<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, 1996
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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
1996 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
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PART I
------
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-2
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . II-3
Item 8. Financial Statements and Supplementary
Data . . . . . . . . . . . . . . . . . . . II-10
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . II-10
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-30
<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. During 1996, five of these BACs were abandoned.
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, 1996, 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
I-1
<PAGE>
PART I
------
ITEM 1. BUSINESS - Continued
--------
competition for eligible tenants with the Local Partnerships' apartment
complexes.
The following is a schedule of the apartment complexes owned by Local
Partnerships in which the Partnership has an investment:
I-2
<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 12/31/96 (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 4,619,708 GMAC 140
Kirkland, WA
Paradise Foothills 6,011,943 The Archon Group L.P. 180
Phoenix, AZ
The Pointe 7,966,360 Lincoln National Life Company 238
El Paso, TX
River Place 2,457,480 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 6,296,661 GMAC 184
Redmond, WA
Willow Creek II 2,851,709 Hartger & Willard Mortgage/221 159
Kalamazoo, MI ------------ (d)(4) of NHA ------------
TOTALS(3)8 $ 41,914,612 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 1996 1995 1994 1993 1992 1996 1995 1994 1993 1992
- -------------------- ---- ---- ---- ---- ---- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Deerfield 98% 98% 96% 99% 93% $ 6,447 $ 6,521 $ 6,265 $ 6,041 $ 5,561
Mehlville, MO
Devonshire 98% 95% 94% 94% 98% 7,286 6,944 6,509 6,605 6,365
Kirkland, WA
Paradise Foothills 96% 95% 97% 96% 98% 6,408 6,340 5,893 5,393 5,063
Phoenix, AZ
The Pointe 98% 84% 97% 95% 96% 6,292 6,403 6,791 6,486 6,265
El Paso, TX
River Place 99% 99% 99% 100% 97% 6,138 6,043 5,823 5,577 5,287
Birmingham, AL
Semper Village 99% 98% 95% 92% 95% 6,782 6,506 6,223 6,009 5,380
Westminster, CO
Springfield 99% 97% 93% 93% 93% 7,744 7,347 6,822 7,190 6,741
Redmond, WA
Willow Creek II 96% 91% 92% 96% 89% 6,025 5,934 5,959 5,807 5,725
Kalamazoo, MI ---- ---- --- ---- ---- -------- -------- -------- -------- --------
TOTALS(3)8 98% 95% 95% 96% 95% $ 6,640 $ 6,505 $ 6,286 $ 6,139 $ 5,798
==== ==== === ==== ==== ======== ======== ======== ======== ========
</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, 1996.
(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 noteholders purchased a 9.9%
and 39.6% interest, respectively, of the Partnership's 98.99% limited partner
interest in River Place, Ltd. (River Place) pursuant to an option agreement (the
Option Agreement) with the noteholders of the related purchase money notes. On
I-4
<PAGE>
PART I
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ITEM 1. BUSINESS - Continued
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February 18, 1997, certain of the noteholders foreclosed on 25.73% of the
Partnership's remaining 49.49% interest in River Place. Certain of the
noteholders also purchased the Partnership's remaining 23.76% interest in River
Place on February 21, 1997 pursuant to the Option Agreement. 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 these transactions.
On February 27, 1996, Deerfield Partners Limited Partnership (Deerfield)
entered into a term sheet agreement with the property's first mortgage
noteholder whereby Deerfield transferred management of the property to the
noteholder on April 1, 1996. Also in accordance with the term sheet agreement,
on January 7, 1997, the mortgagee foreclosed on the property. 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 1996.
I-5
<PAGE>
PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP INTERESTS
-------------------------------------------------
AND RELATED PARTNERSHIP MATTERS
-------------------------------
(a) The Partnership has been informed by Equity Resources Bay Fund (Bay
Fund), a Massachusetts limited partnership which is affiliated with
Equity Resources Group, the general partner of various partnerships
that are limited partners in the Partnership, and Smithtown Bay, LLC
(Smithtown) that they may initiate a tender offer to purchase
additional BACs in the Partnership, but in no case more than a 5%
interest in the Partnership. Bay Fund and Smithtown, which are
unaffiliated with CRI, have stated that they may make the offers for
the express purpose of holding the BACs as a long-term investment and
not with a view to resale. Neither Bay Fund nor Smithtown have
indicated the price per BAC which they may offer for the BACs in the
Partnership. In the event that a tender offer is initiated by either
of these entities, the purchase price will be determined solely at the
discretion of the entities and may not necessarily represent the fair
market value of the BACs. The General Partner takes no position as to
recommending or not recommending these entities to make an offer, nor
will it take a position as to recommending or not recommending either
of the offers to investors, in the event that an offer is made.
Other than the potential Bay Fund or Smithtown offers, it is not
anticipated that there will be any other market for resale of BACs in
the Partnership. As a result, an investor may be unable to sell or
otherwise dispose of his or her interest in the Partnership. There is
no assurance that Bay Fund or Smithtown will initiate a tender offer.
(b) As of March 10, 1997, there were approximately 1,900 registered
holders of BACs in the Partnership.
(c) No distributions were declared or paid by the Partnership during 1996
or 1995. The Partnership received distributions of $516,990 and
$327,334 from Local Partnerships during 1996 and 1995, respectively.
