<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
[_] Confidential, for use of the Commission only (as permitted by
Rule 14a-6(e)(2)
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
("CRITEF")
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
("CRITEF III")
- - - - --------------------------------------------------------------------------------
(Names of Registrants As Specified in Their Charters)
- - - - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2), or Item
22(a)(2) of Schedule 14A.
[_] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
Beneficial Assignee Certificates ("BACs"), CRITEF, Series I & II
Beneficial Assignee Certificates ("BACs"), CRITEF III
2) Aggregate number of securities to which transaction applies:
2,280,000 BACs in CRITEF, Series I
3,238,760 BACs in CRITEF, Series II
5,258,268 BACs in CRITEF III
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule
0-11: $14.41 per BAC in CRITEF, Series I
$14.24 per BAC in CRITEF, Series II
$15.18 per BAC in CRITEF III
4) Proposed maximum aggregate value of transaction: $158,795,251
5) Total fee paid: $31,759
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
1) Amount previously paid:
2) Form, Schedule or Registration Statement No.:
3) Filing parties:
4) Date filed:
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
c/o The CRI Building
11200 Rockville Pike
Rockville, Maryland 20852
________ __, 1996
Dear BAC Holder:
You are cordially invited to attend the special meeting of the holders
(the "BAC Holders") of Beneficial Assignee Certificates ("BACs") in Series I
and II issued by Capital Realty Investors Tax Exempt Fund Limited Partnership
("Fund I-II") to be held at 10:00 a.m. on [meeting date], 1996. At the
Special Meeting, the BAC Holders will vote upon a series of proposals relating
to the merger (the "Merger") of an affiliate of Capital Apartment Properties,
Inc. ("CAPREIT") into Fund I-II and certain related transactions.
As a result of the Merger, all of the BACs (other than any BACs held by
CAPREIT or its affiliates or Fund I-II) will be redeemed for cash in the
amount of $14.41 per BAC in the case of Series I and $14.24 per BAC in the
case of Series II, in each case subject to adjustment based on available cash
(as defined) at closing and subject to reduction by the amount of fees and
expenses payable to plaintiffs' counsel in certain litigation relating to the
Merger.
The proposed Merger and certain proposed related transactions
(collectively, the "Transaction Proposals"), as well as certain payments to be
made to the General Partner and certain of its affiliates, are described in
more detail in the accompanying Joint Proxy Statement for the special meeting
of BAC Holders of Fund I-II and a special meeting of BAC holders of Capital
Realty Investors Tax Exempt Fund III Limited Partnership ("Fund III") to be
held for the purpose of a vote by the BAC holders of such Fund on similar
transaction proposals.
YOUR GENERAL PARTNER BELIEVES THAT THE MERGER AND THE OTHER TRANSACTION
PROPOSALS ARE FAIR TO AND IN THE BEST INTERESTS OF THE BAC HOLDERS.
YOUR GENERAL PARTNER HAS APPROVED THE MERGER AND THE OTHER TRANSACTION
PROPOSALS AND RECOMMENDS THAT THE BAC HOLDERS VOTE "FOR" EACH OF THE MERGER
AND THE OTHER TRANSACTION PROPOSALS FOR THE FOLLOWING REASONS:
. The unadjusted cash consideration being offered to the BAC Holders in
the Merger represents a substantial premium of 22.6%, in the case of
Series I, and 30.9%, in the case of Series II, over the market price of
BACs as of September 8, 1995, the last trading day prior to the initial
public announcement of the Merger. In recommending the approval of the
Merger, the General Partner has given the most weight to this factor.
. The General Partner gave due consideration to and relied upon the
written fairness opinions of Oppenheimer & Co., Inc. to the BAC Holders
of Fund I-II, Series I and Series II, each dated March 14, 1996 (the
"Fairness Opinions"), that, subject to the
<PAGE>
assumptions and limitations set forth therein, the redemption price
being offered to the BAC Holders in the Merger is fair to such BAC
Holders from a financial point of view. The full text of the Fairness
Opinions are attached to the accompanying Joint Proxy Statement.
. Counsel for the plaintiffs in certain class actions who questioned the
sufficiency of the consideration originally offered to the BAC Holders
negotiated improved terms of the Merger, including the consideration
now being offered to the BAC Holders, and have determined that the
consideration is fair to the BAC Holders. A proposed settlement
containing the improved terms of the Merger will be presented to the
court for a determination that it is fair and reasonable.
. The General Partner believes that it is in the best interests of the
BAC Holders to liquidate their interests in Fund I-II now, at a
substantial premium over the market price for the BACs (as of the last
trading day prior to the public announcement of the Mergers), rather
than to wait an indeterminate period of time for the possible
liquidation or other disposition of the assets of Fund I-II at amounts
which cannot now be determined.
. The Merger is more attractive than other possible sale alternatives
because the Merger provides for the disposition of all Fund I-II's
assets in a single transaction, which involves lower transaction costs
for Fund I-II.
. In determining to pursue a transaction with CAPREIT, the General
Partner placed substantial weight on CAPREIT's agreement not to require
that Fund I-II make any representations as to the tax-exempt status of
the mortgage revenue bonds owned by Fund I-II.
. In determining to pursue the transaction with CAPREIT, the General
Partner also took into account CAPREIT's considerable experience and
expertise in the real estate industry, its knowledge of and familiarity
with the mortgage revenue bonds owned by Fund I-II and the properties
that secure them and its financial wherewithal and sophistication.
. Although the BACs have been listed on the American Stock Exchange
since 1993, there had been no significant increase in trading prices of
the BACs prior to the announcement of the Mergers and no active market
for the trading of BACs has developed nor is one expected to develop in
the future.
IN THE OPINION OF THE GENERAL PARTNER, THE MERGER AND THE RELATED
TRANSACTIONS REPRESENT THE BEST ALTERNATIVES FOR THE BAC HOLDERS AT THIS TIME.
FAILURE TO APPROVE THE MERGER MAY HAVE THE FOLLOWING ADVERSE CONSEQUENCES:
<PAGE>
. Waiting for a possible liquidation or other disposition of the assets
of Fund I-II, whether through a bulk sale or dispositions of individual
assets, may result in the BAC Holders receiving less consideration than
the consideration being offered in the Merger, and there can be no
assurance as to whether or when any such liquidation or dispositions
might occur.
. The General Partner currently believes that it is probable that the
full amount of BAC Holder invested capital may not be recoverable on
most of the mortgage revenue bonds when the loans mature. In order to
realize a greater amount of the BAC Holder invested capital, it may be
advisable, with BAC Holder consent, to hold certain of the properties
securing the mortgage revenue bonds beyond the maturity dates of the
mortgage loans (1998 through 2000). Due to proposed Internal Revenue
Service regulations, it is uncertain at this time whether an extension
of the mortgage loans, together with other modifications that might be
appropriate in connection with such extension, would trigger a deemed
reissuance for federal income tax purposes. Any reissuance without the
cooperation of the mortgage revenue bond issuers would result in the
loss of the tax-exempt status of the mortgage revenue bonds. Such
issuers might cooperate and consent to such modifications; however,
there can be no assurance that they would do so.
. Fund I-II does not have the financial resources and asset base to
pursue an alternative transaction on its own that would provide as much
benefit to the BAC Holders as the Merger.
BAC Holders are urged to review carefully the accompanying Joint Proxy
Statement. The affirmative vote of the holders of a majority of the
outstanding BACs voting as a single class will be necessary for the approval
of each of the Transaction Proposals. The approval of each of the Transaction
Proposals is a condition to the approval of each other Transaction Proposal.
At the option of CAPREIT, the consummation of the Transaction Proposals also
is conditioned upon the consummation of similar transactions by Fund III. It
is important to understand that if you abstain from voting, your BACs will, in
effect, be counted as being voted against the Transaction Proposals.
<PAGE>
All BAC Holders are cordially invited to attend the Special Meeting.
Whether or not you plan to attend the Special Meeting in person and regardless
of the number of BACs you own, please complete, sign and date the enclosed
gold Proxy and mail it as soon as possible in the enclosed stamped, addressed
return envelope to ensure that your BACs are voted at the Special Meeting.
You may vote in person if you wish to do so even though you have previously
sent in your Proxy.
THE VOTE OF EVERY BAC HOLDER IS IMPORTANT.
Very truly yours,
CRITEF ASSOCIATES LIMITED
PARTNERSHIP, General Partner
___________________________
William B. Dockser
Chairman of the Board
and
___________________________
H. William Willoughby
President
of CRI, Inc., as general partner of
CRITEF ASSOCIATES LIMITED
PARTNERSHIP
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
c/o The CRI Building
11200 Rockville Pike
Rockville, Maryland 20852
________ __, 1996
Dear BAC Holder:
You are cordially invited to attend the special meeting of the holders
(the "BAC Holders") of Beneficial Assignee Certificates ("BACs") issued by
Capital Realty Investors Tax Exempt Fund III Limited Partnership ("Fund III")
to be held at 11:00 a.m. on [meeting date], 1996. At the Special Meeting, the
BAC Holders will vote upon a series of proposals relating to merger (the
"Merger") of an affiliate of Capital Apartment Properties, Inc. ("CAPREIT")
into Fund III and certain related transactions.
As a result of the Merger, all of the BACs (other than any BACs held by
CAPREIT or its affiliates or Fund III) will be redeemed for cash in the amount
of $15.18 per BAC, subject to adjustment based on available cash (as defined)
at closing and subject to reduction by the amount of fees and expenses payable
to plaintiffs' counsel in certain litigation relating to the Merger.
The proposed Merger and certain proposed related transactions
(collectively, the "Transaction Proposals"), as well as certain payments to be
made to the General Partner and certain of its affiliates, are described in
more detail in the accompanying Joint Proxy Statement for the special meeting
of BAC Holders of Fund III and a special meeting of BAC Holders of Capital
Realty Investors Tax Exempt Fund Limited Partnership ("Fund I-II") to be held
for the purpose of a vote by the BAC holders of such Fund on similar
transaction proposals.
YOUR GENERAL PARTNER BELIEVES THAT THE MERGER AND THE OTHER TRANSACTION
PROPOSALS ARE FAIR TO AND IN THE BEST INTERESTS OF THE BAC HOLDERS.
YOUR GENERAL PARTNER HAS APPROVED THE MERGER AND THE OTHER TRANSACTION
PROPOSALS AND RECOMMENDS THAT THE BAC HOLDERS VOTE "FOR" EACH OF THE MERGER
AND THE OTHER TRANSACTION PROPOSALS FOR THE FOLLOWING REASONS:
. The unadjusted cash consideration being offered to the BAC Holders in
the Mergers represents a substantial premium of 26.5% over the market
price of BACs as of September 8, 1995, the last trading day prior to
the initial public announcement of the Merger. In recommending the
approval of the Merger, the General Partner has given the most weight
to this factor.
. The General Partner gave due consideration to and relied upon the
written fairness opinion of Oppenheimer & Co., Inc. to the BAC Holders
of Fund III dated March 14, 1996 (the "Fairness Opinion"), that,
subject to the assumptions and limitations set forth therein, the
redemption price being offered to the BAC Holders in the Merger is fair
to
<PAGE>
such BAC Holders from a financial point of view. The full text of
the Fairness Opinion is attached to the accompanying Joint Proxy
Statement.
. Counsel for the plaintiffs in certain class actions who questioned the
sufficiency of the consideration originally offered to the BAC Holders
negotiated improved terms of the Merger, including the consideration
now being offered to the BAC Holders, and have determined that the
consideration is fair to the BAC Holders. A proposed settlement
containing the improved terms of the Merger will be presented to the
court for a determination that it is fair and reasonable.
. The General Partner believes that it is in the best interests of the
BAC Holders to liquidate their interests in Fund III now, at a
substantial premium over the market price for the BACs (as of the last
trading day prior to the public announcement of the Mergers), rather
than to wait an indeterminate period of time for the possible
liquidation or other disposition of the assets of Fund III at amounts
which cannot now be determined.
. The Merger is more attractive than other possible sale alternatives
because the Merger provides for the disposition of all Fund III's
assets in a single transaction, which involves lower transaction costs
for Fund III.
. In determining to pursue a transaction with CAPREIT, the General
Partner placed substantial weight on CAPREIT's agreement not to require
that Fund III make any representations as to the tax-exempt status or
the mortgage revenue bonds owned by Fund III.
. In determining to pursue the transaction with CAPREIT, the General
Partner also took into account CAPREIT's considerable experience and
expertise in the real estate industry, its knowledge of and familiarity
with the mortgage revenue bonds owned by Fund III and the properties
that secure them and its financial wherewithal and sophistication.
. Although the BACs have been listed on the American Stock Exchange
since 1993, there had been no significant increase in trading prices of
the BACs prior to the announcement of the Mergers and no active market
for the trading of BACs has developed nor is one expected to develop in
the future.
IN THE OPINION OF THE GENERAL PARTNER, THE MERGER AND THE RELATED
TRANSACTIONS REPRESENT THE BEST ALTERNATIVES FOR THE BAC HOLDERS AT THIS TIME.
FAILURE TO APPROVE THE MERGER MAY HAVE THE FOLLOWING ADVERSE CONSEQUENCES:
. Waiting for a possible liquidation or other disposition of the assets
of Fund III, whether through a bulk sale or dispositions of individual
assets, may result in the BAC Holders receiving less consideration than
the consideration being offered in the Merger, and there can be no
assurance as to whether or when any such liquidation or dispositions
might occur.
<PAGE>
. The General Partner currently believes that it is probable that the
full amount of BAC Holder invested capital will not be recoverable on
most of the mortgage revenue bonds when the loans mature. In order to
realize a greater amount of BAC Holder invested capital, it may be
advisable, with BAC Holder consent, to hold certain of the properties
securing the mortgage revenue bonds beyond the maturity dates of the
mortgage loans (1998 through 2000). Due to proposed Internal Revenue
Service regulations, it is uncertain at this time whether an extension
of the mortgage loans, together with other modifications that might be
required in connection with such extension, would trigger a deemed
reissuance for federal income tax purposes. Any reissuance, without
the cooperation of the mortgage revenue bond issuers, would result in
the loss of the tax-exempt status of the mortgage revenue bonds. Such
issuers might cooperate and consent to such modifications; however,
there can be no assurance that they would do so.
. Fund III does not have the financial resources and asset base to
pursue an alternative transaction on its own that would provide as much
benefit to the BAC Holders as the Merger.
BAC Holders are urged to review carefully the accompanying Joint Proxy
Statement. The affirmative vote of the holders of a majority of the
outstanding BACs will be necessary for the approval of each of the Transaction
Proposals. The approval of each of the Transaction Proposals is a condition
to the approval of each other Transaction Proposal. At the option of CAPREIT,
the consummation of the Transaction Proposals also is conditioned upon the
consummation of similar transactions by Fund I-II. It is important to
understand that if you abstain from voting, your BACs will, in effect, be
counted as being voted against the Transaction Proposals.
<PAGE>
All BAC Holders are cordially invited to attend the Special Meeting.
Whether or not you plan to attend the Special Meeting in person and regardless
of the number of BACs you own, please complete, sign and date the enclosed
gold Proxy and mail it as soon as possible in the enclosed stamped, addressed
return envelope to ensure that your BACs are voted at the Special Meeting.
You may vote in person if you wish to do so even though you have previously
sent in your Proxy.
THE VOTE OF EVERY BAC HOLDER IS IMPORTANT.
Very truly yours,
CRITEF III ASSOCIATES LIMITED
PARTNERSHIP, General Partner
___________________________
William B. Dockser
Chairman of the Board
and
___________________________
H. William Willoughby
President
of CRI, Inc., as general partner of
CRITEF III ASSOCIATES LIMITED
PARTNERSHIP
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
____________________
NOTICE OF SPECIAL MEETINGS
To Be Held on [meeting date], 1996
NOTICE IS HEREBY GIVEN that special meetings of the holders (the "BAC
Holders") of Beneficial Assignee Certificates ("BACs") in Series I and II
issued by Capital Realty Investors Tax Exempt Fund Limited Partnership, a
Delaware limited partnership ("Fund I-II"), and BACs issued by Capital Realty
Investors Tax Exempt Fund III Limited Partnership, a Delaware limited
partnership ("Fund III," and together with Fund I-II, the "Funds") , will be
held at 10:00 a.m. and 11:00 a.m., respectively, on [meeting date], 1996 at
[location of meeting].
The purpose of the special meetings is to consider and vote upon:
(i) the proposed mergers (each, a "Merger" and together, the "Mergers")
of an affiliate of Capital Apartment Properties, Inc., a Maryland corporation
("CAPREIT"), with and into each of the Funds as a result of which all of the
BACs (other than any BACs held by CAPREIT or its affiliates or the Funds),
will be redeemed for cash at the redemption prices set forth below;
(ii) the removal of the current general partner of each of the Funds
immediately prior to the Mergers and the election in its stead of a newly
formed, wholly owned subsidiary of CAPREIT; and
(iii) the proposed amendments to the Agreements of Limited Partnership
of the Funds to authorize expressly the Mergers and the Merger Agreements (as
defined below) and the transactions contemplated thereby and the admission of
a designee of CAPREIT as a limited partner.
Specifically, at the Special Meetings, the BAC Holders of each Fund will
consider and vote upon the following:
1. A proposal (the "Merger Proposal") to approve and adopt (a)
with respect to Fund I-II, the Amended and Restated Agreement and Plan of
Merger, dated as of March 14, 1996 (the "Fund I-II Merger Agreement"),
among Fund I-II, CRITEF Associates Limited Partnership, a Delaware
limited partnership which is the general partner of Fund I-II ("Fund I-II
GP"), Watermark Partners, L.P., a Delaware limited partnership formed by
CAPREIT for purposes of the Merger ("Merger Partnership") and others,
pursuant to which, among other things, each BAC (other than any BACs held
by CAPREIT or its affiliates or the Funds) will be redeemed for cash in
the amount of $14.41 per BAC in the case of Series I and $14.24 per BAC
in the case of Series II, in
<PAGE>
each case subject to adjustment as described below, and (b) with respect
to Fund III, the Amended and Restated Agreement and Plan of Merger, dated
as of March 14, 1996 (the "Fund III Merger Agreement" and, together with
the Fund I-II Merger Agreement, the "Merger Agreements"), among Fund III,
CRITEF III Associates Limited Partnership, a Delaware limited partnership
which is the general partner of Fund III ("Fund III GP" and, together
with Fund I-II GP, the "General Partners"), Watermark III Partners, L.P.,
a Delaware limited partnership formed by CAPREIT for purposes of the
Merger ("Merger Partnership III," and together with Merger Partnership,
the "Merger Partnerships"), and others, pursuant to which, among other
things, each BAC (other than any BACs held by CAPREIT or its affiliates
or the Funds) will be redeemed for cash in the amount of $15.18 per BAC,
subject to adjustment as described below. In each case, the redemption
price per BAC is subject to adjustment based on the amount of available
cash (as defined in the Merger Agreements) at closing and subject to
reduction by the amount of fees and expenses awarded to counsel for the
plaintiffs in certain litigation relating to the Mergers which is
described in more detail in the accompanying Joint Proxy Statement;
2. A proposal (the "New Partners Proposal") to approve, with
respect to each Fund, the removal of such Fund's General Partner
immediately prior to the consummation of a Merger and the simultaneous
election in its stead of a newly-formed wholly-owned subsidiary of
CAPREIT as general partner;
3. A proposal (the "Amendment Proposal" and, together with the
New Partners Proposal and the Merger Proposal, the "Transaction
Proposals") to amend the respective Agreements of Limited Partnership of
each of the Funds to authorize expressly (a) the Mergers and the Merger
Agreements and the transactions contemplated thereby and (b) the issuance
of a limited partner interest in each of the Funds to CAPREIT or its
designee in exchange for a contribution of real property or other assets,
and the admission of CAPREIT or its designee as a limited partner in each
of the Funds; and
4. Such other business as may properly come before the Special
Meetings.
THE APPROVAL AND ADOPTION, BY THE BAC HOLDERS OF EACH FUND, OF EACH
TRANSACTION PROPOSAL TO BE VOTED UPON BY THEM IS CONTINGENT UPON THE APPROVAL
AND ADOPTION, BY THE BAC HOLDERS OF SUCH FUND, OF EACH OTHER TRANSACTION
PROPOSAL TO BE VOTED UPON BY THEM. THE CONSUMMATION OF THE TRANSACTION
PROPOSALS BY ONE FUND IS A CONDITION TO THE CONSUMMATION OF THE TRANSACTION
PROPOSALS BY THE OTHER FUND, WHICH CONDITION MAY BE WAIVED BY CAPREIT IN ITS
SOLE AND ABSOLUTE DISCRETION.
The Transaction Proposals and certain related matters, including, without
limitation, certain payments to be made to the General Partners and certain of
their affiliates, are more fully described in the Joint Proxy Statement
accompanying this notice.
Only BAC Holders of record as of the close of business on [record date],
1996 are entitled to notice of and to vote at the Special Meeting of BAC
Holders in the Fund in which they own
<PAGE>
BACs. Approval of each of the Transaction Proposals by each Fund will require
the affirmative vote of a majority of such Fund's BAC Holders voting together
as a single class.
Whether or not you plan to attend the Special Meeting in person and
regardless of the number of BACs you own, please complete, sign and date the
enclosed Proxy and mail it as soon as possible in the enclosed stamped,
addressed return envelope to ensure that your BACs are voted at the Special
Meeting. You may vote in person if you wish to do so even though you have
previously sent in your Proxy.
By Order of the General Partners:
CRITEF ASSOCIATES LIMITED
PARTNERSHIP
CRITEF III ASSOCIATES LIMITED
PARTNERSHIP
Rockville, Maryland
________ __, 1996
If you have any questions or need assistance in voting your BACs, please
contact MacKenzie Partners, Inc. at the toll-free number listed below.
MACKENZIE PARTNERS
156 Fifth Avenue
New York, NY 10010
(212) 929-5500 (call collect)
or
CALL TOLL FREE (800) 322-2885
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND
LIMITED PARTNERSHIP
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III
LIMITED PARTNERSHIP
c/o The CRI Building
11200 Rockville Pike
Rockville, Maryland 20852
---------------
JOINT PROXY STATEMENT
FOR
SPECIAL MEETINGS OF BAC HOLDERS
TO BE HELD
[meeting date], 1996
---------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY............................................................................................. 1
GENERAL INFORMATION................................................................................. 16
TIME AND PLACE OF THE SPECIAL MEETINGS............................................................. 16
PURPOSE OF THE SPECIAL MEETINGS.................................................................... 16
RECORD DATE; VOTE REQUIREMENTS..................................................................... 18
VOTING PROCEDURES AND PROXIES...................................................................... 19
NO DISSENTER'S RIGHTS.............................................................................. 20
SOLICITATION OF PROXIES............................................................................ 20
BAC OWNERSHIP....................................................................................... 20
PRINCIPAL BAC HOLDERS.............................................................................. 20
MANAGEMENT......................................................................................... 21
SPECIAL CONSIDERATIONS.............................................................................. 22
PURPOSE OF THE TRANSACTION PROPOSALS................................................................ 22
REASONS FOR THE PROPOSED MERGERS................................................................... 23
Background of the Funds........................................................................ 23
Background of the Mergers...................................................................... 24
Alternatives to the Merger..................................................................... 27
RECOMMENDATIONS OF THE GENERAL PARTNERS............................................................. 28
FAIRNESS OPINIONS OF OPPENHEIMER & CO., INC......................................................... 30
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS.................................................... 35
THE TRANSACTION PROPOSALS........................................................................... 37
THE MERGER PROPOSAL............................................................................... 37
The Mergers..................................................................................... 37
The Merger Agreements........................................................................... 38
Conditions to Consummation of the Mergers....................................................... 38
Conduct of Businesses Pending the Mergers....................................................... 39
Other Pre-Closing Covenants..................................................................... 39
Post-Closing Covenants.......................................................................... 40
No Solicitation................................................................................. 40
Indemnification................................................................................. 40
Termination..................................................................................... 40
Deposit......................................................................................... 42
Fees and Expenses............................................................................... 42
Tax Treatment................................................................................... 44
The Financing................................................................................... 44
Credit Enhancement.............................................................................. 45
Collateral...................................................................................... 46
Proposed Amendments to Mortgage Revenue Bonds................................................... 46
NEW PARTNERS PROPOSAL............................................................................. 46
AMENDMENT PROPOSAL................................................................................. 47
</TABLE>
<PAGE>
<TABLE>
<S> <C>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGERS AND RELATED TRANSACTIONS..................... 47
INTRODUCTION...................................................................................... 47
GENERAL PRINCIPLES OF PARTNERSHIP TAXATION......................................................... 47
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGERS............................................. 48
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE FINANCING TRANSACTION............................... 49
MARKET PRICE DATA FOR FUND I-II..................................................................... 50
MARKET PRICE DATA FOR FUND III...................................................................... 52
SELECTED FINANCIAL DATA OF FUND I-II................................................................ 53
BUSINESS OF FUND I-II............................................................................... 55
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF FUND I-II.. 61
FINANCIAL CONDITION AND LIQUIDITY................................................................... 63
RESULTS OF OPERATIONS............................................................................. 69
SELECTED FINANCIAL DATA OF FUND III................................................................. 73
BUSINESS OF FUND III................................................................................ 75
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF FUND III... 76
FINANCIAL CONDITION AND LIQUIDITY................................................................... 84
RESULTS OF OPERATIONS............................................................................... 87
LITIGATION.......................................................................................... 90
MANAGEMENT OF THE FUNDS............................................................................. 92
THE MERGER PARTNERSHIPS............................................................................. 94
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................... 94
MANAGEMENT OF THE MERGER PARTNERSHIPS............................................................... 95
CERTAIN LEGAL MATTERS............................................................................... 97
ACCOUNTANTS......................................................................................... 98
AVAILABLE INFORMATION............................................................................... 98
</TABLE>
<PAGE>
<TABLE>
<S> <C>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS................................................. F-1
Appendix A-1 Amended and Restated Agreement and Plan of Merger among Capital
Realty Investors Tax Exempt Fund Limited Partnership, CRITEF
Associates Limited Partnership, and Watermark Partners, L.P.
Appendix A-2 Amended and Restated Agreement and Plan of Merger among Capital
Realty Investors Tax Exempt Fund III Limited Partnership,
CRITEF III Associates Limited Partnership, and Watermark III
Partners, L.P.
Appendix B-1 Fairness Opinion of Oppenheimer & Co., Inc. Delivered to Capital
Realty Investors Tax Exempt Fund Limited Partnership Relating
to the Holders of Beneficial Assignee Certificates of Series I
Appendix B-2 Fairness Opinion of Oppenheimer & Co., Inc. Delivered to Capital
Realty Investors Tax Exempt Fund Limited Partnership Relating
to the Holders of Beneficial Assignee Certificates of Series II
Appendix B-3 Fairness Opinion of Oppenheimer & Co., Inc. Delivered to Capital
Realty Investors Tax Exempt Fund III Limited Partnership
Relating to the Holders of its Beneficial Assignee Certificates
Appendix C-1 Proposed Amendments to the Agreement of Limited Partnership of
Capital Realty Investors Tax Exempt Fund Limited Partnership
Appendix C-2 Proposed Amendments to the Agreement of Limited Partnership of
Capital Realty Investors Tax Exempt Fund III Limited
Partnership
</TABLE>
<PAGE>
SUMMARY
The following is a brief summary of information contained elsewhere in
this Proxy Statement. This summary is not intended to be complete and is
qualified in all respects by reference to the detailed information contained
elsewhere in this Proxy Statement and the Appendices attached to this Proxy
Statement. BAC Holders are urged to review carefully the entire Proxy
Statement including the Appendices.
These proxy materials are being furnished to the holders (the "BAC
Holders") of Beneficial Assignee Certificates ("BACs") in Series I and II
issued by Capital Realty Investors Tax Exempt Fund Limited Partnership, a
Delaware limited partnership ("Fund I-II"), and BACs issued by Capital Realty
Investors Tax Exempt Fund III Limited Partnership, a Delaware limited
partnership ("Fund III," and together with Fund I-II, the "Funds") , in
connection with the solicitation of proxies for use at the Special Meetings of
the BAC Holders in Fund I-II and Fund III to be held at 10:00 a.m. and 11:00
a.m., respectively, on [meeting date], 1996 at [location of meeting] and at
any adjournments or postponements thereof (the "Special Meetings").
This Proxy Statement is first being mailed to the BAC Holders on or about
[mailing date], 1996. Each BAC Holder is entitled to one vote for each BAC
held of record by such BAC Holder at the close of business on _________ [__],
1996 (the "Record Date"), with respect to each of the proposals described in
this Proxy Statement to be voted upon by such BAC Holder.
THE SPECIAL MEETINGS
PURPOSE OF THE SPECIAL MEETINGS
The purpose of the Special Meetings is to consider and vote upon:
(i) the proposed mergers (each, a "Merger" and together, the "Mergers")
of an affiliate of Capital Apartment Properties, Inc., a Maryland corporation
("CAPREIT"), with and into each of the Funds as a result of which the BACs
(other than any BACs held by CAPREIT and its affiliates or the Funds) will be
redeemed for cash at the redemption prices set forth below;
(ii) the removal of the current general partner of each of the Funds
immediately prior to the Mergers and the simultaneous election in its stead of
a newly formed, wholly owned subsidiary of CAPREIT ("CAPREIT GP") as general
partner; and
(iii) certain amendments to the Agreements of Limited Partnership of the
Funds to authorize expressly the Mergers and the Merger Agreements (as defined
below) and the transactions contemplated thereby and the admission of CAPREIT
or its designee as a limited partner.
Specifically, at each Special Meeting, the BAC Holders of a Fund will,
with respect to such Fund, consider and vote upon:
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(i) A proposal (the "Merger Proposal") to approve and adopt (a) with
respect to Fund I-II, the Amended and Restated Agreement and Plan of Merger,
dated as of March 14, 1996 (the "Fund I-II Merger Agreement"), among Fund I-
II, CRITEF Associates Limited Partnership, a Delaware limited partnership
which is the general partner of Fund I-II ("Fund I-II GP"), Watermark
Partners, L.P., a Delaware limited partnership ("Merger Partnership") which
provides for the Merger of Merger Partnership into Fund I-II, and others, and
(b) with respect to Fund III, the Amended and Restated Agreement and Plan of
Merger, dated as of March 14, 1996 (the "Fund III Merger Agreement," and
together with the Fund I-II Merger Agreement, the "Merger Agreements"), among
Fund III, CRITEF III Associates Limited Partnership, a Delaware limited
partnership which is the general partner of Fund III ("Fund III GP," and
together with Fund I-II GP, the "General Partners"), and Watermark III
Partners, L.P., a Delaware limited partnership ("Merger Partnership III," and
together with Merger Partnership, the "Merger Partnerships") and others, which
provides for the Merger of Merger Partnership III into Fund III.
Upon consummation of each Merger and by virtue thereof, (a) all of the
BACs in the merged Fund (except as provided below) will be redeemed for cash
at the redemption price of (i) with respect to Fund I-II, $14.41 per BAC in
the case of Series I and $14.24 per BAC in the case of Series II and (ii) with
respect to Fund III, $15.18 per BAC, and, in each case, subject to adjustment
as described below (as adjusted, the "Redemption Price") and the interests
represented by such BACs will be canceled, (b) interests in each of the Funds
held by the Assignor Limited Partner of each of the Funds (the "Assignor
Limited Partners") will be canceled and extinguished, (c) partnership
interests in each of the Funds held by CAPREIT or its designee will remain
outstanding and (d) in each case, BACs held by CAPREIT and its affiliates, if
any, will be converted into limited partner interests in the respective Funds
and BACs held by the Funds, if any, will be canceled and no consideration will
be paid therefor.
In arriving at the Redemption Price, the consideration to be paid to the
BAC Holders in the Mergers, in each case, may be increased or decreased by the
amount (the "Adjustment Amount") by which Available Cash (as defined below) is
greater or lesser than, with respect to Fund I-II, $2,606,482 in the case of
Series I, and $3,869,290 in the case of Series II, and, with respect to Fund
III, $5,924,228. The maximum Adjustment Amount is, with respect to Fund I-II,
$319,200 (or $0.14 per BAC) in the case of Series I, and $453,426 (or $0.14
per BAC) in the case of Series II, and, with respect to Fund III, $736,158 (or
$0.14 per BAC). For purposes of calculating the Adjustment Amount, Available
Cash means the amount of cash and cash equivalents held by or at the direction
of a Fund after deducting any amounts then owed, accrued or reserved by such
Fund for goods, services or liabilities of any nature or description (which
liabilities shall not include any liabilities of the properties securing the
Mortgage Revenue Bonds (as defined), including accrued real estate taxes and
insurance); provided, that all amounts held in tax and insurance escrows for
---------
all such properties and all amounts held in replacement reserves for the
benefit of the Owner Partnerships (as defined) shall be deemed to be part of
the Available Cash.
In arriving at the Redemption Price, the consideration to be paid to the
BAC Holders in the Mergers, in each case, also will be reduced by the amount
of fees and expenses, if any,
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awarded to counsel for the plaintiffs in certain class action litigation
brought on behalf of all BAC Holders in connection with the Mergers, which
amount shall not exceed 20% of the aggregate Merger consideration above
$150,260,000 (currently expected to be $1,700,000 in the aggregate). See "THE
TRANSACTION PROPOSALS -- THE MERGER PROPOSAL" and "LITIGATION".
(ii) A proposal (the "New Partners Proposal") to approve the removal of
such Fund's General Partner immediately prior to the consummation of a Merger
and the simultaneous election of CAPREIT GP as general partner in its stead.
CAPREIT has agreed to pay each of the General Partners $500,000 in
consideration for its general partner interest in a Fund. See "INTERESTS OF
CERTAIN PERSONS IN THE TRANSACTIONS" and "THE TRANSACTION PROPOSALS--NEW
PARTNERS PROPOSAL".
(iii) A proposal (the "Amendment Proposal," and together with the New
Partners Proposal and the Merger Proposal, the "Transaction Proposals") to
amend the respective Agreement of Limited Partnership (the "Partnership
Agreement") of each of the Funds to authorize expressly (a) the issuance,
immediately prior to or concurrently with the Mergers, of a limited partner
interest in each of the Funds to CAPREIT or its designee and the admission of
CAPREIT or its designee as a limited partner of each of the Funds and (b) the
Mergers and the Merger Agreements and the transactions contemplated thereby.
See, "THE TRANSACTION PROPOSALS--AMENDMENT PROPOSAL".
(iv) Such other business as may properly come before the Special
Meetings.
The approval and adoption, by the BAC Holders of each Fund, of each
Transaction Proposal to be voted upon by them is conditioned upon the approval
and adoption by such BAC Holders of each other Transaction Proposal to be
voted upon by them.
In the event that the BAC Holders in one Fund approve each of the
Transaction Proposals to be voted upon by them, but the BAC Holders in the
other Fund do not approve the Transaction Proposals to be voted upon by them,
the Merger Partnerships may elect, at their sole and absolute discretion,
whether or not to consummate the Merger and the related transactions with the
Fund whose BAC Holders have approved the Transaction Proposals and not with
the other Fund.
THE GENERAL PARTNERS HAVE APPROVED THE RESPECTIVE TRANSACTION PROPOSALS
AND DETERMINED THAT THE TRANSACTION PROPOSALS ARE FAIR TO AND IN THE BEST
INTERESTS OF THE BAC HOLDERS. ACCORDINGLY, THE GENERAL PARTNERS RECOMMEND
THAT THE BAC HOLDERS OF EACH FUND VOTE "FOR" EACH OF THE TRANSACTION
PROPOSALS.
VOTE REQUIREMENTS AT THE SPECIAL MEETINGS; NO DISSENTER'S RIGHTS
Pursuant to the Delaware Revised Uniform Limited Partnership Act (the
"DRULPA") and the respective Partnership Agreement of each of the Funds, the
approval and adoption of each of the Transaction Proposals by a Fund will
require the affirmative vote of a majority of
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such Fund's BAC Holders entitled to vote at the Special Meetings voting
together as a single class. In that regard, with respect to Fund I-II, holders
of Series I BACs and Series II BACs will vote together as a single class and
the approval of each of the Transaction Proposals will require the affirmative
vote of a majority of the combined BAC Holders of Series I and Series II.
In accordance with the DRULPA and the Partnership Agreements, the BAC
Holders will have no dissenter's rights of appraisal in connection with the
Transaction Proposals.
THE TRANSACTION PROPOSALS
THE MERGERS
The Mergers will be effected pursuant to the terms of the Merger
Agreements. Upon the consummation of the Mergers and by virtue thereof, (a)
each BAC (other than any BACs held by CAPREIT or its affiliates or the Funds)
will be canceled and extinguished and converted into the right to receive the
Redemption Price, (b) interests held by the Assignor Limited Partner of each
of the Funds will be canceled and extinguished, (c) partnership interests in
each of the Funds held by CAPREIT or its designees will remain outstanding and
(d) in each case, BACs held by CAPREIT and its affiliates, if any, will be
converted into limited partner interests in the respective Funds and BACs held
by the Funds, if any, will be canceled and no consideration will be paid
therefor.
Immediately prior to the consummation of the Mergers, the General Partner
of each of the Funds will be removed as general partner and simultaneously
replaced with CAPREIT GP as general partner. CAPREIT has agreed to pay each
General Partner $500,000 in consideration for its general partner interest in
a Fund. See "INTERESTS OF CERTAIN PERSONS IN THE MERGERS". Also, each of the
Funds will issue, concurrently with or immediately prior to the consummation
of the Mergers, limited partner interests in each of the Funds to CAPREIT or
its designee in exchange for the contribution of real property or other assets
and admit it as a limited partner in each of the Funds.
Pursuant to the Merger Agreements, a Merger will become effective on the
date (the "Effective Date") and at the time (the "Effective Time") that the
applicable Certificate of Merger is filed pursuant to Delaware law. It is
currently anticipated that the Effective Date and Effective Time will occur as
soon as practicable after the later of the completion of the Special Meetings
and the receipt of a final and non-appealable order approving the settlement
in certain class actions relating to the Merger. See "LITIGATION." Following
the Effective Date and Effective Time and as a result of a Merger, a Fund, as
the surviving entity of the Merger, will continue in existence under Delaware
law, but will be wholly owned by CAPREIT and its affiliates. Upon
consummation of a Merger, the BACs will be delisted and will no longer trade
on the American Stock Exchange, Inc. (the "AMEX"), and a Fund will cease to be
a reporting company under the Securities Exchange Act of 1934, as amended.
The BAC transfer books of the Funds will be closed as of the close of
business on the Effective Date and no transfer of record of BACs will be made
thereafter other than the
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<PAGE>
registration of transfers reflecting transfers occurring before the close of
business on the Effective Date.
The description contained in this Proxy Statement of the terms and
conditions of the Mergers, the Merger Agreements, and the other related
transactions and documents is qualified in its entirety by reference to the
text of the Merger Agreements, copies of which are attached hereto as
Appendices A-1 and A-2 and which are incorporated herein by reference. See
"THE TRANSACTION PROPOSALS -- THE MERGER PROPOSAL -- The Mergers."
RECOMMENDATIONS OF THE GENERAL PARTNERS; REASONS FOR THE MERGERS
EACH OF THE GENERAL PARTNERS HAS CONCLUDED THAT EACH OF THE TRANSACTION
PROPOSALS IS FAIR TO, AND IN THE BEST INTERESTS OF, THE BAC HOLDERS AND
RECOMMENDS THAT BAC HOLDERS VOTE FOR APPROVAL OF THE TRANSACTION PROPOSALS.
In approving each of the Transaction Proposals and determining to recommend
that BAC Holders vote in favor of each of them the General Partners gave due
consideration to the following:
. The unadjusted cash consideration being offered to the BAC Holders
in the Mergers represents a premium of approximately 22.6%, in the case of
Fund I-II, Series I, 30.9%, in the case of Fund I-II, Series II and 26.5%, in
the case of Fund III, over the market price of BACs, as of September 8, 1995,
the last trading day prior to the initial public announcement of the Mergers.
In recommending the approval of the Mergers, the General Partners have given
the most weight to this factor.
. The General Partners gave due consideration and relied upon the
written fairness opinions of Oppenheimer & Co., Inc. ("Oppenheimer") to the
BAC Holders of Series I and Series II of Fund I-II and the BAC Holders of Fund
III, respectively, each dated March 14, 1996 (collectively, the "Fairness
Opinions") that, subject to the assumptions and limitations set forth therein,
the Redemption Price offered to such BAC Holders in the Mergers is fair to
such BAC Holders from a financial point of view.
. Counsel to the plaintiffs in certain class actions who questioned
the sufficiency of the consideration originally offered to the BAC Holders
negotiated improved terms of the Merger, including the consideration now being
offered to the BAC Holders and have determined that the Redemption Price is
fair to the BAC Holders. A proposed settlement containing the improved terms
of the Merger will be presented to the court for a determination that it is
fair and reasonable.
. The General Partners believe that it is in the best interests of
the BAC Holders to liquidate their interests in the Funds now, at a
substantial premium over the market price for the BACs (as of the last trading
day prior to the public announcement of the Mergers), rather than to wait an
indeterminate period of time for the possible liquidation or other disposition
of the mortgage revenue bonds held by the Funds (the "Mortgage Revenue Bonds")
at amounts which cannot now be determined.
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<PAGE>
. The Mergers are more attractive than other possible sale
alternatives because the Mergers provide for the disposition of all of the
Funds' assets in a single transaction, which involves lower transaction costs
for the Funds.
. In determining to pursue a transaction with CAPREIT, the General
Partners placed substantial weight on CAPREIT's agreement not to require that
the Funds make any representations as to the tax-exempt status of the Mortgage
Revenue Bonds.
. In determining to pursue a transaction with CAPREIT, the General
Partners also took into account CAPREIT's considerable experience and
expertise in the real estate industry, its knowledge of and familiarity with
the Mortgage Revenue Bonds and the properties that secure them and its
financial wherewithal and sophistication.
. Although the BACs have been listed on the AMEX since 1993, there
had been no significant increase in trading prices of the BACs prior to
announcement of the Mergers and no active market for the BACs has developed
nor is one expected to develop in the future.
IN THE OPINION OF THE GENERAL PARTNERS, THE MERGER AND THE RELATED
TRANSACTIONS REPRESENT THE BEST ALTERNATIVES FOR THE BAC HOLDERS AT THIS TIME.
FAILURE TO APPROVE THE TRANSACTION PROPOSALS MAY HAVE THE FOLLOWING ADVERSE
CONSEQUENCES:
. Waiting for a possible liquidation or other disposition of the
assets of the Funds, whether through a bulk sale or disposition of individual
assets, may result in the BAC Holders receiving less consideration than the
consideration being offered in the Merger. There can be no assurance as to
whether or when any such liquidation or dispositions might occur.
. The General Partners currently believe that it is probable that the
full amount of BAC Holder invested capital may not be recoverable on most of
the Mortgage Revenue Bonds. In order to realize a greater amount of BAC
Holder invested capital, it may be advisable, with BAC Holder consent, to hold
certain of the properties beyond the maturity dates of the mortgage loans
(1998 through 2000). Due to proposed Internal Revenue Service regulations, it
is uncertain at this time whether an extension of the mortgage loans, together
with other modifications that might be required in connection with such
extension, would trigger a deemed reissuance for federal income tax purposes.
Any reissuance without the cooperation of the Mortgage Revenue Bond issuer
would result in the loss of the tax-exempt status of the Mortgage Revenue
Bonds. Such issuers might cooperate and consent to such modifications;
however, there can be no assurance that they would do so.
. The Funds do not currently have the financial resources and asset
base to pursue an alternative transaction on their own that would provide as
much benefit to the BAC Holders as the Mergers.
See "SPECIAL CONSIDERATIONS -- REASONS FOR THE PROPOSED MERGERS;
RECOMMENDATIONS OF THE GENERAL PARTNERS."
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THE GENERAL PARTNERS RECOMMEND THAT THE BAC HOLDERS VOTE "FOR" EACH OF
THE TRANSACTION PROPOSALS.
FAIRNESS OPINIONS OF OPPENHEIMER & CO., INC.
Oppenheimer has rendered its Fairness Opinions, each dated March 14,
1996, to the effect that, as of such date and subject to the assumptions and
limitations therein, the Redemption Price offered to the BAC Holders of Series
I and Series II of Fund I-II and to the BAC Holders of Fund III in the Mergers
is fair to such BAC Holders from a financial point of view.
The discussion herein of the Fairness Opinions is qualified in its
entirety by reference to the text of such Fairness Opinions, copies of which
are attached hereto as Appendices B-1, B-2 and B-3, respectively, and which
are incorporated herein by reference. See "SPECIAL CONSIDERATIONS -- FAIRNESS
OPINIONS OF OPPENHEIMER & CO., INC."
THE FUNDS AND THE MERGER PARTNERSHIPS
The Funds. Each of the Funds was originally formed to acquire a
portfolio of tax-exempt mortgage revenue bonds issued by various state or
local governments or their agencies or authorities, which were collateralized
by non-recourse participating first mortgage loans on multifamily residential
developments. The Funds are Delaware limited partnerships with executive
offices at c/o C.R.I., Inc., The CRI Building, 11200 Rockville Pike,
Rockville, Maryland 20852.
The General Partner of Fund I-II is CRITEF Associates Limited Partnership
whose general partners are C.R.I., Inc. ("CRI"), William B. Dockser, H.
William Willoughby and Martin C. Schwartzberg. Mr. Schwartzberg retired from
the business of the Funds and has not acted in the capacity of a general
partner of Fund I-II GP since January 1, 1990. See "LITIGATION." The General
Partner of Fund III is CRITEF III Associates Limited Partnership, whose
general partner is CRI.
