<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
-----------------
Commission file number 0-23766
-----------------
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
- -----------------------------------------------------------------------
(Name of small business issuer 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)
Issuer's telephone number (301) 468-9200
--------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
NONE N/A
- ----------------------------------------- ----------------------
Securities registered pursuant to Section 12(g) of the Act:
BENEFICIAL ASSIGNEE CERTIFICATES
- ------------------------------------------------------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
[ ]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB [X]
State issuer's revenues for its most recent fiscal year $1,013,152.
The limited partner interests of the Registrant are not traded in any
market. Therefore, the limited partner 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
1999 ANNUAL REPORT ON FORM 10-KSB
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. Management's Discussion and Analysis
of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . II-1
Item 7. Financial Statements . . . . . . . . . . . . . . II-5
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . II-5
PART III
--------
Item 9. Directors and Executive Officers
of the Registrant . . . . . . . . . . . . . . . III-1
Item 10. Executive Compensation . . . . . . . . . . . . . III-2
Item 11. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . III-2
Item 12. Certain Relationships and Related Transactions . III-3
Item 13. Exhibits and Reports on Form 8-K . . . . . . . . III-4
Signatures . . . . . . . . . . . . . . . . . . . . . . . . III-5
Financial Statements . . . . . . . . . . . . . . . . . . . III-8
<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
partner 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 BACs were abandoned; during 1998, 37 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
partner interest in limited partnerships (Local Partnerships). The Partnership
originally made investments in eight Local Partnerships. As of December 31,
1999, the Partnership had investments in four 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 6, 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, 1999) of these Local Partnerships. 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, (none as
of December 31, 1999), the Partnership invested as a limited partner in
intermediary partnerships which, in turn, invested as limited partners in the
Local Partnerships. An affiliate of the Managing General Partner of the
Partnership is also a general partner of the six (four as of December 31, 1999)
Local Partnerships as well as the two (none as of December 31, 1999)
intermediary partnerships. In most cases, the local general partners of the
Local Partnerships retain responsibility for developing, constructing,
maintaining, operating and managing the projects. The local general partners
I-1
<PAGE>
PART I
------
ITEM 1. BUSINESS - Continued
--------
and affiliates of the Managing General Partner may operate other apartment
complexes which may be in competition for eligible tenants with the Local
Partnerships' apartment complexes.
I-2
<PAGE>
PART I
------
ITEM 1. BUSINESS - Continued
--------
A schedule of the apartment complexes owned by Local Partnerships in
which the Partnership has an investment as of December 31, 1999, follows.
SCHEDULE OF APARTMENT COMPLEXES 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 12/31/99 (2) and/or Subsidized Under Rental Units
- -------------------- ------------ --------------------------------- ------------
<S> <C> <C> <C>
Paradise Foothills $ 6,011,943 Ocwen Federal Savings Bank/HUD 180
Phoenix, AZ Provisional Workout Agreement
The Pointe 7,374,635 Lincoln National Life Company 238
El Paso, TX
Semper Village 8,150,000 SRS Insurance Services, Inc. 252
Westminster, CO
Willow Creek II 2,680,177 Hartger & Willard Mortgage/ 159
Kalamazoo, MI Section 221(d)(4) of the
National Housing Act
------------ ------------
TOTALS 4 $ 24,216,755 829
============ ============
</TABLE>
I-3
<PAGE>
PART I
------
ITEM 1. BUSINESS - Continued
--------
SCHEDULE OF APARTMENT COMPLEXES 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 1999 1998 1997 1996 1995 1999 1998 1997 1996 1995
- -------------------- ---- ---- ---- ---- ---- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Paradise Foothills 94% 95% 97% 96% 95% $ 6,891 $ 6,951 $ 6,551 $ 6,408 $ 6,340
Phoenix, AZ
The Pointe 91% 95% 97% 98% 84% 6,567 6,716 6,594 6,292 6,403
El Paso, TX
Semper Village 96% 96% 99% 99% 98% 7,685 7,335 6,974 6,782 6,506
Westminster, CO
Willow Creek II 99% 98% 91% 96% 91% 6,713 6,340 6,178 6,025 5,934
Kalamazoo, MI --- ---- ---- ---- ---- -------- -------- -------- -------- --------
TOTALS(3) 4 95% 96% 96% 97% 92% $ 6,964 $ 6,836 $ 6,574 $ 6,377 $ 6,296
=== ==== ==== ==== ==== ======== ======== ======== ======== ========
</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, 1999.
(3) The totals for the percentage of units occupied and the average effective
annual rental per unit are based on a simple average.
Springfield was sold on January 22, 1999. See the notes to the
consolidated financial statements for additional information concerning this
sale.