II-1
<PAGE>
PART II
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ITEM 6. SELECTED FINANCIAL DATA
-----------------------
<TABLE>
<CAPTION>
For the years ended December 31,
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Share of income (loss) from
partnerships $ 329,515 $ 242,074 $ 3,418 $ (209,453) $ (458,564)
Interest income 84,721 105,874 77,539 70,272 99,661
Expenses (1,354,028) (2,040,088) (1,706,239) (1,650,573) (1,568,552)
Extraordinary gain on disposition
of investment in partnership or
forgiveness of accrued interest 1,472,332 1,080,485 -- 585,196 --
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 532,540 $ (611,655) $ (1,625,282) $ (1,204,558) $ (1,927,455)
============ ============ ============ ============ ============
Income (loss) allocated to BAC
Holders (96%) $ 511,239 $ (587,189) $ (1,560,270) $ (1,156,377) $ (1,850,357)
============ ============ ============ ============ ============
Income (loss) per BAC outstanding $ 24.12 $ (27.70) $ (73.60) $ (54.55) $ (87.28)
============ ============ ============ ============ ============
Cash distributions per BAC
outstanding $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ============
BACs outstanding 21,195 21,200 21,200 21,200 21,200
============ ============ ============ ============ ============
Total assets $ 3,659,626 $ 5,054,010 $ 5,750,786 $ 6,061,831 $ 6,825,161
============ ============ ============ ============ ============
Total remaining amounts due on
investments, including accrued
interest on purchase price,
purchase money notes and
due to local general partners $ 11,138,793 $ 13,036,744 $ 13,139,795 $ 11,807,278 $ 11,371,809
============ ============ ============ ============ ============
</TABLE>
II-2
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Financial Condition/Liquidity
-----------------------------
As of December 31, 1996, the Partnership had approximately 1,900 investors,
who subscribed to a total of 21,195 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 $1,266,939 as of
December 31, 1996, 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. The
Partnership determined that the carrying amount of its cash and cash equivalents
approximates fair value. As of March 10, 1997, there are no material
commitments for capital expenditures.
During 1996, 1995 and 1994, the Partnership received cash distributions of
$516,990, $327,334 and $232,536, 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.
The Partnership's obligations with respect to its investments in Local
Partnerships, in the form of purchase money notes having a principal balance of
$3,848,000 plus the accrued interest of $7,040,793 as of December 31,1996, are
payable in full upon the earliest of: (1) sale or refinancing of the respective
Local Partnership's rental property; (2) payment in full of the respective Local
Partnership's permanent loan; or (3) maturity. Purchase money notes in an
aggregate principal amount of $230,000 matured on January 30, 1996 but have not
been paid, as discussed below. Purchase money notes having a principal balance
of $250,000 and $1,250,000 matured on January 1, 1997 and February 1, 1997,
respectively, and the Partnership's obligation with respect to these notes has
been satisfied, as discussed below. The remaining purchase money notes mature
from 2001 to 2003. The purchase money notes are generally secured by the
Partnership's interest in the respective Local Partnership. There is no
assurance that the underlying properties will have sufficient appreciation and
equity to enable the Partnership to pay the purchase money notes' principal and
accrued interest when due. If a purchase money note is not paid in accordance
with its terms, the Partnership will either have to renegotiate the terms of
repayment or risk losing its partnership interest in the Local Partnership. The
Managing General Partner is continuing to investigate possible alternatives to
reduce the Partnership's long-term debt obligations. These alternatives
include, among others, retaining the cash available for distribution to meet the
purchase money note requirements, buying out certain purchase money notes at a
discounted price, extending the due dates of certain purchase money notes, or
refinancing the respective properties' underlying debt and using the
Partnership's share of the proceeds to pay off or buy down certain purchase
money note obligations.
As of both December 31, 1996 and 1995, the Partnership's obligations with
respect to its investments in Local Partnerships included $174,600 due to local
general partners, plus accrued interest on these obligations of $75,400.
II-3
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
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. (River Place) totalling
$2,500,000 plus accrued interest were originally scheduled to mature on December
31, 1995. On December 27, 1995, the Managing General Partner entered into an
agreement with the noteholders which granted the noteholders three options to
purchase the Partnership's 98.99% limited partner interest in River Place over a
two-year period. Under the terms of the agreement, the purchase money note
maturity dates were extended to February 1, 1997, with interest to accrue from
January 1, 1996 to February 1, 1997 at the Applicable Federal Rate for short-
term obligations in effect at January 1, 1996 (5.65%), compounded annually.
Purchase money note interest of $821,528 which accrued during 1995 has been
forgiven by the noteholders as part of the agreement. Also as part of the
agreement, any future cash flow distributions received by the Partnership from
River Place should be applied towards any unforgiven purchase money note
interest accrued prior to December 31, 1994. On June 7, 1996 and February 17,
1997, cash flow distributions of $257,855 and $122,888, respectively, were paid
directly by River Place to the noteholders to be applied to such interest.
On December 31, 1995, the noteholders purchased a 9.9% interest in River
Place from the Partnership in exchange for the forgiveness of purchase money
note principal and accrued interest of $250,000 and $306,015, respectively,
resulting in a net financial statement gain and a net tax gain of $258,957 and
$470,855, respectively, in 1995. On January 2, 1996, the noteholders purchased
an additional 39.6% interest in River Place 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. On
February 18, 1997, certain of the noteholders holding notes with an outstanding
principal and accrued interest balance of $650,000 and $1,348,641, respectively,
foreclosed on 25.73% of the Partnership's remaining 49.49% interest in River
Place, resulting in a net financial statement gain of $1,320,860 in 1997. The
tax gain is estimated to be approximately $1.81 million. On February 21, 1997,
the noteholders purchased the Partnership's remaining 23.76% interest in River
Place from the Partnership in exchange for the forgiveness of purchase money
note principal and accrued interest of $600,000 and $434,616, respectively,
resulting in a net financial statement gain in 1997 of $408,729. The tax gain
is estimated to be approximately $856,400. As a result of the noteholders'
purchase of the Partnership's remaining interest in River Place, Ltd., the
Partnership no longer has an ownership interest in the Local Partnership. In
accordance with the purchase option agreement, CRHC, Inc., an affiliate of the
Managing General Partner, has transferred its .01% general partner interest in
River Place, Ltd. to the noteholders and/or their assignees. Pursuant to the
agreement, the noteholders or an affiliate paid a fee into escrow to the
Partnership of $35,000. This fee plus interest accrued thereon totaling $1,353
was released to the Partnership in accordance with the agreement with the
noteholders, on March 17, 1997.