The Merger Partnerships. The Merger Partnerships have been created
solely for the purpose of effecting the Mergers and have engaged in no other
business or operations. CAPREIT, the general partner of each of the Merger
Partnerships, is based in Rockville, Maryland, and is a self-managed, self-
administered private real estate investment trust. It currently owns 30
multi-family complexes located in 10 states. In addition to managing the
7,512 apartments that it owns, CAPREIT manages another 9,073 apartments
(including 14 of the properties securing the Mortgage Revenue Bonds) for
third-party owners. CAPREIT has a total capitalization in excess of $331
million. AP CAPREIT Partners, L.P. ("AP CAPREIT") holds 99.83% of the
outstanding capital stock of CAPREIT. CAPREIT Limited Partnership, a Maryland
limited partnership, is the initial limited partner of the merger
partnerships. The Merger Partnerships are Delaware limited partnerships with
executive offices at 11200 Rockville Pike, Rockville, Maryland 20852. See
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CAPREIT was initially formed by CRI, an affiliate of the General
Partners, for the purpose of acquiring, owning and managing a portfolio of
multi-family real estate properties. In order to obtain some of the funds
necessary to acquire such properties, CAPREIT issued all its outstanding
shares to AP CAPREIT Partners, L.P. ("AP CAPREIT"), an affiliate of Apollo
Real Estate Investment Fund, L.P., on January 31, 1994. In connection with
such share issuance and CAPREIT's acquisition of 20 properties, CRI and
certain other affiliates of the General Partners (the "CRI Affiliates")
contributed property and asset management contracts relating to approximately
50 multi-family rental properties and other assets relating to its property
management business (including the property management contracts for a
majority of the properties securing the Mortgage Revenue Bonds) to CAPREIT
Residential Corporation ("CAPREIT Residential"), an affiliate of CAPREIT, for
$6,053,000 in installment notes, which installment notes CRI and the CRI
Affiliates contributed to AP CAPREIT in exchange for contingent limited
partner residual profits interests of up to 22% in AP CAPREIT, assuming
certain events occurred and hurdle rates were met. The CRI Affiliates had the
right and the obligation under certain circumstances to reacquire the property
management business at any time prior to June 30, 1995 at no cost to them. As
of June 30, 1995, neither CRI nor the CRI Affiliates had received any
distributions on account of their interests in AP CAPREIT.
On June 30, 1995, in connection with the cancellation of the right to
reacquire the property management business, AP CAPREIT redeemed the contingent
limited partner interests of CRI and the CRI Affiliates in AP CAPREIT for an
aggregate of $4,750,000. Because the respective owner of each property
covered by a property management contract retains the right to terminate the
contract and change the property management agent at any time, CRI and the CRI
Affiliates agreed to pay CAPREIT Residential up to a maximum aggregate amount
of $3,900,000 if certain property management contracts relating to the multi-
family rental properties, including property management contracts for 13 of
the properties which secure the Mortgage Revenue Bonds, are terminated under
specified conditions at any time prior to June 30, 2005 (a "Termination
Refund").
If the Mergers are consummated, the parties have agreed that no
Termination Refunds will be due with respect to the 13 properties securing the
Mortgage Revenue Bonds which are managed by CAPREIT Residential. The maximum
amount of Termination Refunds currently allocable to management contracts for
13 of the properties which secure the Funds' Mortgage Revenue Bonds is
$1,313,864.
CONDITIONS TO CONSUMMATION OF A MERGER
The obligation of a Fund and a Merger Partnership to consummate a Merger
and related transactions is subject to satisfaction or waiver (where
permissible), on or before the Closing Date (or such earlier time as specified
in the condition), of certain conditions, including, but not limited to, (i)
the performance, in all material respects, of the obligations of the other
party or parties contained in a Merger Agreement, (ii) the receipt of all
approvals and authorizations of any
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governmental authority and the making of all filings and notices required for
the consummation of such Merger and related transactions, (iii) the approval
of such Merger and related transactions by the BAC Holders of such Fund, (iv)
the absence of any governmental action which would have the effect of
preventing the consummation of such Merger and related transactions and (v)
the receipt of a final and non-appealable order of a court of competent
jurisdiction approving the settlement of the cases captioned Zakin v. Dockser
----------------
et al. and Wingard v. Dockser et al. filed in connection with the Mergers, as
------ -------------------------
such settlement is set forth in the Memorandum of Understanding, dated January
31, 1996. See "LITIGATION."
The obligation of a Fund to consummate a Merger and related transactions
is subject to certain additional conditions, which conditions must be
satisfied or waived (where permissible), including, but not limited to, the
accuracy of the representations and warranties made by the applicable Merger
Partnership.
The obligation of a Merger Partnership to consummate a Merger and related
transactions is subject to certain additional conditions, which conditions
must be satisfied or waived (where permissible), including, but not limited
to, (i) the maximum Adjustment Amount relating to a shortfall in Available
Cash, shall not have exceeded, with respect to Fund I-II, $319,200 in the case
of Series I, and $453,426 in the case of Series II, and, with respect to Fund
III, $736,158, (ii) the absence of any action, suit or proceeding seeking to
materially restrain or delay the consummation of such Merger and related
transactions or seeking material damages in connection therewith, (iii) the
Financing (as defined) having been consummated in accordance with the terms of
the Commitment (as defined), (iv) the absence of a material adverse change in
the condition of such Fund or an applicable Owner Partnership (as defined),
and (v) both Mergers being closed concurrently.
TERMINATION OF A MERGER AGREEMENT
A Merger Agreement may be terminated and a Merger and related
transactions may be abandoned, at any time prior to the Effective Time,
whether before or after the BAC Holders have approved and adopted such Merger
and related transactions, by the mutual written consent of a Merger
Partnership and a Fund, or by either such Merger Partnership or such Fund if:
(i) a court or governmental, regulatory or administrative authority has issued
a final and non-appealable order, decree, or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting such Merger and
related transactions, (ii) the Effective Time shall not have occurred by June
30, 1996 (the "Termination Date") (so long as the terminating party has
complied with all of its covenants and agreements contained in such Merger
Agreement), or (iii) the BAC Holders of such Fund do not approve and adopt
such Merger and related transactions.
A Merger Agreement may also be terminated at any time prior to the
Effective Time, whether before or after the BAC Holders have approved and
adopted a Merger and the related transactions, by a Fund, if, among other
things, a Merger Partnership (i) fails to perform in all material respects its
obligations under the Merger Agreement, and (ii) if a Merger Partnership fails
to deliver a Commitment Letter executed by a financial institution providing
for financing
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for the Merger and related transactions by the commitment date (the
"Commitment Date"), which is the earlier of May 1, 1996 or the date (the
"Mailing Date") this Proxy Statement is first mailed to BAC Holders. See "THE
TRANSACTION PROPOSALS -- THE MERGER PROPOSALS -- The Financings."
A Merger Agreement may also be terminated at any time prior to the
Effective Time, whether before or after the BAC Holders have approved and
adopted a Merger and related transactions, by a Merger Partnership if: (i) a
Fund or its General Partner shall have (a) withdrawn, amended or modified its
recommendation of such Merger and related transactions, or (b) taken any
public position inconsistent with such recommendations, (ii) if such Fund or
any applicable Owner Partnership fails to perform in all material respects its
obligations under such Merger Agreement, (iii) there shall have occurred a
material adverse change in the business, assets, properties, results of
operations or financial or other condition or prospects of such Fund or such
Owner Partnerships as defined, (iv) if such Fund shall have settled or
compromised any lawsuits or other legal proceedings challenging such Merger
Agreement ("Designated Actions") without the prior written consent of such
Merger Partnership, unless such settlement or compromise requires the payment
of money in an amount which, when aggregated with the other amounts expended
to settle or compromise Designated Actions, does not exceed an agreed upon
amount and (v) the representations and warranties of such Fund and such Owner
Partnerships are not true and correct in all material respects at any time as
if made at and as of such time, except to the extent that any such
representation or warranty is made as of a specific date, in which case such
representation or warranty shall have been true and correct as of such date.
A Merger Agreement may be amended by the written agreement of each of the
parties thereto before or after the BAC Holders have approved of a Merger and
related transactions, provided that, after approval by such BAC Holders, no
such amendment may adversely affect the interests of such BAC Holders unless
such amendment is also approved by such BAC Holders.
DEPOSIT
On the business day immediately prior to the date this Proxy Statement
was first mailed to the BAC Holders, CAPREIT paid into escrow deposits (the
"Deposits") of $1,000,000 under each Merger Agreement ($2,000,000 in the
aggregate), which Deposits are being held in escrow by Chicago Title Insurance
Company (the "Escrow Agent"), an independent third party, pursuant to the
terms of escrow agreements. A Deposit will be paid to a Fund under certain
circumstances in the event that a Merger Partnership fails to perform certain
of its obligations under the applicable Merger Agreement.
FEES AND EXPENSES
In the event a Merger Agreement is terminated or abandoned, under the
specified circumstances described below, a Fund may be liable for the payment
of a fee equal to $2,250,000 with respect to such terminated or abandoned
Merger Agreement.
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Such fee is payable only when a Merger Agreement is terminated or
abandoned, and
(i) such termination or abandonment resulted from the acceptance by its
General Partner, pursuant to its fiduciary duties, of a third party offer (a
"Fiduciary Out Termination"), the breach by such Fund of its covenant not to
solicit or encourage third party offers regarding business combinations or a
willful and material breach by such Fund of any of its covenants and
agreements (other than its representation and warranties); or
(ii) from the date of such Merger Agreement and prior to or concurrently
with such termination or abandonment, there shall have occurred an event (a
"Triggering Event") relating to a tender or exchange offer for any class of
BACs at a price higher than the price to be paid in a Merger, a business
combination with or involving such Fund, or failure by such Fund to support
such Merger, or the acquisition by any Designated Person (as defined in such
Merger Agreement) of at least one-third of any class of outstanding BACs of
such Fund; or
(iii) within 270 days from the date of termination or abandonment of such
Merger Agreement, a Triggering Event shall have resulted in such Fund or the
holders of any class of such Fund's BACs receiving consideration (determined
on a per BAC basis) in excess of the amount to be paid in such Merger.
The payment of such fee and the payment of expenses shall be the sole
remedy available to a Merger Partnership for breach of a Merger Agreement by a
Fund or any applicable Owner Partnership and shall be made as liquidated
damages in full satisfaction of such Fund's or such Owner Partnership's
liabilities or obligations under such Merger Agreement.
If a Merger Agreement is terminated or abandoned due to (i) a Fiduciary
Out Termination, (ii) a willful and material breach by a Fund or any
applicable Owner Partnership (other than a breach of the representations and
warranties), (iii) the failure by such Fund or any of such Owner Partnerships
to perform in all material respects its obligations and duties thereunder, or
(iv) a termination of such Merger Agreement by such Merger Partnership because
such Fund shall have settled Designated Actions for an amount in excess of an
agreed upon amount or such settlement or compromise contains terms to which
such Merger Partnership reasonably objects, then such Fund shall bear all of
its own expenses and reimburse such Merger Partnership and its affiliates for
reasonable out-of-pocket expenses (including, without limitation, all fees and
expenses of counsel, and its financing sources and consultants to the Merger
Partnership and its affiliates) in connection with such Merger and related
transactions and this Proxy Statement. If a closing shall occur under one,
but not the other Merger Agreement, the Merger Partnership which is a party to
the terminated Merger Agreement will be reimbursed for all such expenses
directly allocable to such terminated Merger Agreement and for one-half of all
expenses which cannot be allocated specifically to either of the Merger
Agreements but were incurred in connection with the Merger and the related
transactions. In no event, however, shall the amount paid to reimburse
expenses exceed $2,000,000.
Unless a Merger Agreement is terminated or abandoned for the reasons
specified in the preceding paragraph or a Merger Partnership elects to
terminate such Merger Agreement because
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the representations and warranties of a Fund and the applicable Owner
Partnerships are not true and correct in all material respects, then such
Merger Partnership shall bear all of its own costs and expenses and it shall
reimburse such Fund for all its costs and expenses incurred in connection with
a Merger, the related transactions and this Proxy Statement, other than the
costs and expenses of (i) the fairness opinion and the related legal and
accounting fees, (ii) the legal and accounting fees incurred in negotiating
such Merger Agreement and (iii) reimbursement for certain overhead costs of
such Fund's General Partner and such General Partner's affiliates.
In all other cases, in the event of a termination of a Merger Agreement
each of the parties shall bear their own expenses.
See "THE TRANSACTION PROPOSALS -- THE MERGER PROPOSAL--The Mergers" for a
detailed discussion of the terms and conditions of the Merger Agreements.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the transfer of the Mortgage Revenue
Bonds in connection with the financing for the Mergers will result in the
Funds recognizing significant long term capital losses which will be allocated
to BAC Holders. The payment of the Redemption Price to the BAC Holders will
constitute, for federal income tax purposes, a redemption of the BAC Holders
interests in the Funds pursuant to Section 731(a) of the Internal Revenue Code
of 1986, as amended (the "Code"). Although there will be minor differences as
a result of the Mergers, the BAC Holders for federal income tax purposes will
essentially realize a capital gain or loss equal to the difference between
their original purchase price for their BACs and the cash received as a result
of the Merger.
REMOVAL AND REPLACEMENT OF GENERAL PARTNERS.
In connection with the Mergers, the BAC Holders of each Fund are being
asked to consider and vote upon a proposal to remove the General Partner of
such Fund immediately prior to the Mergers and simultaneously to elect CAPREIT
GP as general partner in its stead. In connection with the removal of the
General Partners, CAPREIT has agreed to pay each of the General Partners
$500,000 in consideration for its general partner interest in a Fund. See
"INTERESTS OF CERTAIN PERSONS IN THE MERGERS" and "THE TRANSACTION PROPOSALS--
NEW PARTNER PROPOSAL.
AMENDMENTS TO AGREEMENTS OF LIMITED PARTNERSHIP
In connection with the Mergers, the BAC Holders of each Fund are being
asked to consider and vote upon a series of amendments to the respective
Partnership Agreements of such Fund to authorize expressly (a) the Mergers and
the Merger Agreements and the transactions contemplated thereby, and (b) the
issuance of a limited partner interest in each of the Funds to CAPREIT or its
designee immediately prior to or concurrently with the consummation of the
Mergers in exchange for the contribution of real property or other assets and
the admission of CAPREIT or its designee as a limited partner. The full text
of the proposed amendments to the
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Partnership Agreements of each of the Funds are included as Appendices C-1 and
C-2, respectively, to this Proxy Statement. See "THE TRANSACTION PROPOSALS --
AMENDMENT PROPOSAL."
THE FINANCING
The funds required to pay for the redemption of the BACs in the Merger
and to pay related fees and expenses will be provided by CAPREIT and the
proceeds of the sale of certain beneficial ownership interests in one or more
trusts (the "Trusts") to be formed at the Effective Time to which the Funds,
following consummation of the Mergers, will cause the Mortgage Revenue Bonds
to be contributed and CAPREIT will contribute an additional bond issue. The
interests in the Trusts to be sold will have the benefit of credit and
liquidity support from third party financial institutions which is to be
arranged and guaranteed in part by CAPREIT and certain of its affiliates. The
obligations of CAPREIT and its affiliates with respect to such credit support
will be secured by subordinate mortgages on the properties securing the
Mortgage Revenue Bonds plus the additional bond issue to be contributed to the
Trusts by CAPREIT, as well as by mortgages on seven other properties owned by
affiliates of CAPREIT and pledges by CAPREIT and its affiliates of the equity
ownership interests in the properties securing the Mortgage Revenue Bonds and
the residual interest in each Trust. See "THE TRANSACTION PROPOSALS -- THE
MERGER PROPOSAL-- The Financing."
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS
The Merger Agreements also provide that on the closing date of the
Mergers (the "Closing Date"), CAPREIT or its designee will acquire the accrued
mortgage servicing and administrative fees (the "Accrued Fees") which are
payable to certain affiliates of the General Partners by certain partnerships
affiliated with the General Partners (the "Owner Partnerships"), to which
certain of the properties securing 15 of the Mortgage Revenue Bonds had been
assigned or transferred by deed in lieu of foreclosure or otherwise, subject
to the existing indebtedness, upon default by the original borrowers, to CRI
through June 30, 1995, and to CRIIMI MAE Services Limited Partnership
("CRIIMI"), the general partner of which is a subsidiary of CRIIMI Mae Inc., a
public company affiliated with the General Partners, from July 1, 1995 through
the Closing Date. The consideration payable to CRI for such Accrued Fees is,
with respect to Fund I-II, $511,680 in the case of Series I, and $770,835, in
the case of Series II, and, with respect to Fund III, $667,485, which amounts
represent, in the aggregate, approximately 42% of the Accrued Fees payable to
CRI. The consideration payable to CRIIMI for the Accrued Fees is, with
respect to Fund I-II, $265,968, in the case of Series I, and $391,296 in the
case of Series II, and with respect to Fund III, $566,676, representing all of
the Accrued Fees payable to CRIIMI through June 30, 1996. If the Closing Date
occurs after June 30, 1996, the amounts payable to CRIIMI will increase by the
amount of the estimated Accrued Fees for each month after June 30, 1996
through the Closing Date.
The payment of the Accrued Fees is subordinated on a current basis, loan
by loan, to the payment of full base interest, plus any unpaid base interest
and interest thereon, on the mortgage loans. In the absence of the Mergers,
the Accrued Fees would not be payable until the earlier of (i) repayment of
any unpaid base interest and interest thereon from increased cash flow of a
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property or (ii) prepayment or maturity of the respective loan or the sale,
refinancing or other disposition of the respective property that secures the
Mortgage Revenue Bond after debt repayment in full of principal and accrued
base interest.
William B. Dockser and H. William Willoughby are the sole shareholders,
directors and Chairman of the Board and President, respectively, of CRI, and
are 5.1% and 4.7% shareholders, respectively, directors and Chairman of the
Board and President, respectively, of CRIIMI Mae Inc., a public company that
owns CRIIMI.
In connection with the Mergers, CAPREIT has agreed to pay the General
Partner of each Fund $500,000 for its general partner interest. Messrs.
Dockser, Willoughby and Schwartzberg will each receive approximately 25% and
CRI will receive approximately .01% of the $500,000 to be paid to the Fund I-
II GP and Messrs. Dockser, Willoughby and Schwartzberg will each receive
approximately 25% and CRI will receive approximately 1% of the $500,000 to be
paid to the Fund III GP in accordance with their respective partnership
interests in those entities. The remaining interests in the General Partners
are held by general partnerships comprised of certain current and former
employees of CRI.
Messrs. Dockser and Willoughby also own, through various corporations,
all of the interests in the the Owner Partnerships. The owners of the
interests in each of the Owner Partnership have agreed to either (a) sell,
assign and transfer the partnership interest in, or the real property and
other assets of, such Owner Partnerships to CAPREIT or its designee for no
additional consideration or (b) admit CAPREIT or its designee as the managing
general partner, whereupon the general partner interests of the current
general partners will be converted into limited partner interests, and CAPREIT
will have the option to acquire all of the limited partner interests at any
time within five years of the Closing Date at the then fair market value
(defined as the proportionate interest of such limited partner in the value of
the partnership property as encumbered by the mortgage loans) thereof.
Although such interests currently have nominal value, if the fair market value
of the partnership properties increases prior to the time CAPREIT exercises
its options, such increase in value may benefit the owners of the Owner
Partnerships.
CAPREIT Residential is currently the property manager for 14 of the 18
properties securing the Mortgage Revenue Bonds. See "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS."
MARKET PRICE DATA
The BACs are listed on the AMEX under the symbols CRA for Fund I-II,
Series I, CRB for Fund I-II, Series II, and CRL for Fund III. On September
8, 1995, the last full trading day prior to the public announcement of the
execution of each of the Merger Agreements, the closing prices per BAC as
reported on the AMEX Composite Tape were $11.75, $10.875 and $12.00,
respectively. On January 31, 1996, the last trading day prior to the public
announcement of the increase in the Redemption Price, the closing prices per
BAC as reported on the AMEX Composite Tape were $12.875, $12.625 and $13.375,
respectively. As of _________ ___, 1996, the day prior to the date of this
Proxy Statement, the closing prices per BAC as reported on the
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AMEX Composite Tape were $___________, $______________ and $_____________,
respectively. See "MARKET PRICE DATA."
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GENERAL INFORMATION
TIME AND PLACE OF THE SPECIAL MEETINGS
These proxy materials are being furnished to the holders (the "BAC
Holders") of Beneficial Assignee Certificates ("BACs") in Series I and II
issued by Capital Realty Investors Tax Exempt Fund Limited Partnership, a
Delaware limited partnership ("Fund I-II"), and BACs issued by Capital Realty
Investors Tax Exempt Fund III Limited Partnership, a Delaware limited
partnership ("Fund III," and together with Fund I-II, the "Funds"), in
connection with the solicitation of proxies for use at the Special Meetings of
BAC Holders of each Fund to be held at 10:00 a.m. and 11:00 a.m.,
respectively, on [meeting date], 1996 at [location of meeting] and at any
adjournments or postponement thereof (the "Special Meetings").
This Proxy Statement is first being mailed to the BAC Holders on or about
[mailing date], 1996.
PURPOSE OF THE SPECIAL MEETINGS
At each Special Meeting, the BAC Holders of a Fund will consider and vote
upon:
(i) A proposal (the "Merger Proposal") to approve and adopt (a) with
respect to Fund I-II, the Amended and Restated Agreement and Plan of Merger,
dated as of March 14, 1996 (the "Fund I-II Merger Agreement"), among Fund I-
II, CRITEF Associates Limited Partnership, a Delaware limited partnership
which is the general partner of Fund I-II ("Fund I-II GP"), and Watermark
Partners, L.P., a Delaware limited partnership which was formed by Capital
Apartment Properties, Inc. ("CAPREIT") for the purposes of this Merger
("Merger Partnership") which provides for the merger of Merger Partnership
into Fund I-II, and (b) with respect to Fund III, the Amended and Restated
Agreement and Plan of Merger, dated as of March 14, 1996 (the "Fund III Merger
Agreement," and together with the Fund I-II Merger Agreement, the "Merger
Agreements"), among Fund III, CRITEF III Associates Limited Partnership, a
Delaware limited partnership which is the general partner of Fund III ("Fund
III GP," and together with Fund I-II GP, the "General Partners"), and
Watermark III Partners, L.P., a Delaware limited partnership ("Merger
Partnership III," and together with Merger Partnerships, the "Merger
Partnerships") which provides for the merger of Merger Partnership III into
Fund III each, a "Merger" and together, the "Mergers").
Upon consummation of each Merger and by virtue thereof, (a) all of the
BACs in the merged Fund (except as provided below) will be redeemed for cash
at a redemption price of (i) with respect to Fund I-II, $14.41 per BAC in the
case of Series I and $14.24 per BAC in the case of Series II and (ii) with
respect to Fund III, $15.18 per BAC, in each case, subject to adjustment as
described below (as adjusted, the "Redemption Price"), (b) interests in each
of the Funds held by the Assignor Limited Partner of each of the Funds will be
canceled and extinguished, (c) interests in each of the Funds held by CAPREIT
or its designees, will remain outstanding and (d) in each case, BACs held by
CAPREIT and its affiliates, if any, will be
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converted into limited partner interests in the respective Funds and BACs held
by the Funds, if any, will be canceled and no consideration will be paid
therefor.
In arriving at the Redemption Price, the consideration to be paid to the
BAC Holders in the Mergers, in each case, may be increased or decreased by the
amount (the "Adjustment Amount") by which Available Cash (as defined below) is
greater or lower than, with respect to Fund I-II, $2,606,482 in the case of
Series I, and $3,869,290 in the case of Series II, and, with respect to Fund
III, $5,924,228. The maximum Adjustment Amount is, with respect to Fund I-II,
$319,200 (or $0.14 per BAC) in the case of Series I, and $453,426 (or $0.14
per BAC) in the case of Series II, and, with respect to Fund III, $736,158 (or
$0.14 per BAC). Based on the Adjusted Amounts, the Redemption Price per BAC,
with respect to Fund I-II, would range from $14.27 to $14.55, in the case of
Series I, and $14.10 to $14.38 in the case of Series II, and, with respect to
Fund III, from $15.04 to $15.32. Any purchase price adjustments shall be
prorated among all of the BACs of the relevant series. For purposes of
calculating the Adjustment Amount, Available Cash means the amount of cash and
cash equivalents held by or at the direction of a Fund after deducting any
amounts then owed, accrued or reserved by such Fund for goods, services or
liabilities of any nature or description (which liabilities shall not include
any liabilities of the properties securing the Mortgage Revenue Bonds (as
defined), including accrued real estate taxes and insurance); provided, that
--------
all amounts held in tax and insurance escrows for all such properties and all
amounts held in replacement reserves for the benefit of the Owner Partnerships
(as defined) shall be deemed to be part of the Available Cash.
In arriving at the Redemption Price, the consideration to be paid to the
BAC Holders in the Mergers, in each case, also will be reduced by the amount
of fees and expenses awarded to counsel to the plaintiffs in certain
litigation relating to the Mergers. Pursuant to the Memorandum of
Understanding entered into with plaintiffs' counsel in such actions,
plaintiffs' counsel will be entitled to apply to the court for an award of
reasonable attorneys' fees and expenses in an amount not to exceed 20% of the
aggregate merger consideration above $150,260,000 (currently expected to be
$1,700,000 in the aggregate), or $0.13 per BAC for Fund I-II, Series I, $0.17
per BAC for Fund I-II, Series II, and $0.16 per BAC for Fund III. See
"LITIGATION" below.
For state law purposes, each Merger Partnership will merge with and into
the Fund into which it is merging, and all assets and obligations of such
Merger Partnership will be transferred by operation of law to the respective
Fund as the surviving entity. In connection with and as consideration for the
Mergers, each BAC Holder will have its BACs converted into the right to
receive cash equal to the Redemption Price.
(ii) A proposal (the "New Partners Proposal") to approve the removal of
the General Partner of each of the Funds immediately prior to the consummation
of the Merger and the simultaneous election of a newly formed, wholly owned
subsidiary of CAPREIT ("CAPREIT GP") as general partner in its stead. CAPREIT
has agreed to pay each of the General Partners $500,000 in consideration for
their general partner interests. See "INTERESTS OF CERTAIN PERSONS IN THE
TRANSACTIONS." If the Mergers are not consummated, the existing
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General Partners of the Funds will not be removed, notwithstanding the
approval of the New Partners Proposal by the BAC Holders.
(iii) A proposal (the "Amendment Proposal," and together with the New
Partners Proposal and the Merger Proposal, the "Transaction Proposals") to
amend the respective Agreement of Limited Partnership (the "Partnership
Agreements") of each of the Funds to expressly authorize (a) the Mergers and
the Merger Agreements and the transactions contemplated thereby and (b) the
issuance of a limited partner interest in each of the Funds to CAPREIT or its
designee in exchange for the contribution of real property or other assets and
the admission of CAPREIT or its designee as a limited partner in each of the
Funds.
(iv) Such other business as may properly come before the Special
Meetings.
THE APPROVAL AND ADOPTION, BY THE BAC HOLDERS OF EACH FUND, OF EACH
TRANSACTION PROPOSAL TO BE VOTED UPON BY THEM IS CONDITIONED UPON THE APPROVAL
AND ADOPTION, BY SUCH BAC HOLDERS, OF EACH OTHER TRANSACTION PROPOSAL TO BE
VOTED UPON BY THEM.
IN THE EVENT THAT THE BAC HOLDERS IN ONE FUND APPROVE EACH OF THE
TRANSACTION PROPOSALS TO BE VOTED UPON BY THEM, BUT THE BAC HOLDERS IN THE
OTHER FUND DO NOT APPROVE THE TRANSACTION PROPOSALS TO BE VOTED UPON BY THEM,
THE MERGER PARTNERSHIPS MAY ELECT, AT THEIR SOLE AND ABSOLUTE DISCRETION,
WHETHER OR NOT TO CONSUMMATE THE MERGER AND THE RELATED TRANSACTIONS WITH THE
FUND WHOSE BAC HOLDERS HAVE APPROVED THE TRANSACTION PROPOSALS AND NOT WITH
THE OTHER FUND.
THE GENERAL PARTNERS HAVE APPROVED THE RESPECTIVE TRANSACTION PROPOSALS
AND HAVE DETERMINED THAT THE TRANSACTION PROPOSALS ARE FAIR TO AND IN THE BEST
INTERESTS OF THE BAC HOLDERS. ACCORDINGLY, THE GENERAL PARTNERS RECOMMEND
THAT THE BAC HOLDERS VOTE "FOR" EACH OF THE TRANSACTION PROPOSALS.
RECORD DATE; VOTE REQUIREMENTS
Only BAC Holders of record as of the close of business on [record date],
1996 (the "Record Date") are entitled to notice of and to vote at the Special
Meeting. Each BAC Holder is entitled to one vote for each BAC owned of record
by him or her. As of the Record Date, there were 2,280,000 Fund I-II, Series
I BACs outstanding held by ______ BAC Holders of record, 3,238,760 Fund I-II,
Series II BACs outstanding held by ______ BAC Holders of record, and 5,258,268
Fund III BACs outstanding held by _____ BAC Holders of record.
Pursuant to the Delaware Revised Uniform Limited Partnership Act (the
"DRULPA") and the respective Partnership Agreements of each of the Funds, the
approval and adoption of each of the Transaction Proposals by the Funds will
require the affirmative vote of a majority of such Fund's limited partners.
The Assignor Limited Partner (the "Assignor Limited Partner") of each of the
Funds is the sole limited partner of such Fund. The BAC Holders of each Fund
are entitled to direct the vote of the Assignor Limited Partner of such Fund
and, accordingly, the approval and adoption of each of the Transaction
Proposals by a Fund will require the
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affirmative vote of a majority of such Fund's BAC Holders entitled to vote at
the Special Meetings. In the case of Fund I-II, holders of Series I BACs and
Series II BACs will vote together as a single class. Approval of each of the
Transaction Proposals will require the affirmative vote of a majority of the
combined BAC Holders of Series I and Series II (i.e., at least 2,759,381 BACs
----
in Fund I-II must be voted in favor of each of the Transaction Proposals).
Accordingly, if a majority of such BAC Holders approve the Transaction
Proposals, such Transaction Proposals will be deemed approved and adopted by
Fund I-II irrespective of whether a majority of the BAC Holders in either
Series I or Series II failed to vote for the Transaction Proposals.
VOTING PROCEDURES AND PROXIES
Each BAC Holder of record on the Record Date is entitled to cast one vote
per BAC in person or by proxy at the Special Meeting or any adjournment
thereof.
The persons named in the Proxy will vote as instructed by the BAC Holder
with respect to the Transaction Proposals, and will have authority, as a
result of holding such Proxy, to vote in their discretion as to procedural
matters relating to the Special Meetings including, without limitation, with
respect to the adjournment of the Special Meeting from time to time.
Each BAC Holder, whether voting in person or by proxy, must vote, with
respect to all of such BAC Holder's BACs in a Fund, either "for," "against" or
"abstain" as to each Transaction Proposal. If a BAC Holder has BACs in more
than one Fund or Series, however, such BAC Holder can vote the BACs held in
one Fund or Series differently from how such BAC Holder votes the BACs held in
the other Fund or Series. A signed Proxy which is returned without a vote
will be voted "for" each of the Transaction Proposals. The failure to return
a signed Proxy or returning it with an "abstain" vote has the effect of, and
is equivalent to, a vote against the Transaction Proposals. In addition,
Broker non-votes (i.e., BACs not voted on a specific proposal by record
holders due to the absence of specific voting instructions from the beneficial
owner of the BACs) have the effect of, and are equivalent to, votes against
the Transaction Proposals.
Any Proxy may be withdrawn or changed at any time prior to the date of
the Special Meetings by completing, executing and returning a Proxy indicating
the changed vote. Any such withdrawal will be effective when the appropriate
Fund receives a signed Proxy with a later date. A BAC Holder may also revoke
a previously delivered Proxy by voting in person at the Special Meeting.
Each BAC Holder is requested to complete and execute the Proxy in
accordance with the instructions contained therein. For a Proxy to be
effective, a BAC Holder must deliver his or her Proxy at any time prior to the
Special Meeting of the relevant Fund or any adjournment thereof to:
C.R.I., Inc.
c/o Registrar and Transfer Company
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10 Commerce Drive
Cranford, New Jersey 07016
A self-addressed, stamped envelope for return of the Proxy has been
included with this Proxy Statement.
THE GENERAL PARTNERS URGE EACH BAC HOLDER TO VOTE--YOUR VOTE IS
IMPORTANT.
NO DISSENTER'S RIGHTS
If a Merger is approved by a Fund's BAC Holders, such approval will bind
all BAC Holders in such Fund including those who voted against such Merger,
abstained or failed to return a completed Proxy. BAC Holders have neither a
statutory nor a contractual right to elect to be paid the appraised value of
their BACs. If a Merger is consummated, each BAC Holder will receive the
consideration, assuming such BACs are validly tendered, set forth herein
regardless of whether or not such BAC Holder approved such Merger.
SOLICITATION OF PROXIES
The expense of preparing, printing and mailing these proxy materials and
the costs of the solicitation will be paid by the Merger Partnerships.
Proxies are being solicited principally by mail, but proxies may also be
solicited personally, by telephone, telegraph and similar means by the General
Partners and their affiliates. In addition, the Merger Partnerships, on
behalf of the Funds, have retained MacKenzie Partners, Inc. to assist in the
solicitation of the proxies for a fee of $__________ plus out-of-pocket
expenses. The Merger Partnerships will also reimburse brokerage firms and
others for their expenses in forwarding proxy solicitation materials to the
beneficial owners of the BACs.
BAC OWNERSHIP
PRINCIPAL BAC HOLDERS
The Funds know of no person or "group" (as such term is used in Section
13(d) of the Exchange Act) who, as of February 29, 1996, beneficially owned
more than 5% of the BACs outstanding with respect to Fund I-II or Fund III.
MANAGEMENT
The following table sets forth certain information concerning, to the
knowledge of the Funds, all BACs beneficially owned, as of February 29, 1996,
by the General Partners and each general partner of the General Partners, and
by all directors and officers as a group of the corporate general partner of
the General Partners. The voting and investment powers for the BACs listed
are held solely by the named beneficial owner.
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The general partners of Fund I-II G.P. consist of C.R.I., Inc., a
Delaware corporation ("CRI"), William B. Dockser, H. William Willoughby and
Martin C. Schwartzberg. Mr. Schwartzberg, who retired from the business of
the Funds effective January 1, 1990, has not acted in the capacity of a
general partner since such time. See "LITIGATION". CRI is the sole general
partner of Fund III G.P. Messrs. Dockser and Willoughby are the sole
shareholders, directors and Chairman of the Board and President, respectively,
of CRI.
Name of Amount and Nature % of total
Beneficial Owner of Beneficial Ownership BACs issued
- - - - --------------------------- ------------------------------- -----------
CRITEF Associates None
CRITEF III Associates None
William B. Dockser 500 BACs in Fund I-II, Series I 0.02%
1,500 BACs in Fund I-II, Series II 0.05%*
500 BACs in Fund III 0.01%
H. William Willoughby None
Martin C. Schwartzberg None
All Directors and Officers 500 BACs in Fund I-II, Series I 0.02%
as a Group (6 persons) 1,500 BACs in Fund I-II, Series II 0.05%
500 BACs in Fund III 0.01%
*Does not include 1,000 BACs in Series II, representing 0.03% of total BACs
issued in Series II, owned by Saundra L. Dockser, Mr. Dockser's spouse.
The Funds have been advised by Mr. Dockser, the only general partner,
director or officer of a General Partner who owns BACs, that he will vote his
BACs in favor of each of the Transaction Proposals.
SPECIAL CONSIDERATIONS
PURPOSE OF THE TRANSACTION PROPOSALS
The principal purpose and effect of the Mergers is to cause the Funds to
be wholly owned and controlled by CAPREIT through the redemption of all of the
BACs in each of the Funds, the removal of the General Partners and the
simultaneous election of CAPREIT GP as general partner in each of the Funds in
its stead, and the admission of CAPREIT or its designee as a limited partner
in each of the Funds. See "THE MERGER PARTNERSHIPS--CERTAIN INFORMATION
CONCERNING CAPREIT." Other than as set forth in this Proxy Statement, the
General Partners have no reason for proposing the Mergers and related
transactions now (as
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opposed to any other time) and are unaware of any material development
affecting the future value of the BACs which has not been discussed in this
Proxy Statement.
In connection with the Transaction Proposals the BAC Holders are being
asked to consider and vote upon (i) the Mergers and the related transactions,
(ii) the removal of the General Partners and the simultaneous election of
CAPREIT GP as general partner in its stead, (iii) the issuance of limited
partner interests in each of the Funds to CAPREIT or its designee in exchange
for the contribution of real property or other assets and the admission of
CAPREIT or its designee as a limited partner; and (iv) certain amendments to
the Agreements of Limited Partnership of each of the Funds, which amendments
are desirable in order to effectuate the foregoing. In each case, the
Partnership Agreement of each of the Funds or DRULPA provide that such
Transaction Proposal must be approved by the affirmative vote of the BAC
Holders holding a majority of the outstanding BACs of each Fund voting
together as a single class.
THE APPROVAL AND ADOPTION, BY THE BAC HOLDERS OF EACH FUND, OF EACH
TRANSACTION PROPOSAL TO BE VOTED UPON BY SUCH BAC HOLDERS IS CONDITIONED ON
THE APPROVAL AND ADOPTION BY SUCH BAC HOLDERS OF EACH OTHER TRANSACTION
PROPOSAL TO BE VOTED UPON BY SUCH BAC HOLDERS.
In the event the BAC Holders in one Fund approve each of the Transaction
Proposals to be voted upon by such BAC Holders, but the BAC Holders in the
other Fund do not approve the Transaction Proposals to be voted upon by such
BAC Holders, the Merger Partnerships may elect, at their sole and absolute
discretion, whether or not to consummate the Merger and the related
transactions with the Fund whose BAC Holders approved the Transaction
Proposals to be voted upon by such BAC Holders and not with the other Fund
REASONS FOR THE PROPOSED MERGERS
BACKGROUND OF THE FUNDS
Fund I-II and Fund III were formed in August, 1986 and September, 1987,
respectively, for the purpose of acquiring portfolios of tax exempt bonds
issued by various state or local governments or their agencies or authorities
which were collateralized by non-recourse participating first mortgage loans
on multifamily residential developments.
The original objectives of the Funds were to: (1) provide (semi-annual,
in the case of Fund I-II, and quarterly, in the case of Fund III) cash
distributions that would be exempt from regular federal income tax on base
interest paid on the mortgage revenue bonds held by the Funds (the "Mortgage
Revenue Bonds"); (2) provide additional cash distributions that would be
exempt from regular federal income tax from payments of contingent interest on
the Mortgage Revenue Bonds which would be determined (a) on the basis of the
cash flow of the mortgaged properties, or (b) to the extent that cash flow was
not sufficient to provide for the current payment of the maximum amount of
contingent interest, on the basis of either (i) the net proceeds resulting
from the sale of the mortgaged properties or repayment on the redemption or
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remarketing of the applicable Mortgage Revenue Bond or (ii) the appraised
value of the mortgaged properties upon repayment of the mortgage loans or
remarketing of the Mortgage Revenue Bonds; and (3) preserve and protect each
Fund's capital. Fund III has the additional objective to provide additional
taxable cash distributions from payments of interest on its working capital
loans.
During 1990 through 1995, 15 of the 18 original borrowers under the
mortgage loans on the properties securing the Mortgage Revenue Bonds defaulted
and such properties were assigned or transferred to certain partnerships
affiliated with the General Partners (the "Owner Partnerships"), subject to
the existing indebtedness, by deed in lieu of foreclosure or otherwise. These
mortgage loans mature in 1998 through 2000 and the General Partners currently
anticipate that it is probable that the values of most of the mortgaged
properties will not be sufficient to pay off the Mortgage Revenue Bonds at
such time. See "INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS."
Accordingly, if market conditions warrant, the General Partners would consider
seeking BAC Holder approval to extend the loan maturities beyond their present
maturity dates. Due to proposed regulations of the Internal Revenue Service
(the "IRS"), the General Partners cannot be sure at this time of the length of
the period for which they could extend the mortgage loans without triggering a
deemed reissuance of the Mortgage Revenue Bonds for federal income tax
purposes. If an extension of the mortgage loan maturity dates is deemed a
reissuance, it would most likely result in the loss of the tax exempt status
of the Mortgage Revenue Bonds.
In addition, a sixteenth mortgage loan, Observatory II in Fund I-II,
Series I, went into default in 1989 and the property securing the Observatory
II loan was transferred to an owner entity in 1990. In 1992, the property was
subsequently sold to an unaffiliated borrower for $2,050,000 (including
$450,000 in cash) and the corresponding Mortgage Revenue Bond was reduced from
$4,039,000 to $1,600,000. This mortgage loan is scheduled to mature on
February 11, 1998. A seventeenth mortgage loan, Paces River 2, failed to meet
its obligations and the borrower and Fund III entered into a workout agreement
pursuant to which the interest payments on the working capital loan were
extended. The borrower fully performed its obligations under the workout
agreement, which matured in March, 1996. The eighteenth mortgage loan,
Washington Ridge, in Fund III, is currently paying full debt service from
operations and is making quarterly contingent interest payments from available
cash.
BACKGROUND OF THE MERGERS
On January 12, 1995, CAPREIT first approached the General Partners to
discuss the possible acquisition by CAPREIT of the Funds. During their
initial discussions, which took place that day and the next, CAPREIT proposed
a tender offer for the BACs. No tender prices were proposed at such time.
On or about February 10, 1995, the Funds submitted written
Confidentiality and Non-Circumvention Agreements (the "Confidentiality
Agreements") to CAPREIT as a condition for proceeding with discussions. After
certain modifications to the Confidentiality Agreements, they were signed by
CAPREIT on March 1, 1995. Following execution of the Confidentiality
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Agreements, CAPREIT reviewed certain documents and data provided by the Funds
and studied potential acquisition structures.
On March 22, 1996, CAPREIT advised the General Partners that it had
determined that a merger of the Funds with affiliates of CAPREIT would be more
beneficial for business planning and tax purposes than a tender offer. Given
these considerations, CAPREIT indicated that it was in a position to offer a
higher price per BAC in a merger than it would under a different acquisition
structure. After CAPREIT agreed to bear the bulk of the Funds' transaction
costs (other than the cost of obtaining the fairness opinions), including, but
not limited to the costs of preparing and mailing this Proxy Statement and
conducting the solicitation, the General Partners agreed in concept to
continue to negotiate the acquisition of the Funds by CAPREIT in a merger
transaction structure.
On April 5, 1995, the General Partners met with CAPREIT to discuss the
general terms of CAPREIT's acquisition proposal and the structure of the
transaction. A number of issues, including the scope of the representations
and warranties to be made by the Funds and the Owner Partnerships to CAPREIT,
the allocation of fees and expenses of the parties, the termination fee and
the conditions precedent to each party's obligation to consummate the
transaction (including the requirement of obtaining favorable fairness
opinions), were discussed, although no final agreements were reached. At the
April meeting, the General Partners and CAPREIT agreed to suspend further
discussions regarding the Mergers pending the completion of the ongoing
negotiations between CAPREIT and certain affiliates of the General Partners to
redeem CRI's and its affiliates' interests in AP CAPREIT in order to avoid any
potential conflict of interest or the appearance thereof. At that meeting,
the General Partners also advised CAPREIT that they would not resume
discussions regarding the Mergers until the General Partners were more
comfortable with CAPREIT's ability to secure financing.
Over the course of the next three months, CAPREIT performed certain due
diligence with respect to the Funds and held discussions with potential
financing sources.
During July 1995, the General Partners became more comfortable that
CAPREIT would be able to secure financing for its proposals and resumed
negotiations with CAPREIT concerning the terms of the Merger Agreements.
These negotiations continued through July and August 1995. On August 22,
1995, CAPREIT offered to pay an aggregate amount of $145,000,000 for the BACs.
Following further negotiations with the General Partners, CAPREIT and the
General Partners agreed upon an aggregate price of $150,000,000 (subject to
the receipt of favorable fairness opinions and approval by the BAC Holders).
Over the next two weeks the parties finalized the provisions of the Merger
Agreements and reviewed proposals for CAPREIT's financing.
The Merger Agreements were signed by all the parties on September 11,
1995 and the Funds issued a press release announcing the signing of the Merger
Agreements and the salient terms thereof. At that time, the General Partners
also engaged Oppenheimer to render Fairness Opinions in connection with the
Mergers.
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During September and October 1995, Oppenheimer inspected each of the
properties which secure the Mortgage Revenue Bonds and reviewed, among other
things, audited financial statements of each Fund for calendar years 1992,
1993 and 1994, and unaudited financial statements of each Fund for the six
months ended June 30, 1995; 1993 and 1994 audited financial statements for
each of the properties which secure the Mortgage Revenue Bonds (except for
Observatory II whose unaudited financial statement for calendar years 1993 and
1994 were reviewed); unaudited financial operating statements which included
actual information for the eight months ended August 31, 1995 combined with
the remaining four months based on the 1995 operating budgets for each
property. Oppenheimer informed the General Partners that based upon
Oppenheimer's investigation and analysis as of October 1995, that the Merger
consideration being offered to the BAC Holders of $13.761 per BAC for Series I
in Fund I-II, $13.313 per BAC for Series II in Fund I-II, and $14.360 per BAC
for Fund III, would not support a fairness determination by Oppenheimer.
On September 22, 1995, Irving Zakin commenced a purported class action on
behalf of the BAC Holders against William Dockser, H. William Willoughby, CRI,
Fund I-II GP, CRITEF Inc., Fund III GP, CRITEF III, Inc., CAPREIT and each of
the Funds in the Court of Chancery of the State of Delaware in New Castle
County (C.A. No. 14558) (the "Zakin Action"). The complaint alleged, among
other things, that the price offered to the BAC Holders was inadequate, that
the defendants breached their fiduciary duty to the BAC Holders, or aided and
abetted such a breach, and engaged in self-dealing and misled BAC Holders, in
connection with the Mergers. The suit sought to enjoin the Transaction
Proposals and obtain damages and also sought to compel the defendants to
maximize the price paid to the BAC Holders and consider alternatives to the
Transaction Proposals.
On October 5, 1995, David and Johanna Wingard commenced a second
purported class action against the same defendants named in the Zakin Action
that in the Court of Chancery of the State of Delaware in New Castle County
(C.A. No. 14604) (the "Wingard Action"). The allegations of the complaint in
the Wingard Action were virtually identical to the allegations of the
complaint filed in the Zakin Action described above and the complaint sought
virtually identical relief.
The defendants commenced settlement discussions with counsel to the
plaintiffs in both actions during October 1995, which discussions continued
throughout November and December 1995.
