<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, 1997
-----------------
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
- ------------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11200 Rockville Pike, Rockville, Maryland 20852
- ----------------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)
(301) 468-9200
- -------------------------------------------------------------------------
(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
- -------------------------------------------------------------------------
(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
1997 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
----
PART I
------
Item 1. Business . . . . . . . . . . . . . . . . . . I-1
Item 2. Properties . . . . . . . . . . . . . . . . . I-3
Item 3. Legal Proceedings . . . . . . . . . . . . . . I-4
Item 4. Submission of Matters to a Vote
of Security Holders . . . . . . . . . . . . I-4
PART II
-------
Item 5. Market for the Registrant's Partnership
Interests and Related Partnership
Matters . . . . . . . . . . . . . . . . . . II-1
Item 6. Selected Financial Data . . . . . . . . . . . II-1
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . II-2
Item 8. Financial Statements and Supplementary
Data . . . . . . . . . . . . . . . . . . . II-6
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . II-6
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-2
Item 13. Certain Relationships and Related
Transactions . . . . . . . . . . . . . . . III-3
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-29
<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). The
Partnership originally made investments in eight Local Partnerships. As of
December 31, 1997, the Partnership had investments in six Local Partnerships.
The original objectives of these 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, applied for
applicable mortgage loans and mortgage insurance and/or entered into
construction contracts, and remained as the local general partners in the Local
Partnerships. The Partnership became the principal limited partner in six (four
as of December 31, 1997) 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 generally a
general partner of the six (four as of December 31, 1997) 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 projects. Additionally, the local
general partners and affiliates of the Managing General Partner may operate
I-1
<PAGE>
PART I
------
ITEM 1. BUSINESS - Continued
--------
other apartment complexes which may be in competition for eligible tenants with
the Local Partnerships' apartment complexes.
A schedule of the apartment complexes owned by Local Partnerships in which
the Partnership has an investment as of December 31, 1997 follows.
I-2
<PAGE>
PART I
------
ITEM 1. BUSINESS - Continued
--------
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 12/31/97 (2) and/or Subsidized Under Rental Units
- -------------------- ------------ --------------------------------- ------------
<S> <C> <C> <C>
Devonshire $ 4,655,047 GMAC 140
Kirkland, WA
Paradise Foothills 6,011,943 The Archon Group L.P. 180
Phoenix, AZ
The Pointe 7,729,288 Lincoln National Life Company 238
El Paso, TX
Semper Village 8,150,000 SRS Insurance Services, Inc. 252
Westminster, CO
Springfield 6,339,569 GMAC 184
Redmond, WA
Willow Creek II 2,798,750 Hartger & Willard Mortgage/221 159
Kalamazoo, MI (d)(4) of the National Housing
Act ------------
------------
TOTALS(3)6 $ 35,684,597 1,153
============ ============
</TABLE>
I-3
<PAGE>
PART I
------
ITEM 1. BUSINESS - Continued
--------
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 1997 1996 1995 1994 1993 1997 1996 1995 1994 1993
- -------------------- ---- ---- ---- ---- ---- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Devonshire 98% 98% 95% 94% 94% $ 7,732 $ 7,286 $ 6,944 $ 6,509 $ 6,605
Kirkland, WA
Paradise Foothills 97% 96% 95% 97% 96% 6,551 6,408 6,340 5,893 5,393
Phoenix, AZ
The Pointe 97% 98% 84% 97% 95% 6,594 6,292 6,403 6,791 6,486
El Paso, TX
Semper Village 99% 99% 98% 95% 92% 6,974 6,782 6,506 6,223 6,009
Westminster, CO
Springfield 97% 99% 97% 93% 93% 8,330 7,744 7,347 6,822 7,190
Redmond, WA
Willow Creek II 91% 96% 91% 92% 96% 6,178 6,025 5,934 5,959 5,807
Kalamazoo, MI ---- ---- ---- --- ---- -------- -------- -------- -------- --------
TOTALS(3)6 97% 98% 93% 95% 94% $ 7,060 $ 6,756 $ 6,579 $ 6,366 $ 6,248
==== ==== ==== === ==== ======== ======== ======== ======== ========
</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, 1997.
(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."
There were no contemplated sales of investments in partnerships as of March
12, 1998.
I-4
<PAGE>
PART I
------
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 I, 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 1997.
I-5
<PAGE>
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP INTERESTS
-------------------------------------------------
AND RELATED PARTNERSHIP MATTERS
-------------------------------
(a) It is not anticipated that there will be any formal market for resale
of BACs in the Partnership. As a result, investors may be unable to
sell or otherwise dispose of their interests in the Partnership.
(b) As of March 12, 1998, there were approximately 1,900 registered
holders of BACs in the Partnership.