The Partnership's investment in River Place, Ltd. represented approximately
78% of the Partnership's investments in and advances to Local Partnerships as of
December 27, 1995. Additionally, the Partnership's investment in River Place
represented approximately 36% and 53% of the Partnership's total assets as of
II-4
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
December 31, 1996 and 1995, respectively. In addition, for the period ended
December 31, 1996 and 1995, distributions from River Place, Ltd. represented
approximately 50% and 51%, respectively, of total distributions from Local
Partnerships. During 1996 and 1995, 100% and 11%, respectively, of the
distributions from Riverplace were paid directly to the purchase money note
holders. The Partnership's share of income from River Place, Ltd. was $75,298
and $193,162 for the periods ended December 31, 1996 and 1995, respectively.
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 $371,464, respectively. As of March 10, 1997,
principal and accrued interest totalling $230,000 and $438,622, respectively,
were due. The Managing General Partner made an offer to the noteholders to
extend the maturity dates to coincide with the completion of the property's
nine-year mortgage workout agreement on May 31, 2003. The noteholders rejected
the offer and, on March 28, 1996, proposed a one-year extension. The Managing
General Partner has subsequently made a counter-offer for a nine-year extension,
and as of March 10, 1997, the Managing General Partner is awaiting a response
from the purchase money note holders. There is no assurance that the Managing
General Partner will reach an agreement of any kind with the noteholders.
Should the noteholders begin foreclosure proceedings on the Partnership's
interest in the related Local Partnership, the Partnership intends to vigorously
defend such action. However, 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.
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. After continuous negotiations between
the Local Partnership and HUD, HUD notified Deerfield that it 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. On February, 27, 1996, prior to any motion
on these hearings, Deerfield entered into a term sheet agreement with the new
mortgagee pursuant to which Deerfield transferred management of the property to
the new mortgagee on April 1, 1996. Additionally, pursuant to the term sheet
agreement, Deerfield agreed, at the new mortgagee's election, to either
voluntarily transfer ownership of the property to the new mortgagee, or not
II-5
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
oppose a foreclosure action, no earlier than January 6, 1997, without further
consideration, if the mortgage loan default had not been cured by that date. On
March 20, 1996, the bankruptcy court dismissed the bankruptcy case, with the
acquiescence of the Local Partnership, subject to the provisions of the term
sheet agreement. On January 7, 1997, in accordance with the term sheet
agreement, the new mortgagee foreclosed on the property.
All net cash flow generated by Deerfield prior to the foreclosure was
applied towards outstanding accrued interest on the defaulted first mortgage
loan. On April 25, 1996, the Partnership received $81,736 which represented the
release of the operating account for the Local Partnership. Additionally, on
August 7, 1996, the Partnership received $4,815 which represented the final
release of the property's operating account.
The Partnership defaulted on its purchase money notes relating to Deerfield
when the notes matured on January 1, 1997 and were not paid. The default amount
included principal and accrued interest of $250,000 and $623,068, respectively.
Since the purchase money notes are nonrecourse and secured solely by the
Partnership's interest in the related Local Partnership, the Partnership's
obligation regarding the purchase money note was retired in conjunction with the
transfer of ownership in Deerfield to the new mortgagee. 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.
As a result of the foreclosure on the Deerfield property, the Partnership's
purchase money note obligation was forgiven and resulted in a net financial
statement gain of $874,783. The tax gain is estimated to be approximately $3.1
million.
During 1989 and 1988, the Partnership loaned a total of $196,746 to
Deerfield to fund operating deficits. For financial statement purposes, these
loans have been reduced to zero as they were deemed uncollectible. The
Partnership advanced net funds of $2,341 in 1995 to fund operating deficits
while the Local Partnership was seeking bankruptcy protection. These loans were
also reduced zero due to uncollectibility. During 1996, the Partnership
received net payments from Deerfield on these advances of $71,405. As these
payments were in excess of the Partnership's investment in Deerfield, they were
included as income from partnerships during 1996. The Partnership does not
anticipate further payment from Deerfield due to the transfer of the property to
the new mortgagee.
With the exception of the purchase money notes relating to Deerfield and
Riverplace, 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 notes
relating to Deerfield are estimated to have no fair value as a result of the
anticipated foreclosure upon the property by the property's first mortgage
noteholder, as discussed below. The purchase money notes relating to Riverplace
are estimated to have no fair value as a result of the anticipated foreclosure
II-6
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
upon and purchase of the Partnership's remaining interest in the Local
Partnership, 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 1996, the receipt of distributions from partnerships was adequate to support
operating cash requirements.
In 1995, 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 income increased in 1996 from 1995 primarily due to a
decrease in interest expense as a result of the forgiveness of a portion of the
purchase money note principal and interest in exchange for a portion of the
Partnership's investment in River Place, as discussed above. Contributing to
the increase in the Partnership's net income was an increase in the
extraordinary gain on disposition of a portion of the Partnership's investment
in River Place, as discussed above, an increase in share of income from
partnerships primarily due to the repayment of an advance received from one
Local Partnership which had previously been written-off, and a decrease in
amortization expense due to the write-down of acquisition fees and property
purchase costs during 1995 relating to Deerfield in order to record the
investment at its net realizable value. Partially offsetting the increase in
the Partnership's net income was a decrease in interest income due to lower
yields earned on cash and cash equivalents during 1996.
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, as discussed above.
For financial reporting purposes, the Partnership, as a limited partner in
the Local Partnerships, does not record losses from the Local Partnerships in
excess of its investment to the extent that the Partnership has no further
obligation to advance funds or provide financing to the Local Partnerships. As
a result, the Partnership's recognized losses for the years ended December 31,
1996, 1995 and 1994 did not include losses of $721,769, $610,490 and $484,769,
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 $18,891 and $56,886 received from one Local Partnership during
1996 and 1995, respectively, were offset against the year's recorded losses
because these amounts were in excess of the Partnership's investment. During
II-7
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
1994, no distribution was received which was in excess of the Partnership's
investment.
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.