In connection with the proposed settlement of the Zakin and Wingard
Actions negotiated with plaintiffs' counsel, during January 1996, CAPREIT and
the General Partners agreed that (a) the aggregate cash consideration to be
paid to the BAC Holders would be increased by $8.5 million from $150.0 million
to $158.5 million (from which amount attorneys' fees and expenses to
plaintiffs' counsel as awarded by the court will be paid prior to
distributions to BAC Holders), subject to adjustment based on the Available
Cash at closing, and (b) the aggregate amount payable in consideration for the
Accrued Fees payable to CRI shall be no more than $2 million as compared with
$4.023 million in the original Merger Agreements.
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Thereafter, CAPREIT continued to discuss with its financing sources the
potential financing for the Mergers and to negotiate the terms thereof. On
January 31, 1996, the parties entered into amendments to the Merger Agreements
providing for the improved merger terms described above. At the same time,
the defendants and the plaintiffs and their respective attorneys entered into
a Memorandum of Understanding (the "Memorandum") setting forth the proposed
settlement of the Zakin and Wingard Actions, including the complete discharge,
settlement and release by the plaintiffs on behalf of the entire class of all
claims that have been, could have been, or in the future might be asserted in
any action or any other proceeding in connection with the Mergers. The
parties to the Memorandum agreed to use their best efforts to execute an
appropriate Stipulation of Settlement (the "Stipulation") and such other
documents as may be required in order to obtain approval by the court of the
settlement. After the Stipulation is executed and the court has granted
preliminary approval of the settlement, a class action notice will be sent to
members of the putative class, and the parties to the Memorandum will present
the proposed settlement to the Court for final hearing and approval. See
"LITIGATION".
During February 1996, the General Partners again asked Oppenheimer to
review the fairness of the transactions based on the improved Merger terms
outlined above. At such time, Oppenheimer reviewed the 1995 annual unaudited
financial operating statements and certain other updated information.
During the first two weeks of March 1996, following further analysis of
the Funds' assets and in connection with additional discussions with
Oppenheimer relating to the Fairness Opinions, it appeared that the portion of
the aggregate Redemption Price that had theretofor been allocated to Fund I-
II, Series II, was disproportionately low. As a result, the Fund I-II GP held
further discussions with CAPREIT which resulted in an increase in the
aggregate consideration to be offered to the Series II BAC Holders in Fund I-
II of approximately $260,000.
On March 14, 1996, Oppenheimer delivered the Fairness Opinions to the
Funds. See "FAIRNESS OPINIONS OF OPPENHEIMER & CO., INC."
Under the terms of the Memorandum, the plaintiffs' counsel reviewed and
approved of this Proxy Statement prior to its mailing.
ALTERNATIVES TO THE MERGER
During 1995 and 1996 the General Partners received indications of
interest from three parties other than CAPREIT with respect to a possible
acquisition by such party of the assets of the Funds. No formal proposals
were received. The General Partners concluded that the consummation of a
transaction with two of those other parties was unlikely and have requested
that the third such party execute a confidentiality agreement and provide
evidence of its financial capability. As of the date of this Proxy Statement,
such third party has not executed a confidentiality agreement nor provided
evidence of its financial capability.
If a proposed Merger with a Fund is not consummated, the General Partners
currently intend to maintain operations of such Fund consistent with the past
until the mortgage loans
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mature. The General Partners currently believe that it is probable that the
full amount of BAC Holder invested capital may not be recoverable on most of
the Mortgage Revenue Bonds when the loans mature in 1998 through 2000. In
order to realize a greater amount of the BAC Holder invested capital, it may
be advisable, with BAC Holder consent, to hold certain of the properties
securing the Mortgage Revenue Bonds beyond the maturity dates of the mortgage
loans. Due to proposed IRS regulations, it is uncertain at this time whether
an extension of the mortgage loans, together with other modifications that
might be appropriate in connection with such extension, would trigger a deemed
reissuance of the Mortgage Revenue Bonds for federal income tax purposes. Any
reissuance without the cooperation of the Mortgage Revenue Bond issuers would
result in the loss of the tax-exempt status of the Mortgage Revenue Bonds.
Such issuers might cooperate and consent to the reissuance; however, there can
be no assurance that such issuers would do so or would not impose additional
requirements that would have an adverse effect on the properties.
Alternatively, the General Partners could seek BAC Holder consent to
refund the Mortgage Revenue Bonds when the loans mature. The issuers of the
Mortgage Revenue Bonds would have to consent to such refundings and they could
possibly require additional income restrictions or requirements on the
properties. A refunding would result in a write-down of unpaid base interest
and principal. Also, bond refundings generally have even greater transaction
costs than the sale of real estate, and refundings of the Mortgage Revenue
Bonds secured by properties held by Owner Partnerships (15 of the 18
properties) could increase the likelihood of the Owner Partnerships sharing in
future appreciation of the properties. There can be no assurance that BAC
Holder approval or issuer consent for any such refunding would be obtained.
If the mortgage loans are not paid off or extended as the mortgage loans
mature, the properties held by the Owner Partnerships could be sold. Such an
approach probably would have higher transaction costs, including brokers'
commissions and real estate transfer taxes. Moreover, relying on a sale of
the individual properties involves more risk than the proposed Mergers because
it is impossible to determine now the price for which the properties could be
sold or the amount of time necessary to complete such sales.
RECOMMENDATIONS OF THE GENERAL PARTNERS
EACH OF THE GENERAL PARTNERS HAS CONCLUDED THAT THE TRANSACTIONS
CONTEMPLATED BY EACH OF THE TRANSACTION PROPOSALS ARE FAIR TO, AND IN THE BEST
INTERESTS OF, THE BAC HOLDERS, AND RECOMMENDS THAT THE BAC HOLDERS SHOULD
APPROVE THE TRANSACTION PROPOSALS FOR THE FOLLOWING REASONS:
. The unadjusted cash consideration being offered to the BAC Holders
in the Mergers represents a premium of approximately 22.6%, in the case of
Fund I-II, Series I, 30.9%, in the case of Fund I-II, Series II and 26.5%, in
the case of Fund III, over the market price of BACs, as of September 8, 1995,
the last trading day prior to the initial public announcement of the Mergers.
In recommending the approval of the Mergers, the General Partners have given
the most weight to this factor. The General Partners also considered the
historical highest closing prices of the BACs prior to September 8, 1995.
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. The General Partners gave due consideration to and relied upon the
written fairness opinions of Oppenheimer to the BAC Holders of Series I of
Fund I-II and Series II of Fund I-II and to the BAC Holders of Fund III,
respectively, each dated March 14, 1996 (collectively, the "Fairness
Opinions") that, subject to the assumptions and limitations set forth therein,
the Redemption Price offered to such BAC Holders in the Mergers is fair to
such BAC Holders from a financial point of view.
. Counsel to the plaintiffs in the Zakin and Wingard Actions who
questioned the sufficiency of the consideration originally offered to the BAC
Holders negotiated improved terms of the Merger, including the Redemption
Prices now being offered to the BAC Holders, and have determined that the
Redemption Prices are fair to the BAC Holders. The proposed Stipulation of
Settlement containing the improved terms of the Mergers will be presented to
the court for a determination that it is fair and reasonable.
. The General Partners believe that it is in the best interests of
the BAC Holders to liquidate their interests in the Funds now, at a
substantial premium over the market price for the BACs (as of the last trading
day prior to the public announcement of the Mergers), rather than to wait an
indeterminate period of time for the possible liquidation or other disposition
of the Mortgage Revenue Bonds owned by the Funds at amounts which cannot now
be determined.
. The Mergers are more attractive than other possible sale
alternatives because they provide for the disposition of all of the Funds'
assets in a single transaction, which involves lower transaction costs for the
Funds.
. In determining to pursue a transaction with CAPREIT, the General
Partners placed substantial weight on CAPREIT's agreement not to require that
the Funds make representations as to the tax-exempt status of the Mortgage
Revenue Bonds.
. In determining to pursue a transaction with CAPREIT, the General
Partners also took into account CAPREIT's considerable experience and
expertise in the real estate industry, its knowledge of and familiarity with
the Mortgage Revenue Bonds and the properties that secure them and its
financial wherewithal and sophistication.
. Although the BACs have been listed on the Amex since 1993, there
had been no significant increase in trading prices of the BACs prior to the
announcement of the Mergers and no active market for the trading of BAC has
developed or is expected to develop in the future.
IN THE OPINION OF THE GENERAL PARTNERS, THE TRANSACTION PROPOSALS
REPRESENT THE BEST ALTERNATIVES FOR THE BAC HOLDERS AT THIS TIME. FAILURE TO
APPROVE THE TRANSACTION PROPOSALS AT THIS TIME COULD HAVE THE FOLLOWING
ADVERSE CONSEQUENCES:
. Waiting for a possible liquidation or other disposition of the
assets of the Funds, whether through a bulk sale or dispositions of individual
assets, may result in the BAC Holders
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receiving less consideration than the consideration being offered in the
Merger. There can be no assurance as to whether or when any such liquidation
or dispositions might occur.
. The General Partners currently believe that it is probable that the
full amount of BAC Holder invested capital will not be recoverable on most of
the Mortgage Revenue Bonds. In order to realize a greater amount of the BAC
Holder invested capital, it may be advisable, with BAC Holder consent, to hold
certain of the properties beyond the maturity dates of the mortgage loans
(1998 through 2000). Due to proposed IRS regulations, it is uncertain at this
time whether an extension of the mortgage loans, together with other
modifications that might be appropriate in connection with such extension,
would trigger a deemed reissuance for federal income tax purposes. Any
reissuance without the cooperation of the Mortgage Revenue Bond issuers would
result in the loss of the tax-exempt status of the Mortgage Revenue Bonds.
Such issuers might cooperate and consent to such modifications; however, there
can be no assurance that they would do so or would not impose additional
requirements that would have an adverse effect on the properties.
. The Funds do not currently have the financial resources and asset
base to pursue an alternative transaction on their own that would provide as
much benefit to the BAC Holders as the Mergers.
In addition to the above factors, the General Partners have given due
consideration to certain other factors in concluding that the proposed Mergers
are fair to, and in the best interest of, the BAC Holders. See, "--FAIRNESS
OPINIONS OF OPPENHEIMER & CO., INC.", "MARKET PRICE DATA FOR FUND I-II",
"MARKET PRICE DATA FOR FUND III" and "LITIGATION".
THE GENERAL PARTNERS RECOMMEND THAT THE BAC HOLDERS VOTE "FOR" EACH OF
THE TRANSACTION PROPOSALS.
FAIRNESS OPINIONS OF OPPENHEIMER & CO., INC.
Fund I-II and Fund III retained Oppenheimer to render its opinions as to
the fairness, from a financial point of view, of the Redemption Prices being
offered to the BAC Holders of Series I and Series II of Fund I-II and to the
BAC Holders of Fund III. The General Partners did not place any limitation on
the scope of Oppenheimer's investigation or review. In connection with its
engagement, Oppenheimer was not requested to serve as financial advisor to the
General Partners, Fund I-II or Fund III or to assist the General Partners in
the merger negotiations or in the negotiations of the related transactions
involving the General Partners and their affiliates and CAPREIT. Oppenheimer
was not requested to and does not make any recommendation to the BAC Holders
of any of the Funds regarding the Mergers. Further, Oppenheimer was not
requested to and did not make any evaluation regarding any other expressions
of interest to the General Partners by third parties with regard to any
alternative transactions (see "SPECIAL CONSIDERATIONS -- REASONS FOR THE
PROPOSED MERGER -- Alternatives to the Merger"), and Oppenheimer expresses no
opinion on any such alternative transaction, including
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whether such alternative transaction may be superior for the BAC Holders to
the transactions contemplated herein. Also, Oppenheimer was not requested to
and did not analyze or give any effect to the impact of any federal, state or
local income taxes to the BAC Holders arising out of the transactions
contemplated herein. In determining the fairness of the Redemption Price, the
General Partners did not request that Oppenheimer take into account the
consideration to be paid to or other benefits to be received by the General
Partners and their affiliates, including CRI or CRIIMI, in connection with the
transactions contemplated herein and Oppenheimer expresses no opinion thereon.
Oppenheimer, as part of its investment banking business, is regularly
engaged in the valuation of businesses and securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate, estate and other purposes. The General Partners
issued requests for proposals concerning the fairness opinions to four
investment banks. The selection of Oppenheimer was based on several factors,
including price, experience and the presentation of its intended analyses.
In rendering the Fairness Opinions which are dated March 14, 1996, and as
the basis therefor, Oppenheimer, among other things, reviewed: the Merger
Agreements, as amended; a draft of this proxy statement dated March 14, 1996;
phase I environmental reports prepared for each property by Law Engineering
and Environmental Services, Inc.; engineering reports prepared for each
property by Law Engineering and Environmental Services, Inc. and Valcon
Construction Consultants, Inc.; construction and site inspection reports for
each property prepared by The Related Companies; audited financial statements
of each Fund for calendar years 1992, 1993 and 1994; audited financial
statements for each of the properties which secure the Mortgage Revenue Bonds
for calendar years 1992, 1993 and 1994 (except Observatory II whose unaudited
financial statements for calendar years 1993 and 1994 were reviewed);
documents relating to the Mortgage Revenue Bonds; and certain financial and
other information relating to Fund I-II and Fund III that was publicly
available or furnished to Oppenheimer by the General Partners, including 1995
property operating budgets, 1995 annual unaudited financial operating
statements, certain internal financial analyses, forecasts, and reports and
other information prepared by or with the approval of the General Partners or
their representatives, or by CAPREIT Residential, which manages 14 of the 18
properties. Oppenheimer has also reviewed a written analysis prepared by
counsel to the General Partners relating to those portions of the limited
partnership agreements for Fund I-II and Fund III which govern the
distribution of proceeds of the respective Funds upon the liquidation or sale
of all or substantially all of their assets. In addition, Oppenheimer also
held discussions with the General Partners and their representatives,
including employees of CRI, inspected each of the properties which secure the
Mortgage Revenue Bonds and the multi-family rental housing market in the
geographic areas where the properties securing the Mortgage Revenue Bonds are
located, conducted such other investigations, financial analyses and studies,
and reviewed such other information and factors as it deemed appropriate for
the purposes of the Fairness Opinions.
In rendering the Fairness Opinions, Oppenheimer relied, without assuming
responsibility for independent verification, on the accuracy and completeness
of all financial and operating data,
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financial analyses, reports and other information that were publicly
available, compiled or approved by or otherwise furnished or communicated to
Oppenheimer by or on behalf of the General Partners. With respect to financial
forecasts utilized by Oppenheimer, the General Partners represented to
Oppenheimer that they are reasonable projections as to future financial
performance, and that there is a reasonable probability that the projections
would prove to be substantially correct. Oppenheimer did not make an
independent evaluation or appraisal of the assets or liabilities (contingent
or otherwise) of Fund I-II or Fund III, nor was Oppenheimer furnished with any
such evaluation or appraisal.
In addition, Oppenheimer assumed, in accordance with estimates provided
by the General Partners, that the Redemption Prices will reflect a reduction
for fees and expenses awarded to plaintiffs' counsel in the Zakin and Wingard
Actions of $0.13, $0.17 and $0.16 in the case of the Series I BAC Holders in
Fund I-II, the Series II BAC Holders in Fund I-II and the Fund III BAC
Holders, respectively. The resulting estimated Redemption Prices, which were
used by Oppenheimer in its analysis, were $14.28, $14.07 and $15.02,
respectively.
The following paragraphs summarize the significant quantitative and
qualitative analyses performed by Oppenheimer in arriving at the Fairness
Opinions. Oppenheimer considered all such quantitative and qualitative
analyses in connection with its valuation analysis, and no one method of
analysis was given particular emphasis.
1. Capitalization Rate Valuation Analysis. Oppenheimer assumed that
each Fund obtained direct ownership of those properties presently owned by the
Owner Partnerships which secure its Mortgage Revenue Bonds effective December
31, 1995 and commenced an orderly liquidation of the properties immediately
thereafter. Oppenheimer applied capitalization rates ranging from 9.0% to
10.25% to the net operating income after capital expenditures ("Cash Flow")
estimated for each such property for 1995 to determine a range of its
capitalized values. Oppenheimer believes that a capitization rate analysis
provides a basis for estimating what a real estate investor would be willing
to pay for a particular property. To the range of capitalized property values,
Oppenheimer added the estimated value (as determined utilizing the methodology
described below at "4. Valuation of the Performing Mortgage Revenue Bonds") of
the Funds' remaining performing Mortgage Revenue Bonds, if any, and the
estimated value, projected as of June 30, 1996, of the Funds' other assets
consisting of cash balances, marketable securities and minimum required
reserve balances less estimated accrued expenses and other liabilities,
estimated distributions payable to BAC Holders and the estimated value, as of
June 30, 1996, of the Owner Partnerships' other assets (together, the "Other
Assets"), less a factor for cost of sale, to determine the total value of the
Funds. Under this methodology, the implied equity values of Fund I-II, Series
I, including the estimated value of its remaining Mortgage Revenue Bonds and
the estimated value of its Other Assets, was $ 13.455 to $ 14.741 per BAC as
compared to the estimated Redemption Price for Fund I-II, Series I of $14.28,
the implied equity value of Fund I-II, Series II, including the estimated
value of its Other Assets, was $ 13.826 to $ 15.220 per BAC as compared to the
estimated Redemption Price for Fund I-II, Series II of $14.07, and the implied
equity value of Fund III, including the estimated value of its remaining
performing Mortgage Revenue Bonds and the estimated value of its Other Assets,
was $ 14.238 to $ 15.436 per BAC as compared to the estimated Redemption Price
for Fund III of $15.02. Oppenheimer believes the capitalization rate
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analysis supports its fairness determination because the estimated Redemption
Price for each Series or Fund, as the case may be, in the Mergers was within
the range of values indicated by such analysis.
2. Discounted Cash Flow Analysis. Oppenheimer performed a discounted
cash flow analysis of (i) the present value of the forecasted Cash Flows from
those properties owned by the Owner Partnerships from future operations, and
(ii) the present value of the proceeds of sale of the property at the
conclusion of the forecast period. In completing its analysis, Oppenheimer
utilized financial and operating forecasts of each property's estimated Cash
Flow for the period 1996 to 2000 and applied discount rates of 11% to 12% to
forecasted Cash Flow and to forecasted residual value which was based upon
capitalizing forecasted Cash Flow for the year 2001 at 10% to 11.25%. To the
resulting range of values, Oppenheimer added the estimated value of the Funds'
three remaining performing Mortgage Revenue Bonds, and the estimated value,
projected as of June 30, 1996, of the Funds' Other Assets. Oppenheimer's
analysis indicated a range of values for Fund I-II, Series I, of $ 13.620 to $
14.781 per BAC as compared to the estimated Redemption Price for Fund I-II,
Series I of $14.28, a range of values for Fund I-II, Series II, of $ 14.053 to
$15.314 per BAC as compared to the estimated Redemption Price for Fund I-II,
Series II of $14.07, and a range of values for Fund III, of $ 14.525 to $
15.629 per BAC as compared to the estimated Redemption Price for Fund III of
$15.02. Oppenheimer believes the discounted cash flow analysis supports its
fairness determination because the estimated Redemption Price for each Series
or Fund, as the case may be, was within the range of values indicated by such
analysis.
3. Valuation of the Funds on a Continuing Basis. Oppenheimer performed a
discounted cash flow analysis of the Funds assuming each Fund obtained
ownership of those properties presently owned by the Owner Partnerships upon
the date the individual loan was scheduled to mature and commenced an orderly
liquidation of such properties immediately thereafter. Using the methodology
described above (see "2. Discounted Cash Flow Analysis"), Oppenheimer
estimated the future value of such properties, which it discounted to present
value utilizing discount rates of 11% to 12%. To the resulting range of
values, Oppenheimer added the estimated present value of the Fund's remaining
performing Mortgage Revenue Bonds, if applicable, assuming the Mortgage
Revenue Bonds were repaid in full by the borrower upon the scheduled maturity
of the loan, and the present value of each Fund's Other Assets. Oppenheimer's
analysis indicated a range of implied present equity values for Fund I-II,
Series I of $ 12.927 to $ 14.015 per BAC as compared to the estimated
Redemption Price for Fund I-II, Series I of $14.28, a range of implied present
equity values for Fund I-II, Series II of $ 13.312 to $ 14.495 per BAC as
compared to the estimated Redemption Price for Fund I-II, Series II of $14.07,
and a range of implied present equity values for Fund III of $ 14.156 to $
15.217 per BAC as compared to the estimated Redemption Price of Fund III of
$15.02. Oppenheimer believes this analysis supports its fairness
determination because the estimated Redemption Price for each Series or Fund,
as the case may be, was within or greater than the range of values indicated
by such analysis.
4. Valuation of the Mortgage Revenue Bonds. Oppenheimer valued the
Funds' three performing Mortgage Revenue Bonds by projecting the current
interest and contingent interest to be received by the Funds from January 1,
1996 through the scheduled maturity of the loans securing such Mortgage
Revenue Bonds. Oppenheimer then discounted the projected payments to
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present value utilizing discount rates of 6.5% to 9.5%, which Oppenheimer
estimated to be the current yield for comparable mortgage revenue bonds having
similar maturities and investment characteristics, including debt service
coverage ratios. In addition, Oppenheimer discounted the estimated principal
to be received by the Funds at the scheduled maturity of the Mortgage Revenue
Bonds to present value at the above stated discount rates. This methodology
was used to determine the values of the three performing Mortgage Revenue
Bonds as applied in the analysis described above under "1. Capitalization Rate
Analysis," "2. Discounted Cash Flow Analysis" and "5. Valuation of the Bonds
as if Reissued."
5. Valuation of the Bonds as if Reissued. Oppenheimer analyzed the
potential economic benefits to be received by each Fund through the
reissuance of its non-performing Mortgage Revenue Bonds. Based upon an
analysis of the documentation underlying each Mortgage Revenue Bond, the Funds
may seek to reissue the Mortgage Revenue Bonds by remarketing them, without
restrictions as to purchasers, by having the Mortgage Revenue Bonds rated by a
recognized rating agency and obtaining a AA or comparable rating and by
providing each purchaser with an Official Statement. Alternatively, the Funds
may seek to reissue the Mortgage Revenue Bonds without obtaining such rating
by remarketing the Mortgage Revenue Bonds solely to institutional investors.
Oppenheimer estimated the value of the Mortgage Revenue Bonds as if reissued
by utilizing, to the extent possible, the rating and valuation methodology
that would be employed by a rating agency in evaluating a similar mortgage
revenue bond for the purpose of assigning a AA rating. Alternatively,
Oppenheimer estimated the value of the Mortgage Revenue Bonds as if re-issued
by utilizing, to the extent possible, the valuation methodology that would be
employed by an institutional investor in evaluating the purchase of a mortgage
revenue bond having similar characteristics to the Mortgage Revenue Bonds. To
the resulting value, Oppenheimer added the estimated value of each Fund's
remaining Mortgage Revenue Bonds, if applicable, and the value of each Fund's
Other Assets. Oppenheimer analysis indicated a range of implied equity values
for Fund I-II, Series I of $11.063 to $11.519 per BAC as compared to the
estimated Redemption Price for Fund I-II, Series I of $14.28, a range of
implied equity values for Fund I-II, Series II of $10.475 to $10.937 per BAC
as compared to the estimated Redemption Price for Fund I-II, Series II of
$14.07, and a range of implied equity values for Fund III of $12.244 to
$12.625 per BAC as compared to the estimated Redemption Price for Fund III of
$15.02. Oppenheimer believes application of this methodology supports its
fairness determination because the Redemption Price for each Series or Fund,
as the case may be, was greater than the range of values indicated by such
analysis.
Oppenheimer considered but did not conduct a comparative merger analysis
as Oppenheimer did not believe this `analytical methodology was appropriate.
Oppenheimer's review of publicly available information on recent mergers and
acquisitions indicated that there had been no similar acquisitions or mergers
of entities having comparable investment objectives and business strategies
announced or completed.
Oppenheimer has analyzed the trading of each of the Funds' stock on the
American Stock Exchange from January 1, 1995 through December 31, 1995 and
noted that the Redemption Price to the BAC Holders of Series I and Series II
of Fund I-II and to the BAC Holders of Fund III upon consummation of the
Mergers represents a substantial premium over the market price of the
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BACs as of September 8, 1995, the last trading day prior to the public
announcement of the Mergers.
The preparation of a fairness opinion involves various determinations as
to the most appropriate and relevant quantitative and qualitative methods of
financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
partial analyses or summary description. Accordingly, Oppenheimer believes
its analyses must be considered as a whole and that considering any portion of
such analyses and of the factors considered, without considering all analyses
and factors, could create a misleading or incomplete view of the process
underlying the Fairness Opinions. Any estimates contained in these analyses
are not necessarily indicative of actual values or predictive of future
results or values, which may be significantly more or less than as set forth
herein. Also, analyses relating to the values of the properties or the
Mortgage Revenue Bonds do not purport to be appraisals or to reflect the
prices at which the properties or the Mortgage Revenue Bonds may actually be
sold.
In connection with the preparation of the Fairness Opinions, Oppenheimer
also assumed, as set forth in the financial forecasts referred to above, that
the actual Adjustment Amount for Series I and Series II of Fund I-II and for
Fund III does not exceed the maximum Adjustment Amount for such Series or
Fund, as the case may be. Oppenheimer also assumed that prior to the
consummation of the Mergers, the Zakin and Wingard Actions shall be subject to
final and non-appealable settlements. See "GENERAL INFORMATION--PURPOSE OF
THE SPECIAL MEETINGS."
Oppenheimer's Fairness Opinions, each dated March 14, 1996, were based
solely upon the information available to it and the economic market and other
circumstances that existed as of the date of such Fairness Opinions. Events
occurring after such date could materially affect the assumptions and
conclusions contained in the Fairness Opinions. Oppenheimer has not
undertaken to reaffirm or revise the Fairness Opinions or otherwise comment
upon any events occurring after the date thereof.
As compensation for its Fairness Opinions with respect to the Mergers,
Oppenheimer will receive an aggregate fee of $500,000 ($250,000 per Fund),
consisting of a $83,333.33 retainer paid at the time of its engagement,
$250,000 paid upon delivery of its Fairness Opinions, and $166,666.67 payable
upon consummation of the Mergers. The Funds have also agreed to reimburse
Oppenheimer for its reasonable out-of-pocket expenses, including attorneys'
fees, and to indemnify Oppenheimer against certain liabilities incurred in
connection with its services, including certain liabilities under the federal
securities laws.
During late 1993, Oppenheimer and its affiliate, Oppenheimer
International, Ltd., served as co-managers and co-underwriters of an
unsuccessful public offering of CAPREIT, which at that time was an affiliate
of the General Partners. Since such date, Oppenheimer has rendered no
investment banking services to CAPREIT. The engagement terminated in January,
1994 prior to acquisition of CAPREIT by AP CAPREIT, the owner of 99.83% of the
outstanding capital stock of CAPREIT. There is no active relationship between
Oppenheimer and Funds other than the engagement to render fairness opinions
with respect to the Mergers.
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INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS
The Merger Agreements provide that on the closing date of the Mergers
(the "Closing Date"), CAPREIT or its designee will acquire the accrued
mortgage servicing and administrative fees (the "Accrued Fees") payable by the
Owner Partnerships to CRI, for fees accrued through June 30, 1995, and to
CRIIMI MAE Services Limited Partnership ("CRIIMI"), whose general partner is a
subsidiary of CRIIMI Mae Inc., a public company affiliated with the General
Partners, for fees accrued from July 1, 1995 through the Closing Date. The
consideration payable to CRI for such Accrued Fees is $511,680 in the case of
Fund I-II, Series I and $770,835 in the case of Fund I-II, Series II, and
$667,485 in the case of Fund III, which represents, in the aggregate,
approximately 42% of the Accrued Fees payable to CRI. The consideration
payable to CRIIMI for the Accrued Fees is, with respect to Fund I-II, $265,968
in the case of Series I, and $391,296 in the case of Series II, and, with
respect to Fund III, $566,676, representing the full amount of such fees and
in each case, will be increased to reflect the fees accrued for the account of
CRIIMI if the closing of the Mergers does not occur prior to June 30, 1996 at
the rate of, with respect to Fund I-II, $22,164 per month in the case of
Series I, and $32,608 per month in the case of Series II, and with respect to
Fund III, $47,223 per month, estimated to be the full amount of the fees which
will accrue after June 30, 1995.
The payment of the Accrued Fees is subordinated on a current basis, loan
by loan, to the payment of full base interest, plus any unpaid base interest
and interest thereon, on the mortgage loans. In the absence of the Mergers,
the Accrued Fees would not be payable until the earlier of (i) repayment of
any unpaid base interest and interest thereon from increased cash flow of a
property or (ii) prepayment or maturity of the respective loan or the sale,
refinancing or other disposition of the respective loan or sale, refinancing
or other disposition of the respective property that secures the Mortgage
Revenue Bond after debt repayment in full of principal and accrued base
interest.
William B. Dockser and H. William Willoughby are the sole shareholders
and directors and Chairman of the Board and President, respectively, of CRI,
and beneficially own 5.1% and 4.7%, respectively, and are directors and
Chairman of the Board and President, respectively, of CRIIMI Mae Inc., a
public company that owns CRIIMI.
In connection with the Mergers, CAPREIT has agreed to pay the General
Partners $500,000 for their general partner interests. Messrs. Dockser,
Willoughby and Schwartzberg will each receive approximately 25%, and CRI will
receive .01%, of the $500,000 to be paid to Fund I-II GP and Messrs. Dockser,
Willoughby and Schwartzberg will each receive approximately 25% and CRI will
receive approximately 1% of the $500,000 to be paid to Fund III GP in
accordance with their respective partnership interests in those entities. The
remaining interests in the General Partners are held by general partnerships
comprised of current and former employees of CRI, including Richard L. Kadish,
Chief Executive Officer, President and Director of CAPREIT, who holds a 23.23%
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general partner interest in a limited partner of Fund I-II GP and a 26.66%
general partner interest in a limited partner of Fund III GP. Prior to
joining CAPREIT in 1994, Mr. Kadish served as the Group Executive Vice
President -- Multifamily Acquisition of CRI.
The $500,000 payment to each of the General Partners represents
substantially more than the General Partners would receive on account of their
general partner interests in the event of the liquidation of the Funds. If the
Funds were liquidated as of December 31, 1995, the Fund I-II GP would have
received only a nominal amount and the Fund III GP would have received
nothing.
Messrs. Dockser and Willoughby also own, through various corporations,
all of the interests in the Owner Partnerships. Each of the Owner
Partnerships has agreed to either (a) sell, assign and transfer the
partnership interests in, or the real property and other assets of, such Owner
Partnerships to CAPREIT or its designee for no additional consideration or (b)
admit CAPREIT or its designee as the managing general partner, whereupon the
general partner interests of the current general partners will be converted
into limited partner interests, and CAPREIT will have the option to acquire
all of the limited partner interests at any time within five years from the
Closing Date at the then fair market value (defined as the proportionate
interest of such limited partner in the fair market value of the partnership
property as encumbered by the mortgage loans) thereof. Although such
interests currently have nominal value, if the fair market value of the
partnership properties increases prior to the time CAPREIT exercises its
option, such increase in value may benefit the owners of the Owner
Partnerships.
CAPREIT Residential is currently the property manager for 14 of the 18
properties securing the Mortgage Revenue Bonds.
THE TRANSACTION PROPOSALS
THE MERGER PROPOSAL
THE INFORMATION CONTAINED IN THIS PROXY STATEMENT WITH RESPECT TO THE
MERGER AGREEMENTS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE TEXT OF THE
MERGER AGREEMENTS ATTACHED HERETO (WITHOUT SCHEDULES AND EXHIBITS) AS
APPENDICES A-1 AND A-2, AND INCORPORATED HEREIN BY REFERENCE. THE BAC HOLDERS
ARE URGED TO READ THE MERGER AGREEMENTS CAREFULLY.
THE MERGERS
The Mergers will be effected pursuant to the terms of the Merger
Agreements. Upon the consummation of each of the Mergers and by virtue
thereof, (a) all of the BACs in each of the Funds (except as provided below)
will be redeemed in cash for the Redemption Price and the interests
represented by such BACs will be canceled, (b) interests held by the Assignor
Limited Partners of each of the Funds will be canceled and extinguished, (c)
partnership interests in each
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of the Funds held by designees of CAPREIT will remain outstanding and (d) in
each case, BACs held by CAPREIT and its affiliates, if any, will be converted
into limited partner interests in the respective Funds and BACs held by the
Funds, if any, will be canceled and no consideration will be paid therefor.
Pursuant to the Merger Agreements, each Merger will become effective on
the date (the "Effective Date") and at the time (the "Effective Time") that
the applicable Certificate of Merger is filed pursuant to Delaware law. It is
anticipated that the Effective Date and the Effective Time will occur as soon
as practicable following the later of the completion of the Special Meetings
and the receipt of a final non-appealable order of the court approving the
settlement of the Zakin and Wingard Actions. Following the Effective Time and
as a result of the Mergers, each of the Funds will continue in existence under
Delaware law, but will be wholly owned by CAPREIT and its affiliates. Upon
consummation of the Mergers, the BACs will be delisted and will no longer
trade on the AMEX, and the Funds, as the surviving entities in the Merger,
will cease to be separate reporting companies under the Securities Exchange
Act of 1934, as amended (the "Exchange Act").
The BAC transfer books of the Funds will be closed as of the close of
business on the Effective Date and no transfer of record of BACs will be made
thereafter other than the registration of transfers reflecting transfers
occurring before the close of business on the Effective Date.
THE MERGER AGREEMENTS
Below is a description of the key terms and provisions of the Merger
Agreements. The two Merger Agreements are similar in all material respects,
except for certain pricing related provisions. BAC Holders should note that
the consummation of the transactions contemplated in one Merger Agreement is
conditioned on the consummation of the transactions contemplated in the other
Merger Agreement. This condition may be waived by the Merger Partnerships in
their sole discretion.
Conditions to Consummation of the Mergers
The respective obligations of a Fund and a Merger Partnership to
consummate a Merger and the related transactions are subject to satisfaction
or (where permissible, and other than clause (v) below) waiver, on or before
the Closing Date (or such earlier time as specified in the condition), of
certain conditions, including, but not limited to, (i) the performance, in all
material respects, of the obligations of the other party or parties contained
in a Merger Agreement, (ii) the receipt of all approvals and authorizations of
any governmental authority required for the consummation of such Merger and
related transactions, (iii) the approval of such Merger and related
transactions by the BAC Holders of such Fund and (iv) the absence of any
governmental action which would have the effect of preventing the consummation
of such Merger and related transactions and (v) the final and non-appealable
approval by a court of competent jurisdiction of the settlement of the Zakin
Action and the Wingard Action on the terms set forth in the Memorandum of
Understanding, dated January 31, 1996.
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The obligation of a Fund to consummate a Merger and the related
transactions is subject to certain additional conditions, which conditions
must be satisfied or waived (where permissible), including, but not limited
to, the accuracy of the representations and warranties made by the Merger
Partnership.
The obligation of a Merger Partnership to consummate a Merger and the
related transactions is subject to certain conditions, which conditions must
be satisfied or waived (where permissible), including, but not limited to, (i)
the maximum Adjustment Amount, relating to a shortfall in Available Cash,
shall not have exceeded, with respect to Fund I-II, $319,200 in the case of
Series I, and $453,426 in the case of Series II, and, with respect to Fund
III, $736,158, (ii) the absence of any action, suit or proceeding seeking to
materially restrain or delay the consummation of such Merger and related
transactions or seeking material damages in connection therewith, (iii) the
Financing (as defined) shall have been consummated in accordance with the
terms of the Commitment, (iv) the absence of a material adverse change in the
condition of such Fund or an applicable Owner Partnership, (v) a General
Partner shall have transferred its respective general partner interest in such
Fund to CAPREIT or its designee, and (vi) both Mergers being closed
concurrently.
Conduct of Businesses Pending the Mergers
During the period from September 11, 1995 through the Closing Date (the
"Pre-Closing Period"), each Fund and the applicable Owner Partnerships have
agreed to conduct their respective businesses only in the ordinary course of
business and consistent with past practices. In that regard, except as
otherwise contemplated by a Merger Agreement, such Fund and such Owner
Partnerships agreed not to sell, dispose of, pledge or encumber any of their
property, and if such property is material to such Fund or such Owner
Partnership, such Fund and such Owner Partnerships will not take such actions
even in the ordinary course of business; amend their respective organizational
documents (other than the proposed amendments of the Agreements of Limited
Partnership of each Fund as described in this Proxy Statement), tax returns,
Mortgage Revenue Bonds or any notes, agreements, indentures or other
instruments relating to the Mortgage Revenue Bonds; declare, set aside or make
any distributions with respect to any partnership interests, except that Fund
I-II may accrue, on a monthly basis, $.09417 per BAC for Series I, and $.09667
per BAC for Series II, and Fund III may accrue, on a monthly basis, $.10 per
BAC for calendar 1996, and pay, on a quarterly or semi-annual basis, as
applicable, such accrued amount to the holders of BACs; or redeem any BACs.
In addition, each Fund and each applicable Owner Partnership has agreed
not to issue, sell or dispose of any BACs; acquire other entities; incur debt
for money borrowed other than short-term debt incurred in the ordinary course
of business; materially change any agreement with or arrangement relating to
any material license, lease, contract or other document other than in the
ordinary course of business; or authorize or effect any change in their
capitalization.
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With respect to tax matters, each Fund and each applicable Owner
Partnership has agreed that pending consummation of a Merger it will not make
any material tax elections, change any material tax accounting method or
settle or compromise any material income tax liability.
Other Pre-Closing Covenants
The parties to a Merger Agreement have agreed, among other things, during
the pre-closing period, to use all commercially reasonable efforts to take all
actions and to do all things necessary to ensure that a Merger and the related
transactions are consummated. In that regard, each Fund and any applicable
Owner Partnerships have agreed to provide to each Merger Partnership and its
representatives reasonable access to its offices, facilities, personnel,
properties, books, records and contracts and, as soon as reasonably
practicable after they become available, additional financial statements.
In addition, each Fund has agreed to take all necessary action to convene
a meeting of its limited partners as soon as practicable to consider and vote
on and obtain the approval of such Fund's BAC Holders for the Merger and
related transactions. With respect to such meeting, each Fund and the
applicable Merger Partnership have agreed to jointly prepare and such Fund has
agreed to file a proxy statement and form of proxy, the costs of which shall
be advanced by such Merger Partnership.
Post-Closing Covenants
Each Merger Partnership and CAPREIT have agreed not to cause the
partnership surviving a Merger to amend any portions of any tax return of a
Fund for years ending prior to the Effective Time to the extent that such
portion relates to the accrual of interest on the Mortgage Revenue Bonds and
to cause the surviving partnership to not otherwise amend any tax returns of
such Fund for years ending prior to the Effective Time without the consent of
such Fund's General Partner or its designee, which consent shall not be
unreasonably withheld. In addition, the surviving partnership, CAPREIT and
the General Partners have agreed to cooperate in filing tax returns for the
tax year including the period ending on the Closing Date.
No Solicitation
A Fund and its general partner have agreed not to solicit, initiate or
invite the submission of offers from any person regarding a business
combination or enter into discussions regarding the foregoing, during the
period a Merger Agreement is in effect and have further agreed not to furnish
information to, or otherwise cooperate with, any person seeking to do any of
the foregoing.
Notwithstanding the above, the general partner of such Fund may, if it is
so required because of its fiduciary duty obligations to the BAC Holders,
respond to any unsolicited inquiry or proposal from a third party regarding a
business combination; provided, however, that such general partner agrees to
notify the Merger Partnership of any such response or negotiations as well as
afford to such Merger Partnership an opportunity to respond.
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Indemnification
Each Merger Partnership has agreed, for a period of three and one-half
years after the Effective Time, to cause the Fund, as the surviving entity in
the Merger, to continue in full force and effect for the benefit of the
current general partner of such Fund, an Assignor Limited Partner and their
respective Affiliates (as defined in such Fund's Agreement of Limited
Partnership) the provisions currently set forth in the Agreement of Limited
Partnership of the Fund relating to indemnification of such general partner,
such Assignor Limited Partner and their Affiliates as if such general partner
and such Assignor Limited Partner continued to serve such Fund in their
respective capacities. CAPREIT has agreed to guarantee the obligations of
each of the surviving partnerships as if it were the indemnifying party,
except that its obligations are not limited to the extent of the assets of a
surviving partnership.
Termination
A Merger Agreement may be terminated and a Merger and the related
transactions may be abandoned at any time prior to the Effective Time, whether
before or after the BAC Holders have approved and adopted such Merger and
related transactions, by the mutual written consent of a Merger Partnership
and a Fund, or by either such Merger Partnership or such Fund if: (i) a court
or governmental, regulatory or administrative authority has issued a final and
non-appealable order, decree, or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting such Merger and related
transactions, (ii) the Effective Time shall not have occurred by June 30, 1996
(the "Termination Date") (so long as a terminating party has complied with all
of its covenants and agreements contained in such Merger Agreement), or (iii)
the BAC Holders do not approve and adopt such Merger and related transactions.
A Merger Agreement may also be terminated at any time prior to the
Effective Time, whether before or after the BAC Holders have approved and
adopted a Merger and the related transactions, by a Fund, if a Merger
Partnership (i) fails to perform in all material respects its obligations
under the Merger Agreement and (ii) if a Merger Partnership fails to deliver a
Commitment Letter executed by a financial institution providing for financing
for the Merger and related transactions by the commitment date (the
"Commitment Date"), which is the earlier of May 1, 1996 or the date (the
"Mailing Date") this Proxy Statement is first mailed to BAC Holders.
A Merger Agreement may also be terminated at any time prior to the
Effective Time, whether before or after the BAC Holders have approved and
adopted a Merger and the related transactions, by a Merger Partnership, if:
(i) a Fund or its general partner shall have (a) withdrawn, amended or
modified their recommendation of a Merger and the related transactions or (b)
taken any public position inconsistent with such recommendations, (ii) if such
Fund or any applicable Owner Partnership fails to perform in all material
respects its obligations under such Merger Agreement, (iii) there shall have
occurred a material adverse change in the business, assets, properties,
results of operations or financial or other condition or prospects of such
Fund or any such Owner Partnerships; (iv) if such Fund shall have settled or
compromised any lawsuits or other legal proceedings challenging such Merger
Agreement ("Designated
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Actions") without the prior written consent of the such Merger Partnership,
unless such settlement or compromise requires the payment of money in an
amount which, when aggregated with the other amounts expended to settle or
compromise Designated Actions, does not exceed an agreed upon amount, and (v)
the representations and warranties of such Fund and such Owner Partnerships,
irrespective of the knowledge of such Fund or such Owner Partnerships at the
time of signing of such Merger Agreement regarding the truthfulness of the
documents it supplied to the Merger Partnership, are not true and correct in
all material respects at any time as if made at and as of such time, except to
the extent that any such representation or warranty is made as of a specific
date, in which case such representation or warranty shall have been true and
correct as of such time.
A Merger Agreement may be amended by the written agreement of each of the
parties either before or after the BAC Holders have approved of a Merger and
the related transactions, provided that, after approval by the BAC Holders, no
such amendment may materially adversely affect the interests of such BAC
Holders unless such amendment is also approved by the BAC Holders.
Deposit
Pursuant to the terms of the Merger Agreements, on the business day
immediately prior to the date this Proxy Statement was first mailed to the BAC
Holders, CAPREIT paid into escrow deposits (the "Deposits") of $1,000,000
under each Merger Agreement ($2,000,000 in the aggregate), which amounts are
being held in escrow for the benefit of each Fund by Chicago Title Insurance
Company (the "Escrow Agent"), an independent third party, pursuant to the
terms of the escrow agreements, the form of which agreement is attached as an
appendix to the Merger Agreements. There are separate escrow agreements, with
identical terms and conditions, with respect to each of the Merger Agreements.
Pursuant to the terms of the Escrow Agreements, the Escrow Agent will pay
the Deposits and any interest earned thereon (the "Escrow Funds") as follows:
(i) if a Closing under a Merger Agreement shall occur, then the Escrow Funds
held for the benefit of the applicable Fund shall be paid to CAPREIT or as
CAPREIT shall direct; (ii) if a Closing under a Merger Agreement shall not
occur on or prior to the Termination Date and the failure of such Closing to
occur shall be due to: (a) the failure of any of a Merger Partnership's
conditions to Closing (other than the condition that the Financing be
consummated), (b) the termination of such Merger Agreement (other than where
such Merger Agreement is terminated because the Effective Time has not
occurred by the Termination Date or such Merger Partnership has not performed
its obligations), (c) a breach of the Financing Commitment (as defined in the
Merger Agreements) by the party issuing such Financing Commitment; or (d) a
change in any statute, law or regulation which affects the tax exempt status
of the Mortgage Revenue Bonds, then the Escrow Fund shall be paid to CAPREIT
or as CAPREIT shall direct; (iii) if a Closing under a Merger Agreement shall
not occur on or prior to the Termination Date and the failure of the Closing
to occur shall be due to the failure of the Financing to be consummated, which
failure occurred because of a failure of a condition to funding set forth in
the Financing Commitment, then one-half of the Escrow Funds shall be paid to
the Fund and one-half of the Escrow Funds shall be paid to CAPREIT or as
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CAPREIT shall direct; and (iv) if the Escrow Funds shall not be paid pursuant
to (i), (ii) or (iii), then the Escrow Funds shall be paid to the Fund on the
earlier of the Termination Date or the date on which such Merger Agreement was
terminated.
If the Escrow Funds are paid to a Fund, such payment shall be made to
such Fund as liquidated damages in full satisfaction of all of a Merger
Partnership's and CAPREIT's liabilities or obligations under a Merger
Agreement, including, without limitation, the obligation to pay such Fund's
expenses.
The payment of Escrow Funds to a Fund does not necessarily mean that
Escrow Funds are payable to the other Fund.