Devonshire was sold on September 30, 1999. See the notes to the
consolidated financial statements for additional information concerning this
sale.
I-4
<PAGE>
PART I
------
ITEM 2. PROPERTIES
----------
Through its ownership of limited partner interests in Local Partnerships,
Capital Realty Investors-85 Limited Partnership indirectly holds an interest in
the underlying real estate. See Part I, Item 1 for information concerning 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 1999.
I-5
<PAGE>
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP INTERESTS
-------------------------------------------------
AND RELATED PARTNERSHIP MATTERS
-------------------------------
(a) On November 1, 1999, Odd Lot Liquidity Fund, LLC (Odd Lot), an
affiliate of an additional limited partner of the Partnership,
initiated a tender offer to purchase no more than 4.9% of the
outstanding units of CRI-85 at a price of $120 per Beneficial Assignee
Certificate (BAC) unit ($85 per BAC on December 1, 1999). Odd Lot,
which is unaffiliated with CRI-85, stated that it made the offer for
the express purpose of holding the BACs for investment purposes and
not with a view to resale. The price offered was determined solely at
the discretion of Odd Lot and did not necessarily represent the fair
market value of each BAC. The Odd Lot offer expired on December 3,
1999, and as of March 17, 2000, the entity to which Odd Lot assigned
the BACs it had acquired, held 1.2% of the BACs of the Partnership.
Other than the Odd Lot tender offer, or any others of the same type,
it is not anticipated that there will be any formal market for resale
of interests 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 22, 2000, there were approximately 1,800 registered
holders of BACs in the Partnership.
(c) On May 3, 1999, the Managing General Partner distributed $2,496,644
(or $118 per Beneficial Assignee Certificate (BAC)) to holder of BACs
from the proceeds generated from the sale of Springfield Apartments,
to the holders of record as of January 22, 1999. On November 5, 1999,
the Managing General Partner distributed $2,412,012 (or $114 per BAC)
to holders of BACs from the proceeds generated from the sale of
Devonshire Apartments, to the holders of record as of September 30,
1999. No distributions were declared or paid by the Partnership
during 1998. The Partnership received distributions of $795,697 and
$503,945 from Local Partnerships during 1999 and 1998, respectively.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Capital Realty Investors-85 Limited Partnership's (the Partnership)
Management's Discussion and Analysis of Financial Condition and Results of
Operations section contains information that may be considered forward looking,
including statements regarding the effect of governmental regulations. Actual
results may differ materially from those described in the forward looking
statements and will be affected by a variety of factors including national and
local economic conditions, the general level of interest rates, terms of
governmental regulations that affect the Partnership and interpretations of
those regulations, the competitive environment in which the Partnership
operates, and the availability of working capital.
II-1
<PAGE>
PART II
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
Financial Condition/Liquidity
-----------------------------
As of December 31, 1999, the Partnership had approximately 1,800 investors
who subscribed to a total of 21,158 BACs in the original amount of $21,158,000.
The Partnership originally made investments in eight Local Partnerships. As of
December 31, 1999, the Partnerships had investments in four Local Partnerships.
The Local Partnerships in turn invested in apartment complexes (the
"properties"). The Partnership's liquidity, with unrestricted cash resources of
$8,086,701 as of December 31, 1999, along with anticipated future cash
distributions from the Local Partnerships, is expected to be adequate to meet
its current and anticipated operating cash needs. The Partnership's remaining
obligation with respect to its investment in Local Partnerships of $174,600,
excluding purchase money notes and accrued interest, is not in excess of its
capital resources. As of March 22, 2000, there were no material commitments for
capital expenditures.
During 1999 and 1998, the Partnership received cash distributions of
$795,697 and $503,945, respectively, from the Local Partnerships.
The acquisition of interests in certain Local Partnerships was paid for in
part by purchase money notes of the Partnership. The purchase money notes are
nonrecourse obligations of the Partnership which typically mature 10 to 15 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 accrued interest of $7,568,093 as of December 31, 1999, 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. A purchase money note in the
principal amount of $230,000 matured on January 30, 1996 but has not been paid
or extended. The remaining purchase money notes mature in 2001 and 2003. See
the notes to the consolidated financial statements for additional information
concerning these purchase money notes.
The purchase money notes, which are nonrecourse to the Partnership, 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 adversely 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, each of
the related Local Partnerships. Thus, even a complete loss of the Partnership's
II-2
<PAGE>
PART II
-------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
interest in one of these Local Partnerships would not have a material adverse
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, paying off certain purchase money notes at a
discounted price, extending the due dates of certain purchase money notes, or
refinancing the respective properties' underlying debt and using the
Partnership's share of the proceeds to pay off or pay down certain purchase
money note obligations.