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, 1996 and December 31, 1995,
accrued interest was $222,188 and $200,402, respectively.
Effective July 1, 1993, the maturity date of the Springfield Apartments'
(Springfield) first mortgage loan was extended to June 30, 1996. Springfield
received a 30-day extension, thereby extending the mortgage loan to July 30,
1996. On July 17, 1996, Springfield closed on a 10 year mortgage loan with a
new lender. The new mortgage has a fixed annual percentage rate of 9.63%, up
from a fixed annual percentage rate of 6.88% on the old mortgage loan. Under
the old mortgage, debt service was 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. Additionally, on April 30, 1996, the Partnership
loaned $64,000 to Springfield for a good faith deposit made in connection with
the new mortgage loan. During the year ended December 31, 1996, Springfield
paid $123,690 to the Partnership as repayment of advances. As of December 31,
1996 and 1995, non-interest-bearing loans to Springfield totalled $294,549 and
$354,239, respectively. There is no assurance that Springfield will be able to
repay any of these loans from the Partnership.
Effective August 1, 1993, the maturity date of the Devonshire Apartments'
(Devonshire) first mortgage loan was extended to July 31, 1996. Devonshire
received a 30-day extension, thereby extending the mortgage loan to August 31,
1996. On August 9, 1996, Devonshire closed on a 10 year mortgage loan with a
new lender. The new mortgage has a fixed annual percentage rate of 9.31%, up
from a fixed annual percentage rate of 6.74% on the old mortgage loan. On April
30, 1996, the Partnership loaned $47,000 to Devonshire for a good faith deposit
II-8
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
made in connection with the new mortgage loan. As of December 31, 1996,
Devonshire had repaid this loan from the Partnership in full.
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.
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.
The following table reflects the combined rental revenues of the properties
for the five years ended December 31, 1996.
II-9
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Combined Rental
Revenue $ 9,715,232 $ 9,511,594 $ 9,225,786 $ 8,991,603 $ 8,482,322
Annual Percentage
Increase 2.1% 3.1% 2.6% 6.0%
</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, 60, 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, 50, 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.
Ronald W. Thompson, 50, 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, 38, 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.
III-1
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - Continued
--------------------------------------------------
Melissa Cecil Lackey, 41, 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), (d), (e), (f), (g), (i), (j), (k) and (l)
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 consolidated 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
for each of the years ended December 31, 1996, 1995 and 1994 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
III-2
<PAGE>
PART III
--------
ITEM 11. EXECUTIVE COMPENSATION - Continued
----------------------
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, 1996, 1995 and 1994.
(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,
1996, 1995 and 1994.
(h) 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, 1996.
(b) Security ownership of management.
The following table sets forth certain information concerning all BACs
beneficially owned, as of December 31, 1996, 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 Five .02%
H. William Willoughby None 0%
All Directors and Officers
as a Group (5 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,
1996 and 1995 IV-6
Consolidated Statements of Operations for
the years ended December 31, 1996, 1995
and 1994 IV-7
Consolidated Statements of Changes in
Partners' Deficit for the years ended
December 31, 1996, 1995 and 1994 IV-8
Consolidated Statements of Cash Flows for
the years ended December 31, 1996, 1995
and 1994 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, 1996, 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-26
Schedule III - Real Estate and Accumulated
Depreciation IV-27
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, 1996.
(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.
Managing General Partner
March 25, 1997 /s/ William B. Dockser
- --------------------------- --------------------------------
DATE William B. Dockser, Director,
Chairman of the Board,
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 25, 1997 /s/ H. William Willoughby
- --------------------------- --------------------------------
DATE H. William Willoughby
Director, President and
Secretary
March 25, 1997 /s/ Deborah K. Browning
- --------------------------- --------------------------------
DATE Deborah K. Browning
Vice President,
Chief Accounting 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 balance sheets of Capital Realty Investors-85 Limited
Partnership as of December 31, 1996 and 1995, and the related statements of
operations, changes in partners' deficit and cash flows for the years ended
December 31, 1996, 1995 and 1994. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion of these financial statements based on our audit. We did not
audit the financial statements of certain Local Partnerships. The Partnership's
share of income or loss from these Local Partnerships constitutes $174,470 of
income in 1996, $29,989 of income in 1995 and $7,200 of losses in 1994 included
in the Partnership's net income/loss. The financial statements of these Local
Partnerships were audited by other auditors whose reports thereon have been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amount 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, 1996 and 1995, and the
consolidated results of its operations, changes in partners' deficit and cash
flows for the years ended December 31, 1996, 1995 and 1994, in conformity with
generally accepted accounting principles.
Grant Thornton LLP
Vienna, VA
March 10, 1997
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 20, 1997 in
accordance with the Securities and Exchange Commission's continuing
hardship exemption granted December 19, 1996.