(c) No distributions were declared or paid by the Partnership during 1997
or 1996. The Partnership received distributions of $528,557 and
$516,990 from Local Partnerships during 1997 and 1996, respectively.
II-1
<PAGE>
PART II
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ITEM 6. SELECTED FINANCIAL DATA
-----------------------
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Share of income (loss) from
partnerships $ 548,490 $ 329,515 $ 242,074 $ 3,418 $ (209,453)
Interest income 143,543 84,721 105,874 77,539 70,272
Expenses (1,185,969) (1,354,028) (2,040,088) (1,706,239) (1,650,573)
Gain on disposition of investment
in partnership or extraordinary
gain on forgiveness of accrued
interest 2,721,977 1,472,332 1,080,485 -- 585,196
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 2,228,041 $ 532,540 $ (611,655) $ (1,625,282) $ (1,204,558)
============ ============ ============ ============ ============
Net income (loss) allocated to BAC
Holders (96%) $ 2,138,920 $ 511,239 $ (587,189) $ (1,560,270) $ (1,156,376)
============ ============ ============ ============ ============
Net income (loss) per weighted
average BAC outstanding $ 100.92 $ 24.12 $ (27.70) $ (73.60) $ (54.55)
============ ============ ============ ============ ============
Cash distribution per weighted
average BAC outstanding $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ============
Weighted average BACs outstanding 21,195 21,195 21,200 21,200 21,200
============ ============ ============ ============ ============
Total assets $ 2,774,058 $ 3,659,626 $ 5,054,010 $ 5,750,786 $ 6,061,831
============ ============ ============ ============ ============
Total remaining amounts due on
investments, including accrued
interest on purchase price,
purchase money notes and
due to local general partners $ 8,017,800 $ 11,138,793 $ 13,036,744 $ 13,139,795 $ 11,807,278
============ ============ ============ ============ ============
</TABLE>
II-2
<PAGE>
PART II
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Financial Condition/Liquidity
-----------------------------
As of December 31, 1997, 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 originally made investments in eight Local Partnerships. As of
December 31, 1997, the Partnerships had investments in six Local Partnerships.
The Local Partnerships in turn invested in apartment complexes (the
"properties"). The Partnership's liquidity, with unrestricted cash resources of
$1,798,455 as of December 31, 1997, 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 has determined that the carrying amount of its cash and cash
equivalents approximates fair value. As of March 12, 1998, there were no
material commitments for capital expenditures.
During 1997, 1996 and 1995, the Partnership received cash distributions of
$528,557, $516,990 and $327,334, 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
$2,348,000 plus the accrued interest of $5,419,800 as of December 31, 1997, 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 or extended . 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. The remaining purchase money notes mature from 2001 to 2003.
See the notes to the consolidated financial statements for additional
information pertaining to these purchase money notes.
The purchase money notes are generally secured by the Partnership's
interest in the respective Local Partnerships. 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 Partnership's
inability to pay certain of the purchase money note principal and accrued
interest balances when due, and the resulting uncertainty regarding the
Partnership's continued ownership interest in the related Local Partnerships,
does not impact the Partnership's financial condition because the purchase money
notes are nonrecourse and secured solely by the Partnership's interest in the
related Local Partnerships. Therefore, should the investment in any of the
Local Partnerships with maturing purchase money notes not produce sufficient
II-3
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
value to satisfy the related purchase money notes, the Partnership's exposure to
loss is limited because the amount of the nonrecourse indebtedness of each of
the maturing purchase money notes exceeds the carrying amount of the investment
in and advances to the related Local Partnerships. Thus, even a complete loss
of one of these Local Partnerships would not have a material impact on the
financial condition of the Partnership.
The Managing General Partner is continuing to investigate possible
alternatives to reduce the Partnership's 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 or buy down certain purchase money
note obligations. See the notes to the consolidated financial statements for
alternatives relating to specific properties.
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.
As of both December 31, 1997 and 1996, 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.
The Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient cash is available for operating requirements.
In 1997, 1996 and 1995, the receipt of distributions from partnerships was
adequate to support operating cash requirements.
II-4
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
Partnership's Results of Operations
-----------------------------------
1997 versus 1996
- ----------------
The Partnership's net income increased in 1997 from 1996 primarily due to
an increase in the gain on disposition of investment in partnership or
extraordinary gain on forgiveness of accrued interest related to the sale and
foreclosure of the Partnership's remaining interests in River Place and
Deerfield, as discussed in the notes to the consolidated financial statements.