Included in due on investments in partnerships is $174,600 due to a local
general partner (related to Paradise Foothills) at both December 31, 1999 and
1998; accrued interest payable thereon was $75,400 at both December 31, 1999 and
1998. These amounts will be paid upon the occurrence of certain specified
events, as outlined in the respective Local Partnership's partnership agreement.
The Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient cash is available for operating requirements.
In 1999 and 1998, the receipt of distributions from partnerships was adequate to
support operating cash requirements.
On May 3, 1999, the Managing General Partner distributed $2,496,644 (or
$118 per Beneficial Assignee Certificate (BAC)) to holders of BACs from the
proceeds generated from the sale of Springfield Apartments, to the holders of
record as of January 22, 1999. On November 5, 1999, the Managing General
Partner distributed $2,412,012 (or $114 per BAC) to holders of BACs from the
proceeds generated from the sale of Devonshire Apartments, to the holders of
record as of September 30, 1999. The Managing General Partner currently intends
to retain all of the Partnership's remaining undistributed proceeds for the
possible repayment, prepayment or retirement of the Partnership's outstanding
purchase money notes related to the Local Partnerships.
Results of Operations
---------------------
1999 versus 1998
- ----------------
The Partnership recognized net income for the year ended December 31, 1999,
compared to net loss for the year ended December 31, 1998, primarily due to gain
on disposition of investment in partnership related to the sales of the
Partnership's interests in Devonshire Development Limited Partnership
(Devonshire) and Springfield Properties Limited Partnership (Springfield), as
discussed in the notes to the consolidated financial statements. Contributing
to the increase in the Partnership's net income was an increase in interest
income due to higher cash and cash equivalent balances during 1999 as a result
of the receipt of proceeds from the sales of Devonshire and Springfield.
Offsetting the increase in the Partnership's net income were an increase in
interest expense on purchase money notes (which is compounded on an annual
basis), an increase in general and administrative expenses, primarily due to
higher reimbursed payroll costs, an increase in professional fees related to
normal increases in the cost of audit and tax services, and a decrease in share
of income from partnerships.
II-3
<PAGE>
PART II
-------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
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,
1999 and 1998 did not include losses of $371,042 and $375,964, 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 $685,391 and $311,781 received
from the three and two Local Partnerships during 1999 and 1998, respectively,
were offset against the respective years' recorded losses because these amounts
were in excess of the Partnership's investment.
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 Partnership's remaining four properties
for the five years ended December 31, 1999, follow. Combined rental revenue
amounts for all years have been adjusted to reflect property sales and interests
transferred during 1999 and prior years, as discussed in the notes to the
consolidated financial statements.
II-4
<PAGE>
PART II
-------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Combined Rental
Revenue $ 5,807,508 $ 5,706,270 $ 5,488,217 $ 5,318,167 $ 5,248,242
Annual Percentage
Increase 1.8% 4.0% 3.2% 1.3%
</TABLE>
Year 2000 Computer Issue
------------------------
The Partnership experienced little to no interruption in its computer
operations, or otherwise, as a result of the transition from the year 1999 to
2000. The Partnership's expenses associated with upgrading and testing its
internal hardware and software systems, data interfaces, business operations and
non-information technology functions which could have been affected by the
transition were not material.
ITEM 7. FINANCIAL STATEMENTS
--------------------
The information required by this item is contained in Part III.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
None.
II-5
<PAGE>
PART III
--------
ITEM 9. 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, follows.
William B. Dockser, 63, 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, 53, 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.
Susan R. Campbell, 41, 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.
Melissa Cecil Lackey, 44, 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.
III-1
<PAGE>
PART III
--------
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - Continued
--------------------------------------------------
(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 10. 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 III.
(h) Termination of employment and change in control arrangements.
None.
ITEM 11. 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, 1999.
(b) Security ownership of management.
The following table sets forth certain information concerning all BACs
beneficially owned, as of December 31, 1999, by each director and by
all directors and officers as a group of the Managing General Partner
of the Partnership.
III-2
<PAGE>
PART III
--------
ITEM 11. 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 (4 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 12. 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 10 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 12(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
12(a).
III-3
<PAGE>
PART III
--------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Continued
----------------------------------------------
(c) Indebtedness of management.
None.
(d) Transactions with promoters.
Not applicable.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Index of Exhibits (Listed according to the number assigned in
----------------- the table in Item 601 of Regulation S-B.)
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 No.
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 No.
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 No. 10(b) to Registrant's Registration Statement on
Form S-11, as amended, dated June 12, 1985.)
Exhibit No. 27 - Financial Data Schedule.
a. Filed herewith electronically.