IV-5
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
1996 1995
------------ ------------
<S> <C> <C>
Investments in and advances to partnerships $ 707,182 $ 826,468
Investment in partnership held for sale 1,303,669 2,675,447
Cash and cash equivalents 1,266,939 1,151,683
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $141,860 and $131,928 respectively 190,677 200,609
Property purchase costs, net of accumulated amortization of
$149,703 and $139,879, respectively 186,635 196,459
Other assets 4,524 3,344
------------ ------------
Total assets $ 3,659,626 $ 5,054,010
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in partnerships $ 4,022,600 $ 5,022,600
Accrued interest payable 7,116,193 8,014,144
Accounts payable and accrued expenses 49,603 78,576
------------ ------------
Total liabilities 11,188,396 13,115,320
------------ ------------
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 (26,162,735) (26,695,275)
------------ ------------
Total partners' deficit (7,528,770) (8,061,310)
------------ ------------
Total liabilities and partners' deficit $ 3,659,626 $ 5,054,010
============ ============
</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,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Share of income from partnerships $ 329,515 $ 242,074 $ 3,418
----------- ----------- -----------
Other revenue and expenses:
Revenue
Interest income 84,721 105,874 77,539
----------- ----------- -----------
Expenses
Interest 1,021,457 1,668,558 1,417,693
General and administrative 144,252 122,172 92,920
Professional fees 70,633 72,368 69,689
Management fee 97,930 97,930 97,930
Amortization 19,756 79,060 28,007
----------- ----------- -----------
1,354,028 2,040,088 1,706,239
----------- ----------- -----------
Total other revenue and expenses (1,269,307) (1,934,214) (1,628,700)
----------- ----------- -----------
Net loss before extraordinary gain on disposition of
investment in partnership or forgiveness of accrued
interest (939,792) (1,692,140) (1,625,282)
----------- ----------- -----------
Extraordinary gain on disposition of investment in
partnership or forgiveness of accrued interest 1,472,332 1,080,485 --
----------- ----------- -----------
Net income (loss) $ 532,540 $ (611,655) $(1,625,282)
=========== =========== ===========
Income (loss) allocated to General Partners (1.51%) $ 8,041 $ (9,236) $ (24,542)
=========== =========== ===========
Income (loss) allocated to Initial and Special Limited
Partners (2.49%) $ 13,260 $ (15,230) $ (40,470)
=========== =========== ===========
Income (loss) allocated to BAC Holders (96%) $ 511,239 $ (587,189) $(1,560,270)
=========== =========== ===========
Income (loss) per BAC based on 21,195, 21,200
and 21,200 BACs outstanding at December 31, 1996,
1995 and 1994, respectively $ 24.12 $ (27.70) $ (73.60)
=========== =========== ===========
</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, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Initial and
Special Additional
General Limited Limited
Partners Partners Partners Total
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Partners' deficit
January 1, 1994 $ (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)
Net income 8,041 13,260 511,239 532,540
----------- ----------- ------------ ------------
Partners' deficit
December 31, 1996 $ (393,057) $ (648,952) $ (6,486,761) $ (7,528,770)
=========== =========== ============ ============
</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,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 532,540 $ (611,655) $ (1,625,282)
Adjustments to reconcile net loss to net cash
used in operating activities:
Share of income from partnerships (329,515) (242,074) (3,418)
Increase in accrued interest receivable on advances
to partnerships (21,786) (23,625) (23,625)
Payment of purchase money note interest (257,855) (19,066) (85,176)
Amortization of deferred costs 19,756 79,060 28,007
Extraordinary gain on disposition of investment
in partnership (1,472,332) (1,080,485) --
Changes in assets and liabilities:
(Increase) decrease in other assets (1,180) (2,737) 945
Increase in accrued interest payable 1,021,457 1,668,558 1,417,693
(Decrease) increase in accounts payable and accrued
expenses (28,973) 17,930 (18,280)
------------ ------------ ------------
Net cash used in operating activities (537,888) (214,094) (309,136)
------------ ------------ ------------
Cash flows from investing activities:
Receipt of distributions from partnerships 516,990 327,334 232,536
Decrease (increase) in deposits and cash reserves -- 531,069 (17,556)
Repayment of advances to partnerships 258,355 216,950 99,618
Investments in and advances to partnerships (122,201) (211,571) --
------------ ------------ ------------
Net cash provided by investing activities 653,144 863,782 314,598
------------ ------------ ------------
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 115,256 274,688 5,462
Cash and cash equivalents, beginning of year 1,151,683 876,995 871,533
------------ ------------ ------------
Cash and cash equivalents, end of year $ 1,266,939 $ 1,151,683 $ 876,995
============ ============ ============
</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. During
1996, five of these BACs were abandoned.
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, 1996 and 1995, the Partnership's share of the cumulative
losses of five and six of the Local Partnerships, respectively, exceeds the
amount of the Partnership's investment in and advances to those Local
Partnerships by $7,074,859 and $6,386,262, 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, 1996 and 1995, cumulative cash distributions
of $98,206 and $79,315, respectively, have been received from the Local
Partnerships for which the Partnership's carrying value is zero. These
IV-10
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
distributions are recorded as increases in the Partnership's share of
income from partnerships.
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.
(River Place) and Deerfield Partners Limited Partnership (Deerfield). The
Partnership ceased amortization of these costs for River Place at December
31, 1995 as a result of its classification as an asset held for sale.
Those costs relating to Deerfield were fully amortized as of December 31,
1995, as discussed below.
e. 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.
f. 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.
g. 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.
h. 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.
i. Assets held for sale
--------------------
On December 28, 1995 and January 2, 1996, the noteholders purchased a
9.9% and 39.6% interest, respectively, of the Partnership's 98.99% limited
partner interest in River Place pursuant to an option agreement with the
noteholders of the related purchase money notes. On February 18, 1997,
certain of the noteholders foreclosed on 25.73% of the Partnership's
remaining 49.49% interest in River Place. Certain of the noteholders also
purchased the Partnership's remaining 23.76% interest in River Place on
IV-11
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
February 21, 1997. Accordingly, the Partnership's investment in this Local
Partnership was classified as an investment held for sale on the balance
sheet as of December 31, 1996 and 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, 1996, 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, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Due to local general partners $ 174,600 $ 174,600
Purchase money notes due:
1996 230,000 230,000
1997 1,500,000 2,500,000
1998 -- --
1999 -- --
2000 -- --
2001 1,475,000 1,475,000
Thereafter 643,000 643,000
------------ ------------
$ 4,022,600 $ 5,022,600
============ ============
</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
upon the earliest of: (1) sale or refinancing of the respective Local
Partnership's rental property; (2) payment in full of the respective Local
Partnership's permanent loan; or (3) maturity. Purchase money notes in an
aggregate principal amount of $230,000 matured on January 30, 1996 but have
not been paid, as discussed below. Purchase money notes having a principal
balance of $250,000 and $1,250,000 matured on January 1, 1997 and February
1, 1997, respectively, and the Partnership's obligation with respect to
these notes has been satisfied, as discussed below. The remaining purchase
money notes mature from 2001 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
IV-12
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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, 1996, 1995 and 1994 was
$1,021,457, $1,668,558 and $1,417,693, respectively. The accrued interest
on the purchase money notes of $7,040,793 and $7,938,744 as of December 31,
1996 and 1995, respectively, is due on the respective maturity dates of the
purchase money notes or earlier if the Local Partnerships have
distributable net cash flow, as defined in the respective Local Partnership
agreements.