Fees and Expenses
In the event a Merger Agreement is terminated or abandoned, and
(i) such termination or abandonment resulted from the breach by a Fund of
its covenant not to solicit or encourage third party offers regarding business
combinations, the acceptance by such Fund's general partner, pursuant to its
fiduciary duties, of such third party offer (a "Fiduciary Out Termination");
or a willful and material breach by such Fund of any of its covenants and
obligations (except its representations and warranties); or
(ii) from the date of such Merger Agreement and prior to or concurrent
with such termination or abandonment, (a) such Fund or its general partner
enters into any letter of intent or agreement with any person (including such
Fund and its affiliates and excluding such Merger Partnership and its
affiliates) or group (as defined in Section 13(d) of the Exchange Act)
(collectively, the "Designated Persons") regarding a (1) tender offer or
exchange offer for any class of such Fund's BACs at a per BAC price in excess
of the price to be paid by such Merger Partnership or (2) a business
combination with or involving such Fund or its affiliates, or any transaction
involving the transfer of beneficial ownership of such Fund's BACs
representing at least 10% of any class of outstanding BACs, (b) such Fund or
its general partner shall file with the Commission a Schedule 14D-9 or similar
document, or make any public announcement or communication (1) recommending,
supporting or endorsing a proposal or plan by such Fund or a Designated Person
to effect any of the foregoing transactions or (2) failing to support a Merger
and the related transactions or (c) any Designated Person shall have acquired
beneficial ownership of at least 33 1/3% of any class of such Fund's
outstanding BACs (the foregoing events being collectively referred to as
"Triggering Events"); or
(iii) within 270 days from the date of termination or abandonment of
such Merger Agreement, a Triggering Event shall have resulted in the Fund or
the holders of any class of such Fund's BACs receiving consideration
(determined on a per BAC basis) in excess of the amount to be paid in such
Merger;
then the Merger Partnership will be entitled to a payment of $2,250,000 plus
its reasonable expenses up to a maximum of $2,000,000.
-42-
<PAGE>
The payment of such fee and its reasonable payment of expenses shall be
the sole remedy available to such Merger Partnership for breach of such Merger
Agreement by such Fund or such Owner Partnership and shall be made as
liquidated damages in full satisfaction of such Fund's or such Owner
Partnerships' liabilities or obligations under such Merger Agreement.
If a Merger Agreement is terminated or abandoned due to (i) a willful and
material breach by a Fund or any applicable Owner Partnership (other than a
breach of the representations and warranties), (ii) the failure by such Fund
or any of such Owner Partnerships to perform in all material respects its
obligations and duties thereunder, (iii) a Fiduciary Out Termination or (iv) a
termination of such Merger Agreement by a Merger Partnership because such Fund
shall have settled Designated Actions for an aggregate amount in excess of an
agreed upon amount or such settlement or compromise contains terms to which
such Merger Partnership reasonably objects, then such Fund shall bear all of
its own expenses and reimburse such Merger Partnership and its affiliates for
reasonable out-of-pocket expenses (including, without limitation, all fees and
expenses of counsel, outside accountants, investment banking firms, financing
sources and third party consultants to such Merger Partnership and its
affiliates) in connection with a Merger and the related transactions and this
Proxy Statement. If a closing shall occur under one, but not the other,
Merger Agreement, the Merger Partnership which is a party to the terminated
Merger Agreement will be reimbursed for all such expenses directly allocable
to the Merger Agreement that did not close and for one-half of all expenses
which can not be allocated specifically to either of the Merger Agreements but
were incurred in connection with the Merger and the related transactions. In
no event shall the amount paid to reimburse expenses exceed $2,000,000 per
Merger Agreement.
Unless a Merger Agreement is terminated or abandoned for the reasons
specified in the preceding paragraph, or a Merger Partnership elects to
terminate such Merger Agreement because the representations and warranties of
a Fund and any applicable Owner Partnerships are not true and correct in all
material respects (and with respect to the representations and warranties
regarding the truthfulness of disclosures made to such Merger Partnership,
irrespective of the knowledge of such Fund or such Owner Partnership at the
time of the signing of such Merger Agreement), at and as of the Effective Time
as if made at and as of such time, except to the extent that any such
representation or warranty is made as of a specific date, in which case such
representation or warranty shall have been true and correct as of such time,
then such Merger Partnership shall bear all of its own costs and expenses and
it shall reimburse such Fund for all its costs and expenses incurred in
connection with a Merger, the related transactions and this Proxy Statement,
other than the costs and expenses of (i) the fairness opinion and the related
legal and accounting fees, (ii) the legal and accounting fees incurred in
negotiating such Merger Agreement and (iii) reimbursement for certain overhead
costs of the general partner of such Fund and its affiliates.
In all other cases, in the event of a termination of a Merger Agreement
each of the parties shall bear their own expenses.
-43-
<PAGE>
TAX TREATMENT
It is the intention of the Funds and the Merger Partnerships that the
payment of the consideration to the BAC Holders will constitute, for income
tax purposes, a redemption or liquidation of the BAC Holders limited partner
interests in the Funds pursuant to Section 731(a) of the Internal Revenue Code
of 1986, as amended (the "Code"), and that the consummation of the
transactions contemplated by the Merger Agreements will not result in a
termination of the Funds pursuant to Section 708(b)(1)(B) of the Code.
THE FINANCING
The funds required to pay the consideration payable to the BAC Holders in
the Mergers and to pay related fees and expenses of the Merger and the
Financing (as defined below) are expected to be approximately $182.4 Million.
The funds required will be provided by CAPREIT and the proceeds of the sale
(the "Financing") of certain beneficial ownership interests in one or more
trusts (the "Trusts") to be formed at the Effective Time to which the Funds
will cause to be contributed, following consummation of the Mergers, the
Mortgage Revenue Bonds and CAPREIT will contribute an additional bond issue.
Each Trust will issue two classes of certificates evidencing the
beneficial ownership interests in such Trust: (i) a class of floating rate
certificates in a face amount of up to 99% of the market value of the Mortgage
Revenue Bonds and the additional bond issue held by such Trust (the "Floater
Certificates") and (ii) a single inverse floating rate certificate in a face
amount equal to the remaining market value of such Mortgage Revenue Bonds and
additional bond issue (the "Residual Certificate"). The Floater Certificates
are expected to be privately placed with investors by Bear, Stearns & Co. for
an anticipated aggregate cash consideration of approximately $228 million,
which will be used to redeem the BACs and to pay fees, expenses and other
items in connection with the Mergers and the Financing. Certain funds from
the Financing, together with funds provided by CAPREIT, will be used to
refinance existing debt on a portion of the collateral required to be pledged
by CAPREIT and its affiliates to obtain the Financing. See "--Collateral"
----------
below. The Residual Certificate for each Trust will be acquired by a
partnership owned, in part, by affiliates of CAPREIT.
The Floater Certificates for each Trust will receive a portion of the
interest distributed on the related Mortgage Revenue Bonds and the additional
bond issue based on distribution rates on the Floater Certificates to be
determined by Bear, Stearns & Co., as remarketing agent, consistent with
market conditions from time to time. The Residual Certificate for each Trust
will receive the balance of the interest distributed on the related Mortgage
Revenue Bonds and the additional bond issue remaining after distributions on
the Floater Certificates and the payment of certain ongoing fees and expenses
in connection with the Financing.
Credit Enhancement
CAPREIT is arranging for certain financial institutions to provide credit
enhancement to facilitate the issuance, sale and remarketing of the Floater
Certificates. It is anticipated that a
-44-
<PAGE>
bank (the "Letter of Credit Bank") will issue one or more irrevocable letters
of credit (the "Letter of Credit") in favor of the trustee for the Trusts. The
Letter of Credit will provide for drawings in such amounts and at such times
as are required to pay amounts due from time to time with respect to the
Mortgage Revenue Bonds and the additional bond issue in the Trusts. Pursuant
to a reimbursement agreement (the "Bank Reimbursement Agreement") by and
between the Letter of Credit Bank and the Owner Partnerships, among others,
the Owner Partnerships will agree to reimburse the Letter of Credit Bank for
all drawings under the Letter of Credit and to pay certain other fees and
expenses of the Letter of Credit Bank.
In addition, the Letter of Credit Bank will be the beneficiary of an
insurance surety bond (the "Surety Bond") issued by a second financial
institution (the "Surety"). The Surety Bond will provide for the payment by
the Surety to the Letter of Credit Bank of any amounts which are owing as a
result of drawings under the Letter of Credit and which have not been paid
under the Bank Reimbursement Agreement or otherwise. The Surety Bond will be
issued pursuant to a master reimbursement and security agreement (the "Surety
Reimbursement Agreement") by and among the Surety, the Funds, CAPREIT, the
Owner Partnerships and others, pursuant to which the Funds and the Owner
Partnerships will agree, on a non-recourse basis, to reimburse the Surety for
any amounts paid on the Surety Bond.
In connection with the Financing, the Owner Partnerships are obligated to
pay certain fees and expenses of the Letter of Credit Bank, the Surety, the
Trustee and others.
Collateral
As collateral security for their reimbursement and other obligations
under the Surety Reimbursement Agreement and certain other agreements relating
thereto, the Owner Partnerships will grant in favor of the Surety liens on and
security interests in certain accounts to be created under the Surety
Reimbursement Agreement and the properties securing the Mortgage Revenue Bonds
and the additional bond issue to be contributed by CAPREIT. In addition,
certain affiliates of CAPREIT will grant in favor of the Surety liens on and
security interests in seven additional multi-family properties owned by
affiliates of CAPREIT. CAPREIT and its affiliates will also pledge or cause
to be pledged their partnership interests in the Owner Partnerships and the
residual interests in the Trusts as additional collateral security for such
obligations. CAPREIT and its affiliates will also provide certain recourse
guarantees to certain parties, including the Surety, in connection with the
Surety Reimbursement Agreement.
Proposed Amendments to Mortgage Revenue Bonds
Subsequent to the consummation of the Mergers and the Financing, CAPREIT
and the Owner Partnerships will attempt to effect amendments to the relevant
documents relating to the Mortgage Revenue Bonds and the additional bond issue
to be contributed by CAPREIT to the Trusts in order to eliminate any
remarketing features, to establish new interest rates and to make certain
other changes affecting such Mortgage Revenue Bonds and such other bond issue,
including the possible extension of the scheduled maturity dates of the
Mortgage Revenue Bonds and the additional bond issue. There is no assurance
that any such amendments will be effected
-45-
<PAGE>
or that, if effected, such amendments will result in the properties securing
the Mortgage Revenue Bonds generating sufficient cash flow to fund timely
payment of the principal of and interest on the Mortgage Revenue Bonds and
additional bond issue.
NEW PARTNERS PROPOSAL
In connection with the Mergers, the BAC Holders of each Fund are being
asked to consider and act upon a proposal to remove the General Partner of
such Fund and to simultaneously elect CAPREIT GP as general partner in its
stead. CAPREIT has agreed to pay each of the General Partners $500,000 in
consideration for its general partner interest. See "INTERESTS OF CERTAIN
PERSONS IN THE TRANSACTIONS".
AMENDMENT PROPOSAL
In connection with the Merger, the BAC Holders are being asked to
consider and vote upon a series of amendments to the Partnership Agreements of
each of the Funds to authorize expressly (a) the Mergers and the Merger
Agreements and the transactions contemplated thereby and (b) the issuance of a
limited partner interest to CAPREIT or its designee in exchange for real
property or other assets and the admission of CAPREIT or its designee as a
limited partner of each of the Funds immediately prior to or concurrently with
consummation of the Mergers.
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES OF THE
MERGERS AND RELATED TRANSACTIONS
INTRODUCTION
The following discussion is intended to provide BAC Holders with a
summary of certain federal income tax matters that should be considered in
connection with the Mergers and the related transactions. Although the
principal federal income tax aspects of general application to BAC Holders
regarding the Mergers and related transactions are discussed herein, no
attempt has been made to comment on all tax matters affecting the BAC Holders.
Moreover, the tax consequences to a particular BAC Holder will depend, in
part, on such BAC Holder's own tax circumstances. The following discussion
may not be applicable to certain categories of BAC Holders including, without
limitation, nonresident aliens, foreign corporations, certain domestic
corporations and tax-exempt entities. Also, the state and local income tax
consequences of the Mergers and related transactions, which may vary among the
BAC Holders based upon the jurisdiction in which they are subject to tax, have
not been discussed. Accordingly, each BAC Holder should consult his own tax
advisor about the federal, state, local, foreign and other tax consequences of
the Mergers and related transactions in respect of his own particular
circumstances.
-46-
<PAGE>
GENERAL PRINCIPLES OF PARTNERSHIP TAXATION
The Funds have been treated as partnerships and the BAC Holders as
partners for federal income tax purposes. A partnership is not subject to
federal income tax. Instead, each partner of a partnership includes his
allocable share of the partnership's items of taxable income, gain, loss,
deduction and credit in determining his income tax. Although a partnership is
not subject to federal income tax, it must file a federal information income
tax return upon which it reports its income, gain, loss, deduction and credit
for each taxable year.
A partnership will allocate to each partner his share of the
partnership's income and loss. Generally, each partner must treat partnership
items on his return consistently with the treatment of those items on the
partnership return. The partnership will also allocate to each partner his
share of items of partnership expense. Due to the tax-exempt nature of the
Funds' interest income in prior years, BAC Holders were not permitted in prior
years to deduct certain items of Fund expense in calculating their income tax.
Under the Code, a partner does not recognize gain upon receipt of a
partnership distribution unless the distribution exceeds his adjusted tax
basis for his interest in the partnership immediately prior to the
distribution. A partner's adjusted tax basis for his interest in a
partnership generally will be equal to the amount paid for the partnership
interest, increased by his allocable share of partnership taxable income and
tax-exempt income, and decreased by his allocable share of partnership
distributions and his allocable share of partnership tax losses and deductions
(including his allocable share of partnership expenditures which are not
deductible in computing its taxable income and are not capital expenditures,
such as the Partnership's expenses allocable to tax-exempt interest income).
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGERS
The Mergers should be treated for federal income tax purposes as
redemptions of the BAC Holders' interests in the Funds. The formation,
transitory existence and merger of the Merger Partnerships should be
disregarded for federal income tax purposes and the Mergers should be treated
as redemptions of partnership interests since the funds to effect the Mergers
are being generated from the transfer of the assets of the Funds rather than
from CAPREIT or its affiliates. To the extent a portion of the merger
consideration is viewed as having been provided by CAPREIT, either directly or
indirectly, there is a risk that the Internal Revenue Service could assert
that the Mergers should be treated as sales of a minority portion of the
partnership interests in the Funds by the BAC Holders, although a
characterization as a sale should not have an adverse impact on the federal
income tax consequences of the Mergers to the BAC Holders. Pursuant to the
Merger Agreement, the Funds and the General Partners have agreed to treat the
Mergers consistently with their characterization as redemptions for income tax
purposes.
Generally, pursuant to Section 731(a) of the Code, each BAC Holder will
recognize gain or loss upon receipt of cash in the Mergers in exchange for
BACs. The amount of gain or loss recognized by a BAC Holder will be equal to
the difference between (a) the amount of cash received in the Mergers and (b)
such BAC Holder's adjusted tax basis in his BACs. Generally, if
-47-
<PAGE>
a BAC Holder holds his BACs as a capital asset, such gain or loss should be
treated as capital gain or capital loss, and will generally constitute long
term capital gain or loss if such BAC Holder has held his BACs for more than
one year. A capital loss recognized by a BAC Holder in connection with the
Mergers and related transactions may offset other capital gains of that BAC
Holder, the excess of such BAC Holder's capital losses over capital gains may
offset an individual BAC Holder's ordinary income, subject to an annual $3,000
limitation, and the remainder may be carried forward to subsequent years. In
determining a BAC Holder's gain or loss on the receipt of cash in the Mergers,
and consistent with the discussion above, a BAC Holder's adjusted tax basis in
his BACs generally equals the amount paid for such BACs increased by his
allocable share of partnership income (including all tax-exempt income) and
decreased by his allocable share of partnership distributions and his
allocable share of taxable losses and deductions (including his share of the
tax loss resulting from the Financing, as discussed below, and his share of
certain expenditures which are not deductible in computing taxable income and
which are not capital expenditures, including certain expenses allocable to
tax-exempt interest).
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE FINANCING TRANSACTION
As described in detail in "The Transaction Proposals -- The Merger
Proposal -- The Financing," the redemption of the BAC Holders' interests in
the Funds through the Mergers will be financed by the transfer of the Funds'
portfolio of Mortgage Revenue Bonds to the Trusts and the receipt of cash in
connection with the sale of interests in the Trusts in the amount of
approximately $228 million. The Trusts will be treated as partnerships for
federal income tax purposes. The Funds' aggregate tax basis in such Mortgage
Revenue Bonds is currently approximately $240 million and the aggregate tax
basis in the working capital loan is currently approximately $3 million. It
is expected that the transfer of the Mortgage Revenue Bonds to the Trusts and
the sale of interests in the Trusts will result in the Funds recognizing a
substantial tax loss in an amount currently estimated to aggregate
approximately $15 million. The Funds believe that this tax loss will
constitute a long term capital loss and that such loss will be allocable,
pursuant to the Funds' Limited Partnership Agreements and relevant provisions
of the Code and Regulations dealing with the allocation of partnership income
and losses, to the BAC Holders rather than to CAPREIT and its affiliates which
will acquire limited partnership interests in the Funds immediately prior to
or concurrently with the consummation of the Mergers. The portion of such
long term capital loss allocated to a BAC Holder will reduce such BAC Holder's
tax basis in his BACs for the purpose of determining gain or loss on the
receipt of cash in the Merger in redemption of his BACs. Such long term
capital gain should be treated by the BAC Holder in the manner described above
in "Certain Federal Income Tax Consequences of the Mergers."
BAC HOLDERS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE
SPECIFIC TAX CONSEQUENCES TO THEM RESULTING FROM THE TRANSACTION, INCLUDING
THE CONSEQUENCES UNDER FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS.
-48-
<PAGE>
MARKET PRICE DATA FOR FUND I-II
On July 1, 1993, Fund I-II GP listed the BACs on the AMEX with a trading
symbol of CRA for Series I and CRB for Series II. As of December 31, 1995,
there were 2,280,000 and 3,238,760 BACs issued and outstanding for Series I
and Series II, respectively. The following table sets forth the high and low
closing sales price and the distributions per BAC for Series I and Series II
during the periods indicated:
SERIES I
--------
Sales Price
------------------ Distribution
1996 Quarter Ended High Low per BAC
- - - - ------------------ --------- ------- ------------
March 31
Sales Price
------------------ Distribution
1995 Quarter Ended High Low per BAC
- - - - ------------------ --------- ------- ------------
March 31 $12 3/8 $10 $0.27
June 30 12 3/8 11 1/2 0.27
September 30 13 1/8 11 1/4 0.27
December 31 13 1/2 12 5/8 0.27
-----
$1.08
=====
Sales Price
------------------ Distribution
1994 Quarter Ended High Low per BAC
- - - - ------------------ --------- ------- ------------
March 31 $12 3/4 $11 3/8 $0.25
June 30 12 1/2 11 1/4 0.25
September 30 12 10 7/8 0.25
December 31 11 1/4 9 3/8 0.25
-----
$1.00
=====
Sales Price
------------------ Distribution
1993 Quarter Ended High Low per BAC/(1)/
- - - - ------------------ --------- ------- ------------
March 31 $N/A $N/A $0.25
June 30 N/A N/A 0.25
September 30 13 1/4 11 0.25
December 31 13 1/4 11 5/8 0.25
-----
$1.00
=====
- - - - ---------------
/(1)/ Prior to the AMEX listing in July 1993, distributions were declared on
a semi-annual basis, payable to BAC Holders of record as of the last
day in each month. Distributions continue to be made on a semi-annual
basis.
-49-
<PAGE>
SERIES II
---------
Sales Price
------------------ Distribution
1996 Quarter Ended High Low per BAC
- - - - ------------------ --------- ------- ------------
March 31
Sales Price
------------------ Distribution
1995 Quarter Ended High Low per BAC
- - - - ------------------ --------- ------- ------------
March 31 $11 3/8 $ 9 3/4 $0.27
June 30 11 1/2 11 0.27
September 30 13 10 7/8 0.27
December 31 12 7/8 12 1/8 0.27
-----
$1.08
=====
Sales Price
------------------ Distribution
1994 Quarter Ended High Low per BAC
- - - - ------------------ --------- ------- ------------
March 31 $12 3/8 $11 3/8 $0.25
June 30 12 1/8 11 0.25
September 30 11 1/2 10 0.25
December 31 10 3/8 9 1/8 0.25
-----
$1.00
=====
Sales Price
------------------ Distribution
1993 Quarter Ended High Low per BAC/(1)/
- - - - ------------------ --------- ------- ------------
March 31 $N/A $N/A $0.25
June 30 N/A N/A 0.25
September 30 12 3/4 9 1/2 0.25
December 31 12 5/8 10 3/8 0.25
-----
$1.00
=====
On September 8, 1995, the last full trading day prior to the public
announcement of the execution of each of the Merger Agreements, the closing
price per BAC as reported on the AMEX Composite Tape was $11.75 and $10.875,
respectively. On January 31, 1996, the last trading day prior to the public
announcement of the increase in the Redemption Price, the closing price per
BAC as reported on the AMEX Composite Tape was $12.875 and $12.625,
respectively. As of _________ ___, 1996, the day prior to the date of this
Proxy Statement, the closing per BAC as reported on the AMEX Composite Tape
was $___________ and $_____________, respectively.
- - - - ---------------
/(1)/ Prior to the AMEX listing in July 1993, distributions were declared on a
semi-annual basis, payable to BAC Holders of record as of the last day in
each month. Distributions continue to be made on a semi-annual basis.
-50-
<PAGE>
MARKET PRICE DATA FOR FUND III
On July 1, 1993, Fund III GP listed the BACs on the AMEX with a trading
symbol of CRL. As of December 31, 1995, there were 5,258,268 BACs issued and
outstanding. The following table sets forth the high and low closing sales
price and the distributions per BAC during the periods indicated:
Sales Price
-------------------- Distribution
1996 Quarter Ended High Low per BAC
- - - - ------------------ ---------- -------- ------------
March 31
Sales Price
-------------------- Distribution
1995 Quarter Ended High Low per BAC
- - - - ------------------ ---------- -------- ------------
March 31 $12 1/4 $10 1/4 $0.30
June 30 12 3/4 11 3/4 0.30
September 30 14 11 5/8 0.30
December 31 13 3/4 13 1/8 0.30
-----
$1.20
=====
Sales Price
-------------------- Distribution
1994 Quarter Ended High Low per BAC
- - - - ------------------ ---------- -------- ------------
March 31 $13 3/8 $11 1/4 $0.40
June 30 12 3/4 11 3/4 0.41
September 30 12 3/8 10 5/8 0.41
December 31 10 7/8 9 1/4 0.41
-----
$1.63
=====
Sales Price
-------------------- Distribution
1993 Quarter Ended High Low per BAC
- - - - ------------------ ---------- -------- ------------
March 31 N/A N/A $0.40
June 30 N/A N/A 0.41
September 30 $15 $11 1/2 0.41
December 31 13 1/2 11 3/8 0.41
-----
$1.63
=====
On September 8, 1995, the last full trading day prior to the public
announcement of the execution of each of the Merger Agreements, the closing
price per BAC as reported on the AMEX Composite Tape was $12.00. On January
31, 1996, the last trading day prior to the public announcement of the
increase in the Redemption Price, the closing price per BAC as reported on the
AMEX Composite Tape was $13.375. As of _________ ___, 1996, the day prior to
the date of this Proxy Statement, the closing per BAC as reported on the AMEX
Composite Tape was $___________.
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<PAGE>
SELECTED FINANCIAL DATA OF FUND I-II
The following selected financial and other data for the years ended
December 31, 1994, 1993, 1992, 1991 and 1990 are derived from the audited
financial statements of Fund I-II. The remaining selected financial and other
data are derived from the unaudited financial statements of Fund I-II. In the
opinion of the Fund I-II GP, the data for the nine months ended September 30,
1995 and 1994 reflect all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation. The data should be read in
conjunction with the other financial information included elsewhere herein.
<TABLE>
<CAPTION>
SERIES I
------------------------------------------------------------------------------------------------------
For the nine For the nine
months ended months ended For the years ended December 31,
September 30, September 30,
1995 1994 1994 1993 1992 1991 1990
------------- ------------ ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net rental income
(loss) (1) $ 926,208 $ 731,422 $ 1,056,573 $ 512,569 $ 326,545 $ 595,498 $ (108,024)
Interest from Mortgage 96,000 96,000 128,000 128,000 157,288 -- 4,167,061
Revenue Bonds
Other income (expenses) (246,069) (127,646) (170,934) (189,188) (200,956) (369,287) (165,101)
Valuation adjustment on
investment in real
estate (1) (2) -- -- -- -- -- (405,071) (10,846,578)
----------- ----------- ----------- ----------- ----------- ----------- -------------
Net Income (loss) $ 776,139 $ 699,776 $ 1,013,639 $ 451,381 $ 282,877 $ (178,860) ($ 6,952,642)
=========== =========== =========== =========== =========== =========== =============
Net income (loss)
allocated to BAC Holders $ 768,300 $ 692,708 $ 1,003,401 $ 446,822 $ 280,020 $ (177,054) $ (6,882,420)
=========== =========== =========== =========== =========== =========== =============
Net income (loss) per BAC
outstanding $ 0.34 $ 0.30 $ 0.44 $ 0.20 $ 0.12 $ (0.08) $ (3.02)
=========== =========== =========== =========== =========== =========== =============
Total cash distribution
per BAC outstanding $ 0.81 $ 0.75 $ 1.00 $ 1.00 $ 1.16 $ 1.37 $ 1.75
=========== =========== =========== =========== =========== =========== =============
Number of BACs outstanding 2,280,000 2,280,000 2,280,000 2,280,000 2,280,000 2,280,000 2,280,000
=========== =========== =========== =========== =========== =========== =============
Investment in real
estate(1) $37,721,666 $37,721,666 $37,721,666 $37,721,666 $37,721,666 $37,721,666 $ 40,413,484
=========== =========== =========== =========== =========== =========== =============
Investment in real estate
per BAC outstanding $ 16.38 $ 16.38 $ 16.38 $ 16.38 $ 16.38 $ 16.38 $ 17.55
=========== =========== =========== =========== =========== =========== =============
Asset held for sale (2) $ -- $ -- $ -- $ -- $ -- $ 2,050,000 $ --
=========== =========== =========== =========== =========== =========== =============
Investment in Mortgage
Revenue Bonds (2) $ 1,600,000 $ 1,600,000 $ 1,600,000 $ 1,600,000 $ 1,600,000 $ -- $ --
=========== =========== =========== =========== =========== =========== =============
Total assets $35,139,094 $35,989,847 $36,204,938 $37,124,695 $38,826,296 $40,943,991 $ 43,756,081
=========== =========== =========== =========== =========== =========== =============
Total assets per BAC
outstanding $ 15.26 $ 15.63 $ 15.72 $ 16.12 $ 16.86 $ 17.78 $ 19.00
=========== =========== =========== =========== =========== =========== =============
Net assets $31,394,504 $32,745,961 $32,484,008 $33,773,632 $35,625,514 $38,011,429 $ 41,354,972
=========== =========== =========== =========== =========== =========== =============
Net assets per BAC
outstanding $ 13.63 $ 14.22 $ 14.10 $ 14.66 $ 15.47 $ 16.50 $ 17.95
=========== =========== =========== =========== =========== =========== =============
</TABLE>
(1) All properties collateralizing the Mortgage Revenue Bonds have been
transferred by foreclosure or deed in lieu of foreclosure to the Owner
Partnerships (Observatory II in Series I was subsequently sold, as
discussed below). As a result, Fund I-II accounts for these as investments
in real estate for financial statement purposes. Fund I-II recorded
valuation adjustments representing the lower of (a) the carrying value of
the loan and related accrued interest or (b) the estimated fair value of
the property and other net assets of the property acquired in settlement of
loans or in-substance foreclosed ("ISF") at the earlier of transfer of the
deed or ISF. The valuation adjustments and the financial statement
presentation are independent of the characterization of the bonds as loans
for federal income tax purposes and the tax-exempt nature of the mortgage
revenue bond interest. A reconciliation of the major differences between
the financial statement net income and the municipal income for federal
income tax purposes is contained in Fund I-II's Annual Report filed on
Form 10-K for the year ended December 31, 1994.
(2) The Observatory II mortgage revenue bond (Series I) was classified as an
asset held for sale as of December 31, 1991 pursuant to a signed letter of
intent from CRICO of Greenhaven, Inc., an Owner Partnership-type entity, to
sell the property underlying the mortgage loan which secured the bond to an
unrelated third party for $2,050,000, with Fund I-II, Series I, providing
tax-exempt mortgage revenue bond financing for $1,600,000. The valuation
adjustment of $405,071 for the sale of the asset was recorded in the
consolidated statement of operations for 1991. Subsequent to the sale of
the property, which occurred on March 31, 1992, the $1,600,000 financing
was classified as an investment in mortgage revenue bond. See Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Fund I-II for a further discussion of the transaction.
-52-
<PAGE>
<TABLE>
<CAPTION>
SERIES II
-----------------------------------------------------------------------------------------------------
For the nine For the nine
months ended months ended For the years ended December 31,
September 30, September 30,
1995 1994 1994 1993 1992 1991 1990
------------- ------------ ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net rental income (1) $ 1,665,169 $ 986,448 $ 1,546,136 $ 1,511,870 $ 428,325 $ 737,795 $ 61,665
Interest from mortgage
revenue bonds -- -- -- -- -- -- 3,568,830
Other income (expenses) (238,926) (140,099) (170,583) (281,593) (127,970) (186,200) 37,896
Valuation adjustment on
investment in real
estate (1) -- -- -- -- -- -- (14,605,402)
----------- ----------- ----------- ----------- ----------- ----------- ------------
Income (loss) before
extraordinary item 1,426,243 846,349 1,375,553 1,230,277 300,355 551,595 (10,937,011)
Extraordinary gain (2) -- -- -- 416,432 -- -- --
----------- ----------- ----------- ----------- ----------- ----------- ------------
Net Income (loss) $ 1,426,243 $ 846,349 $ 1,375,553 $ 1,646,709 $ 300,355 $ 551,595 $(10,937,011)
=========== =========== =========== =========== =========== =========== ============
Net income (loss)
allocated to BAC Holders $ 1,411,838 $ 837,801 $ 1,361,660 $ 1,630,077 $ 297,321 $ 546,024 $(10,826,547)
=========== =========== =========== =========== =========== =========== ============
Net income (loss) per BAC
outstanding $ 0.44 $ 0.26 $ 0.42 $ 0.50 $ 0.09 $ 0.17 $ (3.34)
=========== =========== =========== =========== =========== =========== ============
Total cash distribution
per BAC outstanding $ 0.81 $ 0.75 $ 1.00 $ 1.00 $ 1.00 $ 1.37 $ 1.87
=========== =========== =========== =========== =========== =========== ============
Number of BACs outstanding 3,238,760 3,238,760 3,238,760 3,238,760 3,238,760 3,238,760 3,238,760
=========== =========== =========== =========== =========== =========== ============
Investment in real
estate(1) $56,382,005 $56,382,005 $56,382,005 $56,382,005 $56,382,005 $56,382,005 $ 56,382,005
=========== =========== =========== =========== =========== =========== ============
Investment in real
estate per BAC
outstanding $ 17.23 $ 17.23 $ 17.23 $ 17.23 $ 17.23 $ 17.23 $ 17.23
=========== =========== =========== =========== =========== =========== ============
Total assets $50,630,949 $51,855,246 $52,079,884 $53,638,123 $55,477,180 $57,453,236 $ 61,525,781
=========== =========== =========== =========== =========== =========== ============
Total assets per BAC
outstanding $ 15.47 $ 15.85 $ 15.92 $ 16.39 $ 16.96 $ 17.56 $ 18.80
=========== =========== =========== =========== =========== =========== ============
Net assets $46,394,646 $47,907,312 $47,618,564 $49,514,816 $51,139,913 $54,111,366 $ 58,055,233
=========== =========== =========== =========== =========== =========== ============
Net assets per BAC
outstanding $ 14.18 $ 14.64 $ 14.55 $ 15.13 $ 15.63 $ 16.54 $ 17.74
=========== =========== =========== =========== =========== =========== ============
</TABLE>
(1) All properties collateralizing the Mortgage Revenue Bonds have been
transferred by foreclosure or deed in lieu of foreclosure to the Owner
Partnerships. As a result, Fund I-II accounts for these as investments in
real estate for financial statement purposes. Fund I-II recorded valuation
adjustments representing the lower of (a) the carrying value of the loan
and related accrued interest or (b) the estimated fair value of the
property and other net assets of the property acquired in settlement of
loans or in-substance foreclosed ("ISF") at the earlier of transfer of the
deed or ISF. The valuation adjustments and the financial statement
presentation are independent of the characterization of the bonds as loans
for federal income tax purposes and the tax-exempt nature of the mortgage
revenue bond interest. A reconciliation of the major differences between
the financial statement net income and the municipal income for federal
income tax purposes is contained in Fund I-II's Annual Report filed on Form
10-K for the year ended December 31, 1994.
(2) At December 31, 1992, Fund I-II Series II accrued approximately $621,000
representing the net liability associated with James Street Crossing, which
was expected to be assumed by Fund I-II upon deed in lieu of foreclosure.
Included in this amount was approximately $416,000 which was owed to the
former general partner of James Street Crossing. This liability was not
assumed by the Owner Partnership when it received the deed in lieu of
foreclosure effective March 31, 1993; as such, this liability was reversed
and has been treated as an extraordinary gain in the statement of
operations.
-53-
<PAGE>
BUSINESS OF FUND I-II
Fund I-II was organized on August 1, 1986 under the DRULPA and will
continue until December 31, 2016, unless dissolved earlier in accordance with
its Agreement of Limited Partnership. Fund I-II was formed to acquire a
portfolio of tax-exempt mortgage revenue bonds issued by various state or
local governments or their agencies or authorities, which were collateralized
by non-recourse participating first mortgage loans on multifamily residential
developments (the Observatory II bond, as modified in 1992, no longer has a
participating loan feature).
Fund I-II commenced a public offering of BACs representing assignment of
limited partnership interests in October 1986 and completed the offering in
October 1987. As provided in the original offering, Fund I-II issued BACs in
two series.
On July 1, 1993, Fund I-II GP listed the BACs on the AMEX with a trading
symbol of CRA for Series I and CRB for Series II. Fund I-II GP believed that
the benefits to the BAC Holders from listing the BACs on AMEX include
increased liquidity and reduced transaction costs. However, a publicly traded
partnership is treated as a corporation for income tax purposes unless it
meets certain exceptions. To qualify under these exceptions, Fund I-II GP
annually invests in de minimus taxable investments for both Series I and
Series II. In 1995, 1994 and 1993, Series I and Series II met the exceptions,
and Fund I-II was not taxed as a corporation.
Fund I-II accounts for each Series of BACs separately as though it were a
separate partnership, holding a separate and distinct pool of real estate,
Mortgage Revenue Bonds and, if applicable, payments from Fund I-II's interest
reserves. Organization and offering costs, Fund I-II's working capital
reserves and certain general and administrative expenses of Fund I-II have
been allocated, unless specifically attributed to a Series, pro rata among the
Series, based on the gross offering proceeds raised by each Series (except for
costs relating to the Merger, which are allocated between the Series on a
50/50 basis). Deposits to Fund I-II's interest reserves and subsequent
distributions from the interest reserves to BAC Holders are accounted for by
mortgage investment by Series. The amounts and distributions of cash flow,
residual proceeds, liquidation proceeds, profits and losses and all other
priorities and allocations are separately determined for each Series of BACs.
Fund I-II's objectives have been to: (1) provide semi-annual cash
distributions that will be exempt from regular federal income tax; (2) provide
additional cash distributions that will be exempt from regular federal income
tax from payments of contingent interest on the Mortgage Revenue Bonds which
will be determined (a) on the basis of the cash flow of the mortgaged
properties, or (b) to the extent that cash flow is not sufficient to provide
for the current payment of the maximum amount of contingent interest, on the
basis of either (i) the net proceeds resulting from the sale of the mortgaged
properties or (ii) the appraised value of the mortgaged properties upon
repayment of the mortgage loans or remarketing of the Mortgage Revenue Bonds;
and (3) preserve and protect Fund I-II's capital. All of the properties
securing the loans (except Observatory II in Series I, as discussed herein)
have been taken control of by the Owner Partnerships through foreclosure or
deed in lieu of foreclosure, which resulted in significant
-54-
<PAGE>
valuation adjustments to the carrying values of these properties, primarily
during 1990. Although Fund I-II will use diligent efforts to recover its
investment, it is probable that the full amount of BAC Holder invested capital
may not be recoverable on most of the bonds through net sale or refinancing
proceeds at the originally anticipated time of sale. Consequently, it may be
advisable to hold certain of the properties beyond the maturity dates of the
mortgage loans (1998 through 2000). Due to proposed IRS regulations, the
General Partners cannot be sure at this time how long the mortgage loans could
be extended without triggering a deemed reissuance of the Mortgage Revenue
Bonds for federal income tax purposes. If an extension of the mortgage loan
maturity dates is a deemed reissuance, it would most likely result in the loss
of the tax exempt status of the Mortgage Revenue Bonds.
Base interest income on the mortgage loans is funded from property
operations and reserves, if any, established at the time of closing on the
acquisition of the Mortgage Revenue Bonds. Since base interest could not be
paid in full, Fund I-II GP evaluated various courses of action, including
sale, recapitalization, loan modification, deed in lieu of foreclosure, or
foreclosure.
Fund I-II GP pursued the option of conversion of certain Minnesota
properties to cooperatives owned by the existing residents of the properties
in order to qualify for favorable homestead property tax treatment. The
General Partner submitted a ruling request for the first such proposed
transaction in 1991 to the IRS to ensure that the proposed transaction would
not affect the tax-exempt nature of the mortgage revenue bond interest. The
IRS did not respond to this ruling request and the ruling request was
withdrawn in February 1996 and Fund I-II GP has abandoned pursuit of this
option.
-55-
<PAGE>
A description of the portfolio securing the Mortgage Revenue Bonds held
by Fund I-II is as follows:
SERIES I
--------
<TABLE>
<CAPTION>
Investment Information Mortgage Information Real Estate Information
- - - - ---------------------------------------------- --------------------------------- ------------------------------------------------
Commence- Buildings Carrying
No. of Date of Loan Loan ment of Real and Amount of
Rental Construction Origination Face Maturity Estate Personal Investments
Name and Location Units Completion Date Amount Date Accounting Land Property 9/30/95
- - - - ----------------- ------ ------------ ----------- ----------- -------- ------------ --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Revenue Bond
- - - - ---------------------
OBSERVATORY II
BURNSVILLE, MN (2) 75 -- 3/31/92 $ 1,600,000 2/11/98 -- -- -- $ 1,600,000
Real Estate
- - - - -----------
ROYAL OAKS
EAGAN, MN (1) 231 2/22/88 12/05/86 12,580,000 2/22/98 12/31/90 $ 722,785 $ 9,870,748 $10,593,533
TRAILWAY POND
BURNSVILLE, MN (1) 75 5/01/89 8/07/87 4,675,000 5/01/99 12/31/90 316,510 3,510,063 3,826,573
VALLEY CREEK
WOODBURY, MN (1) 225 2/01/89 3/23/87 12,815,000 2/01/99 12/31/90 674,687 10,470,873 11,145,560
WHITE BEAR WOODS
WHITE BEAR LAKE, MN (1) 225 1/31/89 3/31/87 12,485,000 1/31/99 12/31/90 357,840 11,798,160 12,156,000
--- ----------- ---------- ----------- -----------
831 $44,155,000 $2,071,822 $35,649,844 37,721,666
=== =========== ========== ===========
Less: Accumulated depreciation as of September 30, 1995 (7,977,029)
-----------
$29,744,637
===========
</TABLE>
(1) As discussed herein, the properties are accounted for as real estate due
to actual foreclosures or deeds in lieu of foreclosure.
(2) As discussed herein, effective March 31, 1992, the Observatory II
investment is accounted for as an investment in mortgage revenue bond of
$1,600,000.
-56-
<PAGE>
SERIES II
---------
<TABLE>
<CAPTION>
Investment Information Mortgage Information Real Estate Information
- - - - ---------------------------------------------- --------------------------------- ------------------------------------------------
Commence- Buildings Carrying
No. of Date of Loan Loan ment of Real and Amount of
Rental Construction Origination Maturity Estate Personal Investments
Name and Location Units Completion Date Amount Date Accounting Land Property 9/30/95
- - - - ----------------- ------ ------------ ----------- ----------- -------- ------------ --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate
- - - - -----------
ETHAN'S RIDGE AND
ETHAN'S GLEN IIB 4/01/88 5/29/87 $15,500,000 4/01/98
KANSAS CITY, MO (1)(2) 364 12/15/89 10/26/88 2,300,000 12/15/99 4/15/90 $1,134,352 $14,258,494 $15,392,846
FOUNTAIN PLACE
EDEN PRAIRIE, MN (1) 332 7/01/89 12/23/87 20,900,000 7/01/99 6/01/90 1,328,847 16,179,414 17,508,261
JAMES STREET CROSSING
KENT, WA (1) 300 12/31/89 3/31/88 13,878,001 12/31/99 12/31/90 1,760,956 13,750,703 15,511,659
TRAILWAY POND II
BURNSVILLE, MN (1) 165 5/01/89 8/07/87 10,030,000 5/01/99 12/31/90 721,043 7,248,196 7,969,239
----- ----------- ---------- ----------- -----------
1,161 $62,608,001 $4,945,198 $51,436,807 56,382,005
===== =========== ========== ===========
Less: Accumulated depreciation as of September 30, 1995 (10,977,598)
-----------
$45,404,407
===========
</TABLE>
(1) As discussed herein, the properties are accounted for as real estate due
to receipt of deeds in lieu of foreclosure.
(2) The results of operations and real estate information for these
investments is combined as they are held by the same Owner Partnership and
operated in conjunction with each other.
-57-
<PAGE>
As illustrated in the table below, as of September 30, 1995, Fund I-II
accounts for all of its investments in Mortgage Revenue Bonds except
Observatory II in Series I as real estate for financial statement purposes,
due to the receipt by the Owner Partnerships of deeds in lieu of foreclosure.
<TABLE>
<CAPTION>
Change in
Management
Depletion of Company to
Borrower and Commencement Date of Affiliate of Funds
Name of Investment Debt Service of Real Estate Deed in Lieu/ I-II GP (through
Rental Property Reserves(1) Accounting Foreclosure 1/31/94)(2)
- - - - ------------------ ------------ -------------- ------------- ------------------
<S> <C> <C> <C> <C>
Series I
--------
Observatory II (3) 1990 3/14/90 9/14/90 N/A
Royal Oaks 1991 12/31/90 6/27/91 1/01/92
Trailway Pond 1992 12/31/90 1/02/91 1/01/92
Valley Creek 1991 12/31/90 1/02/91 7/01/92
White Bear Woods 1991 12/31/90 1/02/92 10/01/91
Series II
---------
Ethan's Ridge and
Ethan's IIB 1991 4/15/90 4/15/90(4) 6/01/92
Fountain Place 1990 6/01/90 1/02/91 N/A
James Street
Crossing 1993 12/31/90 3/31/93(5) 5/01/93
Trailway Pond II 1991 12/31/90 1/02/91 1/01/92
</TABLE>
(1) Due to the depletion of borrower and debt service reserves, base interest
payments made to Fund I-II are solely in the form of cash flow from
property operations.
(2) CRICO Management Corporation ("CRICO"), CRICO Management of Minnesota,
Inc. ("CRICO Minnesota") or CRICO Management Northwest, Inc. ("CRICO
Northwest") affiliates of Fund I-II GP, assumed property management
responsibilities on the indicated dates. On February 1, 1994, CRICO,
CRICO Minnesota and CRICO Northwest contributed their property management
contracts and personnel to CAPREIT Residential Corporation
("Residential"). Residential was formed by CRI, but on February 1, 1994,
Residential was sold to AP CAPREIT, which is not currently owned or
controlled by CRI and/or its affiliates.
(3) On March 31, 1992, the Observatory II investment, foreclosed on in 1990
and accounted for as an asset held for sale as of December 31, 1991, was
sold for $450,000 in cash and $1,600,000 in tax-exempt mortgage revenue
bond financing, with interest only, payable monthly at 8% per annum. The
Owner Partnership-type entity holding this property sold it for the
following reasons: (1) due to the size of the property (75 units) and
because it was the second "phase" of a project, it was difficult to
operate the property efficiently and could not recognize economies of
scale and (2) the first "phase" was not owned by Fund I-II and had been
sold to an unrelated third party, thereby decreasing the ability of Fund
I-II to exert control of the operations of the joint properties (both
phases had originally been owned by the same borrower). Fund I-II GP
believes this sale is an isolated incident because of the above described
reasons. The net cash proceeds of $365,544 (approximately $0.16 per BAC),
which is net of expenses of the sale and repayment of the $61,068 loaned
to the Observatory II property from Fund I-II's working capital reserve in
1991, were
-58-
<PAGE>
distributed to BAC Holders of record as of March 31, 1992 with
the distribution paid on August 28, 1992. The mortgage is current as of
September 30, 1995.
(4) Effective July 6, 1990, the Owner Partnership holding Ethan's Ridge and
Ethan's Glen IIB was expanded so that two unaffiliated individuals
acquired a 98.99% interest in the Owner Partnership as limited partners in
consideration for certain capital contributions, plus their undertaking to
form an investor partnership entity to admit additional partners in
exchange for further capital contributions. In November 1991, the Owner
Partnership was further expanded to admit the investor partnership entity.
The unaffiliated limited partners are currently in default with respect to
the pay-in schedule and their interests will be terminated.
(5) Effective March 31, 1993, the borrower of James Street Crossing gave an
Owner Partnership a deed in lieu of foreclosure. In addition, Fund I-II
received a judgment for the outstanding guarantee amount of $454,255 and a
junior lien against the already encumbered assets of two of the three
guarantors. At December 31, 1992, Fund I-II accrued approximately
$621,000 representing the net liability associated with James Street
Crossing, which was expected to be assumed by Fund I-II upon receipt by
the Owner Partnership of a deed in lieu of foreclosure. Included in this
amount was approximately $416,000 which was owed to the former general
partner of James Street Crossing. This liability was not assumed by the
Owner Partnership when it received the deed in lieu of foreclosure
effective March 31, 1993; as such, this liability was reversed and has
been treated as an extraordinary gain in the statement of operations.