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
-------------------
A report on Form 8-K was dated and filed October 15, 1999; the report
discussed the sale of Devonshire Apartments, located in Kirkland,
Washington. See the notes to the consolidated financial statements
for additional information concerning this sale.
III-4
<PAGE>
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
-----------------------------------------------
(Registrant)
by: C.R.I., Inc.
-------------------------------------------
Managing General Partner
March 22, 2000 by: /s/ William B. Dockser
- ----------------- ---------------------------------------
DATE William B. Dockser, Director,
Chairman of the Board,
and Treasurer
(Principal Executive Officer)
In accordance with the Exchange Act, 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 22, 2000 by: /s/ H. William Willoughby
- ----------------- ---------------------------------------
DATE H. William Willoughby,
Director, President
and Secretary
March 22, 2000 by: /s/ Michael J. Tuszka
- ----------------- ---------------------------------------
DATE Michael J. Tuszka
Vice President
and Chief Accounting Officer
(Principal Financial Officer
and Principal Accounting Officer)
III-5
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
-------------------------------
PUBLIC ACCOUNTANTS
------------------
To the Partners
Capital Realty Investors-85 Limited Partnership
We have audited the consolidated balance sheets of Capital Realty
Investors-85 Limited Partnership (a Maryland limited partnership) as of December
31, 1999 and 1998, and the related consolidated statements of operations,
changes in partners' deficit and cash flows for the years ended December 31,
1999 and 1998. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of certain Local Partnerships. The Partnership's share of income
from these Local Partnerships constitutes $83,251 and $299,258 of income in 1999
and 1998, 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 auditing standards generally
accepted in the United States. 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 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, 1999 and 1998 and the consolidated
results of its operations, changes in partners' deficit and cash flows for the
years ended December 31, 1999 and 1998, in conformity with accounting principles
generally accepted in the United States.
Grant Thornton LLP
Vienna, VA
March 7, 2000
III-6
<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 23, 2000 in
accordance with the Securities and Exchange Commission's continuing
hardship exemption granted January 14, 2000.
III-7
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Investments in and advances to partnerships $ 585,343 $ 588,772
Investment in partnership held for sale -- 208,549
Cash and cash equivalents 8,086,701 2,154,057
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $106,606 and $110,438, respectively 124,749 148,172
Property purchase costs, net of accumulated amortization of
$97,422 and $103,963, respectively 111,339 135,960
Other assets -- 55,663
------------ ------------
Total assets $ 8,908,132 $ 3,291,173
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in partnerships $ 2,522,600 $ 2,522,600
Accrued interest payable 7,643,493 6,506,531
Accounts payable and accrued expenses 127,126 77,909
------------ ------------
Total liabilities 10,293,219 9,107,040
------------ ------------
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:
Accumulated distribution to partners (4,908,656) --
Offering costs (2,570,535) (2,570,535)
Accumulated losses (15,110,396) (24,449,832)
------------ ------------
Total partners' deficit (1,385,087) (5,815,867)
------------ ------------
Total liabilities and partners' deficit $ 8,908,132 $ 3,291,173
============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
III-8
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended
December 31,
--------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Share of income from partnerships $ 636,452 $ 649,388
----------- -----------
Other revenue and expenses:
Revenue:
Interest income 376,700 127,213
----------- -----------
Expenses:
Interest 1,148,441 1,011,331
Management fee 97,930 97,930
General and administrative 138,732 104,132
Professional fees 67,631 59,377
Amortization of deferred costs 16,098 18,969
----------- -----------
1,468,832 1,291,739
----------- -----------
Total other revenue and expenses (1,092,132) (1,164,526)
----------- -----------
Loss before gain on disposition of investments in
partnerships (455,680) (515,138)
----------- -----------
Gain on disposition of investments in partnerships 9,795,116 --
----------- -----------
Net income (loss) $ 9,339,436 $ (515,138)
=========== ===========
Net income (loss) allocated to General Partners (1.51%) $ 141,025 $ (7,779)
=========== ===========
Net income (loss) allocated to Initial and Special Limited
Partners (2.49%) $ 232,552 $ (12,827)
=========== ===========
Net income (loss) allocated to BAC Holders (96%) $ 8,965,859 $ (494,532)
=========== ===========
Net income (loss) per BAC based on 21,158 BACs outstanding
at December 31, 1999 and 1998 $ 423.76 $ (23.37)
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
III-9
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
<TABLE>
<CAPTION>
Initial and Beneficial
Special Assignee
General Limited Certificate
Partners Partners Holders Total
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Partners' deficit,
January 1, 1998 $ (359,414) $ (593,474) $ (4,347,841) $ (5,300,729)
Net loss (7,779) (12,827) (494,532) (515,138)
----------- ----------- ------------ ------------
Partners' deficit,
December 31, 1998 (367,193) (606,301) (4,842,373) (5,815,867)
Cash distributions of $232 per
unit of Beneficial Assignee
Certificate -- -- (4,908,656) (4,908,656)
Net income 141,025 232,552 8,965,859 9,339,436
----------- ----------- ------------ ------------
Partners' deficit,
December 31, 1999 $ (226,168) $ (373,749) $ (785,170) $ (1,385,087)