Purchase money notes relating to River Place totalling $2,500,000 plus
accrued interest were originally scheduled to mature on December 31, 1995.
On December 27, 1995, the Managing General Partner entered into an
agreement with the noteholders which granted the noteholders three options
to purchase the Partnership's 98.99% limited partner interest in River
Place over a two-year period. Under the terms of the agreement, the
purchase money note maturity dates were extended to February 1, 1997, with
interest to accrue from January 1, 1996 to February 1, 1997 at the
Applicable Federal Rate for short-term obligations in effect at January 1,
1996 (5.65%), compounded annually. Purchase money note interest of
$821,528 which accrued during 1995 has been forgiven by the noteholders as
part of the agreement. Also as part of the agreement, any future cash flow
distributions received by the Partnership from River Place should be
applied towards any unforgiven purchase money note interest accrued prior
to December 31, 1994. On June 7, 1996 and February 17, 1997, cash flow
distributions of $257,855 and $122,888, respectively, were paid directly by
River Place to the noteholders to be applied to such interest.
On December 31, 1995, the noteholders purchased a 9.9% interest in
River Place from the Partnership in exchange for the forgiveness of
purchase money note principal and accrued interest of $250,000 and
$306,015, respectively, resulting in a net financial statement gain and a
net tax gain of $258,957 and $470,855, respectively, in 1995. On January
2, 1996, the noteholders purchased an additional 39.6% interest in River
Place 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. On February 18,
1997, certain of the noteholders holding notes with an outstanding
principal and accrued interest balance of $650,000 and $1,348,641,
respectively, foreclosed on 25.73% of the Partnership's remaining 49.49%
interest in River Place, resulting in a net financial statement gain of
$1,320,860 in 1997. The tax gain is estimated to be approximately $1.81
million. On February 21, 1997, the noteholders purchased the Partnership's
remaining 23.76% interest in River Place from the Partnership in exchange
for the forgiveness of purchase money note principal and accrued interest
of $600,000 and $434,616, respectively, resulting in a net financial
statement gain in 1997 of $408,729. The tax gain is estimated to be
approximately $856,400. As a result of the noteholders' purchase of the
Partnership's remaining interest in River Place, Ltd., the Partnership no
IV-13
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
longer has an ownership interest in the Local Partnership. In accordance
with the purchase option agreement, CRHC, Inc., an affiliate of the
Managing General Partner, has transferred its .01% general partner interest
in River Place, Ltd. to the noteholders and/or their assignees. Pursuant
to the agreement, the noteholders or an affiliate paid a fee into escrow to
the Partnership of $35,000. This fee plus interest accrued thereon
totaling $1,353 was released to the Partnership in accordance with the
agreement with the noteholders, on March 17, 1997.
The Partnership's investment in River Place, Ltd. represented
approximately 78% of the Partnership's investments in and advances to Local
Partnerships as of December 27, 1995. Additionally, the Partnership's
investment in River Place represented approximately 36% and 53% of the
Partnership's total assets as of December 31, 1996 and 1995, respectively.
In addition, for the period ended December 31, 1996 and 1995, distributions
from River Place, Ltd. represented approximately 50% and 51%, respectively,
of total distributions from Local Partnerships. During 1996 and 1995, 100%
and 11%, respectively, of the distributions from Riverplace were paid
directly to the purchase money note holders. The Partnership's share of
income from River Place, Ltd. was $75,298 and $193,162 for the periods
ended December 31, 1996 and 1995, respectively.
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 $371,464, respectively. As of March
10, 1997, principal and accrued interest totalling $230,000 and $438,622,
respectively, were due. The Managing General Partner made an offer to the
noteholders to extend the maturity dates to coincide with the completion of
the property's nine-year mortgage workout agreement on May 31, 2003. The
noteholders rejected the offer and, on March 28, 1996, proposed a one-year
extension. The Managing General Partner has subsequently made a counter-
offer for a nine-year extension, and as of March 10, 1997, the Managing
General Partner is awaiting a response from the purchase money note
holders. There is no assurance that the Managing General Partner will
reach an agreement of any kind with the noteholders. Should the
noteholders begin foreclosure proceedings on the Partnership's interest in
the related Local Partnership, the Partnership intends to vigorously defend
such action. However, 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 U. S.
IV-14
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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.
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. After continuous
negotiations between the Local Partnership and HUD, HUD notified Deerfield
that it 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. On February, 27, 1996, prior to any motion on these
hearings, Deerfield entered into a term sheet agreement with the new
mortgagee pursuant to which Deerfield transferred management of the
property to the new mortgagee on April 1, 1996. Additionally, pursuant to
the term sheet agreement, Deerfield agreed, at the new mortgagee's
election, to either voluntarily transfer ownership of the property to the
new mortgagee, or not oppose a foreclosure action, no earlier than January
6, 1997, without further consideration, if the mortgage loan default had
not been cured by that date. On March 20, 1996, the bankruptcy court
dismissed the bankruptcy case, with the acquiescence of the Local
Partnership, subject to the provisions of the term sheet agreement. On
January 7, 1997, in accordance with the term sheet agreement, the new
mortgagee foreclosed on the property.
All net cash flow generated by Deerfield prior to the foreclosure was
applied towards outstanding accrued interest on the defaulted first
mortgage loan. On April 25, 1996, the Partnership received $81,736 which
represented the release of the operating account for the Local Partnership.
Additionally, on August 7, 1996, the Partnership received $4,815 which
represented the final release of the property's operating account.
