27.70)
</TABLE>