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
III-10
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended
December 31,
--------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 9,339,436 $ (515,138)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Share of income from partnerships (636,452) (649,388)
Amortization of deferred costs 16,098 18,969
Gain on disposition of investment in partnership (9,795,116) --
Changes in assets and liabilities:
Increase in accrued interest receivable on advances to partnerships (23,625) (23,625)
Decrease (increase) in other assets 55,663 (49,763)
Increase in accrued interest payable 1,148,441 1,011,331
Increase in accounts payable and accrued expenses 49,217 20,922
Payment of purchase money note interest (11,479) --
----------- -----------
Net cash provided by (used in) operating activities 142,183 (186,692)
----------- -----------
Cash flows from investing activities:
Receipt of distributions from partnerships 795,697 503,945
Proceeds from disposition of investments in partnerships 9,903,420 --
Collection of advances made to local partnerships -- 38,349
----------- -----------
Net cash provided by investing activities 10,699,117 542,294
----------- -----------
Cash flows from financing activities:
Distributions to BAC holders (4,908,656) --
----------- -----------
Net increase in cash and cash equivalents 5,932,644 355,602
Cash and cash equivalents, beginning of year 2,154,057 1,798,455
----------- -----------
Cash and cash equivalents, end of year $ 8,086,701 $ 2,154,057
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
III-11
<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
partner interest in limited partnerships (Local Partnerships) which own and
operate apartment properties throughout the United States.
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 BACs were abandoned; during 1998, 37 BACs were abandoned.
b. Method of accounting
--------------------
The financial statements of the Partnership are prepared on the
accrual basis of accounting in conformity with accounting principles
generally accepted in the United States.
c. Principles of consolidation
---------------------------
These financial statements include the accounts of two intermediary
limited partnerships which have invested in 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
-------------------------------------------
At December 31, 1999 and 1998, the Partnership held investments in
four and six Local Partnerships, respectively. These 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, 1999
and 1998, the Partnership's share of the cumulative losses for three and
four, respectively, of the Local Partnerships exceeded the amount of the
Partnership's investment in and advances to those Local Partnerships by
$6,667,921 and $6,984,364, 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
III-12
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
December 31, 1999 and 1998, cumulative cash distributions of $1,275,777 and
$590,386, respectively, have been received from the Local Partnerships for
which the Partnership's carrying value is zero. These distributions are
recorded as increases in the Partnership's share of income from
partnerships.
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 accounting
principles generally accepted in the United States, 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.
III-13
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
i. Investment in Partnership Held For Sale
---------------------------------------
On January 22, 1999, the local managing general partner of Springfield
Apartments sold the property, as discussed in Note 2.d. Accordingly, the
Partnership's investment in this Local Partnership was classified as an
investment in partnership held for sale on the consolidated balance sheet
as of December 31, 1998. Assets held for sale are not recorded in excess
of their estimated net realizable value.
j. Fair Value of Financial Instruments
-----------------------------------
The financial statements include estimated fair value information as
of December 31, 1999, 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.
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.
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
a. Due on investments in partnerships
----------------------------------
As of December 31, 1999 and 1998, the Partnership held limited partner
interests in four and six 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.
III-14
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
<TABLE>
<CAPTION>
December 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Due to local general partner: $ 174,600 $ 174,600
Purchase money notes due in:
1996 230,000 230,000
2001 1,475,000 1,475,000
2003 643,000 643,000
------------ ------------
Subtotal 2,522,600 2,522,600
------------ ------------
Accrued interest payable 7,643,493 6,506,531
------------ ------------
Total $ 10,166,093 $ 9,029,131
============ ============
</TABLE>
The amount due to a local general partner 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 Partnership's partnership
agreement. The purchase money notes have stated interest rates ranging
from 9% to 14%, compounded annually. The purchase money notes 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. A purchase money note
in the principal amount of $230,000 matured on January 30, 1996 but has
not been paid, as discussed below. The remaining purchase money notes
mature in 2001 and 2003.
The purchase money notes, which are nonrecourse to the Partnership,
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 adversely 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, each of the related Local Partnerships. Thus, even a complete
III-15
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
loss of the Partnership's interest in one of these Local Partnerships would
not have a material adverse impact on the financial condition of the
Partnership. See further discussion of certain purchase money notes below.