The Partnership defaulted on its purchase money notes relating to
Deerfield when the notes matured on January 1, 1997 and were not paid. The
default amount included principal and accrued interest of $250,000 and
$623,068, respectively. Since the purchase money notes are nonrecourse
and secured solely by the Partnership's interest in the related Local
Partnership, the Partnership's obligation regarding the purchase money note
was retired in conjunction with the transfer of ownership in Deerfield to
the new mortgagee. 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. As a result of
the foreclosure on the Deerfield property, the Partnership's purchase money
IV-15
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
note obligation was forgiven and resulted in a net financial statement gain
of $874,783. The tax gain is estimated to be approximately $3.1 million.
During 1989 and 1988, the Partnership loaned a total of $196,746 to
Deerfield to fund operating deficits. For financial statement purposes,
these loans have been reduced to zero as they were deemed uncollectible.
The Partnership advanced net funds of $2,341 in 1995 to fund operating
deficits while the Local Partnership was seeking bankruptcy protection.
These loans were also reduced zero due to uncollectibility. During 1996,
the Partnership received net payments from Deerfield on these advances of
$71,405. As these payments were in excess of the Partnership's investment
in Deerfield, they were included as income from partnerships during 1996.
The Partnership does not anticipate further payment from Deerfield due to
the transfer of the property to the new mortgagee.
With the exception of the purchase money notes relating to Deerfield
and Riverplace, 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 notes relating to Deerfield are estimated to have no fair
value as a result of the anticipated foreclosure upon the property by the
property's first mortgage noteholder, as discussed below. The purchase
money notes relating to Riverplace are estimated to have no fair value as a
result of the anticipated foreclosure upon and purchase of the
Partnership's remaining interest in the Local Partnership, 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, 1996, two of the Local Partnerships had surplus cash, as defined by the
respective partnership agreement, in the amount of $308,283. During 1996,
1995 and 1994, the Partnership received cash distributions from rental
operations of the Local Partnerships of $516,990, $327,334 and $232,536,
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
IV-16
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
and (3) certain special distributions to general partners and related
entities of the Local Partnership.
c. Property matters
----------------
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, 1996 and December 31, 1995, accrued interest was $222,188 and $200,402,
respectively.
Effective July 1, 1993, the maturity date of the Springfield
Apartments' (Springfield) first mortgage loan was extended to June 30,
1996. Springfield received a 30-day extension, thereby extending the
mortgage loan to July 30, 1996. On July 17, 1996, Springfield closed on a
10 year mortgage loan with a new lender. The new mortgage has a fixed
annual percentage rate of 9.63%, up from a fixed annual percentage rate of
6.88% on the old mortgage loan. Under the old mortgage, debt service was
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. Additionally, on April 30, 1996,
the Partnership loaned $64,000 to Springfield for a good faith deposit made
in connection with the new mortgage loan. During the year ended December
31, 1996, Springfield paid $123,690 to the Partnership as repayment of
advances. As of December 31, 1996 and 1995, non-interest-bearing loans to
Springfield totalled $294,549 and $354,239, respectively. There is no
assurance that Springfield will be able to repay any of these loans from
the Partnership.
Effective August 1, 1993, the maturity date of the Devonshire
Apartments' (Devonshire) first mortgage loan was extended to July 31, 1996.
Devonshire received a 30-day extension, thereby extending the mortgage loan
to August 31, 1996. On August 9, 1996, Devonshire closed on a 10 year
mortgage loan with a new lender. The new mortgage has a fixed annual
percentage rate of 9.31%, up from a fixed annual percentage rate of 6.74%
on the old mortgage loan. On April 30, 1996, the Partnership loaned
$47,000 to Devonshire for a good faith deposit made in connection with the
new mortgage loan. As of December 31, 1996, Devonshire had repaid this
loan from the Partnership in full.
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,
IV-17
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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, 1996 and 1995 and for the years ended December 31, 1996, 1995
and 1994 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,
1996 1995
------------ ------------
<S> <C> <C>
Rental property, at cost, net of accumulated depreciation of
$21,974,157 and $20,289,128, respectively $ 30,214,664 $ 31,606,503
Land 7,481,137 7,481,137
Other assets 4,411,872 3,954,222
------------ ------------
Total assets $ 42,107,673 $ 43,041,862
============ ============
Mortgage notes payable $ 41,914,612 $ 42,170,423
Due to general partners 3,309,318 1,087,008
Other liabilities 4,280,301 6,212,214
------------ ------------
Total liabilities 49,504,231 49,469,645
Partners' deficit (7,396,558) (6,427,783)
------------ ------------
Total liabilities and partners' deficit $ 42,107,673 $ 43,041,862
============ ============
</TABLE>
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF OPERATIONS
For the years ended December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Rental $ 9,715,232 $ 9,511,594 $ 9,225,786
Interest 82,689 75,437 90,411
Other 382,171 1,597,231 361,085
------------ ------------ ------------
Total revenue 10,180,092 11,184,262 9,677,282
------------ ------------ ------------
Expenses:
Operating 5,418,857 5,591,002 4,945,267
Interest 3,459,186 3,746,952 3,195,793
Depreciation 1,685,029 1,737,018 1,744,793
Amortization 59,156 57,329 37,665
------------ ------------ ------------
Total expenses 10,622,228 11,132,301 9,923,518
------------ ------------ ------------
Net (loss) income $ (442,136) $ 51,961 $ (246,236)
============ ============ ============
</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) income to taxable (loss) income
------------------------------------------
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) income reflected above to the taxable (loss) income for the years
ended December 31, 1996, 1995 and 1994 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,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Financial statement net (loss) income $ (442,136) $ 51,961 $ (246,236)
Adjustments:
Additional tax depreciation using accelerated methods,
net of depreciation on construction period expenses
capitalized for financial statement purposes (563,686) (481,007) (449,745)
Amortization for financial statement purposes not
deducted for tax purposes 1,887 460,907 52,524
Miscellaneous, net (4,314) 23,168 (17,213)
------------ ------------ ------------
Taxable (loss) income $ (1,008,249) $ 55,029 $ (660,670)
============ ============ ============
</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. For the years ended December 31, 1996, 1995 and
1994, the Partnership paid $116,157, $86,907 and $68,747, respectively, as
direct reimbursement of expenses incurred on behalf of the Partnership. Such
expenses are included in the consolidated statements of operations as general
and administrative expenses.