-59-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF FUND I-II
Fund I-II accounts for nine of its ten investments in Mortgage Revenue
Bonds as real estate. Investments in Mortgage Revenue Bonds that were
previously accounted for as loans are accounted for as real estate beginning
on the earlier of the date of foreclosure, deed in lieu of foreclosure, or In-
Substance-Foreclosure ("ISF"), and were recorded as real estate at the lower
of (a) the carrying value of the loan and related accrued interest or (b) the
estimated fair value of the property, including other net assets of the
property. The estimated fair values of the properties are the amounts the
owners of the properties could reasonably expect to receive in an as-is sale
between a willing buyer and a willing seller. Fund I-II GP determined the
estimated fair values of the properties acquired based upon information
obtained from independent real estate appraisers and/or its own market
analyses. To the extent fair value is less than the carrying value, direct
write-downs were recorded to establish a new cost basis for these assets.
Fund I-II continues to evaluate its recorded investment in the properties on a
lower of cost or net realizable value basis, under the guidance of the
American Institute of Certified Public Accountants ("AICPA") Statement of
Position 92-3 "Accounting for Foreclosed Assets" ("SOP 92-3"). Fund I-II's net
realizable value determination takes into account Fund I-II's intention to
hold these properties for the long term, if necessary, to recover its recorded
investment. If Fund I-II determines that its estimated net realizable value
is less than the recorded investment in the property, an additional valuation
adjustment is recorded if the decline in value is considered permanent. In
March 1995, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS 121"). This statement addresses how entities should measure impairment
on long-lived assets. This statement is required to be implemented by Funds
I-II in 1996 and effectively supersedes the impairment guidance under SOP 92-3
for the properties intended to be held long term. The adoption of SFAS 121 is
not expected to have a material effect on Fund I-II's consolidated financial
statements. If the Merger is not consummated, it may be necessary to hold the
properties for longer periods within the terms of the Mortgage Revenue Bonds,
rather than the shorter existing loan terms, in which event investor approval
will be sought.
Series I
As of February 12, 1987, 2,280,000 BACs had been sold, representing
capital contributions of $57,000,000 and the completion of the offering of
Series I.
The five original Series I mortgage loans securing the Mortgage Revenue
Bonds, with a current aggregate principal amount of $44,155,000, went into
default, resulting in actual foreclosures or deeds in lieu of foreclosure to
the Owner Partnerships. As of September 30, 1995, Fund I-II accounts for
these investments, excluding the modified Observatory II mortgage revenue
bond, as real estate for financial statement purposes. Accordingly, the
consolidated balance sheets reflect these investments in the amounts of
$29,744,637 and $30,844,339 as of September 30, 1995 and December 31, 1994,
respectively, net of accumulated depreciation. The financial statement
presentation is independent of the characterization of the bonds as loans for
federal income tax purposes and the tax-exempt nature of the mortgage revenue
bond interest.
-60-
<PAGE>
Additionally, Fund I-II accounts for the investment in the Observatory II
mortgage revenue bond as a security with a recorded investment of $1,600,000
as of September 30, 1995, and December 31, 1994.
No valuation adjustments were necessary on the Series I investments
during the first nine months of 1995, and the years ended December 31, 1994,
1993 or 1992.
In connection with the transfers of properties to the Owner Partnerships,
Fund I-II obtained an opinion from its former independent accounting firm in
July of 1991 that the reduction in pay rate and compounding of unpaid base
interest at the original base interest rate would not cause a reissuance of
the bonds under Section 103 of the Internal Revenue Code of 1986, as amended
(the "Code") (which would cause the bonds to lose their tax-exempt status).
Fund I-II also obtained opinions from bond counsel that certain transfers of
the properties to the Owner Partnerships would not cause Fund I-II to become a
substantial user of the projects pursuant to Section 103 of the Code (which
also could have caused the bonds to lose their tax exempt status). The bond
counsel opinions were obtained in connection with the Observatory II, Royal
Oaks, Trailway Pond and Valley Creek transfers.
In conjunction with the transfer of the Royal Oaks deed to an Owner
Partnership, the Royal Oaks mortgage revenue bond was modified. Fund I-II,
based on information and advice from outside counsel, believes that the
modification does not adversely affect the tax-exempt nature of the Royal Oaks
bond interest. The modification complied with IRS guidelines in effect at
that time. The IRS has since issued proposed regulations which could be
interpreted as adversely affecting the tax-exempt nature of the modified
mortgage revenue bond. However, the IRS has stated that the regulations will
apply only to modifications made on or after 30 days from the final
publication of the regulations in the Federal register. As of the date of
this Proxy Statement, the regulations have not been finalized and no changes
to these positions have been announced by the IRS. Fund I-II believes the
interest on the Royal Oaks bond should continue to be tax-exempt.
Series II
As of October 29, 1987, 3,238,760 BACs had been sold, representing
capital contributions of $80,969,000 and the completion of the offering of
Series II.
The five original Series II mortgage loans securing the Mortgage Revenue
Bonds with an aggregate principal amount of $62,608,001 went into default,
resulting in deeds in lieu of foreclosure to the Owner Partnerships. As of
September 30, 1995, Fund I-II accounts for these investments as real estate
for financial statement purposes. Accordingly, the consolidated balance
sheets reflected these investments in the amounts of $45,404,407 and
$46,900,416 as of September 30, 1995 and December 31, 1994, respectively, net
of accumulated depreciation. The financial statement presentation is
independent of the characterization of the bonds as loans for federal income
tax purposes and tax-exempt nature of the mortgage revenue bond interest.
No valuation adjustments were necessary on the Series II investments
during the first nine months of 1995 and the years ended December 31, 1994,
1993 or 1992.
-61-
<PAGE>
In connection with the transfers of properties to the Owner Partnerships,
Fund I-II obtained an opinion from its former independent accounting firm in
July of 1991 that the reduction in pay rate and compounding of unpaid base
interest at the original base interest rate would not cause a reissuance of
the bonds under Section 103 of the Code (which could cause the bonds to lose
their tax-exempt status). Fund I-II also obtained opinions from bond counsel
that certain transfers of the properties to the Owner Partnerships would not
cause Fund I-II to become a substantial user of the projects pursuant to Code
Section 103 (which also would have caused the bonds to lose their tax exempt
status). The bond counsel opinions were obtained in connection with the
Ethan's Ridge and Ethan's Glen IIB, Fountain Place and Trailway Pond II
transfers.
General
In 1991, the U.S. Supreme Court decided a case, Cottage Savings
---------------
Association v. Commissioner ("Cottage Savings"), that could be interpreted to
---------------------------
compromise the tax-exempt status of Mortgage Revenue Bonds which have been
modified. In response to this decision, in December 1992, the IRS issued
proposed regulations in connection with the modification of debt instruments.
If the regulations are adopted in their present form, they would alter
existing authority and curtail the type and extent of modifications that could
be made by a bond owner/lender without adversely affecting the tax-exempt
status of bonds. It is not clear at this time what effect the Cottage Savings
---------------
decision or the proposed regulations may have on Fund I-II with respect to the
bonds secured by loans on properties currently held by the Owner Partnerships.
Fund I-II GP continues to believe that these bonds remain tax-exempt. In the
event the Merger is not consummated, Fund I-II GP will continue its efforts to
protect the tax-exempt status of the bonds and the interest thereon. However,
in light of the Cottage Savings decision and the proposed regulations, there
---------------
can be no assurance that Fund I-II GP will be successful in its efforts.
The Fund I-II GP's ongoing strategy has been for the Owner Partnership to
continue holding the properties acquired upon the defaults of the original
borrowers until the loan maturity dates. If the Merger Proposal is approved,
the interests of the BAC Holders will be redeemed. If the Merger Proposal is
not approved, in order to maximize the overall yield, the Fund I-II GP may
recommend, subject to satisfactory resolution of any issues relating to the
tax exempt status of the Mortgage Revenue Bonds, for investor approval of the
extension of certain loan maturity dates and, if approved, arrange for related
amendments to the pertinent Mortgage Revenue Bond document.
FINANCIAL CONDITION AND LIQUIDITY
The primary sources of Fund I-II's future cash flows are expected to be
from receipts of base interest on mortgage loans, which are dependent upon the
net operating income of the properties. Therefore, Fund I-II's investment in
the Mortgage Revenue Bonds is subject to the general risks inherent to the
ownership of real property. These risks include reduction in rental income
due to an inability to maintain occupancy levels, adverse changes in general
economic conditions, and adverse changes in local conditions. Fund I-II GP
expects that the properties
-62-
<PAGE>
transferred to the Owner Partnerships will continue to generate sufficient
cash flow to pay all operating expenses, meet escrow deposit requirements and
pay some, but not all, of the base interest due to Fund I-II. Fund I-II has no
material commitments for capital expenditures. However, the Owner Partnership
of James Street Crossing (Series II) may be required to fund approximately
$100,000 to $150,000 for environmental mitigation if such an obligation is
determined to run with the land at the property. If required, such funding
could be provided from the property's cash flow or from existing replacement
reserves. Because the Owner Partnership owning James Street Crossing believes
that the obligation does not run with the land at the property, the financial
statements do not include an adjustment for this obligation.
Series I
Series I expects to continue to make distributions to BAC Holders on a
semi-annual basis. The Merger Agreement stipulates that the 1996
distributions cannot exceed $.09417 per BAC per month. There are no other
legal restrictions on Series I's present or future ability to make cash
distributions other than as set forth in the Fund I-II Merger Agreement.
However, property level reserves are depleted and estimated cash flows from
the properties' operations are insufficient to pay full monthly base interest
(except for Observatory II), therefore, the distribution to BAC Holders may
fluctuate from current levels. Fund I-II GP seeks to optimize cash flow from
the properties owned by the Owner Partnerships. Despite these efforts, the
amounts paid to Fund I-II from the properties' operations may be expected to
fluctuate from period to period due to changes in occupancy rates, rental
rates, operating expenses and other variables. The 1995 distribution was
$1.08 per BAC.
The following distributions were paid or accrued to the Series I BAC
Holders of record for the nine months ended September 30, 1995 and the years
ended December 31, 1994, 1993 and 1992:
1995 1994
Distributions to Distributions to
BAC Holders BAC Holders
-------------------- ----------------------
Quarter Ended Total Per BAC Total Per BAC
- - - - --------------- ---------- ------- ---------- -------
March 31 $ 615,600 $0.27 $ 570,000 $0.25
June 30 615,600 0.27 570,000 0.25
September 30 615,600 0.27 570,000 0.25
December 31 (3) (3) 570,000 0.25
---------- ----- ---------- -----
Total $1,846,800 $0.81 $2,280,000 $1.00
========== ===== ========== =====
-63-
<PAGE>
1993 1992
Distributions to Distributions to
BAC Holders BAC Holders(1)
-------------------- ----------------------
Quarter Ended Total Per BAC Total Per BAC
- - - - --------------- ---------- ------- ---------- -------
March 31 $ 570,000 $0.25 -- --
June 30 570,000 0.25 $1,495,681(2) $0.66
September 30 570,000 0.25 -- --
December 31 570,000 0.25 1,146,156 0.50
---------- ----- ---------- -----
Total $2,280,000 $1.00 $2,641,837 $1.16
========== ===== ========== =====
(1) Prior to the AMEX listing in July 1993, distributions were declared on a
semi-annual basis, payable to BAC Holders of record as of the last day of
each month.
(2) The net cash proceeds from the sale of the Observatory II investment of
$365,544 (approximately $0.16 per BAC), net of expenses of the sale and
repayment of the $61,068 loaned to the Observatory II property from Fund
I-II's working capital reserve in 1990, were distributed to BAC Holders of
record as of March 31, 1992 with the distribution paid on August 28, 1992.
(3) Distributions to BAC Holders totaling $615,600 or $0.27 per BAC were
declared for the quarter ended December 31, 1995, bringing the 1995
distribution to BAC Holders to $2,462,400 or $1.08 per BAC.
Distributions to BAC Holders for the nine months ended September 30, 1995
and the years ended December 31, 1994, 1993 and 1992 were funded as follows:
<TABLE>
<CAPTION>
For the nine months
ended September 30, For the years ended December 31,
------------------- ------------------------------------------
1995 1994 1993 1992
------------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash flow (2) $2,055,481 $2,654,529 $2,382,906 $2,434,720
Net deposits to working capital reserves (189,838) (351,266) (79,643) (131,472)(1)
Net proceeds from sale of asset -- -- -- 365,544
---------- ---------- ---------- ----------
Total cash available for
distribution $1,865,643 $2,303,263 $2,303,263 $2,668,792
========== ========== ========== ==========
Distributions to:
General Partner (1.01%) $ 18,843 $ 23,263 $ 23,263 $ 26,955
========== ========== ========== ==========
BAC Holders (98.99%) $1,846,800 $2,280,000 $2,280,000 $2,641,837
========== ========== ========== ==========
</TABLE>
(1) Excludes repayment to the working capital reserves of the $61,068 loaned
to the Observatory II property.
(2) As defined in the Limited Partnership Agreement.
Although distributions are paid on a semi-annual basis, in July 1993,
Fund I-II began declaring distributions on a monthly basis as a result of
listing the BACs on AMEX.
-64-
<PAGE>
As of September 30, 1995, Series I had cash and cash equivalents of
$36,577, unrestricted marketable securities of $688,085, restricted cash and
cash equivalents of $1,660,008 and working capital reserves invested in
marketable securities of $1,111,767. Marketable securities consist of tax-
exempt municipal bonds which generally contain a seven-day put option with
established banks or brokerage houses and are stated at cost, which generally
represents par value and approximates market value. In May 1993, the
Financial Accounting Standards Board issued Statement on Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"). This statement requires that most investments in
securities be classified into one of the following investment categories based
upon circumstances under which securities might be sold: Held to Maturity,
Available for Sale, and Trading. Generally, investments in securities for
which an enterprise has both the ability and the intent to hold to maturity
should be accounted for using the amortized cost method and all other
securities must be recorded at their fair values. Fund I-II implemented SFAS
115 in 1994, and has classified its investments in marketable securities into
the Available for Sale category. Realized gains and losses on the sale of
marketable securities were determined on a specific identification basis.
Fund I-II accounts for its investment in the Observatory II Mortgage Revenue
Bond as available for sale since it may not have the ability to hold the
Mortgage Revenue Bond to maturity. There were no net unrealized holding gains
or losses recognized for the nine months ended September 30, 1995 and the year
ended December 31, 1994 for Series I as the cost of the tax-exempt municipal
and mortgage revenue bonds approximated market value throughout the nine
months ended September 30, 1995 and the year ended December 31, 1994.
As of December 31, 1994, Series I had aggregate investments in marketable
securities with the following maturities:
Amount Maturity
---------- --------------------------
$ 99,716 Within one year
100,000 Between one and five years
1,811,735 After ten years
----------
$2,011,451
==========
Fund I-II closely monitors its cash flow and liquidity position for
Series I in an effort to ensure that sufficient cash is available for
operating requirements and distributions to BAC Holders. Series I's net cash
provided by operating activities, which consists primarily of receipt of base
interest on mortgage loans, for the nine months ended September 30, 1995 and
the years ended December 31, 1994 and 1993 was adequate to support operating
requirements and the payment of declared distributions to BAC Holders and Fund
I-II GP. For the nine months ended September 30, 1995, cash and cash
equivalents decreased due to the timing of distribution payments. Fund I-II
estimates that future cash flows from receipt of base interest on mortgage
loans, in the aggregate, will be sufficient to pay operating expenses and make
distributions to BAC Holders.
-65-
<PAGE>
Series II
Series II expects to continue to make distributions to BAC Holders on a
semi-annual basis. The Merger Agreement stipulates that 1996 distributions
cannot exceed $0.09667 per BAC per month. There are no other legal
restrictions on Series II's present or future ability to make cash
distributions other than as set forth in the Fund I-II Merger Agreement.
However, property level reserves are depleted and estimated cash flows from
the properties' operations are insufficient to pay full monthly base interest,
therefore, the distribution to BAC Holders may fluctuate from current levels.
Fund I-II GP seeks to optimize cash flow from the properties owned by the
Owner Partnership. Despite these efforts, the amounts paid to Fund I-II from
the properties' operations may be expected to fluctuate from period to period
due to changes in occupancy rates, rental rates, operating expenses and other
variables. The 1995 distribution was $1.08 per BAC.
The following distributions were paid or accrued to the Series II BAC
Holders of record during the nine months ended September 30, 1995 and the
years ended December 31, 1994, 1993 and 1992:
1995 1994
Distributions to Distributions to
BAC Holders BAC Holders
Quarter -------------------- -------------------
Ended Total Per BAC Total Per BAC
- - - - ------------- ---------- ------- ---------- -------
March 31 $ 874,465 $0.27 $ 809,690 $0.25
June 30 874,465 0.27 809,690 0.25
September 30 874,465 0.27 809,690 0.25
December 31 (2) (2) 809,690 0.25
---------- ----- ---------- -----
Total $2,623,395 $0.81 $3,238,760 $1.00
========== ===== ========== =====
1993 1992
Distributions to Distributions to
BAC Holders BAC Holders(1)
Quarter -------------------- -------------------
Ended Total Per BAC Total Per BAC
- - - - ------------- ---------- ------- ---------- -------
March 31 $ 809,690 $0.25 -- .--
June 30 809,690 0.25 $1,610,637 $0.50
September 30 809,690 0.25 -- .--
December 31 809,690 0.25 1,628,123 0.50
---------- ----- ---------- -----
Total $3,238,760 $1.00 $3,238,760 $1.00
========== ===== ========== =====
(1) Prior to the AMEX listing in July 1993, distributions were declared
on a semi-annual basis, payable to BAC Holders of record as of the last day of
each month.
-66-
<PAGE>
(2) Distributions to BAC Holders totaling $874,465 or $0.27 per BAC were
declared for the quarter ended December 31, 1995, bringing the 1995
distribution to BAC Holders to $3,497,860 or $1.08 per BAC.
Distributions to the Series II BAC Holders for the nine months ended
September 30, 1995 and years ended December 31, 1994, 1993 and 1992 were
funded as follows:
<TABLE>
<CAPTION>
For the nine
months ended
September 30, For the years ended December 31,
1995 1994 1993 1992
------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash flow(1)
$2,995,965 $3,731,519 $3,310,726 $3,487,978
Net deposits to working
capital/interest reserves (345,804) (459,714) (38,920) (216,170)
---------- ---------- ---------- ----------
Total cash available for distribution $2,650,161 $3,271,805 $3,271,806 $3,271,808
========== ========== ========== ==========
Distributions to:
General Partner (1.01%) $ 26,766 $ 33,045 $ 33,046 $ 33,048
========== ========== ========== ==========
BAC Holders (98.99%) $2,623,395 $3,238,760 $3,238,760 $3,238,760
========== ========== ========== ==========
</TABLE>
(1) As defined in the Limited Partnership Agreement.
Although distributions are paid on a semi-annual basis, in July 1993,
Fund I-II began declaring distributions on a monthly basis as a result of
listing the BACs on AMEX.
As of September 30, 1995, Series II had cash and cash equivalents of
$45,968, unrestricted marketable securities of $791,750, restricted cash and
cash equivalents of $2,026,600 and working capital reserves invested in
marketable securities of $1,992,550. Marketable securities consist of tax-
exempt municipal bonds which generally contain a seven-day put option with
established banks or brokerage houses and are stated at cost, which generally
represents par value and approximates market value. In May 1993, the
Financial Accounting Standards Board issued SFAS 115. This statement requires
that most investments in securities be classified into one of the following
investment categories based upon circumstances under which securities might be
sold: Held to Maturity, Available for Sale, and Trading. Generally,
investments in securities for which an enterprise has both the ability and the
intent to hold to maturity should be accounted for using the amortized cost
method and all other securities must be recorded at their fair values. Fund
I-II implemented SFAS 115 in 1994, and has classified its investments in
marketable securities into the Available for Sale category. Realized gain and
losses on the sale of marketable securities was determined on a specific
identification basis. There were no net unrealized holding gains or losses
recognized during the nine months ended September 30, 1995 and the year ended
December 31, 1994 for Series II as the cost for the tax-
-67-
<PAGE>
exempt municipal bonds approximated market value throughout the nine months
ended September 30, 1995 and the year ended December 31, 1994.
As of December 31, 1994, Series II had aggregate investments in
marketable securities with the following maturities:
Amount Maturity
---------- --------------------------
$ 605,879 Within one year
209,294 Between one and five years
155,340 Between five and ten years
2,124,076 After ten years
----------
$3,094,589
==========
Fund I-II closely monitors its cash flow and liquidity position for
Series II in an effort to ensure that sufficient cash is available for
operating requirements and distributions to BAC Holders. Series II's net cash
provided by operating activities, which consists primarily of receipt of base
interest on mortgage loans, for the nine months ended September 30, 1995 and
the years ended December 31, 1994 and 1993 was adequate to support operating
requirements and the payment of declared distributions to BAC Holders and the
Fund I-II GP. For the nine months ended September 30, 1995, cash and cash
equivalents decreased due to the timing of distribution payments. Fund I-II
estimates that future cash flows from receipt of base interest on mortgage
loans, in the aggregate, will be sufficient to pay operating expenses and make
distributions to BAC Holders.
RESULTS OF OPERATIONS
Series I
Series I's net income for the three months ended September 30, 1995
decreased from the corresponding period in 1994 primarily due to fees to
Oppenheimer in connection with the Fairness Opinions. Contributing to the
decrease in net income was an increase in rental expenses primarily due to an
increase in non-recurring repairs and maintenance costs at certain properties.
Partially offsetting the decrease in net income was an increase in rental
revenue, resulting from an increase in rental rates and occupancy levels at
all properties, as well as a decrease in depreciation expense as a result of
the use of an accelerated method for personal property. Also partially
offsetting the decrease in net income was an increase in interest and other
income as a result of higher yields on investments.
Series I's net income for the nine months ended September 30, 1995
increased from the corresponding period in 1994 primarily due to an increase
in rental revenue, a decrease in depreciation expense, and an increase in
interest and other income, as discussed above. Partially offsetting the
increase in net income was an increase in rental expenses and merger-related
expenses, as discussed above.
-68-
<PAGE>
Series I's net income for 1994 increased compared to 1993 primarily due
to an increase in rental revenues resulting from an increase in rental rates
in 1994. Contributing to the increase in net income was a decrease in
depreciation expense as a result of the use of an accelerated method for
personal property.
Series I's net income for 1993 increased compared to 1992 primarily due
to a decrease in depreciation expense, as discussed above. Contributing to
the increase in net income was a decrease in professional fees resulting from
costs incurred in 1992 relating to the deed transfer of White Bear Woods.
Partially offsetting the increase in net income was a decrease in mortgage
revenue bond interest receipts primarily resulting from the qualified bond
refunding of Greenhaven during 1992, and an increase in AMEX listing fees in
1993.
Series II
Series II's net income for the three and nine months ended September 30,
1995 increased from the corresponding periods in 1994 primarily due to an
increase in rental revenue resulting from an increase in rental rates and
occupancy levels at certain properties. Contributing to the increase in net
income was a decrease in rental expenses primarily due to a reduction in non-
recurring repairs and maintenance costs and general and administrative
expenses at certain properties, as well as a decrease in depreciation expense
as a result of the use of an accelerated method for personal property. Also
contributing to the increase in net income was an increase in interest and
other income resulting from higher yields on investments. Partially
offsetting the increase in net income were fees to Oppenheimer in connection
with the Fairness Opinions.
Series II's net income for 1994 decreased compared to 1993 primarily due
to an extraordinary gain on debt reduction recognized in 1993, as discussed
above. Contributing to the decrease in net income was an increase in rental
expenses primarily due to the exterior painting of two properties and an
increase in real estate taxes at one property. Partially offsetting the
decrease in net income was an increase in rental revenue due to increased
rental rates at four properties. Also offsetting the decrease in net income
was a decrease in depreciation expense as a result of the use of an
accelerated method for personal property. A decrease in general and
administrative expenses due to the 1993 transfer of the deed of James Street
Crossing to an Owner Partnership of Fund I-II also offset the decrease in net
income.
Series II's net income for 1993 increased compared to 1992 primarily due
to a decrease in rental expenses. Contributing to the increase in net income
was an extraordinary gain on debt reduction, as previously discussed.
Partially offsetting the increase in net income was an increase in general and
administrative expenses associated with the transfer of the deed to James
Street Crossing to an Owner Partnership, as well as an increase in AMEX
listing fees in 1993. Also partially offsetting the increase in net income
was a decrease in interest and other income as a result of less cash available
for short-term investments and of declining yields on short-term investments.
-69-
<PAGE>
Presented below is a summary of the rental operations for the nine months
ended September 30, 1995 and 1994 and the years ended December 31, 1994, 1993
and 1992 of each of the properties in which Series I and II have invested.
<TABLE>
<CAPTION>
SERIES I
--------
Average Physical Occupancy
---------------------------------------------------------------------
Nine months ended
Name of Investment September 30, September 30, For the years ended December 31,
Rental Property 1995 1994 1994 1993 1992
- - - - ------------------ ------------- ------------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Observatory II 100% 99% 99% 99% 99%
Royal Oaks 99% 96% 97% 95% 97%
Trailway Pond 98% 96% 96% 94% 96%
Valley Creek 97% 94% 94% 95% 97%
White Bear Woods 98% 96% 97% 97% 98%
---- --- --- --- ---
98% 96% 96% 96% 97%
==== === === === ===
</TABLE>
<TABLE>
<CAPTION>
SERIES I
--------
Base Interest Paid from Properties' Operations (1)
------------------------------------------------------------------------------------------------
Name of Investment Nine months ended For the years ended December 31,
Rental Property September 30, 1995 September 30, 1994 1994 1993 1992
- - - - ------------------ ------------------ ------------------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Observatory II (3) N/A N/A N/A N/A N/A
Royal Oaks $ 602,387 $ 541,320 $ 754,518 $ 679,224 $ 664,797
Trailway Pond 182,636 173,983 252,168 210,360 181,680
Valley Creek 677,430 564,212 821,503 728,818 720,038
White Bear Woods 688,514 629,129 873,476 791,512 766,121
---------- ---------- ---------- ---------- ----------
$2,150,967 $1,908,644 $2,701,665 $2,409,914 $2,332,636
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
SERIES I
--------
Net Rental Operating Income (2)
------------------------------------------------------------------------------------------------
Nine months ended For the years ended December 31,
Name of Investment
Rental Property September 30, 1995 September 30, 1994 1994 1993 1992
- - - - ------------------ ------------------ ------------------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Observatory II (3) N/A N/A N/A N/A $ 309,990
Royal Oaks $ 670,438 $ 617,695 $ 800,192 $ 759,731 686,998
Trailway Pond 208,358 183,839 252,701 223,996 243,416
Valley Creek 728,317 649,941 889,567 709,627 788,829
White Bear Woods 626,064 695,155 972,817 832,260 842,661
---------- ---------- ---------- ---------- ----------
$2,233,177 $2,146,630 $2,915,277 $2,525,614 $2,871,894
========== ========== ========== ========== ==========
</TABLE>
-70-
<PAGE>
<TABLE>
<CAPTION>
SERIES II
---------
Average Physical Occupancy
---------------------------------------------------------------------------
Name of Investment Nine months ended For the years ended December 31,
Rental Property September 30, 1995 September 30, 1994 1994 1993 1992
- - - - -------------------------------- ------------------ ------------------ ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ethan's Ridge and
Ethan's Glen IIB 94% 94% 94% 93% 94%
Fountain Place 95% 93% 94% 97% 98%
James Street Crossing 97% 91% 92% 92% 89%
Trailway Pond II 98% 93% 94% 94% 94%
------------------ ------------------ ---- ---- ----
96% 93% 93% 94% 94%
------------------ ------------------ ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
SERIES II
---------
Base Interest Paid From Properties Operations(1)
---------------------------------------------------------------------------------------------------------
Name of Investment Nine months ended For the years ended December 31,
Rental Property September 30, 1995 September 30, 1994 1994 1993 1992
- - - - ------------------- --------------------- ------------------ ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ethan's Ridge and
Ethan's Glen IIB $ 871,763 $ 855,849 $1,185,957 $1,051,763 $1,028,553
Fountain Place 1,090,395 906,407 1,271,575 1,343,102 1,078,123
James Street Crossing 794,261 671,759 879,491 767,321 878,920
Trailway Pond II 412,189 311,626 460,387 449,564 469,880
---------- ---------- ---------- ---------- ----------
$3,168,608 $2,745,641 $3,797,410 $3,611,750 $3,455,476
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
SERIES II
---------
Net Rental Operating Income(2)
---------------------------------------------------------------------------------------------------
Name of Investment Nine months ended For the years ended December 31,
Rental Property September 30, 1995 September 30, 1994 1994 1993 1992
- - - - ------------------ ------------------ ------------------ ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ethan's Ridge and
Ethan's Glen IIB $ 926,764 $ 719,299 $1,055,881 $1,140,445 $1,056,498
Fountain Place 1,276,007 969,766 1,405,406 1,560,484 1,262,374
James Street Crossing 842,631 795,620 1,047,043 955,506 841,452
Trailway Pond II 470,714 376,511 521,123 477,705 564,323
---------- ---------- ---------- ---------- ----------
$3,516,116 $2,861,196 $4,029,453 $4,134,140 $3,724,647
========== ========== ========== ========== ==========
</TABLE>
(1) Exclusive of amounts paid to Fund I-II from the properties' reserves and/or
general partners of the borrowers. Such amounts for Series I were $0 for
both the nine months ended September 30, 1995 and 1994 and $0, $0 and
$139,048 for the years ended December 31, 1994, 1993 and 1992, respectively.
Such amounts for Series II were $0 and $27,500 for the nine months ended
September 30, 1995 and 1994, respectively, and $27,500, $23,288 and $139,838
for the years ended December 31, 1994, 1993 and 1992, respectively.
(2) Calculated from the respective property's financial statements as net loss
adjusted for depreciation, amortization, mortgage loan interest, and
mortgage servicing and administrative fees.
(3) Rental operating information is not provided for the Observatory II
investment because it is accounted for as an Investment in Mortgage Revenue
Bond and is paying full base interest.
-71-
<PAGE>
SELECTED FINANCIAL DATA OF FUND III
The following selected financial data and other data for the years ended
December 31, 1994, 1993, 1992, 1991 and 1990 are derived from the audited
financial statements of Fund III. The remaining selected financial and other
data are derived from the unaudited financial statements of Fund III. In the
opinion of Fund III GP, the data for the nine months ended September 30, 1995
and 1994 reflect all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation. The data should be read in conjunction
with the other financial information included elsewhere herein.
-72-
<PAGE>
<TABLE>
<CAPTION>
For the nine For the nine
months ended months ended FOR THE YEARS ENDED DECEMBER 31,
September 30, September 30,
1995 1994(4) 1994(4) 1993 1992 1991 1990
----------- ----------- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net rental income (1) $ 2,337,440 $ 2,112,975 $ 3,429,900 $ 2,822,609 $ 2,198,325 $ 1,067,970 $ 211,690
Interest income from:
Mortgage Revenue Bonds
and working capital
loans(3) 684,105 -- -- -- -- 769,025 3,928,031
Income from equity investment
in Mortgage Revenue Bonds
and working capital
loan (2) -- -- -- -- -- 989,152
Other income (expenses) (443,385) (129,644) (173,586) (230,847) 50,411 (19,760) 406,798
Valuation adjustment on
investment in real
estate (1) -- -- -- -- -- (373,637) (4,485,918)
----------- ----------- ----------- ----------- ----------- ----------- ----------
Net income $ 2,578,160 $ 1,983,331 $ 3,256,314 $ 2,591,762 $ 2,248,736 $2,432,750 $ 210,038
=========== =========== =========== =========== =========== =========== ==========
Net income allocated to
BAC Holders $ 2,552,121 $ 1,963,299 $ 3,223,425 $ 2,565,585 $ 2,226,024 $ 2,408,179 $ 207,917
=========== =========== =========== =========== =========== ============ ===========
Net Income per BACs
outstanding $ 0.49 $ 0.37 $ 0.61 $ 0.49 $ 0.42 $ 0.46 $ 0.04
=========== =========== =========== =========== =========== ============ ===========
Total cash distribution per
BAC outstanding $ 0.90 $ 1.22 $ 1.63 $ 1.63 $ 1.63 $ 1.87 $ 1.87
=========== =========== =========== =========== =========== ============ ===========
Number of BACs outstanding 5,258,268 5,258,268 5,258,268 5,258,268 5,258,268 5,258,268 5,258,268
=========== =========== =========== =========== =========== ============ ===========
Investment in real estate
(1) $82,123,975 $91,576,714 $82,123,975 $91,576,714 $91,576,714 $ 91,576,714 $50,109,480
=========== =========== =========== =========== =========== ============ ===========
Investment in real estate
per BAC outstanding $ 15.46 $ 17.24 $ 15.46 $ 17.24 $ 17.24 $ 17.24 $ 9.43
=========== =========== =========== =========== =========== ============ ===========
Investment in Mortgage
Revenue Bonds and
working capital loans (1) $ 8,254,707 -- $ 8,254,707 -- -- -- $ 42,867,356
=========== =========== =========== =========== =========== ============ ============
Total assets $85,419,187 $88,970,753 $87,296,032 $92,296,205 $97,929,180 $102,798,278 $109,519,928
=========== =========== =========== =========== =========== ============ ============
Total assets per BAC
outstanding $ 16.08 $ 16.75 $ 16.43 $ 17.38 $ 18.44 $ 19.35 $ 20.62
=========== =========== =========== =========== =========== ============ ============
Net assets $79,273,833 $82,381,301 $81,476,398 $86,878,511 $92,918,617 $ 99,301,738 $106,828,989
=========== =========== =========== =========== =========== ============ ============
Net assets per BAC
outstanding $ 14.92 $ 15.51 $ 15.34 $ 16.36 $ 17.49 $ 18.69 $ 20.11
=========== =========== =========== =========== =========== ============ ============
</TABLE>
(1) Certain properties collateralizing the Mortgage Revenue Bonds have been
transferred by deed in lieu of foreclosure to Owner Partnerships or
considered in-substance foreclosed (ISF), generally as a result of defaults
of the borrowers. As a result, Fund III has accounted for these investments
as investments in real estate for financial statement purposes. Fund III
recorded valuation adjustments representing the lower of (a) the carrying
value of the loan and related accrued interest or (b) the estimated fair
value of the property and other net assets of the property acquired in
settlement of loans or in-substance foreclosed at the earlier of
acquisition, development or construction (ADC) determination, transfer of
the deed or when considered ISF. The valuation adjustments and the financial
statement presentation are independent of the characterization of the bonds
as loans for federal income tax purposes and the tax-exempt nature of the
mortgage revenue bond interest. A reconciliation of the major differences
between the financial statement net income and the municipal income for
federal income tax purposes is contained in Fund III's Annual Report filed
on Form 10-K for the year ended December 31, 1994.
(2) In accordance with generally accepted accounting principles, two of the
loans which had not been foreclosed or considered ISF were accounted for as
real estate due to ADC determination as of December 31, 1991. Further
discussion is contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations.
(3) Effective December 31, 1994, Fund III reclassified its investment in Paces
River 2 from real estate to a mortgage revenue bond and working capital
loan, as further discussed in Management's Discussion and Analysis of
Financial Condition and Results of Operations.
(4) Certain amounts have been reclassified to conform to 1995 presentation.
-73-
<PAGE>
BUSINESS OF FUND III
Fund III was organized on September 1, 1987 under the DRULPA and will
continue until December 31, 2017, unless dissolved earlier in accordance with
its Agreement of Limited Partnership. Fund III was formed to acquire a
portfolio of tax-exempt mortgage revenue bonds, issued by various state or
local governments or their agencies or authorities and collateralized by non-
recourse participating first mortgage loans on multifamily residential
developments. Additionally, Fund III was permitted to use up to 5% of its
gross offering proceeds to make taxable working capital loans to borrowers to
cover certain expenses which could not be financed from the proceeds of the
Mortgage Revenue Bonds.
Fund III commenced a public offering of Series A BACs representing
assignment of limited partnership interests in February 1988. As provided in
the original offering, Fund III could issue BACs in additional series at the
discretion of Fund III GP. As of September 30, 1995, 5,258,268 Series A BACs
had been sold, representing total capital contributions of $131,456,700.
On July 1, 1993, the Fund III GP listed the BACs on the AMEX with a
trading symbol of CRL. The Fund III GP believes that the benefits to
investors from listing the BACs on AMEX include increased liquidity and
reduced transaction costs. However, a publicly traded partnership is treated
as a corporation for income tax purposes unless it meets certain exceptions.
In 1995, 1994, and 1993, Fund III met these exceptions due to its taxable
working capital loans and was not taxed as a corporation.
Fund III's objectives have been to: (1) provide quarterly cash
distributions that will be exempt from regular federal income tax from base
interest on the Mortgage Revenue Bonds; (2) provide additional cash
distributions that will be exempt from regular federal income tax from
payments of contingent interest on the Mortgage Revenue Bonds which will be
determined (a) on the basis of the cash flow of the mortgaged properties, or
(b) to the extent that cash flow is not sufficient to provide for the current
payment of the maximum amount of contingent interest, on the basis of either
(i) the net proceeds resulting from the sale of the mortgaged properties or
(ii) the appraised value of the mortgaged properties upon repayment of the
mortgage loans or remarketing of the Mortgage Revenue Bonds; (3) in certain
circumstances, provide additional taxable cash distributions from payments of
interest on the working capital loans; and (4) preserve and protect Fund III's
capital. As of September 30, 1995, six of the eight properties securing the
loans have been taken control of by Owner Partnerships through deed in lieu of
foreclosure (or through transfer of partnerships interest of the borrower in
the case of Geary Courtyard), which resulted in significant valuation
adjustments to the carrying values of these properties during 1991 and 1990.
Although Fund III will use diligent efforts to recover its investment, it is
probable that the full amount of BAC Holder invested capital may not be
recoverable on most of the bonds through net sale or refinancing proceeds as
originally anticipated at the time of the BAC offerings. Consequently, it may
be advisable to hold certain of the properties beyond the maturity dates of
the mortgage loans (1998 through 2000). Due to proposed IRS regulations, the
General Partners cannot be sure at this time how long the mortgage loans could
be extended without triggering a deemed reissuance of the Mortgage Revenue
Bonds
-74-
<PAGE>
for federal income tax purposes. If an extension of the mortgage loan
maturity dates is a deemed reissuance, it would most likely result in the loss
of the tax exempt status of the Mortgage Revenue Bonds.
Base interest income on the mortgage loans is funded from property
operations, certain borrowers' operating deficit guarantees, and reserves, if
any, established at the time of closing on the acquisition of the Mortgage
Revenue Bonds. If base interest payments cannot be fully satisfied, Fund III
GP evaluates various courses of action, including sale, recapitalization, loan
modification, deed in lieu of foreclosure or foreclosure.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF FUND III
Fund III invested in eight Federally tax-exempt Mortgage Revenue Bonds
with an aggregate principal amount of $97,101,000 and made three working
capital loans with an aggregate principal amount of $3,409,604. As discussed
below, as of September 30, 1995, six properties collateralizing certain of the
Mortgage Revenue Bonds have been transferred by deed in lieu of foreclosure
(or by transfer of partnership interests in the borrower entity) to Owner
Partnerships. As a result, Fund III accounts for these investments as real
estate for financial statement purposes. Additionally, Fund III accounts for
the Washington Ridge mortgage revenue bond as real estate in accordance with
the AICPA Notice to Practitioners-ADC Arrangements. Accordingly, the
consolidated balance sheets reflect these investments in the amounts of
$68,659,334 and $70,780,645 as of September 30, 1995, and December 31, 1994,
respectively, net of accumulated depreciation. Additionally, Fund III
accounts for the investment in the Paces River 2 Mortgage Revenue Bond and
working capital loan as a security and a loan, respectively, with a combined
recorded investment of $8,254,707 as of September 30, 1995 and December 31,
1994, as discussed below.
Investments in Mortgage Revenue Bonds that were previously accounted for
as loans are accounted for as real estate on the earlier of the date of ADC
determination, deed in lieu of foreclosure, transfer of partnership interests,
or ISF and were recorded as real estate at the lower of (a) the carrying value
of the loan and related accrued interest or (b) the estimated fair value of
the property including other net assets of the property. The estimated fair
values of the properties are the amounts the owners of the properties could
reasonably expect to receive in an as-is sale between a willing buyer and a
willing seller. Fund III GP determined the estimated fair value of the
properties acquired based upon information obtained from independent real
estate appraisers and/or its own market analyses. To the extent fair value
was less than carrying value, direct write-downs were recorded to establish a
new cost basis for these assets. Fund III continues to evaluate its recorded
investment in the properties on a lower of cost or net realizable value basis,
under the guidance of the AICPA Statement of Position 92-3 "Accounting for
Foreclosed Assets" ("SOP 92-3"). Fund III's net realizable value
determination takes into account Fund III's intention to hold these properties
for the long term, if necessary, to recover its recorded investment. If Fund
III determines that its estimated net realizable value is less than the
recorded investment in the property, then an additional valuation adjustment
is recorded if the decline is considered permanent. In March 1995, the
Financial Accounting Standards Board
-75-
<PAGE>
("FASB") issued Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" ("SFAS 121"). This statement addresses how entities should
measure impairment on long-lived assets. This statement is required to be
implemented by Fund III in 1996 and effectively supersedes the impairment
guidance under SOP 92-3 for properties intended to be held long term. The
adoption of SFAS 121 is not expected to have a material effect on Fund III's
consolidated financial statements. If the Merger is not consummated, it may be
necessary to hold the properties through longer periods within the terms of
the Mortgage Revenue Bonds, rather than the shorter existing loan terms, in
which event investor approval of the extension of the mortgage term will be
sought.
In May 1993, the FASB issued Statement on Financial Accounting Standards
No. 115 "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS 115"). This statement requires that most investments in securities be
classified into one of the following investment categories based upon
circumstances under which securities might be sold: Held to Maturity,
Available for Sale, and Trading. Generally, investments in securities for
which an enterprise has both the ability and the intent to hold to maturity
should be accounted for using the amortized cost method and all other
securities must be recorded at their fair values.
The investment in Paces River 2 on Fund III's consolidated balance sheets
is comprised of an investment in mortgage revenue bond and working capital
loan with a combined recorded investment of $8,254,707. Fund III accounts for
its investment in the Paces River 2 Mortgage Revenue Bond as available for
sale since it may not have the ability to hold the Mortgage Revenue Bond to
maturity. There were no unrealized gains or losses recognized for the nine
months ended September 30, 1995, as the recorded investment approximated
market value. The Mortgage Revenue Bond and working capital loan original
principal balances are $8,750,000 and $850,000, respectively. Prior to
December 31, 1994, the investments in Paces River 2 had been accounted for as
real estate as they had been considered ISF. Fund III expects the full
principal amounts of these investments to be repaid at maturity in 2000. Fund
III recognizes the income from the Paces River 2 investment on a cash basis.
No valuation adjustments were necessary on the properties for the nine
months ended September 30, 1995 or for the years ended December 31, 1994, 1993
or 1992.
In connection with the transfers of properties to the Owner Partnerships,
Fund III obtained an opinion from its former independent accounting firm in
July of 1991 that the reduction in pay rate and compounding of unpaid base
interest at the original base interest rate would not cause a reissuance of
the bonds under Section 103 of the Code (which would cause the bonds to lose
their tax-exempt status). Fund III also obtained opinions from bond counsel
that certain transfers of the properties to the Owner Partnerships would not
cause Fund III to become a substantial user of the projects pursuant to
Section 103 of the Code (which also could have caused the bonds to lose their
tax-exempt status). The bond counsel opinions were obtained in connection
with the Ethan's Glen IIA and Ocean Walk transfers.
-76-
<PAGE>
In 1991, the U.S. Supreme Court decided a case, Cottage Savings
---------------
Association v. Commissioner ("Cottage Savings"), that could be interpreted to
---------------------------
compromise the tax-exempt status of Mortgage Revenue Bonds which have been
modified. In response to this decision, in December 1992, the Internal
Revenue Service issued proposed regulations in connection with the
modification of debt instruments. If the regulations are adopted in their
present form, they would alter existing authority and curtail the type and
extent of modifications that could be made by a bond owner/lender without
adversely affecting the tax-exempt status of bonds. It is not clear at this
time what effect the Cottage Savings decision or the proposed regulations may
---------------
have on Fund III with respect to the bonds secured by loans on properties
currently held by the Owner Partnerships. Fund III GP continues to believe
that these bonds remain tax-exempt. If the Merger is not consummated, Fund
III GP will continue its efforts to protect the tax exempt status of the bonds
and the interest thereon. However, in light of the Cottage Savings decision
---------------
and the proposed regulations, there can be no assurance that Fund III GP will
be successful in its efforts.
The Fund III GP's ongoing strategy has been for the Owner Partnership to
continue holding the properties acquired upon the defaults of the original
borrowers until the loan maturity dates. If the Merger Proposal is approved,
the interests of the BAC Holders will be redeemed. If the Merger Proposal is
not approved, in order to maximize the overall yield, the Fund III GP may
recommend, subject to satisfactory resolution of any issues relating to the
tax-exempt status of the Mortgage Revenue Bonds, for investor approval of the
extension of certain loan maturity dates and, if approved, arrange for related
amendments to the pertinent Mortgage Revenue Bond document.
Following are updates of significant events affecting Fund III's
properties during the nine months ended September 30, 1995 and the year ended
December 31, 1994:
Ocean Walk
In March 1994, Ocean Walk experienced fire damage of approximately
$135,000. The fire was caused by the negligence of a resident. The
property's insurance carrier has covered the cost of the repairs less a
minimal deductible. The cost of repairing the fire damage and the insurance
carrier's reimbursement are reflected in rental expenses and rental revenue,
respectively, in the consolidated statement of income. Repairs to the
property relating to the fire damage were completed during the third quarter
of 1994. In addition, the insurance carrier reimbursed the property
approximately $27,000 in 1995 to cover lost rental revenue due to units taken
off the market in 1994 as a result of the fire. As of December 31, 1994, all
units were fully operational.
Woodlane Place
In March 1994, Fund III was notified by the management agent of Woodlane
Place that certain buildings at the property experienced damage due to frost
heaving. The Owner Partnership hired an engineer to analyze the underlying
problem of inadequate drainage at the property and to determine the number of
affected buildings and the severity of the drainage problem. Based on this
analysis, the estimated costs associated with the correction of the drainage
problem could be as high as $300,000, and will not be covered by the
property's
-77-
<PAGE>
insurance carrier. Property improvements relating to the drainage
problem totaling approximately $29,000 were completed in the fourth quarter of
1994 and are included in the buildings and personal property in the
consolidated balance sheets. As the remaining costs to correct the drainage
problem are capitalizable costs and the work had not begun as of September 30,
1995, the consolidated financial statements do not include an adjustment for
the remaining estimated costs. A contract for $55,000 in drainage work
representing the first phase of the repairs has been negotiated and work began
in October 1995. The remaining repairs are expected to be completed in 1996
and 1997. Due to the nature of the drainage problem, occupancy levels at the
property are not expected to decrease as a result of the ongoing capital
improvements. Funding for these future capital improvements may be provided
from the property's existing replacement reserves, future property cash flow,
and/or a loan to the property from the working capital reserves of Fund III.