Interest expense on the Partnership's purchase money notes for the
years ended December 31, 1999 and 1998 was $1,148,441 and $1,011,331,
respectively. The accrued interest payable on the purchase money notes of
$7,568,093 and $6,431,131 as of December 31, 1999 and 1998, respectively,
is due on the respective maturity dates of the purchase money notes or
earlier, in some instances, if (and to the extent of a portion thereof) the
related Local Partnership has distributable net cash flow, as defined in
the relevant Local Partnership agreement.
Paradise Foothills
------------------
The Partnership defaulted on its purchase money note relating to
Paradise Associates, L.P. (Paradise Foothills) when the note matured on
January 30, 1996 and was not paid. The default amount included principal
and accrued interest of $230,000 and $371,464, respectively. As of March
22, 2000, principal and accrued interest totaling $230,000 and $663,046,
respectively, were due. The Managing General Partner made an offer for an
extension of the purchase money note maturity date until May 31, 2003,
coterminous with the expiration of the related Local Partnership's
provisional workout agreement related to its mortgage loan. As of March
22, 2000, the Managing General Partner is awaiting a response from the
purchase money noteholder. There is no assurance that the Managing General
Partner will reach an agreement of any kind with the noteholder. Should
the noteholder begin foreclosure proceedings on the Partnership's interest
in the Local Partnership, the Managing General Partner intends to
vigorously contest such action. Due to a possible foreclosure by the
noteholder, 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 adversely impact the Partnership's financial
condition, as discussed above. In the event of a foreclosure, the excess
of the nonrecourse indebtedness over the carrying amount of the
Partnership's investment in the related Local Partnership would be deemed
cancellation of indebtedness income, which would be taxable to Limited
Partners at a federal tax rate of up to 39.6%. Additionally, in the event
of a foreclosure, the Partnership would lose its investment in the Local
Partnership and, likewise, its share of any future cash flow distributed by
the Local Partnership from rental operations, mortgage debt refinancings,
or the sale of the real estate. The Partnership did not receive any
distributions from Paradise Foothills during the years ended December 31,
1999 and 1998, and its aggregate share of income from this Local
Partnership was $0 for the years ended December 31, 1999 and 1998.
III-16
<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 98% 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 1999 and 1998, the
Partnership received cash distributions from rental operations of the Local
Partnerships of $795,697 and $503,945, respectively. As of December 31,
1999 and 1998, two and one of the Local Partnerships had aggregate surplus
cash, as defined by their respective partnership agreements, in the amount
of $348,522 and $125,806, respectively, which may be available for
distribution in accordance with the respective agency's regulations.
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. Advances to Local Partnerships
------------------------------
The Pointe
----------
Mesa Partners Limited Partnership (The Pointe), located in El Paso,
Texas, modified its mortgage loan in 1987. In connection with the loan
modification, the Partnership loaned $262,500 to the Local Partnership in
1987. Repayment of this loan, with simple interest at 9% per annum, is
expected to occur upon sale or refinancing of the property. As of December
31, 1999 and December 31, 1998, accrued interest was $293,063 and $269,438,
respectively.
Springfield
-----------
The Partnership had previously made advances to Springfield Properties
Limited Partnership (Springfield) related to its mortgage loan. The
balance of these advances, which was $38,349 as of December 31, 1997, was
repaid to the Partnership on March 13, 1998.
III-17
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
d. Property matters
----------------
Devonshire and Springfield
--------------------------
During June 1998, the local managing general partners of Devonshire
Development Limited Partnership (Devonshire) and Springfield Properties
Limited Partnership (Springfield) received offers from third parties to
purchase the respective properties. The local managing general partners of
Devonshire and Springfield entered into contracts to sell the respective
properties to a real estate investment trust (REIT) (in the case of
Springfield) and the REIT's affiliate (in the case of Devonshire) on or
before January 15, 1999. In September 1998, prior to the expiration of the
due diligence period, the purchaser, in accordance with its rights under
the sale contract, terminated the sale contract for Devonshire.
On January 22, 1999, pursuant to the Springfield sale contract, the
Local Partnership sold Springfield Apartments, located in Redmond,
Washington, to ASN-Washington Holdings (1) Incorporated, an affiliate of
the REIT. The sale resulted in a financial statement gain of approximately
$6.3 million, an estimated federal tax gain of approximately $10.2 million,
and net cash proceeds of approximately $6.4 million to the Partnership. As
a result of the sale, CRICO of Springfield, Inc., the local managing
general partner of the Local Partnership and a wholly-owned affiliate of
the Managing General Partner, received an additional management fee of
$636,789, pursuant to the Local Partnership Agreement, all of which was
paid in 1999.