Contributing to the increase in the Partnership's net income was an increase in
share of income from partnerships principally due to the repayment of advances
from one Local Partnership during 1997 which were previously written off. Also
contributing to the increase in the Partnership's net income was a decrease in
interest expense due to the forgiveness of debt related to the sale and
foreclosure of River Place and Deerfield, as discussed in the notes to the
consolidated financial statements, an increase in interest and other income
primarily due to the receipt of cash previously held in escrow related to River
Place and a decrease in general and administrative fees due to decreased payroll
costs.
1996 versus 1995
- ----------------
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 in the notes to the
consolidated financial statements. 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 in the notes to the consolidated financial statements, 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.
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,
1997, 1996 and 1995 did not include losses of $447,600, $721,769 and $610,490,
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 $180,399, $18,891 and $56,886 received from two, one and one
Local Partnerships during 1997, 1996 and 1995, respectively, were offset against
the respective year's recorded losses because these amounts were in excess of
the Partnership's investment.
II-5
<PAGE>
PART II
-------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
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 combined rental revenues of the properties for the five years ended
December 31, 1997, follow. Combined rental amounts for years prior to 1997 have
been adjusted to reflect the sale of the Partnership's remaining interest in
River Place and the foreclosure on the Deerfield property, as discussed in the
notes to the consolidated financial statements.
II-6
<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,
---------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Combined Rental
Revenue $ 8,103,395 $ 7,763,087 $ 7,572,418 $ 7,359,042 $ 7,199,680
Annual Percentage
Increase 4.4% 2.5% 2.9% 2.2%
</TABLE>
Year 2000 Computer Issue
------------------------
The Year 2000 ("Y2K") computer issue refers to the inability of many
computer systems in use today to recognize "00" in the date field as the year
2000 and to recognize the year 2000 as a leap year. The Y2K problem arose
because, for many years, computer software programs, including programs embedded
in hardware, utilized only the last two digits to specify the year with the
assumption that the first two digits were "19." As a result, such programs may
not be able to recognize and process dates beyond 1999; rather they may
recognize and process "00," "01," "02," etc. incorrectly as 1900, 1901, 1902,
instead of as 2000, 2001, 2002. In the opinion of computer experts, this could
cause such programs to create erroneous results, malfunction, or fail completely
unless corrective measures are taken.
The Partnership utilizes software and related computer technologies
essential to its operations that will be affected by the Y2K issue. The
Managing General Partner is studying what actions will be necessary to make its
computer systems Year 2000 compliant; certain upgrades are already scheduled.
The expense associated with these actions cannot presently be determined, but
the Managing General Partner does not expect it to be material.
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-7
<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, 61, 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 properties. 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 and a Director of CRIIMI MAE Inc. and CRIIMI, Inc.
H. William Willoughby, 51, has been President, Secretary and a Director of CRI
since January 1990 and was 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 & Co. He holds a Juris Doctor 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. and CRIIMI, Inc.
Ronald W. Thompson, 51, is 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, 39, is Executive Vice President and Chief Operating Officer.
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, 42, is 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 Doctor degree 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 incorporated herein by
reference to Notes 3 and 4 of the notes to the consolidated financial
statements contained in Part IV, Item 14.
(h) Termination of employment and change in control arrangements.
None.
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, 1997.
(b) Security ownership of management.
The following table sets forth certain information concerning all BACs
beneficially owned, as of December 31, 1997, by each director and by
all directors and officers as a group of the Managing General Partner
of the Partnership's General Partner.
III-2
<PAGE>
PART III
--------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------
MANAGEMENT - Continued
----------
<TABLE>
<CAPTION>
Name of Amount and Nature % of total
Beneficial Owner of Beneficial Ownership Units issued
---------------- ----------------------- ------------
<S> <C> <C>
William B. Dockser Five BACs .02%
H. William Willoughby None 0%
All Directors and Officers
as a Group (5 persons) Five BACs .02%
</TABLE>
(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.
(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-3
<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,
1997 and 1996 IV-6
Consolidated Statements of Operations for
the years ended December 31, 1997, 1996
and 1995 IV-7
Consolidated Statements of Changes in
Partners' Deficit for the years ended
December 31, 1997, 1996 and 1995 IV-8
Consolidated Statements of Cash Flows for
the years ended December 31, 1997, 1996
and 1995 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, 1997, 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-25
Schedule III - Real Estate and Accumulated
Depreciation IV-26
The remaining schedules are omitted because the required information
is included in the consolidated 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 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, 1997.