Fund III has joined with the property's insurance carrier in a lawsuit
against the original architect and general contractor of Woodlane Place.
Fund III has joined on a contingency basis, with no legal fees being incurred
unless Fund III receives a settlement or judgment, and with other legal
expenses estimated to be less than $20,000. There is no assurance that Fund
III will receive any funds as a result of this lawsuit.
Ethan's Glen IIA
In April 1995, Ethan's Glen IIA suffered damage to certain roofs due to a
severe hail storm. The cost to repair the damaged roofs was paid by the
property's insurance carrier, less a minimal deductible.
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<PAGE>
A description of the portfolio securing the Mortgage Revenue Bonds held by Fund
III is as follows:
<TABLE>
<CAPTION>
Investment Information Mortgage Information
- - - - ------------------------------------------------------------ ----------------------------------------
Date of
Acquisition
No. of or Date of Loan Loan
Rental Construction Origination Face Maturity
Name and Location Units Completion Date Amount Date
- - - - -------------------- ------ ------------ ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Mortgage Revenue Bond
- - - - ---------------------
and working capital loan
------------------------
Paces River 2
Rock Hill, SC (2,4) 230 -- 7/28/88 $ 9,600,000 2/02/2000
Real Estate
- - - - -----------
Ethan's Glen IIA
Kansas City, MO (1) 242 2/88 8/18/88 10,525,000 3/31/2000
Geary Courtyard
San Francisco, CA (1,2) 164 2/89 8/18/88 18,900,000 9/01/2000
Ocean Walk
Key West, FL (1) 296 1/89 1/27/89 19,826,000 4/01/2000
Regency Woods
West Des Moines, IA (1,2) 200 1/90 1/29/90 7,559,604 2/01/2000
Valley Creek II
Woodbury, MN (1) 177 5/89 2/21/89 10,100,000 7/01/2000
Washington Ridge
Knoxville, TN (3) 248 9/90 12/14/88 10,000,000 7/01/2000
Woodlane Place
Woodbury, MN (1) 216 2/88 9/16/88 14,000,000 11/01/1999
----- ------------
1,773 $100,510,604
===== ============
</TABLE>
<TABLE>
<CAPTION>
Real Estate Information
------------------------------------------------------
Buildings Carrying
Commencement and Amount of
of Real Estate Personal Investments
Name and Location Accounting Land Property at 9/30/95
- - - - -------------------- --------------- ------- -------- -----------
<S> <C> <C> <C> <C>
Mortgage Revenue Bond
- - - - ---------------------
and working capital loan
------------------------
Paces River 2
Rock Hill, SC (4) -- -- -- $ 8,254,707
===========
Real Estate
- - - - -----------
Ethan's Glen IIA
Kansas City, MO (1) 4/15/90 $ 887,222 $ 8,943,985 $ 9,831,207
Geary Courtyard
San Francisco, CA (1) 12/31/90 2,679,666 16,716,243 19,395,909
Ocean Walk
Key West, FL (1) 9/30/91 3,580,530 13,387,656 16,968,186
Regency Woods
West Des Moines, IA (1) 12/31/91 552,938 6,382,591 6,935,529
Valley Creek II
Woodbury, MN (1) 12/31/90 107,964 8,416,883 8,524,847
Washington Ridge
Knoxville, TN (3) 12/31/91 1,697,677 6,492,192 8,189,869
Woodlane Place
Woodbury, MN (1) 12/31/90 722,059 11,556,369 12,278,428
----------- ----------- -----------
$10,228,056 $71,895,919 82,123,975
=========== ===========
Less: Accumulated depreciation as of September 30, 1995 (13,464,641)
-----------
$ 68,659,334
============
</TABLE>
(1) As discussed herein, as of September 30, 1995, these properties are
accounted for as real estate due to deeds in lieu of foreclosure or other
transfer.
(2) The amount listed under face amount of mortgage includes both the first lien
tax-exempt loan and the second lien working capital loan.
-79-
<PAGE>
(3) This loan has the characteristics of real estate and, therefore, is
accounted for as such in accordance with the policy discussed in Fund III's
Annual Report filed on Form 10-K for the year ended December 31, 1994.
(4) As discussed herein, effective December 31, 1994, the Paces River 2
investment is accounted for as an investment in Mortgage Revenue Bond and
working capital loan.
-80-
<PAGE>
As illustrated in the table below, as of September 30, 1995, Fund III
accounts for seven of its eight investments in Mortgage Revenue Bonds and two
of its three working capital loans as real estate for financial statement
purposes due to the receipt by the Owner Partnerships of deeds in lieu of
foreclosure or transfer of partnership interests or in accordance with the
AICPA Notice of Practitioners-ADC Arrangements.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Change in
Management
Depletion of Company to
Borrower and Date of Affiliate of the
Name of Investment Debt Service Commencement of Deed in Lieu Fund III GP through
Rental Property Reserves (1) Real Estate Accounting or Transfer 1/31/94 (2)
- - - - ------------------- ---------------- --------------------------- ------------------- ----------------------
Ethan's Glen IIA 1993 4/15/90 4/15/90(3) 6/01/92
Geary Courtyard 1991 12/31/90 6/30/93(4) N/A
Ocean Walk 1992 9/30/91 3/16/93(5) 11/01/93
Paces River 2 1992 12/31/91 N/A(6,7) N/A
Regency Woods 1995 12/31/91 2/28/95(8) N/A
Valley Creek II 1993 12/31/90 1/02/93 7/01/92
Washington Ridge N/A 12/31/91 N/A(9) N/A
Woodlane Place 1991 12/31/90 1/02/92 10/01/91
</TABLE>
(1) Due to the depletion of borrower and debt service reserves, base interest
payments made to Fund III are solely in the form of cash flow from the
property's operations.
(2) CRICO and CRICO Minnesota, affiliates of Fund III GP, assumed property
management responsibilities on the indicated dates. On February 1, 1994,
CRICO and CRICO Minnesota contributed their property management contracts
and personnel to Residential. Residential was formed by CRI but on
February 1, 1994, Residential was sold to AP CAPREIT, which is not
currently owned by CRI and/or its affiliates.
(3) During 1990, the Owner Partnership holding Ethan's Glen IIA was expanded
so that two individuals unaffiliated with Fund III acquired a 98.99%
interest in the Owner Partnership as limited partners in consideration for
certain capital contributions, plus their undertaking to form an investor
limited partnership to admit additional partners in exchange for further
capital contributions. In November 1991, the Owner Partnership was
further expanded to admit the investor partnership entity. The
unaffiliated limited partners are in default with respect to the pay-in
schedule and their interests will be terminated.
(4) In 1991, Fund III entered into a workout agreement with the borrower
pursuant to which the borrower would pay all cash flow to Fund III, with
certain agreed upon minimum performance goals. The borrower, at that
time, deposited a deed in lieu of foreclosure in escrow that would be
recorded if the borrower defaulted under the workout or failed to cure all
arrearages by June 1, 1992. The borrower transferred its partnership
interests in Geary Courtyard Associates, a California limited partnership,
as a result of the default by the borrower on the loan workout agreement.
(5) A deed in lieu of foreclosure was obtained in exchange for a release of
the borrower's general partners' unsecured operating deficit guarantee.
(6) In March 1993, Fund III finalized a three-year workout agreement (the
"Workout") with the borrower. The balance of the borrower's guarantee
amount has been paid in full. The Workout requires the borrower to pay
the base interest on the tax-exempt loan in full on a monthly basis, while
allowing all or a portion of the interest on the working capital loan to
accrue (the amount adjusts annually). Upon the occurrence of a monetary
default during the term of the Workout, Fund III may direct the release of
the deed currently held in escrow to be recorded in lieu of foreclosure.
Currently, the borrower is in compliance with the terms of the Workout.
(7) Effective December 31, 1994, the Paces River 2 investment is accounted for
as an investment in Mortgage Revenue Bond and working capital loan, as
discussed above.
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<PAGE>
(8) Shortfalls in interest payments from Regency Woods were being paid from
draws on a $250,000 irrevocable letter of credit. Fund III drew down the
full amount remaining under the letter of credit in January 1995,
resulting in the default by the borrower on the working capital loan. The
borrower transferred the property by deed in lieu of foreclosure to an
Owner Partnership as of February 28, 1995.
(9) In the first quarter of 1992, the borrower on Washington Ridge informed
Fund III that six months of break-even operations occurred and
subsequently provided documentation to Fund III from the borrower's
independent accounting firm to support this conclusion. Therefore, the
outstanding operating deficit guarantee was reduced pursuant to the terms
of the loan agreement to $500,000. Currently, the borrower is paying full
debt service solely from property operations. In the fourth quarter of
1994, the borrower informed Fund III that the debt service coverage
requirement had been met. Fund III GP has reviewed documentation from the
borrower's independent accounting firm, and released the operating deficit
guarantee in the first half of 1995. Contingent interest is being paid on
a quarterly basis. This investment is accounted for as real estate due to
ADC determination.
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<PAGE>
FINANCIAL CONDITION AND LIQUIDITY
The primary sources of Fund III's future cash flows are expected to be
from receipts of base interest on mortgage loans, which are dependent upon the
net operating income of the properties. Therefore, Fund III's investment in
the Mortgage Revenue Bonds and working capital loans is subject to the general
risks inherent to the ownership of real property. These risks include
reduction in rental income due to an inability to maintain occupancy levels,
adverse changes in general economic conditions, and adverse changes in local
conditions. Fund III GP expects that the properties transferred to the Owner
Partnerships will continue to generate sufficient cash flow to pay all
operating expenses, meet escrow deposit requirements and pay some, but not
all, of the base interest due to Fund III. Other than the estimated $270,000
in drainage correction costs relating to Woodlane Place, as discussed above,
Fund III has no material commitments for capital expenditures.
Fund III expects to continue to make distributions to BAC Holders on a
quarterly basis. The Merger Agreement stipulates that 1996 distributions
cannot exceed $.10 per BAC per month. There are no other legal restrictions
on Fund III's present or future ability to make cash distributions other than
as set forth in the Fund III Merger Agreement. The distributions to BAC
Holders have been funded from three primary sources: cash flow from the
underlying properties' operations, surplus working capital reserves of Fund
III, and funds from property reserves/borrower guarantees. However, because
the surplus working capital reserves are almost depleted and property
reserves/borrower guarantees have been depleted during the first quarter of
1995, Fund III will not be able to maintain the distributions to BAC Holders
at the 1994 level. The 1995 distributions will be based primarily on cash
flow from Fund III's operations. Cash flow from Fund III's operations consist
of cash flow from six of the properties, plus specified base interest payments
from two properties, plus contingent interest from one property, supplemented
by any available property reserves/borrower guarantees, less Fund III's
expenses. Fund III GP seeks to optimize cash flow from the properties owned
by the Owner Partnerships. Despite these efforts, the amounts paid to Fund
III from the properties' operations may be expected to fluctuate from period
to period due to changes in occupancy rates, rental rates, operating expenses
and other variables. The 1995 distribution was $1.20 per BAC.
The following distributions were paid or accrued to Fund III BAC Holders
of record for the nine months ended September 30, 1995 and the years ended
December 1994, 1993 and 1992:
<TABLE>
<CAPTION>
1995 1994 1993 1992
Distributions to Distributions to Distributions to Distributions to
BAC Holders BAC Holders BAC Holders BAC Holders
------------------------ ------------------ --------------------- -------------------
Per Per Per Per
Quarter Ended Total BAC Total BAC Total BAC Total BAC
- - - - ---------------- ----------- ----- ------------ ------- ------------ --------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31 $1,577,480 $0.30 $2,103,307 $0.40 $2,106,988 $0.40 $2,124,340 $0.40
June 30 1,577,480 0.30 2,155,890 0.41 2,135,908 0.41 2,124,340 0.40
September 30 1,577,480 0.30 2,155,890 0.41 2,141,693 0.41 2,147,477 0.41
December 31 (1) (1) 2,155,890 0.41 2,160,097 0.41 2,148,529 0.42
-------------- -------- ------------ ------- ---------- --------- ----------- ------
Total $4,732,440 $0.90 $8,570,977 $1.63 $8,544,686 $1.63 $8,544,686 $1.63
============== ======== =========== ======= =========== ======== =========== ======
</TABLE>
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<PAGE>
(1) Distributions to BAC Holders totaling $1,577,480 or $0.30 per BAC were
declared for the quarter ended December 31, 1995, bringing the 1995
distribution to BAC Holders to $6,309,920 or $1.20 per BAC.
Distributions to Fund III BAC Holders for the nine months ended
September 30, 1995 and the years ended December 31, 1994, 1993 and 1992 were
funded as follows:
<TABLE>
<CAPTION>
For the nine months
ended September 30,
-------------------
For the years ended December 31,
------------------------------------------------------------------
1995 1994 1993 1992
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Cash flow (1) $4,820,355 $6,740,474 $7,132,542 $6,239,773
Net (deposits to) withdrawals from
working capital/interest reserves (39,630) 1,917,953 1,499,326(2) 2,392,085(3)
------------------- ------------------- ---------------------- ------------------
Total cash available for
distribution $4,780,725 $8,658,427 $8,631,868 $8,631,858
=================== ==================== ==================== ==================
Distributions to:
General Partner (1.01%) $48,285 $87,450 $87,182 $87,171
=================== =================== ===================== =================
BAC Holders (98.99%) $4,732,440 $8,570,977 $8,544,686 $8,544,686
=================== =================== ===================== =================
</TABLE>
(1) As defined in the Limited Partnership Agreement.
(2) Excludes working capital loan advances and repayments of $153,000 and
$83,939, respectively.
(3) Excludes payments of deferred interest from interest reserves of $179,948.
As of September 30, 1995, Fund III had cash and cash equivalents of
$131,737, unrestricted marketable securities of $1,304,826 and restricted cash
and cash equivalents of $2,113,785. Marketable securities consist of tax-
exempt municipal bonds which generally contain a seven-day put option with
established banks or brokerage houses, and are stated at cost, which generally
represents par value and approximates market value. In May 1993, the FASB
issued SFAS No. 115. This statement requires that most investments in
securities be classified into one of the following investment categories based
upon circumstances under which securities might be sold: Held to Maturity,
Available for Sale, and Trading. Generally, investments in securities for
which an enterprise has both the ability and the intent to hold to maturity
should be accounted for using the amortized cost method and all other
securities must be recorded at their fair values. Fund III implemented SFAS
115 in 1994, and has classified its investments in marketable securities into
the Available for Sale category. Realized gains and losses on the sale of the
marketable securities were determined on a specific identification basis.
There were no net unrealized holding gains or losses recognized during the
nine months ended September 30, 1995 and the year ended December 31, 1994 as
the cost for the tax-exempt municipal bonds approximated market value
throughout the nine months ended September 30, 1995 and the year ended
December 31, 1994.
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<PAGE>
As of December 31, 1994, Fund III had aggregate investments in marketable
securities (including those held in working capital and interest reserves, as
discussed below) with the following maturities:
Amount Maturity
------------ ------------------------
$1,931,570 Within one year
296,402 Between one and five years
670,714 Between five and ten years
3,069,732 After ten years
------------
$5,968,418
============
Fund III has working capital reserves which may be available for the
ongoing costs of operating Fund III, for supplementing distributions to
investors and for making working capital loans to the borrowers. As of
September 30, 1995 and December 31, 1994, the working capital reserves were
$4,001,726 and $3,846,520, respectively, both of which exceed Fund III's
minimum working capital reserve balance of approximately $3,718,000. The
minimum working capital reserve balance may be increased or decreased from
time to time as deemed necessary by Fund III GP. The surplus working capital
reserve balance of approximately $284,000 as of September 30, 1995 may be used
to supplement distributions to BAC Holders. Of the total distributions made
during the nine months ended September 30, 1995 and the years ended December
31, 1994, 1993 and 1992, $0, $1,917,953, $1,499,326 and $2,392,085,
respectively, were funded from the surplus working capital reserves.
Fund III established interest reserves which represent Fund III GP's
estimate of the total base interest on the investment in Mortgage Revenue
Bonds and working capital loans to be deferred during the deferral period,
generally, the project construction period as defined by the respective loan
agreements. The interest reserves also included debt service reserves
established by Fund III for six mortgage loans. Funds in the interest
reserves are invested in tax-exempt municipal bonds with terms similar to Fund
III's marketable securities and are stated at cost, which generally represents
par value and approximates market value. The interest reserves may be used to
supplement distributions to BAC Holders in an amount sufficient to achieve an
equivalent gross base interest rate as if the full amount of base interest had
been paid to Fund III during the deferral period. During the nine months
ended September 30, 1995 and the years ended December 31, 1994, 1993 and 1992,
$115,576, $0, $15,000 and $649,854, respectively, were transferred to working
capital reserves to fund distributions to BAC Holders. As of September 30,
1995, interest reserves relating to Regency Woods had been depleted, and
interest reserves applicable to Washington Ridge were $298,750. As of
December 31, 1994, interest reserves applicable to Regency Woods and
Washington Ridge were $414,326.
Fund III closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient cash is available for operating requirements
and distributions to BAC Holders. Fund III's net cash provided by operating
activities, which consists primarily of receipt of base interest on mortgage
loans, for the nine months ended September 30, 1995 was adequate to support
operating requirements and the payment of declared distributions to BAC
Holders and Fund III GP. Fund III's net cash provided by operating activities
for 1994 and 1993 was supplemented by
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withdrawals from working capital reserves to meet distributions to BAC Holders
and the Fund III GP. Fund III estimates that future cash flows from
receipt of base interest on mortgage loans, in the aggregate, will be
sufficient to pay operating expenses.
RESULTS OF OPERATIONS
Fund III's net income for the three months ended September 30, 1995
increased from the same period in 1994 primarily due to a decrease in rental
expenses resulting from repairs made in 1994 relating to fire damage and frost
heaving at Ocean Walk and Woodlane Place, respectively, as well as a decrease
in real estate tax expense at Woodlane Place resulting from a special
assessment paid in 1994. Contributing to the increase in net income was the
reclassification of the investment in Paces River 2 from real estate to
Mortgage Revenue Bond and working capital loan, as discussed above. In 1995,
Fund III recognized income from the Paces River 2 Mortgage Revenue Bond and
working capital loan on an accrual basis. The 1994 income from the Paces
River 2 Mortgage Revenue Bond and working capital loan is limited to the
property's net rental income due to its classification as real estate in 1994.
Also contributing to the increase in net income was a decrease in depreciation
expense as a result of the use of an accelerated method for personal property.
Partially offsetting the increase in net income were fees to Oppenheimer in
connection with the Fairness Opinion, as previously discussed, as well as a
decrease in rental revenue resulting from the receipt in 1994 of insurance
reimbursements for repairs to Ocean Walk and Woodlane Place, as discussed
above. The decrease in rental revenue was partially offset by an increase in
occupancy and rental rates at certain properties. Also partially offsetting
the increase in net income was an increase in general and administrative
expenses due to the recognition in the third quarter of 1994 of decreased
annual report printing costs.
The Fund III's net income for the nine months ended September 30, 1995
increased from the same period in 1994 primarily due to the reclassification
of the investment in Paces River 2, a decrease in rental expenses and a
decrease in depreciation expense, as discussed above. Partially offsetting
the increase in net income were fees to Oppenheimer, as discussed above, as
well as a decrease in other interest income resulting from lower cash and
investment balances.
Fund III's net income for 1994 increased compared to 1993 primarily as a
result of an increase in net rental income. The net rental income of the
properties increased principally as a result of an increase in rental rates
and economic occupancy at certain properties, as well as insurance
reimbursements received in 1994 for repairs to Ocean Walk and Woodlane Place,
as discussed above. Contributing to the increase in net income was a decrease
in depreciation expense as a result of the use of an accelerated method for
personal property. Also contributing to the increase in net income was a
decrease in general and administrative costs and professional fees primarily
related to loan workout negotiations in 1993 concerning Paces River 2 and the
transfer of the deed of Ocean Walk. Partially offsetting the increase in net
income was an increase in rental expense resulting primarily from repairs
relating to fire damage and frost heaving at Ocean Walk and Woodlane Place,
respectively, as discussed above, as well as an increase in non-recurring
repairs and maintenance, payroll expense and marketing fees at certain
properties. Also partially offsetting the increase in net income was a
decrease in other interest income resulting from less cash available for
short-term investments.
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Fund III's net income for 1993 increased compared to 1992 primarily as a
result of an increase in net rental income. The net rental income of the
properties increased principally as a result of increased rental rates and
occupancy and a decrease in concessions and receipt of real estate tax refunds
at certain properties. Partially offsetting the increase in net income was a
decrease in Fund III's interest income resulting from less cash available for
short-term investments and a decline in yield on those investments, as well as
an increase in general and administrative costs (primarily related to the
transfer of deed of Ocean Walk).
Presented below is a summary of the rental operations for the nine months
ended September 30, 1995 and 1994 and the years ended December 31, 1994, 1993
and 1992 of each of the properties in which Fund III has invested.
<TABLE>
<CAPTION>
Average Physical Occupancy
---------------------------------------------------------------------------------------------------------
Name of Investment Nine months ended For the years ended December 31,
Rental Property ---------------------------------------------------------------------------------------------------------
- - - - ------------------------ September 30, September 30,
1995 1994 1994 1993 1992
----------------- ------------------- -------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ethan's Glen IIA 93% 92% 92% 94% 92%
Geary Courtyard 93% 90% 89% 88% 68%
Ocean Walk 95% 93% 94% 97% 86%
Paces River 2 96% 97% 97% 97% 92%
Regency Woods 95% 96% 95% 93% 94%
Valley Creek II 97% 95% 96% 95% 97%
Washington Ridge 96% 95% 95% 94% 95%
Woodlane Place 98% 97% 97% 98% 98%
----------------- ------------------- ---------------- ----------------- -------------------
95% 94% 94% 95% 90%
================= =================== ================ ================= ====================
</TABLE>
<TABLE>
<CAPTION>
Base Interest Paid From Properties' Operations (1)
---------------------------------------------------------------------------------------------------------
Name of Investment Nine months ended For the years ended December 31,
Rental Property ---------------------------------------------------------------------------------------------------------
- - - - ------------------------ September 30, 1995 September 30, 1994 1994 1993 1992
--------------------------------------------------------- -------------------- ----------------------
<S> <C> <C> <C> <C> <C>
Ethan's Glen IIA $ 547,277 $ 546,087 $ 776,803 $ 811,075 $ 568,480
Geary Courtyard 577,000 451,329 601,329 687,267 178,811
Ocean Walk 1,209,332 1,087,162 1,571,022 1,560,048 1,129,283
Paces River 2 607,835 560,939 743,314 706,634 601,946
Regency Woods 333,562 408,055 544,268 538,836 572,508
Valley Creek II 520,052 387,959 614,332 554,970 464,701
Washington Ridge 656,250 656,250 875,000 875,000 875,000
Woodlane Place 707,716 600,917 979,747 880,463 682,318
------------------ ------------------- ------------- -------------------- ---------------------
$ 5,159,024 $ 4,698,698 $ 6,705,815 $ 6,614,293 $ 5,073,047
================== ==================== ============= ===================== ======================
</TABLE>
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<TABLE>
<CAPTION>
Net Rental Operating Income(2)
----------------------------------------------------------------------------------
Name of Investment Nine months ended For the years ended December 31,
----------------------------------------------------------------------------------
Rental Property September 30, 1995 September 30, 1994 1994 1993 1992
------------------ ------------------ ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Ethan's Glen IIA $ 586,439 $ 562,689 $ 790,845 $ 774,122 $ 770,350
Geary Courtyard 631,505 442,318 783,771 580,464 359,379
Ocean Walk 1,250,336 1,242,732 1,824,749 1,606,833 1,280,178
Paces River 2 -- 511,600 687,471 742,487 624,118
Regency Woods 313,187 480,407 625,189 565,256 829,249
Valley Creek II 537,062 482,472 673,774 614,947 687,992
Washington Ridge 786,095 778,069 1,024,343 1,006,807 967,320
Woodlane Place 811,433 624,623 964,846 1,026,677 930,143
---------- ---------- ---------- ---------- ----------
$4,916,057 $5,124,910 $7,374,988 $6,917,593 $6,448,729
========== ========== ========== ========== ==========
</TABLE>
(1) Exclusive of amounts paid to Fund III from the properties' reserves and/or
general partners of the borrowers. Such amounts were $17,834 and $213,531
for the nine months ended September 30, 1995 and 1994, respectively, and
$250,682, $622,060 and $854,837, respectively, for the years ended
December 31, 1994, 1993 and 1992.
(2) Calculated from the respective property's financial statements as net
loss, adjusted for depreciation, amortization, mortgage loan interest and
mortgage servicing and administration fees.
(3) Rental operating income is not provided for the Paces River 2 investment
for the nine months ended September 30, 1995 because beginning
December 31, 1994 it is accounted for as an investment in Mortgage
Revenue Bond and working capital loan, as discussed herein.
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<PAGE>
LITIGATION
On September 22, 1995, Irving Zakin commenced a putative class action
(the "Zakin Action") against William Dockser, H. William Willoughby, CRI, the
General Partners, the Assignor Limited Partners, CAPREIT and each of the Funds
(collectively, the "Defendants") in the Court of Chancery of the State of
Delaware in New Castle County (C. A. No. 14558). The complaint alleges, among
other things, that the price offered to the BAC Holders in the Mergers at the
time the complaint was filed was inadequate, and that the Defendants breached
their fiduciary duty to the BAC Holders, or aided and abetted such a breach,
engaged in self-dealing and misled BAC Holders, in connection with the
Mergers. The suit seeks to enjoin the Transaction Proposals, damages in an
unspecified amount for the BAC Holders, and to compel the Defendants to
maximize the price paid to the BAC Holders and consider unspecified
alternatives to the Transaction Proposals.
On October 5, 1995, David and Johanna Wingard (the "Wingard Action")
commenced a second putative class action against the Defendants in the Court
of Chancery of the State of Delaware in New Castle County (C. A. No. 14604).
The complaint in the Wingard Action contains virtually the identical
allegations and seeks virtually the identical relief as in the Zakin Action.
A request to the Court has been made by the plaintiffs in both lawsuits to
consolidate the two actions.
On January 31, 1996, the Defendants and the plaintiffs and their
respective attorneys reached a tentative settlement of the purported class
actions which is memorialized in a Memorandum of Understanding (the
"Memorandum"), dated as of such date. The proposed settlement must be
approved by the Court. The Memorandum contemplates the complete discharge,
settlement and release of all claims that have been, could have been, or in
the future might be asserted in any action or any other proceeding in
connection with the Mergers. The parties to the Memorandum will use their best
efforts to execute an appropriate Stipulation of Settlement (the
"Stipulation") and such other documents as may be required in order to obtain
approval by the court of the settlement.
The Defendants have denied, and continue to deny, that any of them have
committed or threatened to commit any violations of law or breaches of duty to
the BAC Holders. The Defendants have entered into the Memorandum solely
because the proposed settlement would eliminate the burden and expense of
further litigation and would facilitate the consummation of the Mergers, which
the General Partners believe to be in the best interests of the BAC Holders.
In accordance with the Memorandum, the Merger Agreements were amended to
provide that (a) the aggregate cash consideration paid to the BAC Holders
shall be increased by $8.5 million from $150.0 million to $158.5 million (from
which will be paid attorneys' fees and expenses as awarded by the court), and
(b) the aggregate amount payable in consideration for the Accrued Fees payable
to CRI shall be no more than $2 million as compared with $4.023 million in the
original Merger Agreements.
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<PAGE>
Counsel for the plaintiffs have reviewed certain documents relating to
the Mergers, including this Preliminary Proxy Statement, and will have the
opportunity to review and take depositions of representatives of the General
Partners and CAPREIT. After such review, counsel for the plaintiffs shall
have the right to terminate the settlement contemplated in the Memorandum,
based on material information not presently available to them.
After the stipulation is executed, the parties will seek preliminary
approval of the settlement by the Court and will then mail notice of the
proposed settlement to members of the putative class. As soon as practicable
following completion of the discovery described in the preceding paragraph and
after class members have had a period of time to review the notice of proposed
settlement, the parties will use their best efforts to obtain final Court
approval of the settlement and the dismissal of the class actions as to all of
the claims.
On November 9, 1995, CRI filed a complaint against Capital Management
Strategies, Inc. ("CMS"), a company controlled by Martin C. Schwartzberg, to
determine the proper amount of fees to be paid in 1996 under an Asset
Management Agreement. CMS answered on January 10, 1996, but asserted no
counterclaims.
Thereafter, Mr. Schwartzberg launched a hostile consent solicitation to
be designated as managing general partner of 125 private partnerships
sponsored by CRI. Mr. Schwartzberg is a former shareholder and executive
officer of CRI who decided to leave the company as of January 1, 1990. In
connection with his departure, he relinquished his general partner duties for
all CRI-sponsored partnerships, including those of Fund I-II GP. Mr.
Schwartzberg has publicly stated that he is opposing the Mergers until the
Funds make their financial statements and financial statements of the Owner
Partnerships available. The financial statements of the Funds are included in
this Proxy Statement. The financial statements of the Owner Partnerships will
be filed as exhibits to Current Reports on Form 8-K, to be filed with the
Securities and Exchange Commission (the "SEC") by each of the Funds during the
week of March 17, 1996. See "AVAILABLE INFORMATION".
On January 18, 1996, Mr. Schwartzberg and CMS filed a complaint in the
Circuit Court of Montgomery County, Maryland, against CRI and Messrs. Dockser
and Willoughby alleging, among other things, (i) that CRI and Messrs. Dockser
and Willoughby have breached an Asset Management Agreement pursuant to which
Mr. Schwartzberg's company, CMS, agreed to perform limited functions related
to property-level issues for a portion of CRI's subsidized housing portfolio
(but not properties securing the Mortgage Revenue Bonds) by reducing the
proposed budget for 1996, (ii) that the actions of CRI and Messrs. Dockser and
Willoughby in connection with the Merger involve self-dealing and constitute a
breach of their fiduciary duties to Mr. Schwartzberg, and (iii) that the
actions in connection with the merger of CRIIMI MAE Inc. in June 1995 involved
self-interest and led in part to the proposed reduction of the Asset
Management Agreement budget. Neither of the Funds nor the General Partners
was named as a defendant in this action, and Mr. Schwartzberg does not allege
that he is a BAC Holder. Messrs. Dockser and Willoughby have entered an answer
denying all of Mr. Schwartzberg's claims and moving to dismiss or strike the
allegations concerning the Funds and CRIIMI MAE Inc. and dismiss or strike the
related counts for failure to state a claim upon which relief can be granted.
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<PAGE>
Messrs. Dockser and Willoughby have publicly responded that Mr. Schwartzberg's
suit is motivated by his budget dispute with CRI and personal animosity.
On February 12, 1996, the Montgomery County Circuit Court issued a
memorandum opinion and order enjoining CMS and Mr. Schwartzberg from
disclosing information made confidential under the Asset Management Agreement.
On February 15, 1996, Mr. Schwartzberg filed suit in the New Castle
County, Delaware Chancery Court against the General Partners (No. 14837). He
alleges that he has made demands upon the General Partners, in his capacity as
a general and limited partner of Fund I-II GP and as a limited partner of Fund
III GP, to inspect and obtain copies of a current list of the BAC holders and
other documents. He further alleges that his demands were rejected. On
February 23, 1996, the General Partners answered the complaint, admitting that
his demands have been rejected and denying that Mr. Schwartzberg is entitled
to the materials requested because, among other things, he lacks standing and
proper purpose to inspect and obtain copies of the requested materials. A
hearing was held on March 6 and 7, 1996 and it is expected that the Court will
render a decision following submission of briefs by the parties.
On February 16, 1996, the Funds, together with the General Partners, CRI,
and CAPREIT filed suit against Mr. Schwartzberg in the United States District
Court for the Southern District of New York, No. 96 Civ. 1186 (LAK). The
complaint alleges that Mr. Schwartzberg is engaged in an unlawful solicitation
of proxies of the BAC Holders through two press releases he issued in
violation of the federal securities laws and rules promulgated by the SEC
requiring definitive proxy materials to be filed with the SEC and delivered to
the BAC Holders and that he has made false and misleading statements in the
solicitations concerning the terms of the Merger Agreements, the availability
of certain financial information, and has falsely imputed base motives to the
principals of the General Partners. On February 23, 1996, the court, without
making findings of fact, issued a temporary restraining order barring Mr.
Schwartzberg from making any solicitation of the BAC Holders without first
complying with the SEC rules pending a hearing on a proposed preliminary
injunction. The court held a hearing on March 5, 1996, on the motion for
preliminary injunction, and, pending a decision, continued the temporary
restraining order.
MANAGEMENT OF THE FUNDS
The Funds have no directors, executive officers or employees of their
own. Set forth below are the names, ages and business experience of the
directors and current executive officers of CRI, the corporate general partner
of the General Partners. The business address of each of the persons listed
below is CRI, Inc., The CRI Building, 11200 Rockville Pike, Rockville,
Maryland 20852.
William B. Dockser, 59, Chairman of the Board and Treasurer 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
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partnerships created to invest in low and moderate income multifamily
apartment complexes. For a period of 2-1/2 years prior to joining Kaufman and
Broad, he served in various positions at HUD, culminating in the post of
Deputy FHA Commissioner and Deputy Assistant Secretary for Housing Production
and Mortgage Credit, where he was responsible for all federally insured
housing production programs. Before coming to Washington, Mr. Dockser was a
practicing attorney in Boston and also was a special Assistant Attorney
General for the Commonwealth of Massachusetts. He holds a Bachelor of Laws
degree from Yale University Law School and a Bachelor of Arts degree, cum
laude, from Harvard University. He is also Chairman of the Board of CRIIMI MAE
Inc., CRIIMI, Inc., and CRI Liquidating REIT, Inc.
H. William Willoughby, 49, President, Secretary and a Director of CRI since
January 1990 and Senior Executive Vice President, Secretary and a Director of
CRI from 1974 to 1989. He is principally responsible for the financial
management of CRI and its associated partnerships. Prior to joining CRI in
1974, he was Vice President of Shelter Corporation of America and a number of
its subsidiaries dealing principally with real estate development and equity
financing. Before joining Shelter Corporation, he was a Senior Tax Accountant
with Arthur Andersen & Co. He holds a Juris Doctorate degree, a Master of
Business Administration degree and a Bachelor of Science degree in Business
Administration from the University of South Dakota. He is also a Director and
executive officer of CRIIMI MAE Inc., CRIIMI, Inc. and CRI Liquidating REIT,
Inc.
Richard J. Palmer, 44, Senior Vice President-Chief Financial Officer. Prior
to joining CRI in 1983 as Director of Tax Policy, he was a Tax Manager at
Grant Thornton (formerly Alexander Grant & Company). He also served in the
Tax and Audit Departments of Peat, Marwick, Main and Company (formerly Peat,
Marwick, Mitchell and Company) prior to his seven years at Grant Thornton. He
holds a Bachelor of Business Administration degree from the Florida Atlantic
University and is also a Certified Public Accountant.
Ronald W. Thompson, 49, Group Executive Vice President-Hotel Asset Management.
Prior to joining CRI in 1985, he was employed at the Hyatt Organization where
he most recently served as the General Manager of the Hyatt Regency in Flint,
Michigan. During his nine year tenure with Hyatt, he held senior management
positions with the Hyatt Regency in Dearborn, Michigan, the Hyatt in Richmond,
Virginia, the Hyatt in Winston-Salem, North Carolina and the Hyatt Regency in
Atlanta, Georgia. Before joining Hyatt, Mr. Thompson worked in London,
England for the English Tourist Board as well as holding management positions
in Europe, Australia, and New Zealand in the hotel industry. Mr. Thompson
received his education in England where he received a business degree in Hotel
Administration from Winston College.
Susan R. Campbell, 37, Senior Vice President-CRI Realty Services. Prior to
joining CRI in March 1985, she was a budget analyst for the B.F. Saul Advisory
Company. She holds a Bachelor of Science degree in business from the
University of Maryland.
Melissa Cecil Lackey, 40, Senior Vice President and General Counsel. Prior to
joining CRI in 1990, she was associated with the firms of Zuckerman, Spaeder,
Goldstein, Taylor & Kolker in Washington, D.C. and Hirsch & Westheimer in
Houston, Texas. She holds a Juris Doctorate
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from the University of Virginia School of Law and a Bachelor of Arts degree
from the College of William & Mary.
THE MERGER PARTNERSHIPS
The Merger Partnerships have been created solely for the purpose of
effecting the Mergers. CAPREIT, the general partner of the Merger
Partnerships, is based in Rockville, Maryland and is a self-managed, self-
administered private real estate investment trust. It presently owns 30
multi-family complexes located in 10 states. In addition to managing the
7,512 apartments that it owns, CAPREIT manages another 9,073 apartments
(including some of the apartments owned by the Owner Partnerships) for third-
party owners. CAPREIT has a total capitalization in excess of $331 million.
AP CAPREIT holds 99.83% of the outstanding capital stock of CAPREIT. CAPREIT
Limited Partnership, a Maryland limited partnership, is the initial limited
partner of each of the Merger Partnerships.
The Merger Partnerships are Delaware limited partnerships with executive
offices at 11200 Rockville Pike, Rockville, Maryland 20852.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CAPREIT was initially formed by CRI, an affiliate of the General
Partners, for the purpose of acquiring, owning and managing a portfolio of
multi-family real estate properties. In order to obtain some of the funds
necessary to acquire such properties, CAPREIT issued all its outstanding
shares to AP CAPREIT Partners, L.P. ("AP CAPREIT"), an affiliate of Apollo
Real Estate Investment Fund, L.P., on January 31, 1994. In connection with
such share issuance and CAPREIT's acquisition of 20 properties, CRI and
certain other affiliates of the General Partners (the "CRI Affiliates")
contributed property and asset management contracts relating to approximately
50 multi-family rental properties and other assets relating to its property
management business (including the property management contracts for a
majority of the properties securing the Mortgage Revenue Bonds) to CAPREIT
Residential Corporation ("CAPREIT Residential"), an affiliate of CAPREIT, for
$6,053,000 in installment notes, which installment notes CRI and the CRI
Affiliates contributed to AP CAPREIT in exchange for contingent limited
partner residual profits interests of up to 22% in AP CAPREIT, assuming
certain events occurred and hurdle rates were met. The CRI Affiliates had the
right and the obligation under certain circumstances to reacquire the property
management business at any time prior to June 30, 1995, at no cost to them.
As of June 30, 1995, neither CRI nor the CRI Affiliates had not received any
distributions on account of their interests in AP CAPREIT.
On June 30, 1995, in connection with the cancellation of the right to
reacquire the property management business, AP CAPREIT redeemed the limited
partner interests of CRI and the CRI Affiliates in AP CAPREIT for an aggregate
of $4,750,000. Because the respective owner of each property covered by the
property management contracts retains the right to terminate the contract and
change the property management agent at any time, CRI and the CRI Affiliates
agreed to pay CAPREIT Residential up to a maximum aggregate amount of
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$3,900,000 if certain property management contracts relating to the multi-
family rental properties, including property management contracts for a
majority of the properties which secure the Mortgage Revenue Bonds, are
terminated under specified conditions at any time prior to June 30, 2005 (a
"Termination Refund").
If the Mergers are consummated, the parties have agreed that no
Termination Refunds shall be due with respect to the 13 properties securing
the Mortgage Revenue Bonds which are managed by CAPREIT Residential. The
maximum amount of Termination Refunds currently allocable to management
contracts for the 13 properties which secure the Funds' Mortgage Revenue Bonds
is $1,313,864, which amount decreases to $1,149,631 as of June 30, 1996.
MANAGEMENT OF THE MERGER PARTNERSHIPS
The Merger Partnerships have no directors, executive officers or
employees of their own. Set forth below are the names, ages and business
experience of the directors and senior executive officers of CAPREIT, the
general partner of the Merger Partnerships.
Richard L. Kadish, 52, President, Chief Executive Officer and a Director of
CAPREIT. Mr. Kadish oversees and directs all business affairs of CAPREIT.
Prior to joining CAPREIT in January, 1994, Mr. Kadish was Group Executive Vice
President-Multifamily Acquisitions for CRI. See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS." Prior to 1978, he served as a Deputy Attorney General
of the State of New Jersey, where he was counsel to the Division of Local
Finance and Housing and Urban Renewal. He then served as counsel to the New
Jersey Housing Finance Agency (now New Jersey Housing and Mortgage Finance
Agency) and later was appointed as the Deputy Executive Director of the New
Jersey Housing Finance Agency. Mr. Kadish is a member of the American Bar
Association and the New Jersey Bar Association and is a director of both the
National Housing & Rehabilitation Association and the National Multi Housing
Council. He holds Juris Doctorate and Master of Arts degrees from Rutgers
University and a Bachelor of Arts degree from the University of Pennsylvania.
Mr. Kadish's business address is Capital Apartment Properties, Inc., 11200
Rockville Pike, Rockville, Maryland 20852.
Bruce A. Esposito, 41, Chief Financial Officer and a Senior Vice President of
CAPREIT. As CFO, Mr. Esposito is principally responsible for the
administration of all financial affairs of CAPREIT. Prior to joining CAPREIT
in April, 1994, Mr. Esposito was a Senior Engagement Manager with Coopers &
Lybrand, dealing principally with clients in the real estate industry with
concentrations in real estate investment trusts, SEC reporting matters and
initial public offerings. Mr. Esposito holds a Master of Business
Administration degree and Bachelor of Science degree from the University of
Maryland and is a Certified Public Accountant. Mr. Esposito's business
address is Capital Apartment Properties, Inc., 11200 Rockville Pike,
Rockville, Maryland 20852.
Jeffrey A. Goldshine, 43, Director of Management Operations and a Senior Vice
President of CAPREIT. Mr. Goldshine is principally responsible for directing
the property management
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affairs of CAPREIT. Prior to joining CAPREIT in January, 1994, Mr. Goldshine
was President and Chief Operating Officer of Artery Property Management, Inc.,
where he was responsible for all operations of a portfolio of 30 properties of
12, 000 apartments. Prior to joining Artery in 1984, Mr. Goldshine held
supervisory positions in property management with Kay Management Company,
Inc., Charles E. Smith Management, Inc. and Arlen Realty, Inc. Mr. Goldshine
is a Certified Property Manager (CPM) affiliated with the Institute of Real
Estate Management (IREM). Mr. Goldshine holds a Bachelor of Arts degree from
George Washington University. Mr. Goldshine's business address is Capital
Apartment Properties, Inc., 11200 Rockville Pike, Rockville, Maryland 20852.
Ernest L. Heymann, 34, Director of Acquisitions and Strategic Planning and
Senior Vice President of CAPREIT. Mr. Heymann is the chief financial
underwriter for all acquisitions and developments of CAPREIT. Prior to
joining CAPREIT in January, 1994, Mr. Heymann was Vice President-Multifamily
Acquisitions of CRI. where he was responsible for the financial underwriting
of multifamily properties. Prior to 1987, Mr. Heymann served as a project
finance officer with Oxford Mortgage and Investment Corporation where he
assisted in the structuring and placement of equity and debt for multifamily
properties. He holds a Master of Business Administration (Finance) degree
from George Washington University and a Bachelor of Science degree in finance
from Gannon University. Mr. Heymann's business address is Capital Apartment
Properties, Inc., 11200 Rockville Pike, Rockville, Maryland 20852.
Michael D. Weiner, 43, Director of CAPREIT. Mr. Weiner became a Director of
CAPREIT in January, 1994. Mr. Weiner has been an officer since 1992 of the
general partner of Apollo Advisors, L.P., which, together with its affiliates,
serves as the managing general partner of Apollo Investment Fund, L.P., AIF
II, L.P. and Apollo Investment Fund III, L.P., private securities investment
funds, and since 1993 an officer of the general partner of Apollo Real Estate
Advisors, L.P. ("Apollo") which serves as the managing general partner of
Apollo Real Estate Investment Fund L.P., a private real estate investment
fund. Prior to 1992, Mr. Weiner was a partner of the national law firm of
Morgan, Lewis & Bockius. Mr. Weiner is also a director of Applause, Inc.,
Continental Graphics Holdings, Inc., The Florsheim Shoe Company, Inc. and
Furniture Brands International, Inc. Mr. Weiner's business address is Apollo
Advisors, L.P., 1999 Avenue of the Stars, Suite 1900, Los Angeles, California
90057.
W. Edward Scheetz, 30, a Director of CAPREIT. Mr. Scheetz became a Director
of CAPREIT in January, 1994. Mr. Scheetz has been a principal of Apollo Real
Estate Advisors, L.P. since May 1993 directing AREIF's investment program
since that time. Prior to joining Apollo Real Estate Advisors, L.P., Mr.
Scheetz was a principal of Trammel Crow Ventures, a national real estate
investment firm. Mr. Scheetz is also a director of Crocker Realty Trust, Inc.
and Roland International. Mr. Scheetz's business address is Apollo Real
Estate Advisors, L.P., 1301 Avenue of the Americas, 38th Floor, New York, New
York 10019.
Ronald Kravit, 38, a Director of CAPREIT. Mr. Kravit became a Director of
CAPREIT in January, 1995. Mr. Kravit joined Apollo in 1994. Immediately
prior to joining Apollo, Mr. Kravit was a Senior Vice President of G. Soros
Realty Advisors/Reichmann International, managers of the Quantum Realty Fund.
From 1991 to 1993, Mr. Kravit was with Maxxam
-95-
<PAGE>
Property Company, and from 1984 to 1991, he was a Vice President with Miller-
Klutznick-Davis-Gray Co. and Miller/Davis Co., real estate investment,
development and management firms affiliated with investors Marvin Davis and
Myron Miller. Mr. Kravit graduated Cum Laude from Georgetown University with a
B.S. in Business Administration and from the University of Pennsylvania's
Wharton School of Business with an M.B.A. in Finance and Real Estate. Mr.