Following the termination of the sales contract for Devonshire, on
June 28, 1999, the Local Partnership entered into a contract with a
different, unrelated, third party to sell the property. On September 30,
1999, pursuant to the Devonshire sale contract, the Local Partnership sold
Devonshire Apartments, located in Kirkland, Washington, to Kirkland
Rrestoration LLC. The sale resulted in a financial statement gain of
approximately $3.5 million, an estimated federal tax gain of approximately
$6 million, and net cash proceeds of approximately $3.5 million to the
Partnership, which net cash proceeds were received by the Partnership on
October 1, 1999. As a result of the sale, CRICO of Devonshire, Inc., the
local managing general partner of the Local Partnership and a wholly-owned
affiliate of the Managing General Partner, received an additional
management fee of $300,086, of which $269,485 was paid in 1999 and $30,601
was paid in January 2000, pursuant to the Local Partnership Agreement.
e. Summarized financial information
--------------------------------
Combined balance sheets and combined statements of operations for the
four and six Local Partnerships in which the Partnership is invested as of
December 31, 1999 and 1998, respectively, follow. The statement of
operations for the year ended December 31, 1999, includes information for
Springfield through the date of sale on January 22, 1999, and for
Devonshire through the date of sale on September 30, 1999.
III-18
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
<TABLE>
<CAPTION>
COMBINED BALANCE SHEETS
December 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Rental property, at cost, net of accumulated depreciation
of $17,433,502 and $20,620,004, respectively $ 13,349,354 $ 21,420,278
Land 4,078,361 6,444,869
Other assets 3,818,421 4,531,513
------------ ------------
Total assets $ 21,246,136 $ 32,396,660
============ ============
Mortgage notes payable $ 24,216,755 $ 35,411,668
Due to general partners 3,455,079 3,492,581
Other liabilities 2,858,609 3,168,050
------------ ------------
Total liabilities 30,530,443 42,072,299
Partners' deficit (9,284,307) (9,675,639)
------------ ------------
Total liabilities and partners' deficit $ 21,246,136 $ 32,396,660
============ ============
</TABLE>
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF OPERATIONS
For the years ended
December 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenue:
Rental $ 6,850,082 $ 8,452,327
Interest 95,865 84,570
Gain on disposition of investments in partnerships 12,195,836 --
Other 314,069 364,382
------------ ------------
Total revenue 19,455,852 8,901,279
------------ ------------
Expenses:
Operating 4,554,702 4,321,211
Interest 2,412,988 3,129,245
Depreciation 1,131,919 1,180,610
Amortization 190,298 72,165
------------ ------------
Total expenses 8,289,907 8,703,231
------------ ------------
Net income $ 11,165,945 $ 198,048
============ ============
</TABLE>
III-19
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
f. Reconciliation of the Local Partnerships' financial statement
-------------------------------------------------------------
net income to taxable loss
--------------------------
For federal income tax purposes, the Local Partnerships report on a
basis whereby: (1) certain revenue and the related assets are recorded
when received rather than when earned; (2) certain costs are expensed when
paid or incurred rather than capitalized and amortized over the period of
benefit; and (3) a shorter life is used to compute depreciation on the
property as permitted by Internal Revenue Service (IRS) Regulations. These
returns are subject to audit and, therefore, possible adjustment by the
IRS.
III-20
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
A reconciliation of the Local Partnerships' financial statement net
income reflected above to taxable income (loss) follows.
<TABLE>
<CAPTION>
For the years ended
December 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Financial statement net income $ 11,165,945 $ 198,048
Adjustments:
Additional tax depreciation using accelerated methods,
net of depreciation on construction period expenses
capitalized for financial statement purposes (257,056) (499,377)
Amortization for financial statement purposes not
deducted for income tax purposes 7,223 7,223
Difference in gain on disposition of investments in
partnerships 4,632,424 --
Miscellaneous, net 14,192 3,063
------------ ------------
Taxable income (loss) $ 15,562,728 $ (291,043)
============ ============
</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, 1999 and 1998,
the Partnership paid $95,962 and $75,602, respectively as direct reimbursement
of expenses incurred on behalf of the Partnership. Such expenses are included
in the accompanying 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. For each of the years ended December 31, 1999 and 1998,
the Partnership paid the Managing General Partner a Management Fee of $97,930.
III-21
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. RELATED PARTY TRANSACTIONS - Continued
On January 22, 1999, Springfield Properties Limited Partnership, one of the
Local Partnerships in which the Partnership has invested, sold Springfield
Apartments. As a result of the successful sale, CRICO of Springfield, Inc., the
local managing general partner of the Local Partnership and a wholly-owned
affiliate of the Managing General Partner, earned an additional management fee
of $636,789, pursuant to the Local Partnership Agreement, all of which was paid
in 1999.