(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 26, 1998 by: /s/ William B. Dockser
- ----------------- ---------------------------------
DATE William B. Dockser, Director,
Chairman of the Board,
and Treasurer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
March 26, 1998 by: /s/ H. William Willoughby
- ----------------- ---------------------------------
DATE H. William Willoughby,
Director, President
and Secretary
March 26, 1998 by: /s/ Michael J. Tuszka
- ----------------- ---------------------------------
DATE Michael J. Tuszka
Vice President
and Chief Accounting Officer
(Principal Financial Officer
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 (a Maryland limited partnership) as of December 31, 1997 and 1996,
and the related statements of operations, changes in partners' deficit and cash
flows for the years ended December 31, 1997, 1996 and 1995. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. We did not audit the financial statements of certain Local
Partnerships. The Partnership's share of income from these Local Partnerships
constitutes $111,891, $174,470 and $29,989 of income in 1997, 1996 and 1995,
respectively, included in the Partnership's net income or 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, 1997 and 1996, and the
consolidated results of its operations, changes in partners' deficit and cash
flows for the years ended December 31, 1997, 1996 and 1995, in conformity with
generally accepted accounting principles.
Grant Thornton LLP
Vienna, VA
March 12, 1998
IV-4
<PAGE>
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS -
LOCAL PARTNERSHIPS IN WHICH
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
HAS INVESTED*
* The reports of independent certified public accountants - Local
Partnerships in which Capital Realty Investors-85 Limited Partnership has
invested were filed in paper format under Form SE on March 26, 1998 in
accordance with the Securities and Exchange Commission's continuing
hardship exemption granted January 22, 1998.
IV-5
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
---------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Investments in and advances to partnerships $ 612,145 $ 707,182
Investment in partnership held for sale -- 1,303,669
Cash and cash equivalents 1,798,455 1,266,939
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $117,156 and $141,860 respectively 180,745 190,677
Property purchase costs, net of accumulated amortization of
$117,875 and $149,703, respectively 176,813 186,635
Other assets 5,900 4,524
------------ ------------
Total assets $ 2,774,058 $ 3,659,626
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in partnerships $ 2,522,600 $ 4,022,600
Accrued interest payable 5,495,200 7,116,193
Accounts payable and accrued expenses 56,987 49,603
------------ ------------
Total liabilities 8,074,787 11,188,396
------------ ------------
Commitments and contingencies
Partners' capital (deficit):
Capital paid in:
General Partners 2,000 2,000
Limited Partners 21,202,500 21,202,500
------------ ------------
21,204,500 21,204,500
Less:
Offering costs (2,570,535) (2,570,535)
Accumulated losses (23,934,694) (26,162,735)
------------ ------------
Total partners' deficit (5,300,729) (7,528,770)
------------ ------------
Total liabilities and partners' deficit $ 2,774,058 $ 3,659,626
============ ============
</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,
-------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Share of income from partnerships $ 548,490 $ 329,515 $ 242,074
----------- ----------- -----------
Other revenue and expenses:
Revenue
Interest income 143,543 84,721 105,874
----------- ----------- -----------
Expenses
Interest 909,935 1,021,457 1,668,558
Management fee 97,930 97,930 97,930
General and administrative 97,693 144,252 122,172
Professional fees 60,656 70,633 72,368
Amortization 19,755 19,756 79,060
----------- ----------- -----------
1,185,969 1,354,028 2,040,088
----------- ----------- -----------
Total other revenue and expenses (1,042,426) (1,269,307) (1,934,214)
----------- ----------- -----------
Loss before gain on disposition of investment in
partnership or extraordinary gain on forgiveness
of accrued interest (493,936) (939,792) (1,692,140)
----------- ----------- -----------
Gain on disposition of investment in partnership or
extraordinary gain on forgiveness of accrued
interest 2,721,977 1,472,332 1,080,485
----------- ----------- -----------
Net income (loss) $ 2,228,041 $ 532,540 $ (611,655)
=========== =========== ===========
Net income (loss) allocated to General Partners (1.51%) $ 33,643 $ 8,041 $ (9,236)
=========== =========== ===========
Net income (loss) allocated to Initial and Special Limited
Partners (2.49%) $ 55,478 $ 13,260 $ (15,230)
=========== =========== ===========
Net income (loss) allocated to BAC Holders (96%) $ 2,138,920 $ 511,239 $ (587,189)
=========== =========== ===========
Net income (loss) per BAC based on 21,195, 21,195
and 21,200 BACs outstanding at December 31, 1997,
1996 and 1995, respectively $ 100.92 $ 24.12 $ (27.70)
=========== =========== ===========
</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
<TABLE>
<CAPTION>
Initial and
Special Additional
General Limited Limited
Partners Partners Partners Total
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Partners' deficit,
January 1, 1995 $ (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)
Net income 33,643 55,478 2,138,920 2,228,041
----------- ----------- ------------ ------------
Partners' deficit,
December 31, 1997 $ (359,414) $ (593,474) $ (4,347,841) $ (5,300,729)
=========== =========== ============ ============
</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,
------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,228,041 $ 532,540 $ (611,655)
Adjustments to reconcile net loss to net cash
used in operating activities:
Share of income from partnerships (548,490) (329,515) (242,074)
Increase in accrued interest receivable on advances
to partnerships (23,625) (21,786) (23,625)
Gain on disposition of investment in partnership