Kravit is also a director of various subsidiaries of Winthrop Financial Corp.
Mr. Kravit's business address is Apollo Real Estate Advisors, L.P., 1301
Avenue of the Americas, 38th Floor, New York, New York 10019.
Lee S. Neibart, 43, a Director of CAPREIT. Mr. Neibart became a director of
CAPREIT in 1994. Mr. Neibart has been an associate of Apollo since December
1993. Since October 1994, Mr. Neibart has been a Director of Deforest
Capital, Deforest Capital I, NPI and NPI Equity. Prior to 1993, Mr. Neibart
also served as Executive Vice President and Chief Operating Officer of the
Robert Martin Company, a private real estate development and management firm
based in Westchester County, New York. Mr. Neibart is also a director of
Crocker Realty Trust, Inc. and Roland International, Inc. Mr. Neibart's
business address is Apollo Real Estate Advisors, L.P., 1301 Avenue of the
Americas, 38th Floor, New York, New York 10019.
Jay Sugarman, 33, a Director of CAPREIT Mr. Sugarman became a Director of
CAPREIT in January, 1994. Mr. Sugarman is President of Starwood Mezzanine
Investors, L.P. ("Starwood Mezzanine"), a $220 million partnership dedicated
to investing in junior and participating mortgages, subordinated CMBS, and
other real estate related debt. Starwood Mezzanine focuses on creating and
structuring subordinated debt investments which provide superior returns on a
risk-adjusted basis. Prior to forming Starwood Mezzanine, Mr. Sugarman
managed a diversified investment fund on behalf of the Burden family, a branch
of the Vanderbilts, and the Ziff family, former owners of Ziff-Davis
Communications. While in that position, he was responsible for negotiating
and structuring the formation of Starwood Capital Group on behalf of the
Burden and Ziff families and for reviewing all real estate investments for
both families. Earlier in his career, Mr. Sugarman worked in the merger and
acquisition department of the First Boston Corporation and the commodity and
derivatives trading area of Goldman Sachs & Co.. Mr. Sugarman graduated summa
cum laude from Princeton University, where he was nominated for valedictorian
and received the Paul Volcker Award in Economics. He is also a graduate of
the Harvard Business School, receiving Baker Scholar Honors Mr. Sugarman's
business address is Starwood Mezzanine Investors, L.P., Three Pickwick Plaza,
Suite 250, Greenwich, CT 06830.
CERTAIN LEGAL MATTERS
Except as set forth in this Proxy Statement, the General Partners are not
aware of any filings, approvals or other action by any domestic or foreign
governmental agency that would be required prior to the consummation of the
Mergers and the related transactions. As noted above, the making of such
filings, the obtaining of such approvals and the taking of such other action
is a condition to the consummation of the Mergers and the related
transactions.
-96-
<PAGE>
The General Partners do not believe that the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, is applicable to the Mergers and the
related transactions.
ACCOUNTANTS
Representatives of Arthur Andersen, LLP, the independent public
accountants for each of the Funds, will be present at the Special Meetings and
will be available to respond to questions.
AVAILABLE INFORMATION
Fund I-II and Fund III are subject to the informational requirements of
the Exchange Act, and, in accordance therewith, file reports, proxy statements
and other information with the Securities and Exchange Commission (the
"Commission"). The reports, proxy statements and other information filed by
the Funds with the Commission can be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and at the public reference
facilities maintained by the Commission at 7 World Trade Center, Suite 1300,
New York, New York, 10048 and at Northwestern Atrium Center, Suite 1400, 500
West Madison Street, Chicago, Illinois 60661. Copies of such materials can be
obtained at prescribed rates from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The Beneficial
Assignee Certificates in the Funds are listed for trading on the AMEX. Copies
of documents filed by the Funds also should be available for inspection at the
offices of the American Stock Exchange at 86 Trinity Place, New York, New York
10006.
All reports and opinions from outside parties described under "SPECIAL
CONSIDERATIONS", as well as financial statements of the Owner Partnerships,
also will be made available for inspection and copying at the principal
executive offices of the Funds during their regular business hours by any
interested BAC Holder or representative thereof who has been so designated in
writing.
-97-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
Consolidated Balance Sheets as of September 30, 1995 (unaudited) and
December 31, 1994...................................................... F-2
Consolidated Statements of Operations (unaudited) for the three and
nine months ended September 30, 1995 and 1994.......................... F-6
Consolidated Statements of Changes in Partners' Capital (Deficit)
for the nine months ended September 31, 1995 (unaudited)............... F-10
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1995 and 1994 (unaudited).......................... F-11
Notes to Consolidated Financial Statements (unaudited).................. F-15
Report of Independent Public Accountants................................ F-30
Consolidated Balance Sheet as of December 31, 1994 and 1993............. F-31
Consolidated Statements of Income for the years ended December 31,
1994, 1993 and 1992.................................................... F-32
Consolidated Statements of Changes in Partners' Capital (Deficit)
for the years ended December 31, 1994, 1993 and 1992................... F-34
Consolidated Statements of Cash Flows for the years ended December 31,
1994, 1993 and 1992.................................................... F-36
Notes to Consolidated Financial Statements.............................. F-38
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
Consolidated Balance Sheets as of September 30, 1995 (unaudited) and
December 31, 1994...................................................... F-64
Consolidated Statements of Income (unaudited) for the three and
nine months ended September 30, 1995 and 1994.......................... F-66
Consolidated Statements of Changes in Partners' Capital (Deficit)
for the nine months ended September 31, 1995 (unaudited)............... F-68
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1995 and 1994 (unaudited).......................... F-69
Notes to Consolidated Financial Statements (unaudited).................. F-71
Report of Independent Public Accountants................................ F-83
Consolidated Balance Sheet as of December 31, 1994 and 1993............. F-84
Consolidated Statements of Income for the years ended December 31,
1994, 1993 and 1992.................................................... F-85
Consolidated Statements of Changes in Partners' Capital (Deficit)
for the years ended December 31, 1994, 1993 and 1992................... F-86
Consolidated Statements of Cash Flows for the years ended December 31,
1994, 1993 and 1992.................................................... F-87
Notes to Consolidated Financial Statements.............................. F-88
F-1
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
ASSETS
Series I
-------------
As of As of
September 30, December 31,
------------- ------------
1995 1994
----------- -----------
(Unaudited)
Investments in real estate:
Land $ 2,071,822 $ 2,071,822
Buildings and personal property 35,649,844 35,649,844
----------- -----------
37,721,666 37,721,666
Less:
Accumulated depreciation (7,977,029) (6,877,327)
----------- -----------
29,744,637 30,844,339
Mortgage revenue bond 1,600,000 1,600,000
Cash and cash equivalents 36,577 103,864
Restricted cash and cash equivalents 1,660,008 1,251,815
Marketable securities 688,085 1,089,522
Working capital reserves invested
in marketable securities 1,111,767 921,929
Receivables and other assets 298,020 393,469
----------- -----------
Total assets $35,139,094 $36,204,938
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
F-2
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS - Continued
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Series I
-------------
As of As of
September 30, December 31,
------------- ------------
1995 1994
----------- -----------
(Unaudited)
Distributions payable $ 621,881 $ 1,151,631
Accrued mortgage administration and
servicing fees due to related parties 1,225,393 1,093,242
Other liabilities related to real
estate operations 1,004,146 688,704
Deferred revenue 710,118 710,118
Accounts payable and accrued expenses 183,052 77,235
----------- -----------
Total liabilities 3,744,590 3,720,930
----------- -----------
Partners' capital (deficit):
General partner (219,984) (208,980)
Beneficial Assignee Certificates
(BACs) - issued and outstanding
(2,280,000 of Series I BACs) 31,614,488 32,692,988
----------- -----------
Total partners' capital 31,394,504 32,484,008
----------- -----------
Total liabilities and partners'
capital $35,139,094 $36,204,938
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
ASSETS
Series II
-------------
As of As of
September 30, December 31,
------------- ------------
1995 1994
------------ -----------
(Unaudited)
Investment in real estate:
Land $ 4,945,198 $ 4,945,198
Buildings and personal property 51,436,807 51,436,807
------------ -----------
56,382,005 56,382,005
Less:
Accumulated depreciation (10,977,598) (9,481,589)
------------ -----------
45,404,407 46,900,416
Cash and cash equivalents 45,968 101,283
Restricted cash and cash equivalents 2,026,600 1,526,228
Marketable securities 791,750 1,447,843
Working capital reserves invested
in marketable securities 1,992,550 1,646,746
Receivables and other assets 369,674 457,368
------------ -----------
Total assets $ 50,630,949 $52,079,884
============ ===========
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS - Continued
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Series II
-------------
As of As of
September 30, December 31,
------------- ------------
1995 1994
------------- ------------
(Unaudited)
Distributions payable $ 883,387 $ 1,635,903
Accrued mortgage administration and
servicing fees due to related parties 1,847,496 1,670,426
Other liabilities related to real
estate operations 707,486 461,336
Deferred revenue 594,180 594,180
Accounts payable and accrued expenses 203,754 99,475
----------- -----------
Total liabilities 4,236,303 4,461,320
----------- -----------
Partners' capital (deficit):
General partner (283,276) (270,915)
Beneficial Assignee Certificates
(BACs) - issued and outstanding
(3,238,760 of Series II BACs) 46,677,922 47,889,479
----------- -----------
Total partners' capital 46,394,646 47,618,564
----------- -----------
Total liabilities partners'
capital $50,630,949 $52,079,884
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Series I
----------
For the three months ended For the nine months ended
September 30, September 30,
-------------------------- -------------------------
1995 1994 1995 1994
---------- ---------- ----------- -----------
Income from invest-
ments in real
estate:
Rental revenue $1,602,681 $1,490,642 $ 4,637,938 $ 4,333,008
Rental expenses (905,345) (803,189) (2,612,028) (2,416,124)
Depreciation (366,567) (395,154) (1,099,702) (1,185,462)
---------- ---------- ----------- -----------
Net rental
income 330,769 292,299 926,208 731,422
Mortgage revenue
bond interest 32,000 32,000 96,000 96,000
---------- ---------- ----------- -----------
362,769 324,299 1,022,208 827,422
---------- ---------- ----------- -----------
Other income
(expenses):
Interest and
other income 19,927 8,084 53,642 32,736
Merger-related
expenses (143,162) -- (143,162) --
General and
admini-
strative (33,972) (25,291) (127,309) (120,721)
Professional
fees (10,299) (15,275) (29,240) (39,661)
---------- ---------- ----------- -----------
(167,506) (32,482) (246,069) (127,646)
---------- ---------- ----------- -----------
Net income $ 195,263 $ 291,817 $ 776,139 $ 699,776
========== ========== =========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS - Continued
(Unaudited)
Series I
------------
For the three months ended For the nine months ended
September 30, September 30,
-------------------------- -------------------------
1995 1994 1995 1994
------------ ------------ ------------ -----------
Net income allo-
cated to General
Partner (1.01%) $ 1,972 $ 2,948 $ 7,839 $ 7,068
============ ============ ============ ===========
Net income allo-
cated to BAC
Holders
(98.99%) $ 193,291 $ 288,869 $ 768,300 $ 692,708
============ ============ ============ ===========
Net income per
BAC $ 0.09 $ 0.12 $ 0.34 $ 0.30
============ ============ ============ ===========
BACs outstanding 2,280,000 2,280,000 2,280,000 2,280,000
============ ============ ============ ===========
The accompanying notes are an integral part
of these consolidated financial statements.
F-7
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Series II
-----------
For the three months ended For the nine months ended
September 30, September 30,
-------------------------- -------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
Income from invest-
ments in real
estate:
Rental revenue $ 2,244,450 $ 2,076,012 $ 6,462,377 $ 5,970,854
Rental expenses (1,195,397) (1,247,463) (3,301,199) (3,451,935)
Depreciation (498,670) (510,824) (1,496,009) (1,532,471)
----------- ----------- ----------- -----------
Net rental
income 550,383 317,725 1,665,169 986,448
----------- ----------- ----------- -----------
Other income
(expenses):
Interest and
other income 29,780 12,678 95,660 63,365
Merger-related
expenses (143,215) -- (143,215) --
General and
admini-
strative (41,619) (33,324) (152,181) (151,935)
Professional
fees (12,967) (5,930) (39,190) (51,529)
----------- ----------- ----------- -----------
(168,021) (26,576) (238,926) (140,099)
----------- ----------- ----------- -----------
Net income $ 382,362 $ 291,149 $ 1,426,243 $ 846,349
=========== =========== =========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
F-8
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS - Continued
(Unaudited)
Series II
------------
For the three months ended For the nine months ended
September 30, September 30,
-------------------------- -------------------------
1995 1994 1995 1994
------------ ------------ ------------- ----------
Net income allo-
cated to General
Partner (1.01%) $ 3,862 $ 2,941 $ 14,405 $ 8,548
============ ============ ============= ==========
Net income allo-
cated to BAC
Holders
(98.99%) $ 378,500 $ 288,208 $1,411,838 $ 837,801
============ ============ ============= ==========
Net income per
BAC $ 0.12 $ 0.09 $ 0.44 $ 0.26
============ ============ ============= ==========
BACs outstanding 3,238,760 3,238,760 3,238,760 3,238,760
============ ============ ============= ==========
The accompanying notes are an integral part
of these consolidated financial statements.
F-9
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the nine months ended September 30, 1995
(Unaudited)
SERIES I
----------
Beneficial
Assignee
Certificate General
Holders Partner Total
------------ ---------- ------------
Balance, December 31, 1994 $32,692,988 $(208,980) $32,484,008
Net income 768,300 7,839 776,139
Distributions paid or accrued
of $0.81 per BAC (including
return of capital of $0.47
per BAC) (1,846,800) (18,843) (1,865,643)
------------ ---------- ------------
Balance, September 30, 1995 $31,614,488 $(219,984) $31,394,504
============ ========== ============
SERIES II
----------
Beneficial
Assignee
Certificate General
Holders Partner Total
------------ ---------- ------------
Balance, December 31, 1994 $47,889,479 $(270,915) $47,618,564
Net income 1,411,838 14,405 1,426,243
Distributions paid or accrued
of $0.81 per BAC (including
return of capital of $0.37
per BAC) (2,623,395) (26,766) (2,650,161)
------------ ---------- ------------
Balance, September 30, 1995 $46,677,922 $(283,276) $46,394,646
============ ========== ============
The accompanying notes are an integral part
of these consolidated financial statements.
F-10
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Series I
-------------------------
For the nine months ended
September 30,
-------------------------
1995 1994
------------ -----------
Cash flows from operating activities:
Net income $ 776,139 $ 699,776
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 1,099,702 1,185,462
Changes in assets and liabilities:
Increase in restricted cash and
cash equivalents (408,193) (512,823)
Decrease in receivables and other
assets 95,449 32,606
Increase in accrued mortgage admini-
stration and servicing fees due to
related parties 132,151 199,476
Increase (decrease) in accounts payable
and accrued expenses 105,817 (16,612)
Increase in other liabilities related
to real estate operations 315,442 285,775
---------- ----------
Net cash provided by operating
activities 2,116,507 1,873,660
---------- ----------
Cash flows from investing activities:
Net sales of marketable securities 401,437 748,671
Net deposits to working capital
reserves invested in marketable
securities (189,838) (193,603)
---------- ----------
Net cash provided by investing
activities 211,599 555,068
---------- ----------
The accompanying notes are an integral part
of these consolidated financial statements.
F-11
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(Unaudited)
Series I
--------------------------
For the nine months ended
September 30,
--------------------------
1995 1994
------------ ------------
Cash flows from financing activities:
Distributions to BAC Holders
and General Partner (2,395,393) (2,303,263)
----------- -----------
Net (decrease) increase in
cash and cash equivalents (67,287) 125,465
Cash and cash equivalents, beginning
of period 103,864 33,549
----------- -----------
Cash and cash equivalents, end
of period $ 36,577 $ 159,014
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
F-12
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Series II
-------------------------
For the nine months ended
September 30,
-------------------------
1995 1994
-------------- -----------
Cash flows from operating activities:
Net income $1,426,243 $ 846,349
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 1,496,009 1,532,471
Changes in assets and liabilities:
Increase in restricted cash and
cash equivalents (500,372) (462,081)
Decrease in receivables and other
assets 87,694 67,089
Increase in accrued mortgage admini-
stration and servicing fees due to
related parties 177,070 293,473
Increase (decrease) in accounts payable
and accrued expenses 104,279 (20,618)
Increase in other liabilities related
to real estate operations 246,150 369,724
---------- ----------
Net cash provided by operating
activities 3,037,073 2,626,407
---------- ----------
Cash flows from investing activities:
Net sales of marketable securities 656,093 809,878
Net deposits to working capital
reserves invested in marketable
securities (345,804) (277,536)
---------- ----------
Net cash provided by investing
activities 310,289 532,342
---------- ----------
The accompanying notes are an integral part
of these consolidated financial statements.
F-13
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(Unaudited)
Series II
--------------------------
For the nine months ended
September 30,
--------------------------
1995 1994
------------ ------------
Cash flows from financing activities:
Distributions to BAC Holders
and General Partner (3,402,677) (3,271,805)
----------- -----------
Net decrease in cash and cash equivalents (55,315) (113,056)
Cash and cash equivalents, beginning
of period 101,283 202,810
----------- -----------
Cash and cash equivalents, end
of period $ 45,968 $ 89,754
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
F-14
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of CRITEF Associates Limited Partnership (the General
Partner), the accompanying unaudited consolidated financial statements of
Capital Realty Investors Tax Exempt Fund Limited Partnership (the Partnership)
contain all adjustments of a normal recurring nature necessary to present fairly
the Partnership's consolidated financial position as of September 30, 1995 and
December 31, 1994, and the results of its consolidated operations for the three
and nine months ended September 30, 1995 and 1994 and its consolidated cash
flows for the nine months ended September 30, 1995 and 1994.
These unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. While the General Partner believes
that the disclosures presented are adequate to make the information not
misleading, it is suggested that these consolidated financial statements be read
in conjunction with the consolidated financial statements and the notes included
in the Partnership's Annual Report filed on Form 10-K for the year ended
December 31, 1994.
The Partnership's consolidated balance sheets reflect the financial
position of the properties for the dates presented. The Partnership's
consolidated statements of income include the rental income, rental expenses and
depreciation of nine of its ten properties, exclusive of debt service due to the
Partnership, as a result of the receipt of deeds in lieu of foreclosure. The
underlying real estate for Observatory II (formerly known as Greenhaven) in
Series I is not included in this consolidation because the investment is
accounted for as a loan for financial statement purposes.
Certain amounts in the 1994 financial statements have been
reclassified to conform to 1995 presentation.
2. MERGER PROPOSAL
On September 11, 1995, the Partnership and its General Partner entered
into a merger agreement, subject to BAC Holder approval, with an affiliate of
Capital Apartment Properties, Inc. (CAPREIT), a private real estate investment
trust. An affiliate of CAPREIT is the property manager for four of the five
properties securing the bonds held by Series I, and all five properties securing
the bonds in Series II. If the merger proposal is approved by a majority vote
of BAC Holders, all of the BACs in both Series I and Series II will be redeemed
for cash and the interests represented by such BACs will be canceled. The
redemption price per BAC will be $13.761 and $13.313 for Series I and Series II,
respectively. In addition, the General Partner will sell its 1.01% general
partnership interest in the Partnership to CAPREIT for $500,000. CAPREIT will
also acquire an account receivable held by an affiliate and a former affiliate
of the General Partner for the accrued mortgage servicing and
F-15
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. MERGER PROPOSAL - Continued
administration fees on the related property mortgage loans of both Series I and
Series II by paying the discounted amount of $2,929,035.
Consummation of the merger is contingent upon the approval of a
majority of combined Series I and Series II BAC Holders, voting together as one
class. The proposed merger is also contingent upon receiving a favorable
opinion regarding the fairness of the redemption price to BAC Holders from a
financial point of view. A proxy statement is expected to be issued to BAC
Holders after it is filed with and reviewed by the Securities and Exchange
Commission. This proxy statement will include a full description of the
proposed merger and the independent fairness opinion.
3. INVESTMENTS
SERIES I
--------
Series I invested in five federally tax-exempt mortgage revenue bonds
with a current aggregate principal amount of $44,155,000. As discussed in the
Partnership's Annual Report filed on Form 10-K for the year ended December 31,
1994, all five properties collateralizing the bonds have been transferred by
foreclosure or deed in lieu of foreclosure to nominees of the Partnership
(Observatory II was subsequently sold to an unaffiliated third party and the
related bond modified). As a result, the Partnership accounts for four of the
five investments as real estate for financial statement purposes. Accordingly,
the consolidated balance sheets reflect the investments in real estate in the
amounts of $29,744,637 and $30,844,339 as of September 30, 1995 and December 31,
1994, respectively, net of accumulated depreciation, based on the lower of cost
or fair value at the date of deed transfer or in-substance foreclosure (ISF).
The Partnership continues to evaluate these investments on a lower of cost or
net realizable basis, taking into consideration the Partnership's intention to
hold these properties for the long term if necessary, and with investor consent,
in order to recover its recorded investment. The financial statement
presentation is independent of the characterization of the bonds as loans for
federal income tax purposes and the tax-exempt nature of the mortgage revenue
bond interest. Additionally, the Partnership accounts for the investment in the
Observatory II mortgage revenue bond as a loan with a carrying value of
$1,600,000 as of both September 30, 1995 and December 31, 1994.
As of September 30, 1995, Series I had cash and cash equivalents of
$36,577, unrestricted marketable securities of $688,085, restricted cash and
cash equivalents of $1,660,008, and working capital reserves invested in
marketable securities of $1,111,767. Marketable securities consist of tax-
exempt municipal bonds which generally contain a seven-day put option with
established banks or brokerage houses, and are stated at cost, which generally
represents par value and approximates market value. The Partnership has
classified these investments as Available for Sale in accordance with SFAS 115.
Realized gains and losses on the sale of marketable securities were determined
on a specific identification basis.
F-16
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENTS - Continued
There were no net unrealized holding gains or losses recognized during the three
and nine months ended September 30, 1995 as there was no material difference
between the cost for the tax-exempt municipal bonds and fair value throughout
the first three quarters of 1995.
No significant events have occurred during the nine months ended
September 30, 1995 in connection with the Series I properties.
SERIES II
---------
Series II invested in five federally tax-exempt mortgage revenue bonds
with an aggregate principal amount of $62,608,001. As discussed in the
Partnership's Annual Report filed on Form 10-K for the year ended December 31,
1994, all five properties collateralizing the bonds have been transferred by
deed in lieu of foreclosure to nominees of the Partnership. As a result, the
Partnership accounts for these investments as real estate for financial
statement purposes. Accordingly, the consolidated balance sheets reflect the
investments in real estate in the amounts of $45,404,407 and $46,900,416 as of
September 30, 1995 and December 31, 1994, respectively, net of accumulated
depreciation, based on the lower of cost or fair value at the date of deed
transfer or ISF. The Partnership continues to evaluate these investments on a
lower of cost or net realizable basis, taking into consideration the
Partnership's intention to hold these properties for the long term if necessary,
and with investor consent, in order to recover its recorded investment. The
financial statement presentation is independent of the characterization of the
bonds as loans for federal income tax purposes and the tax-exempt nature of the
mortgage revenue bond interest.
As of September 30, 1995, Series II had cash and cash equivalents of
$45,968, unrestricted marketable securities of $791,750, restricted cash and
cash equivalents of $2,026,600, and working capital reserves invested in
marketable securities of $1,992,550. Marketable securities consist of tax-
exempt municipal bonds which generally contain a seven-day put option with
established banks or brokerage houses, and are stated at cost, which generally
represents par value and approximates market value. The Partnership has
classified these investments as Available for Sale in accordance with SFAS 115.
Realized gains and losses on the sale of marketable securities were determined
on a specific identification basis. There were no net unrealized holding gains
or losses recognized during the three and nine months ended September 30, 1995
as there was no material difference between the cost for the tax-exempt
municipal bonds and fair value throughout the first three quarters of 1995.
The following is an update of significant events affecting the Series
II properties during the nine months ended September 30, 1995:
F-17
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENTS - Continued
Ethan's Ridge and Ethan's Glen IIB
- - - - ----------------------------------
In April 1995, Ethan's Ridge and Ethan's Glen IIB suffered damage to
certain roofs due to a severe hail storm. The cost to repair the damaged roofs
was paid by the properties' insurance carrier, less a minimal deductible.
SERIES I and II
---------------
In 1991, the U. S. Supreme Court decided a case, Cottage Savings
Association v. Commissioner (Cottage Savings), that could be interpreted to
compromise the tax-exempt status of mortgage revenue bonds which have been
modified. In response to this decision, in December 1992, the Internal Revenue
Service (IRS) issued proposed regulations in connection with the modification of
debt instruments. If the regulations are adopted in their present form, they
would alter existing authority and curtail the type and extent of modifications
that could be made by a bond owner/lender without adversely affecting the tax-
exempt status of bonds. It is not clear at this time what effect the Cottage
Savings decision or the proposed regulations may have on the Partnership with
respect to the bonds secured by loans on properties currently held by nominees.
The General Partner continues to believe that these bonds remain tax-exempt.
The General Partner will continue its efforts to protect the tax-exempt status
of the bonds and the interest thereon. However, in light of the Cottage Savings
decision and the proposed regulations, there can be no assurance that the
General Partner will be successful in its efforts.
4. DISTRIBUTIONS TO BAC HOLDERS
The Partnership expects to continue to make distributions to BAC
Holders on a semi-annual basis. The merger agreement stipulates that current
year distributions cannot exceed nine cents per BAC per month for Series I and
nine cents per BAC per month for Series II. The agreement also stipulates that
distributions during 1996 cannot exceed 95% of Cash Flow as defined in the
Partnership Agreement. There are no other legal restrictions on the
Partnership's present or future ability to make cash distributions. However,
property level reserves are depleted and estimated cash flow from the
properties' operations are insufficient to pay full monthly base interest
(except for Observatory II in Series I), therefore, the distributions to BAC
Holders may fluctuate from current levels. The Partnership seeks to optimize
cash flow from the properties owned by nominees. Despite these efforts, the
amounts paid to the Partnership from the properties' operations may be expected
to fluctuate from period to period due to changes in occupancy rates, rental
rates, operating expenses and other variables. Based upon the current
operations of the Partnership, the General Partner expects the 1995 distribution
for both Series I and Series II to approximate $1.08 per BAC.
F-18
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SERIES I
--------
4. DISTRIBUTIONS TO BAC HOLDERS - Continued
SERIES I
--------
The following distributions were paid or accrued to BAC Holders of
record during the nine months ended September 30, 1995 and 1994:
1995 1994
Distributions to Distributions to
BAC Holders BAC Holders
-------------------- --------------------
Quarter Ended Total Per BAC Total Per BAC
- - - - ------------- ---------- ------- ---------- -------
March 31, $ 615,600 $0.27 $ 570,000 $0.25
June 30, 615,600 0.27 570,000 0.25
September 30, 615,600 0.27 570,000 0.25
---------- ----- ---------- -----
Total $1,846,800 $0.81 $1,710,000 $0.75
========== ===== ========== =====
Distributions to BAC Holders for the three and nine months ended
September 30, 1995 and 1994 were funded as follows:
For the three months ended
September 30,
--------------------------
1995 1994
---------- --------
Cash Available for Distribution:
Cash flow (1) $ 687,175 $611,246
Net deposits to working capital reserves (65,294) (35,430)
---------- --------
Total cash available for distribution $ 621,881 $575,816
========== ========
Distributions to:
General partner (1.01%) $ 6,281 $ 5,816
========== ========
BAC Holders (98.99%) $ 615,600 $570,000
========== ========
F-19
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the nine months ended
September 30,
-------------------------
1995 1994
---------- ----------
Cash Available for Distribution:
Cash flow (1) $2,055,481 $1,921,050
Net deposits to working capital reserves (189,838) (193,603)
---------- ----------
Total cash available for distribution $1,865,643 $1,727,447
========== ==========
Distributions to:
General partner (1.01%) $ 18,843 $ 17,447
========== ==========
BAC Holders (98.99%) $1,846,800 $1,710,000
========== ==========
(1) As defined in the Partnership Agreement.
The General Partner expects the distribution for the six months ending
December 31, 1995 to total approximately $0.54 per BAC, payable on February 29,
1996, or possibly earlier depending on the merger closing date, payable to
Series I BAC Holders of record as of the last day in each month during this
period.
SERIES II
---------
The following distributions were paid or accrued to BAC Holders of
record during the nine months ended September 30, 1995 and 1994:
1995 1994
Distributions to Distributions to
BAC Holders BAC Holders
-------------------- -------------------
Quarter Ended Total Per BAC Total Per BAC
- - - - ------------- ---------- ------- ---------- -------
March 31, $ 874,465 $0.27 $ 809,690 $0.25
June 30, 874,465 0.27 809,690 0.25
September 30, 874,465 0.27 809,690 0.25
---------- ----- ---------- -----
Total $2,623,395 $0.81 $2,429,070 $0.75
========== ===== ========== =====
F-20
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. DISTRIBUTIONS TO BAC HOLDERS - Continued
Distributions to BAC Holders for the three and nine months ended
September 30, 1995 and 1994 were funded as follows:
For the three months ended
September 30,
--------------------------
1995 1994
----------- -------------
Cash Available for Distribution:
Cash flow (1) $ 930,135 $1,003,964
Net deposits to working capital reserves (46,748) (186,014)
----------- -----------
Total cash available for distribution $ 883,387 $ 817,950
=========== ===========
Distributions to:
General partner (1.01%) $ 8,922 $ 8,260
=========== ===========
BAC Holders (98.99%) $ 874,465 $ 809,690
=========== ===========
For the nine months ended
September 30,
-------------------------
1995 1994
----------- ------------
Cash Available for Distribution:
Cash flow (1) $2,995,965 $2,731,389
Net deposits to working capital reserves (345,804) (277,536)
----------- -----------
Total cash available for distribution $2,650,161 $2,453,853
=========== ===========
Distributions to:
General partner (1.01%) $ 26,766 $ 24,783
=========== ===========
BAC Holders (98.99%) $2,623,395 $2,429,070
=========== ===========
(1) As defined in the Partnership Agreement.
The General Partner expects the distribution for the six months ending
December 31, 1995 to total approximately $0.54 per BAC, payable on February 29,
1996, or possibly earlier depending on the merger closing date, payable to
Series II BAC Holders of record as of the last day in each month during this
period.
F-21
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. INCOME TAXES
For income tax purposes, base interest income is accrued when earned.
The accrual of interest is discontinued when, at the time of accrual, ultimate
collectibility of the interest due is considered unlikely. Once a loan has been
placed on a non-accrual status, income is recorded only as cash payments are
received from the borrower until such time as the uncertainty of collection of
unpaid base interest is eliminated. As of December 31, 1993, all loans except
Observatory II were placed on a non-accrual status for income tax purposes;
therefore, income is recognized to the extent of cash received. Contingent
interest from the investment is recognized as revenue when collected. No
contingent interest was recognized for the nine months ended September 30, 1995
and 1994.
A publicly traded partnership is treated as a corporation for income tax
purposes unless it meets certain exceptions. To qualify under these exceptions,
the General Partner annually invests in de minimus taxable investments for both
Series I and Series II.
SERIES I
--------
As discussed in Note 3, four of the five investments in Series I
mortgage revenue bonds are accounted for as investments in real estate for
financial statement purposes as of September 30, 1995. However, for federal
income tax purposes, the investments in all of the mortgage revenue bonds are
treated as loans, interest on which is exempt from federal income tax. A
reconciliation of the primary differences between the financial statement net
income and municipal income for tax purposes is as follows:
F-22
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. INCOME TAXES - Continued
For the three months For the nine months
ended September 30, ended September 30,
---------------------- --------------------------
1995 1994 1995 1994
---------- ---------- ------------ ------------
Financial statement
net income $ 195,263 $ 291,817 $ 776,139 $ 699,776
Municipal interest
income not
recognized (1) 822,683 611,541 2,205,550 1,952,697
Rental income,
net (2) (330,769) (292,299) (926,208) (731,422)
--------- --------- ---------- ----------
Municipal income,
net for tax
purposes $ 687,177 $ 611,059 $2,055,481 $1,921,051
========= ========= ========== ==========
Municipal income
per BAC out-
standing $ 0.30 $ 0.27 $ 0.89 $ 0.83
========= ========= ========== ==========
(1) Represents the adjustment for interest income received or receivable during
the period, which was previously eliminated from net income for financial
statement purposes.
(2) Represents net rental income from investments accounted for as real estate.
Although the Partnership accounted for four of the five mortgage loan
investments as real estate for financial statement purposes during the nine
months ended September 30, 1995 and 1994 and reclassified the cash flow from the
properties as rental income and expense, the Partnership continued to charge the
borrowers interest under the terms of the original loans and interest on unpaid
base interest. The Observatory II mortgage revenue bond investment is not shown
in the table below since it pays all debt service currently. The following
tables summarize the full interest payments for the nine months ended September
30, 1995 and 1994 that are due to the Partnership from the properties:
F-23
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. INCOME TAXES - Continued
<TABLE>
<CAPTION>
For the nine months ended September 30, 1995
--------------------------------------------------------------
Base Base
Interest Interest Current
Current Base Paid From Paid From Base
Interest Properties' Non-Operating Interest
Due(1) Operations Sources(2) Not Paid
----------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
Royal Oaks $ 801,972 $ 602,387 $ -- $ 199,585
Trailway Pond 345,366 182,636 -- 162,730
Valley Creek 994,764 677,430 -- 317,334
White Bear Woods 983,194 688,514 -- 294,680
---------- ---------- ------------- ----------
$3,125,296 $2,150,967 $ -- $ 974,329
========== ========== ============= ==========
<CAPTION>
For the nine months ended September 30, 1994
---------------------------------------------------------------
Base Base
Interest Interest Current
Current Base Paid From Paid From Base
Interest Properties' Non-Operating Interest
Due(1) Operations Sources(2) Not Paid
------------ ----------- ------------- ----------
<S> <C> <C> <C> <C>
Royal Oaks $ 801,972 $ 541,320 $ -- $ 260,652
Trailway Pond 345,366 173,983 -- 171,383
Valley Creek 994,764 564,212 -- 430,552
White Bear Woods 983,194 629,129 -- 354,065
---------- ---------- ------------- ----------
$3,125,296 $1,908,644 $ -- $1,216,652
========== ========== ============= ==========
</TABLE>
(1) Although these loans were placed on non-accrual status for income tax
purposes, the Partnership also charges the borrowers interest on unpaid
base interest, which totalled $569,902 and $420,125 for the nine months
ended September 30, 1995 and 1994, respectively.
(2) Amounts were funded from reserves provided for from the mortgage loan
proceeds.
F-24
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. INCOME TAXES - Continued
SERIES II
---------
As discussed in Note 3, the five investments in Series II mortgage
revenue bonds are accounted for as investments in real estate for financial
statement purposes as of September 30, 1995. However, for federal income tax
purposes, the investments in these mortgage revenue bonds are treated as loans,
interest on which is exempt from federal income tax. A reconciliation of the
primary differences between the financial statement net income and municipal
income for tax purposes is as follows:
For the three months For the nine months
ended September 30, ended September 30,
------------------------ ------------------------
1995 1994 1995 1994
---------- ---------- ----------- ----------
Financial statement
net income $ 382,362 $ 291,149 $ 1,426,243 $ 846,349
Municipal interest
income not
recognized (1) 1,098,156 1,030,541 3,234,890 2,871,487
Rental income,
net (2) (550,383) (317,725) (1,665,169) (986,448)
---------- ---------- ----------- ----------
Municipal income,
net for tax
purposes $ 930,135 $1,003,965 $ 2,995,964 $2,731,388
========== ========== =========== ==========
Municipal income
per BAC out-
standing $ 0.29 $ 0.31 $ 0.92 $ 0.83
========== ========== =========== ==========
(1) Represents the adjustment for interest income received or receivable during
the period, which was previously eliminated from net income for financial
statement purposes.
(2) Represents net rental income from investments accounted for as real estate.
Although the Partnership accounted for all of the mortgage loan
investments as real estate for financial statement purposes during the nine
month ended September 30, 1995 and 1994 and reclassified the cash flow from the
properties as rental income and expense, the Partnership continued to charge the
borrowers interest under the terms of the original loans and interest on unpaid
base interest. The following tables summarize the full interest payments for
the nine months ended
F-25
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. INCOME TAXES - Continued
September 30, 1995 and 1994 that are due to the Partnership from the properties:
<TABLE>
<CAPTION>
For the nine months ended September 30, 1995
----------------------------------------------------------
Base Base
Interest Interest Current
Current Base Paid From Paid From Base
Interest Properties' Non-Operating Interest
Due(1) Operations Sources(2) Not Paid
------------ ----------- -------------- ----------
<S> <C> <C> <C> <C>
Ethan's Ridge and
Ethan's Glen IIB $1,139,062 $ 871,763 $ -- $ 267,299
Fountain Place 1,489,125 1,090,395 -- 398,730
James Street
Crossing 1,001,818 794,261 -- 207,557
Trailway Pond II 752,250 412,189 -- 340,061
---------- ---------- --------- ----------
$4,382,255 $3,168,608 $ -- $1,213,647
========== ========== ========= ==========
<CAPTION>
For the nine months ended September 30, 1994
-----------------------------------------------------------
Base Base
Interest Interest Current
Current Base Paid From Paid From Base
Interest Properties' Non-Operating Interest
Due(1) Operations Sources(2) Not Paid
------------ ----------- ------------- ----------
<S> <C> <C> <C> <C>
Ethan's Ridge and
Ethan's Glen IIB $1,139,062 $ 855,849 $27,500 $ 255,713
Fountain Place 1,489,125 906,407 -- 582,718
James Street
Crossing 1,001,818 671,759 -- 330,059
Trailway Pond II 752,250 311,626 -- 440,624
---------- ---------- ------- ----------
$4,382,255 $2,745,641 $27,500 $1,609,114
========== ========== ======= ==========
</TABLE>
(1) Although certain loans were placed on non-accrual status for income tax
purposes, the Partnership also charges the borrowers interest on unpaid
base interest, which totalled $874,077 and $674,154 for the nine months
ended September 30, 1995 and 1994, respectively.
(2) Amounts were funded from reserves provided for from the mortgage loan
proceeds and/or from partners of the borrowers.
F-26
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. LITIGATION
On September 22, 1995, a purported class-action lawsuit (styled Zakin v.
Dockser, et. al.) was filed by Irving Zakin (the Plaintiff), a BAC Holder of the
Partnership against the Partnership, its general partner (CRITEF Associates
Limited Partnership), its Assignor Limited Partner (CRITEF, Inc.), C.R.I., Inc.,
William B. Dockser, H. William Willoughby, Capital Realty Investors Tax Exempt
Fund III Limited Partnership, CRITEF III Associates Limited Partnership, CRITEF
III, Inc., and CAPREIT (collectively, the Defendants) in Chancery Court for the
State of Delaware. The lawsuit alleges, among other matters, that certain
Defendants breached their fiduciary duty to the BAC Holders by failing to fully
disclose their intentions regarding the proposed merger. The lawsuit also
alleges that the Defendants' merger negotiations have not been conducted at
arms-length, resulting in self-dealing among certain of the Defendants. The
lawsuit seeks, among other things, to enjoin the proposed merger, to require
arms-length negotiations purportedly to increase the price to be paid to BAC
Holders, to evaluate alternatives to the proposed merger, and to pay Plaintiff's
costs.
On October 5, 1995, a second purported class-action lawsuit (styled
Wingard v. Dockser, et. al.) was filed by David and Johanna Wingard, BAC Holders
of the Partnership, against the same Defendants, in Chancery Court for the State
of Delaware. The second lawsuit makes the same allegations as the first
lawsuit. A request to the court has been made by the Plaintiffs in both
lawsuits to consolidate the two complaints.
The Partnership Agreement provides that the costs incurred in connection
with any litigation in which the Partnership is involved be borne by the
Partnership itself. At this time, there is no estimate as to the timing or
amount, if any, of the outcome of the lawsuits, therefore, the Partnership's
financial statements do not include any adjustment that might result from the
outcome of the lawsuits. The Defendants believe that the lawsuits are without
merit and intend to defend themselves vigorously against the allegations
contained in both lawsuits.
7. RELATED-PARTY TRANSACTIONS
The General Partner and its affiliates are entitled to receive
reimbursements from the Partnership for actual costs and expenses incurred in
connection with the operation of the Partnership.
SERIES I
--------
Expense reimbursements to an affiliate of the General Partner for the
three and nine months ended September 30, 1995 were $21,847 and $76,632,
respectively, and for the three and nine months ended September 30, 1994 were
$26,503 and $88,868, respectively. These expenses are included in general and
administrative expense and merger-related expenses in the consolidated
statements of income.
F-27
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. RELATED-PARTY TRANSACTIONS - Continued
CRICO Mortgage Company, Inc. (CRICO Mortgage), a former affiliate of the
General Partner, was entitled to annual mortgage administration and servicing
fees from the borrowers which were payable from operating revenues each month
after payment of debt service on the mortgage loans. On June 30, 1995, CRICO
Mortgage merged with and into an affiliate of CRIIMI MAE Inc., a publicly traded
real estate investment trust (the REIT). The REIT was originally sponsored by
C.R.I., Inc. (CRI), a general partner of the General Partner, but is not
controlled by CRI, although the CRI stockholders are officers and major
stockholders of the REIT. Pursuant to the REIT merger agreement, the right to
receive the accrued and unpaid mortgage administration and servicing fees as of
the date of the REIT merger was distributed by CRICO Mortgage to its
shareholders and contributed by them to CRI. As of June 30, 1995, the mortgage
administration and servicing are being performed by an affiliate of the REIT and
mortgage administration and servicing fees are paid to that entity. This merger
did not result in any increase in fees or changes in the amount of fees which
are currently payable. Unpaid fees of $1,225,393 and $1,093,242 were due to CRI
as of September 30, 1995 and December 31, 1994, respectively. Unpaid fees of
$67,325 were due to the affiliate of the REIT as of September 30, 1995, and are
included in other liabilities related to real estate operations in the
consolidated balance sheets. The unpaid fees are payable from available cash
flow after payment of all current and delinquent base interest and accrued
interest on delinquent base interest. If available cash flow from the borrower
is insufficient to pay the fee, it is payable on the earlier of prepayment or
maturity of the loan, after debt repayment. Any payments made with respect to
unpaid fees will be applied against the oldest outstanding fees first. During
the six months ended June 30, 1995, the fees paid by the borrowers to CRICO
Mortgage totalled $5,000. During the three months ended September 30, 1995, the
fees paid by the borrowers to CRI totalled $833. During the three months ended
September 30, 1995, the fees paid by the borrowers to the affiliate of the REIT
totalled $2,500. Fees paid by the borrowers to CRICO Mortgage for the three and
nine months ended September 30, 1994 were $2,500 and $7,500, respectively.
In addition, CRICO Management of Minnesota, Inc. (CRICO Minnesota), an
affiliate of the General Partner, provided property management services to White
Bear Woods, Trailway Pond, Royal Oaks and Valley Creek through January 31, 1994.
Management fees of $16,916 were paid or accrued to this affiliate of the General
Partner by the properties for the month ended January 31, 1994. On February 1,
1994, CRICO Minnesota contributed its property management contracts and
personnel to CAPREIT Residential Corporation (Residential). Residential was
formed by CRI but is not owned or controlled by CRI and/or its affiliates.
SERIES II
---------
Expense reimbursements to an affiliate of the General Partner for the
three and nine months ended September 30, 1995, were $27,339 and $89,907,
respectively, and for the three and nine months ended September 30, 1994
F-28
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. RELATED-PARTY TRANSACTIONS - Continued
were $32,645 and $101,010, respectively. These expenses are included in general
and administrative expense and merger-related expenses in the consolidated
statements of income.
CRICO Mortgage, a former affiliate of the General Partner, was entitled
to annual mortgage administration and servicing fees from the borrowers which
were payable from operating revenues each month after payment of debt service on
the mortgage loans. On June 30, 1995, CRICO Mortgage merged with and into an
affiliate of the REIT. The REIT was originally sponsored by CRI, but is not
controlled by CRI, although the CRI stockholders are officers and major
stockholders of the REIT. Pursuant to the REIT merger agreement, the right to
receive the accrued and unpaid mortgage administration and servicing fees as of
the date of the REIT merger was distributed by CRICO Mortgage to its
shareholders and contributed by them to CRI. As of June 30, 1995, the mortgage
administration and servicing are being performed by an affiliate of the REIT and
mortgage administration and servicing fees are paid to that entity. This merger
did not result in any increase in fees or changes in the amount of fees which
are currently payable. Unpaid fees of $1,847,496 and $1,670,426 were due to CRI
as of September 30, 1995 and December 31, 1994, respectively. Unpaid fees of
$97,824 were due to the affiliate of the REIT as of September 30, 1995, and are
included in other liabilities related to real estate operations in the
consolidated balance sheets. The unpaid fees are payable from available cash
flow after payment of all current and delinquent base interest and accrued
interest on delinquent base interest. If available cash flow from the borrower
is insufficient to pay the fee, it is payable on the earlier of prepayment or
maturity of the loan, after debt repayment. Any payments made with respect to
unpaid fees will be applied against the oldest outstanding fees first. During
the three and nine months ended September 30, 1995 and 1994, no fees were paid
by the borrowers.
In addition, CRICO Minnesota provided property management services to
Trailway Pond II, Ethan's Ridge and Ethan's Glen IIB through January 31, 1994.
Additionally, CRICO Management Northwest, Inc. (CRICO Northwest) provided
property management services to James Street Crossing. Management fees of
$15,446 were paid or accrued to these affiliates of the General Partner by the
properties for the month ended January 31, 1994. On February 1, 1994, CRICO
Minnesota and CRICO Northwest contributed their property management contracts
and personnel to Residential. Residential was formed by CRI but is not owned or
controlled by CRI and/or its affiliates.
F-29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Series I and Series II Partners and Beneficial Assignee Certificate
Holders of Capital Realty Investors Tax Exempt Fund Limited Partnership:
We have audited the accompanying consolidated balance sheets of Series I
and Series II of Capital Realty Investors Tax Exempt Fund Limited Partnership
(the Partnership, a Delaware limited partnership) as of December 31, 1994 and
1993, and the related consolidated statements of operations, changes in
partners' capital (deficit) and cash flows for the years ended December 31,
1994, 1993 and 1992. 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 a borrower (James Street Crossing Limited Partnership) which
received the proceeds of the Partnership's investments in mortgage revenue
bonds, which statements reflect assets of 26 percent and revenues of 26 percent
of Series II 1992 consolidated totals. Those statements were audited by another
auditor whose report has been furnished to us and our opinion, insofar as it
relates to the amounts included for this borrower, is based solely on the report
of the other auditor.