Additionally, in accordance with the terms of the Partnership Agreement,
the Partnership is obligated to pay an annual incentive management fee (the
Management Fee), after all other expenses of the Partnership are paid. 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, 1996, 1995
and 1994.
IV-21
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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;
(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
IV-22
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS - Continued
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 $140,000, $100,000 and $0 for the years ended December 31,
1996, 1995 and 1994, respectively. No distributions were declared or paid
during the years ended December 31, 1996, 1995 and 1994.
5. RECONCILIATION OF THE PARTNERSHIP'S FINANCIAL STATEMENT NET INCOME
(LOSS) TO TAXABLE 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 income
(loss) to the taxable income (loss) for the years ended December 31, 1996,
IV-23
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. RECONCILIATION OF THE PARTNERSHIP'S FINANCIAL STATEMENT NET INCOME
(LOSS) TO TAXABLE LOSS - Continued
1995 and 1994 is as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Financial statement net income (loss) $ 532,540 $ (611,655) $ (1,625,282)
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) (1,069,022) 601,244 (715,775)
Amortization for financial statements purposes not
deducted for income tax purposes (46,631) 20,535 (23,526)
Difference in gain on disposition of investment in
partnership 941,801 (609,630) --
------------ ------------ ------------
Taxable income (loss) $ 358,688 $ (599,506) $ (2,364,583)
============ ============ ============
</TABLE>
IV-24
<PAGE>
FINANCIAL STATEMENT SCHEDULE
IV-25
<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 financial statements of Capital Realty
Investors-85 Limited Partnership referred to in our report dated March 10, 1997,
which is included in this Form 10-K, we have also audited Schedule III as of
December 31, 1996, 1995 and 1994. We did not audit the financial statements for
certain of the Local Partnerships in 1996, 1995 and 1994, which are accounted
for as described in Note 1.d. 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 10, 1997
IV-26
<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, 1996
<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 56,849 --
Phoenix, AZ
(180 units-family
apartment complex)
The Pointe (A) 984,058 10,392,750 203,227 --
El Paso, TX
(238 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 6,788,578 299,511 --
Westminster, CO
(252 units-family
apartment complex)
Springfield Apartments (A) 1,143,644 6,572,213 445,443 --
Redmond, WA
(184 units-family
apartment complex)
Willow Creek II (A) 5,000 3,018,599 4,693,792 --
Kalamazoo, MI ----------- ------------ ------------ -----------
(159 units-family
apartment complex)
Total $ 6,595,758 $ 47,527,912 $ 5,546,288 $ --
=========== ============ ============ ===========
</TABLE>
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 - Continued
December 31, 1996
<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 $ (1,574,427) 1985 12/85 10-40
Mehlville, MO
(100 units-family
apartment complex)
Devonshire 836,846 4,758,281 5,595,127 (1,479,120) 1985 5/86 5-40
Kirkland, WA
(140 units-family
apartment complex)
Paradise Foothills 1,390,853 5,160,240 6,551,093 (2,604,824) 1985 12/85 5-25
Phoenix, AZ
(180 units-family
apartment complex)
The Pointe 984,058 10,595,977 11,580,035 (4,153,535) 1985 12/85 10-30
El Paso, TX
(238 units-family
apartment complex)
River Place 644,224 6,455,167 7,099,391 (2,293,374) 1985 12/85 3-30
Birmingham, AL
(213 units-family
apartment complex)
Semper Village 1,468,152 7,088,089 8,556,241 (3,287,324) 1985 12/85 5-25
Westminster, CO
(252 units-family
apartment complex)
Springfield Apartments 1,143,644 7,017,656 8,161,300 (2,104,006) 1985 4/86 5-40
Redmond, WA
(184 units-family
apartment complex)
Willow Creek II 621,316 7,096,075 7,717,391 (4,477,547) 1985 12/85 5-40
Kalamazoo, MI ----------- ------------ ------------- ------------
(159 units-family
apartment complex)
Total $ 7,481,137 $ 52,188,821 $ 59,669,958 $(21,974,157)
=========== ============ ============ ============
</TABLE>
IV-28
<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, 1996
(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 $52,134,462. The total of the
above-mentioned items is $59,126,588.
(C) Reconciliation of real estate
-----------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of period $ 59,376,768 $ 58,929,254 $ 58,617,621
Additions during the year:
Acquisitions 293,190 456,137 317,359
Improvements -- -- --
Deletions -- (8,623) (5,726)
------------ ------------ ------------
Balance at end of period $ 59,669,958 $ 59,376,768 $ 58,929,254
============ ============ ============
</TABLE>
Reconciliation of accumulated depreciation
------------------------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of period $ 20,289,128 $ 18,558,558 $ 16,819,491
Depreciation expense for the period 1,685,029 1,737,018 1,744,793
Deletions -- (6,448) (5,726)
------------ ------------ ------------
Balance at end of period $ 21,974,157 $ 20,289,128 $ 18,558,558
============ ============ ============
</TABLE>
IV-29
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
- ------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
IV-30
<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 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,266,939
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,659,626
<CURRENT-LIABILITIES> 0
<BONDS> 11,138,793
0
0
<COMMON> 0
<OTHER-SE> (7,528,770)
<TOTAL-LIABILITY-AND-EQUITY> 3,659,626
<SALES> 0
<TOTAL-REVENUES> 414,236
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 332,571
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,021,457
<INCOME-PRETAX> (939,792)
<INCOME-TAX> 0
<INCOME-CONTINUING> (939,792)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,472,332
<CHANGES> 0
<NET-INCOME> 532,540
<EPS-PRIMARY> 24.12
<EPS-DILUTED> 24.12
</TABLE>