or extraordinary gain on forgiveness of accrued
interest (2,721,977) (1,472,332) (1,080,485)
Payment of purchase money note interest (122,888) (257,855) (19,066)
Amortization of deferred costs 19,755 19,756 79,060
Changes in assets and liabilities:
Increase in other assets (1,376) (1,180) (2,737)
Increase in accrued interest payable 909,935 1,021,457 1,668,558
Increase (decrease) in accounts payable and accrued expenses 7,384 (28,973) 17,930
------------ ------------ ------------
Net cash used in operating activities (253,241) (537,888) (214,094)
------------ ------------ ------------
Cash flows from investing activities:
Receipt of distributions from partnerships 528,557 516,990 327,334
Advances to partnerships -- (122,201) (211,571)
Repayment of advances to partnerships 256,200 258,355 216,950
Decrease in deposits and cash reserves -- -- 531,069
------------ ------------ ------------
Net cash provided by investing activities 784,757 653,144 863,782
------------ ------------ ------------
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 531,516 115,256 274,688
Cash and cash equivalents, beginning of year 1,266,939 1,151,683 876,995
------------ ------------ ------------
Cash and cash equivalents, end of year $ 1,798,455 $ 1,266,939 $ 1,151,683
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 122,888 $ 257,855 $ 19,066
============ ============ ============
</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 properties.
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 comprised of 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 properties. All activity between the two
intermediary limited partnerships and the Partnership has been eliminated
in consolidation.
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, 1997 and 1996, the Partnership's share of the cumulative
losses of four of the six and five of the eight Local Partnerships,
respectively, exceeds the amount of the Partnership's investment in and
advances to those Local Partnerships by $7,522,459 and $7,074,859,
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, 1997 and 1996,
cumulative cash distributions of $278,605 and $98,206, respectively, have
IV-10
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
been received from the Local Partnerships for which the Partnership's
carrying value is zero. These distributions are recorded as increases in
the Partnership's share of income from partnerships.
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.
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.
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
or her personal income tax return his or her 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 of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
i. Fair Value of Financial Instruments
-----------------------------------
The financial statements include estimated fair value information as
of December 31, 1997, as required by Statement of Financial Accounting
Standards (SFAS) No. 107, "Disclosure About Fair Value of Financial
Instruments." Such information, which pertains to the Partnership's
financial instruments (primarily cash and cash equivalents and purchase
money notes), is based on the requirements set forth in SFAS No. 107 and
does not purport to represent the aggregate net fair value of the
Partnership.
The balance sheet carrying amounts for cash and cash equivalents
approximate estimated fair values of such assets.
IV-11
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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.
j. Asset held for sale
-------------------
On December 28, 1995 and January 2, 1996, certain of the noteholders
purchased a 9.9% and 39.6% interest, respectively, of the Partnership's
98.99% limited partnership 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 purchased the Partnership's remaining 23.76% interest in River
Place on February 21, 1997. Accordingly, the Partnership's investment in
this Local Partnership was classified as an asset held for sale on the
balance sheet as of December 31, 1996. 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 investments in partnerships
----------------------------------
As of December 31, 1997 and 1996, the Partnership held limited
partnership interests in six and eight Local Partnerships, respectively,
which were organized to develop, construct, own, maintain and operate
multifamily apartment properties. The remaining principal amounts due on
investments in the Local Partnerships were as follows.
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
Due to local general partners $ 174,600 $ 174,600
Purchase money notes due in:
1996 230,000 230,000
1997 -- 1,500,000
2001 1,475,000 1,475,000
Thereafter 643,000 643,000
------------ ------------
Total $ 2,522,600 $ 4,022,600
============ ============
</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
IV-12
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
agreements. The purchase money notes have stated interest rates ranging
from 7.5% 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 Partnerships. 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 Partnership's inability to pay certain of the purchase
money note principal and accrued interest balances when due, and the
resulting uncertainty regarding the Partnership's continued ownership
interest in the related Local Partnerships, does not impact the
Partnership's financial condition because the purchase money notes are
nonrecourse and secured solely by the Partnership's interest in the related
Local Partnerships. Therefore, should the investment in any of the Local
Partnerships with maturing purchase money notes not produce sufficient
value to satisfy the related purchase money notes, the Partnership's
exposure to loss is limited because the amount of the nonrecourse
indebtedness of each of the maturing purchase money notes exceeds the
carrying amount of the investment in and advances to the related Local
Partnerships. Thus, even a complete loss of one of these Local
Partnerships would not have a material impact on the financial condition of
the Partnership.