On September 30, 1999, Devonshire Development Limited Partnership, one of
the Local Partnerships in which the Partnership has invested, sold Devonshire
Apartments. As a result of the successful sale, CRICO of Devonshire, Inc., the
local managing general partner of the Local Partnership and a wholly-owned
affiliate of the Managing General Partner, earned an additional management fee
of $300,086, pursuant to the Local Partnership Agreement; $269,485 was paid
during 1999; the remainder was paid in 2000.
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 Local Partnerships 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;
III-22
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS - Continued
(vii) to the repayment of any unrepaid loans theretofore made by any partner
or any affiliate to the Partnership for Partnership obligations and to
the payment of any unpaid amounts owing to the General Partners
pursuant to the Partnership Agreement;
(viii) to the General Partners in the amount of their capital contributions;
(ix) thereafter, in equal shares to the General Partners for services to
the Partnership and to the Special Limited Partner whether or not any
is then a general partner or special limited partner (or their
designees), an aggregate fee of 1% of the gross proceeds resulting
from (A) such sale (if the proceeds are from a sale rather than a
refinancing) and (B) any prior sales from which such 1% fee was not
paid to the General Partners or the Special Limited Partner or their
designees;
(x) to the General Partners, the Initial Limited Partner and the Special
Limited Partner an amount equal to the total of all accrued but unpaid
portions of the Deferred Cash Flow Return which were previously
deferred; and
(xi) the remainder, 12% in the aggregate to the General Partners and the
Initial Limited Partner (or their assignees) (11.51% to the General
Partners and 0.49% 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, 0.49% to the Initial Limited
Partner and 8.01% to the General Partners after payment of the Management Fee
(see note 3), 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 $837,000 and $380,000 for the years ended December 31,
1999 and 1998, respectively. On May 3, 1999, the Managing General Partner
distributed $2,496,644 (or $118 per Beneficial Assignee Certificate (BAC)) to
holder of BACs from the proceeds generated from the sale of Springfield
III-23
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS - Continued
Apartments, to the holders of record as of January 22, 1999. On November 5,
1999, the Managing General Partner distributed $2,412,012 (or $114 per BAC) to
holders of BACs from the proceeds generated from the sale of Devonshire
Apartments, to the holders of record as of September 30, 1999. No distribution
was declared or paid by the Partnership during 1998.
5. RECONCILIATION OF THE PARTNERSHIP'S FINANCIAL STATEMENT NET
LOSS TO TAXABLE LOSS
For federal income tax purposes, the Partnership reports on a basis
whereby: (1) certain expenses are amortized rather than expensed when incurred;
(2) certain costs are amortized over a shorter period for tax purposes, as
permitted by IRS Regulations; and (3) certain costs are amortized over a longer
period for tax purposes. The Partnership records its share of losses from its
investments in limited partnerships for federal income tax purposes as reported
on the Local Partnerships' federal income tax returns (see note 2.f.), including
losses in excess of related investment amounts. These returns are subject to
audit and, therefore, possible adjustment by the IRS.
III-24
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. RECONCILIATION OF THE PARTNERSHIP'S FINANCIAL STATEMENT NET
LOSS TO TAXABLE LOSS - Continued
A reconciliation of the Partnership's financial statement net income
(loss) to taxable income (loss) follows.
<TABLE>
<CAPTION>
For the years ended
December 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Financial statement net income (loss) $ 9,339,436 $ (515,138)
Adjustments:
Differences between the income tax income (losses) and financial
statement income (losses) related to the Partnership's
equity in the Local Partnerships' losses 4,855,118 (825,015)
Differences in amortization of
acquisition costs and property purchase costs (11,109) (17,043)
Miscellaneous, net (32,909) --
------------ ------------
Taxable income (loss) $ 14,150,536 $ (1,357,196)
============ ============
</TABLE>
III-25
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
- ------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
III-26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE ANNUAL REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH 10-KSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,086,701
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,908,132
<CURRENT-LIABILITIES> 0
<BONDS> 10,166,093
0
0
<COMMON> 0
<OTHER-SE> (1,385,087)
<TOTAL-LIABILITY-AND-EQUITY> 8,908,132
<SALES> 0
<TOTAL-REVENUES> 1,013,152
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 320,391
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,148,441
<INCOME-PRETAX> 9,339,436
<INCOME-TAX> 0
<INCOME-CONTINUING> 9,339,436
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,339,436
<EPS-BASIC> 423.76
<EPS-DILUTED> 423.76
</TABLE>