Interest expense on the Partnership's purchase money notes and unpaid
purchase price for the years ended December 31, 1997, 1996 and 1995 was
$909,935, $1,021,457 and $1,668,558, respectively. The accrued interest on
the purchase money notes of $5,419,800 and $7,040,793 as of December 31,
1997 and 1996, 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.
Deerfield
---------
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 its mortgage loan. The
Local Partnership defaulted on its mortgage loan in 1990. On November 16,
1995, the Local Partnership received a notice of default, acceleration and
assignment of rents from the mortgagee. On February, 27, 1996, Deerfield
entered into a term sheet agreement with the mortgagee pursuant to which
Deerfield transferred management of the property to the mortgagee on April
1, 1996. Additionally, pursuant to the term sheet agreement, Deerfield
agreed, at the mortgagee's election, to either voluntarily transfer
IV-13
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
ownership of the property to the mortgagee, or not oppose a foreclosure
action, occurring no earlier than January 6, 1997, without further
consideration, if the mortgage loan default had not been cured by that
date. On January 7, 1997, in accordance with the term sheet agreement, the
mortgagee foreclosed on the property.
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 were nonrecourse
and secured solely by the Partnership's interest in the related Local
Partnership, the Partnership's obligation regarding the purchase money
notes was retired in conjunction with the transfer of ownership in
Deerfield to the mortgagee, as discussed above. 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 previously fully
amortized 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 approximately $875,000. The federal tax gain was
approximately $2.4 million.
Paradise Foothills
------------------
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
12, 1998, principal and accrued interest totaling $230,000 and $505,683,
respectively, were due. The Managing General Partner made an offer for a
nine-year extension, and as of March 12, 1998, the Managing General Partner
is awaiting a response from the purchase money noteholders. There is no
assurance that the Managing General Partner will reach an agreement of any
kind with the noteholders. Additionally, the holder of the loan secured by
the mortgage on Paradise Foothills has attempted to terminate the
provisional workout agreement related to the property. The Managing
General Partner is disputing the purported termination, and since July,
1997, has not received any response from the mortgagee. Should the
noteholders begin foreclosure proceedings on the Partnership's interest in
the related Local Partnership, the Managing General Partner intends to
vigorously contest against such action. However, there can be no assurance
that the Partnership will be able to retain its interest in the Local
Partnership. The uncertainty regarding the continued ownership of the
Partnership's interest in the related Local Partnership does not impact the
Partnership's financial condition, as discussed above.
River Place
-----------
Purchase money notes relating to River Place, Ltd. (River Place)
totaling $2,500,000 plus accrued interest were originally scheduled to
mature on December 31, 1995. On December 27, 1995, the Managing General
Partner entered into an agreement with the noteholders which granted the
noteholders three options to purchase the Partnership's 98.99% limited
partnership interest in River Place over a two-year period. Under the
IV-14
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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, was
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 were to be applied toward any unforgiven purchase money
note interest accrued prior to December 31, 1994. For the years ended
December 31, 1997 and 1996, cash flow distributions of $122,888 and
$257,855, 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 federal tax gain of $258,957 and $470,855, respectively, in 1995. On
January 2, 1996, certain of 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 federal tax gain of approximately $1.5 million and
approximately $2.4 million, 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 approximately
$1.4 million, and a federal tax gain of approximately $1.9 million in 1997.
On February 21, 1997, certain of 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 of approximately $468,000, and a federal tax gain
of approximately $900,000 in 1997. As a result of the noteholders'
purchase of the Partnership's remaining interest in River Place, 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 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, and interest accrued
thereon totaling $1,353, were released to the Partnership in accordance
with the purchase option agreement, on March 17, 1997.
The Partnership's investment in River Place represented approximately
0% and 36% of the Partnership's total assets as of December 31, 1997 and
1996, respectively. In addition, for the years ended December 31, 1997 and
1996, distributions from River Place represented approximately 23% and 50%,
respectively, of total distributions from Local Partnerships. During 1997
and 1996, 100% of the distributions from River Place were paid directly to
the purchase money noteholders. The Partnership's share of income from
River Place was approximately $5,000 and $75,000 for the years ended
December 31, 1997 and 1996, respectively.
IV-15
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
b. Interests in profits, losses and cash distributions
---------------------------------------------------
made by Local Partnerships
--------------------------
The Partnership has a 97.99% to 98.99% interest in profits, losses and
cash distributions 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 invested in the Local
Partnership. As stipulated by the Local Partnerships' partnership
agreements, the Local Partnerships are required to make annual cash
distributions from surplus cash flow, if any. During 1997, 1996 and 1995,
the Partnership received cash distributions from rental operations of the
Local Partnerships of $528,557, $516,990 and $327,334, respectively, which
may be available for distribution in accordance with the respective
agencies' regulations. As of December 31, 1997 and 1996, one and two,
respectively, of the Local Partnerships had surplus cash, as defined by
their respective partnership agreements, in the amount of $96,013 and
$308,283, respectively.
Upon sale or refinancing of a property owned by a Local Partnership,
or upon the liquidation of a Local Partnership, the proceeds from such
sale, refinancing or liquidation shall be distributed in accordance with
the respective 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 amounts as outlined in each
partnership agreement, and (3) certain special distributions to general
partners and related entities of the Local Partnership.
c. Property matters
----------------
Springfield
-----------
The Partnership had previously made advances to Springfield Properties
Limited Partnership (Springfield) related to its mortgage loan. During the
years ended December 31, 1997 and 1996, Springfield paid $256,200, and
$123,690, respectively, to the Partnership as repayment of advances. As of
December 31, 1997 and 1996, non-interest-bearing loans to Springfield
totalled $38,349 and $294,549, respectively. The remaining balance of
these loans and advances was received by the Partnership during 1998.
Semper Village
--------------
On August 31, 1995, the local general partners of Sheridan West
Limited Partnership (Semper Village) refinanced the existing mortgage loan
with a new lender. In connection with the refinancing, the local general
partners executed a settlement agreement with the original mortgagee to pay
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), who in
IV-16
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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.
d. Summarized financial information
--------------------------------
Summarized financial information for the Local Partnerships at
December 31, 1997 and 1996 and for the years ended December 31, 1997, 1996
and 1995 follows.
IV-17
<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,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Rental property, at cost, net of accumulated depreciation of
$19,463,950 and $21,974,157, respectively $ 22,418,372 $ 30,214,664
Land 6,444,869 7,481,137
Other assets 4,073,692 4,411,872
------------ ------------
Total assets $ 32,936,933 $ 42,107,673
============ ============
Mortgage notes payable $ 35,684,597 $ 41,914,612
Due to general partners 3,429,235 3,309,318
Other liabilities 3,181,624 4,280,301
------------ ------------
Total liabilities 42,295,456 49,504,231
Partners' deficit (9,358,523) (7,396,558)
------------ ------------
Total liabilities and partners' deficit $ 32,936,933 $ 42,107,673
============ ============
</TABLE>
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF OPERATIONS
For the years ended December 31,
---------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Rental $ 8,292,309 $ 9,715,232 $ 9,511,594
Interest 75,499 82,689 75,437
Other 358,720 382,171 1,597,231
------------ ------------ ------------
Total revenue 8,726,528 10,180,092 11,184,262
------------ ------------ ------------
Expenses:
Operating 4,437,917 5,418,857 5,591,002
Interest 3,153,678 3,459,186 3,746,952
Depreciation 1,395,848 1,685,029 1,737,018
Amortization 72,292 59,156 57,329
------------ ------------ ------------
Total expenses 9,059,735 10,622,228 11,132,301
------------ ------------ ------------
Net (loss) income $ (333,207) $ (442,136) $ 51,961
============ ============ ============
</TABLE>
IV-18
<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 on the
property 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 taxable (loss) income follows.
IV-19
<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,
---------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Financial statement net (loss) income $ (333,207) $ (442,136) $ 51,961
Adjustments:
Additional tax depreciation using accelerated methods,
net of depreciation on construction period expenses
capitalized for financial statement purposes (378,313) (563,686) (481,007)
Amortization for financial statement purposes not
deducted for income tax purposes 11,847 1,887 460,907
Miscellaneous, net (16,027) (4,314) 23,168
------------ ------------ ------------
Taxable (loss) income $ (715,700) $ (1,008,249) $ 55,029
============ ============ ============
</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 the estimated useful lives of the properties (generally 30 years), using
the straight-line method.
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, 1997, 1996 and
1995, the Partnership paid $61,605, $116,157 and $86,907, 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 the Managing General Partner 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,
1997, 1996 and 1995.
IV-20
<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 non liquidating 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-21
<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
properties, shall not in the aggregate exceed the lesser of the competitive rate
or 6% of the sales price of the apartment properties.
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's 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, was approximately $490,000, $140,000 and $100,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. No distributions were declared
or paid during the years ended December 31, 1997, 1996 and 1995.
5. RECONCILIATION OF THE PARTNERSHIP'S FINANCIAL STATEMENT NET INCOME
(LOSS) TO TAXABLE INCOME (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 investment 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 taxable income (loss) follows.
IV-22
<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 INCOME (LOSS) - Continued
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Financial statement net income (loss) $ 2,228,041 $ 532,540 $ (611,655)
Adjustments:
Differences between the income tax losses and financial
statement losses related to the Partnership's
equity in the Local Partnerships' losses (844,397) (1,069,022) 601,244
Amortization for financial statements purposes not
deducted for income tax purposes 78,989 (46,631) 20,535
Difference in gain on disposition of investment in
partnership 4,805,918 941,801 (609,630)
------------ ------------ ------------
Taxable income (loss) $ 6,268,551 $ 358,688 $ (599,506)
============ ============ ============
</TABLE>
IV-23
<PAGE>
FINANCIAL STATEMENT SCHEDULE
IV-24
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
ON FINANCIAL STATEMENT SCHEDULE
-------------------------------
To the Partners
Capital Realty Investors-85 Limited Partnership
In connection with our audits of the financial statements of Capital Realty
Investors-85 Limited Partnership referred to in our report dated March 12, 1998,
which is included in this Form 10-K, we have also audited Schedule III as of
December 31, 1997, 1996 and 1995. We did not audit the financial statements for
certain of the Local Partnerships in 1997, 1996 and 1995, 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 12, 1998
IV-25
<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, 1997
<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
- -------------------- ------- ----------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
Devonshire (A) 836,846 4,686,649 113,486 --
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 10,392,750 202,301 --
El Paso, TX
(238 units-family
apartment complex)
Semper Village (A) 1,468,152 6,788,578 303,325 --
Westminster, CO
(252 units-family
apartment complex)
Springfield Apartments (A) 1,143,644 6,572,213 497,976 --
Redmond, WA
(184 units-family
apartment complex)
Willow Creek II (A) 5,000 3,018,599 4,762,523 --
Kalamazoo, MI ----------- ------------ ------------ -----------
(159 units-family
apartment complex)
Total $ 5,828,553 $ 36,562,180 $ 5,936,460 $ --
=========== ============ ============ ===========
</TABLE>
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 - Continued
December 31, 1997
<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 (B) (C) (C) ruction Acquired computed (years)
- -------------------- ----------- ------------ ------------- ------------ ------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Devonshire 836,846 4,800,135 5,636,981 (1,596,161) 1985 5/86 5-40
Kirkland, WA
(140 units-family
apartment complex)
Paradise Foothills 1,390,853 5,160,240 6,551,093 (2,797,423) 1985 12/85 5-25
Phoenix, AZ
(180 units-family
apartment complex)
The Pointe 984,058 10,595,051 11,579,109 (4,497,661) 1985 12/85 5-30
El Paso, TX
(238 units-family
apartment complex)
Semper Village 1,468,152 7,091,903 8,560,055 (3,566,706) 1985 12/85 7-25
Westminster, CO
(252 units-family
apartment complex)
Springfield Apartments 1,143,644 7,070,189 8,213,833 (2,279,907) 1985 4/86 5-40
Redmond, WA
(184 units-family
apartment complex)
Willow Creek II 621,316 7,164,806 7,786,122 (4,726,092) 1985 12/85 5-40
Kalamazoo, MI ----------- ------------ ------------- ------------
(159 units-family
apartment complex)
Total $ 6,444,869 $ 41,882,324 $ 48,327,193 $(19,463,950)
=========== ============ ============ ============
</TABLE>
IV-27
<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, 1997
(A) Secures mortgage loans.
(B) The aggregate cost of land for federal income tax purposes is $6,053,851
and the aggregate cost of buildings and improvements for federal income
tax purposes is $41,162,865. The total of the above-mentioned items is
$47,216,716.
(C) Reconciliation of real estate
-----------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of period $ 59,669,958 $ 59,376,768 $ 58,929,254
Additions during period 172,154 293,190 456,137
Deletions during period (11,514,921) -- (8,623)
------------ ------------ ------------
Balance at end of period $ 48,327,191 $ 59,669,958 $ 59,376,768
============ ============ ============
</TABLE>
Reconciliation of accumulated depreciation
------------------------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of period $ 21,974,157 $ 20,289,128 $ 18,558,558
Depreciation expense for the period 1,395,848 1,685,029 1,737,018
Deletions (3,906,055) -- (6,448)
------------ ------------ ------------
Balance at end of period $ 19,463,950 $ 21,974,157 $ 20,289,128
============ ============ ============
</TABLE>
IV-28
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
- ------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
IV-29
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,798,455
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,774,058
<CURRENT-LIABILITIES> 0
<BONDS> 8,017,800
0
0
<COMMON> 0
<OTHER-SE> (5,300,729)
<TOTAL-LIABILITY-AND-EQUITY> 2,774,058
<SALES> 0
<TOTAL-REVENUES> 692,033
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 276,034
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 909,935
<INCOME-PRETAX> (493,936)
<INCOME-TAX> 0
<INCOME-CONTINUING> (493,936)
<DISCONTINUED> 0
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</TABLE>