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 and the report of the other auditor provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditor,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Series I and Series II of Capital
Realty Investors Tax Exempt Fund Limited Partnership as of December 31, 1994 and
1993, and the results of operations and cash flows of Series I and Series II for
the years ended December 31, 1994, 1993 and 1992, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
March 14, 1995
F-30
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SERIES I SERIES II
--------------------------------- --------------------------
As of December 31, As of December 31,
1994 1993 1994 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Investments in
Real estate:
Land $ 2,071,822 $ 2,071,822 $ 4,945,198 $ 4,945,198
Buildings and personal property 35,649,844 35,649,844 51,436,807 51,436,807
----------- ----------- ----------- -----------
37,721,666 37,721,666 56,382,005 56,382,005
Less: accumulated depreciation (6,877,327) (5,296,712) (9,481,589) (7,438,295)
----------- ----------- ----------- -----------
30,844,339 32,424,954 46,900,416 48,943,710
Mortgage revenue bond 1,600,000 1,600,000 -- --
Cash and cash equivalents 103,864 33,549 101,283 202,810
Restricted cash and cash equivalents 1,251,815 1,018,207 1,526,228 1,488,191
Marketable securities 1,089,522 1,155,619 1,447,843 1,435,861
Working capital reserves invested in
marketable securities 921,929 570,663 1,646,746 1,187,032
Receivables and other assets 393,469 321,703 457,368 380,519
----------- ----------- ----------- -----------
Total assets $36,204,938 $37,124,695 $52,079,884 $53,638,123
=========== =========== =========== ===========
</TABLE>
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Distributions payable $ 1,151,631 $ 1,151,631 $ 1,635,903 $ 1,635,903
Accrued mortgage administration and
servicing fees due to related parties 1,093,242 827,274 1,670,426 1,279,129
Other liabilities related to real
estate operations 688,704 577,883 461,336 508,520
Deferred revenue 710,118 710,118 594,180 594,180
Accounts payable and accrued expenses 77,235 84,157 99,475 105,575
----------- ----------- ----------- -----------
Total liabilities 3,720,930 3,351,063 4,461,320 4,123,307
----------- ----------- ----------- -----------
Partners' capital (deficit):
General Partner (208,980) (195,955) (270,915) (251,763)
Beneficial Assignee Certificates
(BACs) - issued and outstanding,
2,280,000 of Series I BACs and
3,238,760 of Series II BACs 32,692,988 33,969,587 47,889,479 49,766,579
----------- ----------- ----------- -----------
Total partners' capital 32,484,008 33,773,632 47,618,564 49,514,816
----------- ----------- ----------- -----------
Total liabilities and
partners' capital $36,204,938 $37,124,695 $52,079,884 $53,638,123
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-31
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SERIES I
----------------------------------------
For the years ended December 31,
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Income from investments in real estate:
Rental revenues $ 5,987,773 $ 5,612,280 $ 5,564,843
Rental expenses (3,350,585) (3,358,479) (3,272,270)
Depreciation (1,580,615) (1,741,232) (1,966,028)
----------- ----------- -----------
Net rental income 1,056,573 512,569 326,545
Mortgage revenue bond interest 128,000 128,000 157,288
----------- ----------- -----------
1,184,573 640,569 483,833
----------- ----------- -----------
Other income (expenses):
Other interest income 46,713 47,738 62,963
General and administrative (169,257) (185,885) (188,656)
Professional fees (48,390) (34,063) (75,263)
AMEX Listing -- (16,978) --
----------- ----------- -----------
(170,934) (189,188) (200,956)
----------- ----------- -----------
Net income $ 1,013,639 $ 451,381 $ 282,877
=========== =========== ===========
Net income allocated to General
Partner (1.01%) $ 10,238 $ 4,559 $ 2,857
=========== =========== ===========
Net income allocated to BAC
Holders (98.99%) $ 1,003,401 $ 446,822 $ 280,020
=========== =========== ===========
Net income per BAC $ 0.44 $ 0.20 $ 0.12
=========== =========== ===========
BACs outstanding 2,280,000 2,280,000 2,280,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-32
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SERIES II
----------------------------------------
For the years ended December 31,
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Income from investments in real estate:
Rental revenues $ 8,260,714 $ 7,950,088 $ 7,618,182
Rental expenses (4,671,284) (4,291,557) (4,898,317)
Depreciation (2,043,294) (2,146,661) (2,291,540)
----------- ----------- -----------
Net rental income 1,546,136 1,511,870 428,325
----------- ----------- -----------
Other income (expenses):
Other interest income 92,536 73,571 106,213
General and administrative (203,936) (290,178) (164,505)
Professional fees (59,183) (43,402) (69,678)
AMEX listing -- (21,584) --
----------- ----------- -----------
(170,583) (281,593) (127,970)
----------- ----------- -----------
Income before extraordinary item 1,375,553 1,230,277 300,355
Extraordinary item - gain on debt
reduction -- 416,432 --
----------- ----------- -----------
Net income $ 1,375,553 $ 1,646,709 $ 300,355
=========== =========== ===========
Net income allocated to General
Partner (1.01%) $ 13,893 $ 16,632 $ 3,034
=========== =========== ===========
Net income allocated to BAC
Holders (98.99%) $ 1,361,660 $ 1,630,077 $ 297,321
=========== =========== ===========
Per BAC data:
Operating income $ 0.42 $ 0.37 $ 0.09
Extraordinary gain -- .13 --
----------- ----------- -----------
Net income per BAC $ 0.42 $ 0.50 $ 0.09
=========== =========== ===========
BACs outstanding 3,238,760 3,238,760 3,238,760
=========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-33
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
SERIES I
---------------------------------------
Beneficial
Assignee
Certificate General
Holders Partner Total
------------- ---------- ------------
<S> <C> <C> <C>
Balance, December 31, 1991 $38,164,582 $(153,153) $38,011,429
Net income 280,020 2,857 282,877
Distributions of $1.16 per BAC
(including return of capital of $1.04
per BAC) (2,641,837) (26,955) (2,668,792)
----------- --------- -----------
Balance, December 31, 1992 35,802,765 (177,251) 35,625,514
Net income 446,822 4,559 451,381
Distributions of $1.00 per BAC
(including return of capital of $0.80
per BAC) (2,280,000) (23,263) (2,303,263)
----------- --------- -----------
Balance, December 31, 1993 33,969,587 (195,955) 33,773,632
Net income 1,003,401 10,238 1,013,639
Distributions of $1.00 per BAC
(including return of capital of $0.56
per BAC) (2,280,000) (23,263) (2,303,263)
----------- --------- -----------
Balance, December 31, 1994 $32,692,988 $(208,980) $32,484,008
=========== ========= ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-34
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
SERIES II
---------------------------------------
Beneficial
Assignee
Certificate General
Holders Partner Total
------------- ---------- ------------
<S> <C> <C> <C>
Balance, December 31, 1991 $54,316,701 $(205,335) $54,111,366
Net income 297,321 3,034 300,355
Distributions of $1.00 per BAC
(including return of capital of $0.91
per BAC) (3,238,760) (33,048) (3,271,808)
----------- --------- -----------
Balance, December 31, 1992 51,375,262 (235,349) 51,139,913
Net income 1,630,077 16,632 1,646,709
Distributions of $1.00 per BAC
(including return of capital of $0.50
per BAC) (3,238,760) (33,046) (3,271,806)
----------- --------- -----------
Balance, December 31, 1993 49,766,579 (251,763) 49,514,816
Net income 1,361,660 13,893 1,375,553
Distributions of $1.00 per BAC
(including return of capital of $0.58
per BAC) (3,238,760) (33,045) (3,271,805)
----------- --------- -----------
Balance, December 31, 1994 $47,889,479 $(270,915) $47,618,564
=========== ========= ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-35
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SERIES I
----------------------------------------
For the years ended December 31,
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,013,639 $ 451,381 $ 282,877
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,580,615 1,741,232 1,966,028
Changes in assets and liabilities:
Increase in restricted cash and cash equivalents (233,608) (9,584) (272,770)
Increase in receivables and other assets (71,766) (2,424) (129,627)
Increase in accrued mortgage administration and
servicing fees due to related parties 265,968 265,968 201,695
Increase (decrease) in other liabilities related to
real estate operations 110,821 (96,940) 86,223
Increase in deferred revenue -- -- 282,836
Decrease in accounts payable and accrued expenses (6,922) (12,528) (8,868)
----------- ----------- -----------
Net cash provided by operating activities 2,658,747 2,337,105 2,408,394
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of asset -- -- 450,000
Sale of marketable securities 3,177,612 2,966,087 3,414,385
Purchase of marketable securities (3,111,515) (2,883,255) (3,323,325)
Deposits to working capital reserves invested in
marketable securities (351,266) (79,643) (192,540)
----------- ----------- -----------
Net cash (used in) provided by investing activities (285,169) 3,189 348,520
----------- ----------- -----------
Cash flows from financing activities:
Distributions to BAC Holders and General Partner (2,303,263) (2,309,482) (2,962,458)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 70,315 30,812 (205,544)
Cash and cash equivalents, beginning of year 33,549 2,737 208,281
----------- ----------- -----------
Cash and cash equivalents, end of year $ 103,864 $ 33,549 $ 2,737
=========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-36
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SERIES II
----------------------------------------
For the years ended December 31,
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,375,553 $ 1,646,709 $ 300,355
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 2,043,294 2,146,661 2,291,540
Changes in assets and liabilities:
Increase in restricted cash and cash equivalents (38,037) (312,337) (400,545)
(Increase) decrease in receivables and other assets (76,849) 68,391 (120,343)
Increase in accrued mortgage administration and
servicing fees due to related parties 391,297 391,297 391,297
(Decrease) increase in other liabilities related to real
estate operations (47,184) (587,414) 803,739
Increase in deferred revenue -- -- 207,913
(Decrease) increase in accounts payable and accrued expenses (6,100) (9,007) 9,603
----------- ----------- -----------
Net cash provided by operating activities 3,641,974 3,344,300 3,483,559
----------- ----------- -----------
Cash flows from investing activities:
Sale of marketable securities 5,874,674 6,590,743 6,162,961
Purchase of marketable securities (5,886,656) (6,459,193) (5,864,164)
Deposits to working capital reserves invested in marketable
securities (459,714) (75,409) (533,170)
Withdrawals from interest reserves invested in
marketable securities -- 16,939 317,000
Withdrawals from working capital reserves invested in
marketable securities -- 19,550 --
----------- ----------- -----------
Net cash (used in) provided by investing activities (471,696) 92,630 82,627
----------- ----------- -----------
Cash flows from financing activities:
Distributions to BAC Holders and General Partner (3,271,805) (3,280,642) (3,688,963)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (101,527) 156,288 (122,777)
Cash and cash equivalents, beginning of year 202,810 46,522 169,299
----------- ----------- -----------
Cash and cash equivalents, end of year $ 101,283 $ 202,810 $ 46,522
=========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-37
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
Capital Realty Investors Tax Exempt Fund Limited Partnership (the
Partnership) was organized on August 1, 1986 under the Delaware Revised Uniform
Limited Partnership Act and will continue until December 31, 2016, unless
dissolved earlier in accordance with the Partnership Agreement. The Partnership
was formed to acquire a portfolio of tax-exempt mortgage revenue bonds issued by
various state or local governments or their agencies or authorities, which are
collateralized by nonrecourse participating first mortgage loans on multifamily
residential developments (the Observatory II bond, as modified in 1992, no
longer features a participating loan).
The Partnership received initial capital contributions from the
General Partner and the Assignor Limited Partner. The General Partner is CRITEF
Associates Limited Partnership (CRITEF Associates) whose general partners
include C.R.I., Inc. (CRI) and the shareholders of CRI. The limited partners of
CRITEF Associates are the shareholders of CRI, certain employees of CRI and
others. The Assignor Limited Partner is CRITEF, Inc., whose outstanding shares
of stock are owned by the shareholders of CRI.
The Assignor Limited Partner has assigned certain of the ownership
attributes of its limited partnership interests (including rights to a
percentage of the income, gains, losses, deductions and distributions of the
Partnership) to the purchasers of Beneficial Assignee Certificates (BACs) on the
basis of one unit of limited partnership interest for one BAC.
A Form S-11 Registration Statement was filed with the Securities and
Exchange Commission and became effective October 29, 1986 for a maximum offering
of 12,000,000 BACs at $25 per BAC (the public offering). The Registration
Statement provided, as was allowed for in the Partnership Agreement, that the
BACs could be issued in a series at the discretion of the General Partner. On
February 12, 1987, the Partnership completed offering BACs in Series I after
raising $57,000,000 from the sale of 2,280,000 BACs, and on October 29, 1987,
the Partnership completed offering BACs in Series II after raising $80,969,000
from the sale of 3,238,760 BACs. The public offering terminated on October 29,
1987.
On July 1, 1993, the General Partner listed the BACs on the American
Stock Exchange (AMEX) with a trading symbol of CRA for Series I and CRB for
Series II. The General Partner believes that the benefits from listing the
BACs on AMEX include increased liquidity and reduced transaction costs.
However, a publicly traded partnership is treated as a corporation for income
tax purposes unless it meets certain exceptions. To qualify under these
exceptions,the General Partner annually invests in de minimus taxable
investments for both Series I and Series II. In 1994, Series I and Series II
met the exceptions, and the Partnership was not taxed as a corporation.
F-38
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization - continued
The Partnership accounts for each Series of BACs separately as though
it were a separate partnership, holding a separate and distinct pool of real
estate, mortgage revenue bonds and, if applicable as discussed below, payments
from the Partnership's interest reserves. Organization and offering costs, the
Partnership's working capital reserves and certain general and administrative
expenses of the Partnership have been allocated, unless specifically attributed
to a Series, pro rata among the Series, based on the gross offering proceeds
raised by each Series. Deposits to the Partnership's interest reserves and
subsequent distributions from the interest reserves to BAC Holders are
accounted for by mortgage investment by Series. The amounts and distributions
of cash flow, residual proceeds, liquidation proceeds, profits and losses and
all other priorities and allocations (see Note 4) are separately determined
for each Series of BACs.
2. Summary of significant accounting policies
Method of accounting
--------------------
The consolidated financial statements of each Series of the
Partnership are prepared on the accrual basis of accounting in accordance
with generally accepted accounting principles.
The Partnership's consolidated balance sheets reflect the financial
position of the properties for the dates presented. The Partnership's
consolidated statements of income include the rental income, rental
expenses and depreciation of the properties, exclusive of debt service due
to the Partnership, as of the date of deed in lieu of foreclosure or in-
substance foreclosure (ISF). However, the underlying real estate for
Observatory II (formerly known as Greenhaven) in Series I is not included
in this consolidation.
Reclassifications
-----------------
Certain amounts in the consolidated financial statements as of
December 31, 1993 and for the years ended December 31, 1993 and 1992 have
been reclassified to conform with the 1994 presentation.
Investment in mortgage revenue bonds
------------------------------------
The Partnership accounts for the investment in the Observatory II
mortgage revenue bond in Series I as a loan with a carrying value of
$1,600,000, which approximates market, as of both December 31, 1994 and
1993.
F-39
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of significant accounting policies - continued
Investment in real estate
-------------------------
As further described in Note 5, as of December 31, 1994, the
Partnership accounts for nine of its ten investments in mortgage revenue
bonds as real estate. Investments in mortgage revenue bonds that were
previously accounted for as loans are accounted for as real estate
beginning on the earlier of the date of foreclosure, deed in lieu of
foreclosure, or ISF, and are recorded at the lower of (a) the carrying
value of the loan and related accrued interest or (b) the estimated fair
value of the property, including other net assets of the property. The
estimated fair values of the properties are the amounts the owners of the
properties could reasonably expect to receive in an as-is sale between a
willing buyer and a willing seller. The General Partner determined the
estimated fair values of the properties acquired based upon information
obtained from independent real estate appraisers and/or its own market
analyses. To the extent fair value is less than carrying value, direct
write-downs were recorded to establish a new basis for these assets.
The Partnership continues to evaluate its recorded investment in the
properties on a lower of cost or net realizable value basis, under the
guidance of the AICPA Statement of Position 92-3 "Accounting for Foreclosed
Assets." The Partnership's net realizable value determination takes into
account the Partnership's intention to hold these properties for the long
term, if necessary, to recover its recorded investment. If the Partnership
determines that its estimated net realizable value is less than the
recorded investment in the property, an additional valuation adjustment is
recorded if the decline in value is considered permanent. It may be
necessary to hold the properties for longer periods within the terms of the
mortgage revenue bonds, rather than the shorter existing loan terms, in
which event investor approval will be sought.
Depreciation
------------
Depreciation of real estate is based on the estimated useful lives of
the properties, which consist of 27.5 years for buildings and 7 years for
personal property. The straight-line method is used for buildings, and the
double declining-balance method is used for personal property.
Cash and cash equivalents
-------------------------
Cash and cash equivalents consist of tax-exempt money market funds
with original maturities of three months or less.
F-40
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of significant accounting policies - continued
Restricted cash and cash equivalents
------------------------------------
Restricted cash and cash equivalents consist of the following funds
obtained from the former borrowers on the mortgage revenue bonds (excluding
Observatory II, formerly known as Greenhaven, in Series I, which is not
held by a nominee) in connection with the transfer of the properties to
nominees of the Partnership: (i) escrow deposits restricted for tax and
insurance payments and for replacement of fixed assets; and (ii) operating
and debt service reserves, if any, restricted for payment of base mortgage
interest on the mortgage revenue bond and contingencies relating to the
properties. These accounts were established under the terms of the original
mortgage loans and escrow agreements and are maintained in interest-bearing
savings and money market accounts.
Marketable securities
---------------------
Marketable securities, consisting of tax-exempt municipal bonds with
carrying amounts as of December 31, 1994 and 1993, of $1,089,522 and
$1,155,619, respectively, for Series I, and $1,447,843 and $1,435,861,
respectively, for Series II, are stated at cost, which generally represents
par value and approximates market value. The Partnership has the option to
resell certain bonds to the seller on seven days' notice at the bonds' par
value. Proceeds from the sale of marketable securities totalled $3,177,612,
$2,966,087 and $3,414,385 for the years ended December 31, 1994, 1993 and
1992, respectively, for Series I. Proceeds from the sale of marketable
securities totalled $5,874,674, $6,590,743 and $6,162,961 for the years
ended December 31, 1994, 1993 and 1992, respectively, for Series II.
Realized gains and losses on these sales were determined on a specific
identification basis. The interest rate on the bonds is generally adjusted
weekly.
In May 1993, the Financial Accounting Standards Board issued Statement
on Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115). This statement
requires that most investments in securities be classified into one of the
following investment categories based upon circumstances under which
securities might be sold: Held to Maturity, Available for Sale, and
Trading. Generally, investments in securities for which an enterprise has
both the ability and the intent to hold to maturity should be accounted for
using the amortized cost method and all other securities must be recorded
at their fair values. The Partnership implemented SFAS 115 in 1994, and has
classified its investments in marketable securities into the Available for
Sale category. There were no net unrealized holding gains or losses
recognized during 1994 for Series I or Series II as the cost for the tax-
exempt municipal bonds approximated market value throughout 1994.
F-41
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of significant accounting policies - continued
As of December 31, 1994, the Partnership had aggregate investments in
marketable securities (including those held in working capital reserves, as
discussed below) with the following maturities:
SERIES I
--------
Amount Maturity
---------- ----------
$ 99,716 Within one year
100,000 Between one and five years
1,811,735 After ten years
----------
$2,011,451
==========
SERIES II
---------
Amount Maturity
---------- ----------
$ 605,879 Within one year
209,294 Between one and five years
155,340 Between five and ten years
2,124,076 After ten years
----------
$3,094,589
==========
Consolidated statements of cash flows
-------------------------------------
The consolidated statements of cash flows are intended to reflect only
cash receipt and cash payment activity; therefore, the statements do not
reflect non-cash investing and financing activities that affect the
consolidated balance sheets. Investments in mortgage revenue bonds, which
through deeds in lieu of foreclosure or other transfers resulted in
ownership of the underlying properties by nominees of the Partnership,
represent for financial statement purposes non-cash investing activities.
Working capital reserves
------------------------
The Partnership established working capital reserves for each Series
from the offering proceeds. The working capital reserves may be increased or
reduced by the General Partner as it deems advisable under the
circumstances. The funds held in the working capital reserves are invested
in tax-exempt municipal bonds with terms similar to the Partnership's
marketable securities and are stated at cost, which generally represents par
value and approximates market value. The reserves are available for the
payment of ongoing costs of operating and administering the Partnership's
business, for supplementing distributions to BAC Holders and for making
working capital loans to borrowers.
F-42
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of significant accounting policies - continued
SERIES I
--------
Working capital reserves were $921,929 and $570,663 as of December 31,
1994 and 1993, respectively. None of the distributions made to BAC Holders
during 1994, 1993 and 1992 was funded from the working capital reserves. In
1991, $61,068 was used to make a loan to Observatory II for roof repairs,
which was repaid on March 31, 1992. During 1994, 1993 and 1992, working
capital reserves were increased by $351,266, $79,643 and $192,540,
respectively, from surplus operating cash.
SERIES II
---------
Working capital reserves were $1,646,746 and $1,187,032 as of December
31, 1994 and 1993, respectively. None of the distributions made to BAC
Holders during 1994, 1993 and 1992 was funded from the working capital
reserves. During 1994, 1993 and 1992, $459,714, $55,859 and $533,170,
respectively, were added to the working capital reserves from the interest
reserves or surplus operating cash.
Interest reserves
-----------------
The Partnership established interest reserves for each Series which
represented the General Partner's estimate of the total base interest on the
mortgage revenue bonds to be deferred during the deferral period (generally
the project construction period) for the loans of that Series, as defined by
the respective loan agreements. The interest reserves also included debt
service reserves established by the Partnership for three mortgage loans.
The interest reserves have been used to supplement distributions to BAC
Holders in an amount sufficient to achieve an equivalent gross base interest
rate as if the full amount of base interest had been paid during the
deferral period.
SERIES I
--------
Interest reserves were depleted during 1990.
SERIES II
---------
Interest reserves were depleted during 1993. Of the total
distributions made to BAC Holders during 1994, 1993 and 1992, $0, $16,939
and $317,000, respectively, were funded from the interest reserves.
F-43
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of significant accounting policies - continued
Income taxes
------------
No provision has been made for federal, state or local income taxes in
the consolidated financial statements for each Series of the Partnership
since the General Partner and the BAC Holders are required to report on
their individual tax returns their allocable share of taxable income, gains,
losses, deductions and credits of the Partnership. For federal income tax
purposes, the Partnership's investment in mortgage revenue bonds is carried
at cost in the aggregate amount of $44,155,000 for Series I and $62,608,001
for Series II as of both December 31, 1994 and 1993. Interest income from
the mortgage revenue bonds is exempt from regular federal income tax, as
discussed in Notes 5 and 6.
Net income and distributions per BAC
------------------------------------
Net income and distributions per BAC represent 98.99% of net income
and distributions declared, respectively, divided by the number of BACs
outstanding during the year.
3. Related party transactions
The General Partner has the authority and responsibility for, among other
things, the overall management and control of the Partnership. The General
Partner and its affiliates do not receive any fees from the Partnership for
their services to the Partnership, but are reimbursed by the Partnership for any
actual costs and expenses incurred in connection with the operation of the
Partnership.
SERIES I
--------
Expense reimbursements to an affiliate of the General Partner for 1994, 1993
and 1992 were $118,266, $108,374 and $100,564, respectively, and are included in
general and administrative expense in the consolidated statements of income.
CRICO Mortgage Company, Inc., an affiliate of the General Partner, is
entitled to annual mortgage administration and servicing fees from the
borrowers which are payable from operating revenues each month after payment of
debt service on the mortgage loan. Unpaid fees of $1,093,242 and $827,274 were
due to this affiliate as of December 31, 1994 and 1993, respectively. The
unpaid fees are payable from available cash flow after payment of all current
and delinquent base interest and accrued interest on delinquent base interest.
If available cash flow from the borrower is insufficient to pay the fee, it is
payable on the earlier of prepayment or maturity of the loan, after debt
repayment. During the years ended December 31, 1994,
F-44
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Related party transactions - continued
1993 and 1992, the fees paid by the borrowers totalled $10,000, $10,000 and
$21,277, respectively.
CRICO Mortgage Company, Inc. and two other affiliates of the General Partner
are currently considering a merger with a publicly traded REIT. If the merger
is completed, the right to receive all or a substantial portion of the accrued
and unpaid mortgage administration and servicing fees as of the date of the
merger will be transferred from CRICO Mortgage Company, Inc. to CRI or an
affiliate of CRI. After the merger, the mortgage administration and servicing
will be performed by an affiliate of the REIT and mortgage administration and
servicing fees will be paid to that entity. This proposed merger will not
result in any increase in fees or changes in the amount of fees which are
currently payable. The merger is subject to the performance of certain
conditions and there is no guarantee the merger will be consummated.
CRICO Management Corporation (CRICO), an affiliate of the General Partner,
assumed property management responsibilities for White Bear Woods on October 1,
1991 and for Trailway Pond and Royal Oak on January 1, 1992. The General
Partner engaged CRICO Management of Minnesota, Inc. (CRICO Minnesota), another
affiliate of the General Partner, as management agent for Valley Creek on July
1, 1992. Effective August 1, 1992, CRICO transferred its property management
responsibilities for White Bear Woods, Trailway Pond and Royal Oak to CRICO
Minnesota. Management fees of $16,916 were paid or accrued to this affiliate
of the General Partner by the properties for the month ended January 31, 1994.
Management fees of $209,057 and $175,625 were paid or accrued during 1993 and
1992, respectively. The amount received under each management contract
represented a base fee equal to 3.75% of total gross revenues of the property,
plus an additional incentive fee of 0.50% payable only if certain performance
standards were met.
On February 1, 1994, CRICO and CRICO Minnesota contributed their property
management contracts and personnel to CAPREIT Residential Corporation (CAPREIT).
CAPREIT was formed by CRI but is not currently owned or controlled by CRI and/or
its affiliates. This change did not result in any increase in property
management fees.
Existing nominee entities formed to take title to properties are structured
as limited partnerships. The nominee entities and the managing general partner
of the General Partner have primarily common ownership and are under common
control. The nominees, rather than the Partnership, became holders of title to
the properties in an effort to maintain the tax-exempt nature of interest on the
mortgage revenue bonds and to hold the properties until their ultimate
disposition. No compensation or fees were paid by the Partnership to the
nominee entities or their principals in connection with the transfers of
ownership. The limited partners' interests held in the nominee owners of Royal
Oaks, Valley Creek, Trailway Pond, and White Bear Woods
F-45
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Related party transactions - continued
were transferred to a newly formed S corporation for tax purposes effective
January 1, 1992. The transaction costs for these transfers of partnership
interests were nominal.
SERIES II
---------
Expense reimbursements to an affiliate of the General Partner for 1994, 1993
and 1992 were $134,468, $130,050 and $91,664, respectively, and are included in
general and administrative expense in the consolidated statement of operations.
CRICO Mortgage Company, Inc., an affiliate of the General Partner, is
entitled to annual mortgage administration and servicing fees from the borrowers
which is payable from operating revenues each month after payment of debt
service on the mortgage loan. Unpaid fees of $1,670,426 and $1,279,129
were due to this affiliate as of December 31, 1994 and 1993, respectively,
and are included in other liabilities related to real estate operations in
the consolidated balance sheets. The unpaid fees are payable from
available cash flow after payment of all current and delinquent base interest
and accrued interest on delinquent base interest. If available cash flow from
the borrower is insufficient to pay the fee, it is payable on the earlier of
prepayment or maturity of the loan, after debt repayment. During the years
ended December 31, 1994, 1993 and 1992, no fees were received from the
borrowers.
CRICO Mortgage Company, Inc. and two other affiliates of the General Partner
are currently considering a merger with a publicly traded REIT. If the merger
is completed, the right to receive all or a substantial portion of the accrued
and unpaid mortgage administration and servicing fees as of the date of the
merger will be transferred from CRICO Mortgage Company, Inc. to CRI or an
affiliate of CRI. After the merger, the mortgage administration and servicing
will be performed by an affiliate of the REIT and mortgage administration and
servicing fees will be paid to that entity. This proposed merger will not
result in any increase in fees or changes in the amount of fees which are
currently payable. The merger is subject to the performance of certain
conditions and there is no guarantee the merger will be consummated.
CRICO Management Corporation (CRICO), an affiliate of the General Partner,
assumed property management responsibilities for Trailway Pond II on January 1,
1992 and for Ethan's Ridge and Ethan's Glen IIB on June 1, 1992. Effective
August 1, 1992, CRICO transferred its property management responsibilities for
these properties to CRICO Management of Minnesota, another affiliate of the
General Partner. CRICO Management Northwest, Inc., another affiliate of the
General Partner, assumed management responsibilities for James Street Crossing
effective May 1, 1993. Management fees of $15,446 were paid or accrued to these
affiliates of the General Partner by the properties for the month ended January
31, 1994. In addition, 1993 incentive management fees of $8,927 and $1,356
relating to Ethan's Ridge and Ethan's Glen IIB, respectively, were paid to CRICO
Minnesota in December 1994. Management fees of $173,849
F-46
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Related party transactions - continued
and $83,150 were paid or accrued during 1993 and 1992, respectively. The
amount received under each management contract represented a base fee equal
to 3.75% of total gross revenues of the property, plus an additional incentive
fee of 0.50% payable only if certain performance standards were met.
On February 1, 1994, CRICO, CRICO Minnesota and CRICO Management Northwest
contributed their property management contracts and personnel to CAPREIT
Residential Corporation (CAPREIT). CAPREIT was formed by CRI but is not
currently owned or controlled by CRI and/or its affiliates. This change did not
result in any increase in property management fees.
Nominee entities formed to take title to properties are structured as
limited partnerships. The nominee entities and the managing general partner of
the General Partner have primarily common ownership (except for Ethan's Ridge
and Ethan's Glen IIB) and are under common control. The nominees, rather than
the Partnership, became holders of title to the properties in an effort to
maintain the tax-exempt nature of interest on the mortgage revenue bonds and to
hold the properties until their ultimate disposition. No compensation or
fees were paid by the Partnership to the nominee entities in connection with the
transfers of ownership. The limited partners' interests held in the nominee
partnerships that own Fountain Place and Trailway Pond II were transferred to a
newly formed S corporation for tax purposes effective January 1, 1992. The
transaction costs for these transfers of partnership interests were nominal.
4. Profits, losses and cash distributions to Partners
Cash available for distribution (defined below) is distributed within 60
days after the end of each six-month period ending June 30 and December 31 for
both Series I and Series II. Each year, cash available for distribution is
distributed 98.99% to the BAC Holders and 1.01% to the General Partner until the
BAC Holders receive a noncumulative return equal to 10% of their adjusted
capital contribution (adjusted for any return of capital contributions and any
distribution of residual or liquidation proceeds from the sale of a mortgaged
property or the dissolution of the Partnership, described below). Thereafter,
during such year, the balance of all such cash available for distribution will
be distributed 90% to the BAC Holders and 10% to the General Partner.
Cash available for distribution, as defined in the Partnership Agreement, is
as follows:
(1) all revenues received by the Partnership, plus
(2) any amounts released by the General Partner from the working capital
reserves, plus
F-47
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Profits, losses and cash distributions to Partners - continued
(3) any amounts released from the interest reserves after completion of any
applicable interest deferral period with respect to the mortgage loan in
connection with such mortgaged property, less:
(i) payments from revenues of operating expenses and Partnership
indebtedness, and
(ii) any amounts set aside for deposit into the working capital
reserves.
All cash receipts of the Partnership arising from a sale or other
disposition of a mortgaged property or the repayment of the principal and the
payment of interest, if any, payable upon the redemption or remarketing of the
applicable mortgage revenue bond (residual proceeds) will be distributed as
follows:
(1) to pay all debts and obligations of the Partnership and add to the
working capital reserves as the General Partner deems necessary;
(2) to the General Partner and BAC Holders in an amount equal to the
positive balance in their respective capital accounts as of the date of
sale or repayment adjusted for operations and distributions to that date
but prior to any allocation of profit from such sale or repayment;
(3) to the BAC Holders in the amount of their adjusted capital
contributions;
(4) to the General Partner in the amount of its adjusted capital
contributions;
(5) 98.99% to the BAC Holders and 1.01% to the General Partners until the
BAC Holders have received any unpaid portion of the preferred cash flow
return (i.e., an annual noncompounded return of 10% on their adjusted
capital contribution); provided, however, that the distribution
to the General Partner pursuant to this subsection will be deferred until
the BAC Holders have received any unpaid portion of the preferred cash flow
return;
(6) to the extent applicable by reason of foreclosure of a mortgage loan,
payment to an affiliate of the General Partner of a disposition fee not to
exceed 2% of the gross sales proceeds from the mortgaged property; and,
(7) the remainder, 90% to the BAC Holders and 10% to the General Partner.
All cash receipts other than residual proceeds arising from the dissolution
of the Partnership and the liquidation of the Partnership's assets less the
amounts utilized to pay the expenses of such liquidation (liquidation proceeds)
will be allocated in the same order as residual proceeds.
All profits and losses not arising from a sale of a mortgaged property or
repayment of a mortgage loan shall be allocated 98.99% to the BAC Holders and
1.01% to the General Partner until the BAC Holders have received any unpaid
portion of the preferred cash flow
F-48
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Profits, losses and cash distributions to Partners - continued
return. Thereafter, such profits and losses shall be allocated 90% to the
BAC Holders and 10% to the General Partner.
Gains arising from a sale of a mortgaged property or repayment of a
mortgage loan will be allocated to the General Partner and BAC Holders as
follows: first, in proportion to the negative balances in their capital
accounts, if any, to bring such negative balances in their capital accounts to
zero; and second, in proportion to their share of residual proceeds from steps
(5) and (7) as described above. Losses from such a sale or repayment will be
allocated to the General Partner and BAC Holders as follows: first, in an
amount equal to the amount by which the total of all capital accounts exceeds
the total capital contributions in the ratio that each Partner's and BAC
Holder's excess balance bears to the aggregate excess balances; second, to the
General Partner and BAC Holders until their capital accounts are reduced to
zero; and third, any remaining losses 1.01% to the General Partner and 98.99% to
the BAC Holders. No proceeds were received in connection with any transfer of
properties to nominees.
The Partnership expects to continue to make distributions to BAC Holders on
a semi-annual basis. There are no legal restrictions on the Partnership's
present or future ability to make cash distributions. However, property level
reserves are depleted and estimated cash flows from the properties' operations
are insufficient to pay full monthly base interest (except for Observatory II),
therefore, the distributions to BAC Holders may fluctuate from current levels.
The General Partner has undertaken various measures in an attempt to stabilize
the properties' operations. Despite these efforts, the amounts paid to the
Partnership from the properties' operations may be expected to fluctuate from
period to period due to changes in occupancy rates, rental rates, operating
expenses and other variables. Based upon the current operations of the
Partnership, the General Partner expects the 1995 distribution for both Series I
and Series II to approximate $1.08 per BAC.
The following distributions were paid or accrued to BAC Holders of record
during 1994, 1993 and 1992:
SERIES I
--------
<TABLE>
<CAPTION>
1994 1993 1992
Distributions to Distributions to Distributions to
BAC Holders BAC Holders BAC Holders
-------------------- -------------------- ---------------------
Six-Month Period Ended Total Per BAC Total Per BAC Total Per BAC
- - - - ------------------------ ----------- ------- ----------- ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
June 30 $1,140,000 $0.50 $1,140,000 $0.50 $1,495,681* $0.66
December 31 1,140,000 0.50 1,140,000 0.50 1,146,156 0.50
---------- ----- ---------- ----- ---------- -----
Total $2,280,000 $1.00 $2,280,000 $1.00 $2,641,837 $1.16
========== ===== ========== ===== ========== =====
</TABLE>
* The net cash proceeds from the sale of the Observatory II investment of
$365,544 (approximately $0.16 per BAC), net of expenses of the sale and
repayment of the $61,068 loaned to the Observatory II property from the
Partnership's working capital reserve in 1990, were distributed to BAC
Holders of record as of March 31, 1992 with the distribution paid on August
28, 1992.
F-49
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Profits, losses and cash distributions to Partners - continued
Distributions to BAC Holders for the years ended December 31, 1994, 1993 and
1992 were funded as follows:
<TABLE>
<CAPTION>
For the years ended
December 31,
-------------------------------------------
1994 1993 1992
------------ ------------ ---------------
<S> <C> <C> <C>
Cash flow from the Partnership's operations $2,654,529 $2,382,906 $2,434,720
Net deposits to working capital reserves (351,266) (79,643) (131,472)(1)
Net proceeds from sale of asset -- -- 365,544
---------- ---------- ----------
Total cash available for distribution $2,303,263 $2,303,263 $2,668,792
========== ========== ==========
Distributions to:
General partner (1.01%) $ 23,263 $ 23,263 $ 26,955
========== ========== ==========
BAC Holders (98.99%) $2,280,000 $2,280,000 $2,641,837
========== ========== ==========
</TABLE>
(1) Excludes repayment to the working capital reserves of the $61,068 loaned to
the Observatory II property.
Although distributions are paid on a semi-annual basis, in July 1993, the
Partnership began declaring distributions on a monthly basis as a result of
listing the BACs on AMEX. Distributions to BAC Holders totalling $615,600 or
$0.27 per BAC were declared payable for the three months ending March 31, 1995
to BAC Holders of record as of the last day of each month.
SERIES II
---------
<TABLE>
<CAPTION>
1994 1993 1992
Distributions to Distributions to Distributions to
BAC Holders BAC Holders BAC Holders
-------------------- -------------------- ---------------------
Six-Month Period Ended Total Per BAC Total Per BAC Total Per BAC
- - - - ------------------------ ----------- ------- ----------- ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
June 30 $1,619,380 $0.50 $1,619,380 $0.50 $1,610,637 $ 0.50
December 31 1,619,380 0.50 1,619,380 0.50 1,628,123 0.50
---------- ----- ---------- ------- ------------ -------
Total $3,238,760 $1.00 $3,238,760 $1.00 $3,238,760 $ 1.00
========== ===== ========== ======= ============ =======
</TABLE>
F-50
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Profits, losses and cash distributions to Partners - continued
Distributions to BAC Holders for the years ended December 31, 1994, 1993 and
1992 were funded as follows:
<TABLE>
<CAPTION>
For the years ended
December 31,
---------------------------------------
1994 1993 1992
------------ ------------ -----------
<S> <C> <C> <C>
Cash flow from the Partnership's operations $3,731,519 $3,310,726 $3,487,978
Net deposits to working capital/interest
reserves (459,714) (38,920) (216,170)
---------- ---------- ----------
Total cash available for distribution $3,271,805 $3,271,806 $3,271,808
========== ========== ==========
Distributions to:
General partner (1.01%) $ 33,045 $ 33,046 $ 33,048
========== ========== ==========
BAC Holders (98.99%) $3,238,760 $3,238,760 $3,238,760
========== ========== ==========
</TABLE>
Although distributions are paid on a semi-annual basis, in July 1993, the
Partnership began declaring distributions on a monthly basis as a result of
listing the BACs on AMEX. Distributions to BAC Holders totalling $874,465 or
$0.27 per BAC were declared payable for the three months ending March 31, 1995
to BAC Holders of record as of the last day of each month.
5. Investments
Description of the portfolios
- - - - -----------------------------
The Partnership acquired a portfolio of ten tax-exempt mortgage revenue
bonds issued by various state and local governments or their agencies or
authorities. The proceeds from the mortgage revenue bonds were used by the
issuers to make nonrecourse participating mortgage loans to finance construction
and ownership of multifamily residential developments. The mortgage revenue
bond with respect to each mortgaged property is payable only from payments made
on the corresponding mortgage loan. None of the mortgage revenue bonds
constitutes a general obligation of any state or local government agency or
authority and no such government agency or authority is liable for the mortgage
revenue bonds.
SERIES I
--------
The five original Series I mortgage loans securing the mortgage revenue
bonds, with a current aggregate principal amount of $44,155,000, went into
default, resulting in actual foreclosures or deeds in lieu of foreclosure to
nominees of the Partnership. As of December 31, 1994, the Partnership accounts
for these investments, excluding the modified Observatory II mortgage revenue
bond, as real estate for financial statement purposes. Accordingly, the
F-51
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Investments - continued
consolidated balance sheets reflect these investments in the amounts of
$30,844,339 and $32,424,954 as of December 31, 1994 and 1993, respectively, net
of accumulated depreciation, based on the lower of cost or fair value at the
date of deed transfer or ISF. The financial statement presentation is
independent of the characterization of the bonds as loans for federal income
tax purposes and the tax-exempt nature of the mortgage revenue bond interest.
Additionally, the Partnership accounts for the investment in the Observatory II
mortgage revenue bond as a loan with a carrying value of $1,600,000 as of both
December 31, 1994 and 1993.
SERIES II
---------
The five original Series II mortgage loans securing the mortgage revenue
bonds, with an aggregate principal amount of $62,608,001, went into default,
resulting in deeds in lieu of foreclosure to nominees of the Partnership. As
of December 31, 1994, the Partnership accounts for these investments as real
estate for financial statement purposes. Accordingly, the consolidated balance
sheets reflected these investments in the amounts of $46,900,416 and $48,943,710
as of December 31, 1994 and 1993, respectively, net of accumulated depreciation,
based on the lower of cost or fair value at the date of deed transfer or ISF.
The financial statement presentation is independent of the characterization of
the bonds as loans for federal income tax purposes and the tax-exempt nature of
the mortgage revenue bond interest.
The portfolios are summarized in the table below and a discussion regarding
the collateral and terms of the bonds immediately follows the table:
F-52
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
5. Investments - continued
Investment Information Mortgage Information Real Estate Information
- - - - ---------------------------------------------- ---------------------------------- ------------------------------------------
Commencement Buildings Carrying
No. of Date of Loan Loan of ISF and Amount of
Rental Construction Origination Maturity Accounting Personal Investments
Name and Location Units Completion Date Face Amount Date Treatment Land Property at 12/31/94
- - - - ------------------------ ------ ------------ ----------- ----------- -------- ------------ ---- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SERIES I
--------
Mortgage Loan
- - - - -------------
OBSERVATORY II
BURNSVILLE, MN (2) 75 -- 3/31/92 $ 1,600,000 2/11/98 -- -- -- $ 1,600,000
===========
Real Estate
- - - - -----------
ROYAL OAKS
EAGAN, MN (1) 231 2/22/88 12/05/86 12,580,000 2/22/98 12/31/90 $ 722,785 $9,870,748 $10,593,533
TRAILWAY POND
BURNSVILLE, MN (1) 75 5/01/89 8/07/87 4,675,000 5/01/99 12/31/90 316,510 3,510,063 3,826,573
VALLEY CREEK
WOODBURY, MN (1) 225 2/01/89 3/23/87 12,815,000 2/01/99 12/31/90 674,687 10,470,873 11,145,560
WHITE BEAR WOODS
WHITE BEAR LAKE, MN (1) 225 1/31/89 3/31/87 12,485,000 1/31/99 12/31/90 357,840 11,798,160 12,156,000
--- ----------- ---------- ---------- -----------
831 $44,155,000 $2,071,822 $35,649,844 37,721,666
=== =========== ========== ===========
Less: Accumulated depreciation as of December 31, 1994 (6,877,327)
-----------
$30,844,339
===========
<CAPTION>
SERIES II
---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate
- - - - -----------
ETHAN'S RIDGE AND
ETHAN'S GLEN IIB 4/01/88 5/29/87 $15,500,000 4/01/98
KANSAS CITY, MO (1)(3) 364 12/15/89 10/26/88 2,300,000 12/15/99 4/15/90 $1,134,352 $14,258,494 $15,392,846
FOUNTAIN PLACE
EDEN PRAIRIE, MN (1) 332 7/01/89 12/23/87 20,900,000 7/01/99 6/01/90 1,328,847 16,179,414 17,508,261
JAMES STREET CROSSING
KENT, WA (1) 300 12/31/89 3/31/88 13,878,001 12/31/99 12/31/90 1,760,956 13,750,703 15,511,659
TRAILWAY POND II
BURNSVILLE, MN (1) 165 5/01/89 8/07/87 10,030,000 5/01/99 12/31/90 721,043 7,248,196 7,969,239
----- ----------- ---------- ----------- -----------
1,161 $62,608,001 $4,945,198 $51,436,807 56,382,005
===== =========== ========== ===========
Less: Accumulated depreciation as of December 31, 1994 (9,481,589)
-----------
$46,900,416
===========
</TABLE>
(1) As discussed herein and in Note 2, the properties are accounted for as real
estate at their fair value as of the date of the actual or deemed transfer
due to receipt of a deed in lieu of foreclosure.
(2) As discussed herein, effective March 31, 1992, the Observatory II investment
is accounted for as an investment in mortgage revenue bond of $1,600,000.
(3) The results of operations and real estate information for these investments
is combined as they are held by the same nominee entity and operated in
conjunction with each other.
F-53
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Investments - continued
Collateral
- - - - ----------
The mortgage revenue bonds are secured by mortgage loans which are
collateralized by first mortgages on the properties and by assignments of
existing and future rents and security agreements with respect to personal
property evidenced by the filing of Uniform Commercial Code (UCC) financing
statements. Additionally, the Partnership required the borrowers to establish
operating reserves, tax and insurance escrows, replacement reserves and debt
service reserves and provide operating deficit guarantees. As a result of
various circumstances, including, but not limited to, slow rent-up of the
properties, unstable operations and depletion of the properties' operating and
debt service reserves, nominees of the Partnership had received the title to
nine of the ten properties as of December 31, 1994 through deeds in lieu of
foreclosure and one property via foreclosure (Observatory II, which was
ultimately sold to an independent purchaser subject to a mortgage held by the
Partnership.) This collateral is classified as Investments in Real Estate in
the accompanying consolidated balance sheet as of December 31, 1994.
SERIES I
--------
The consolidated balance sheets reflect the Investments in Real Estate
discussed above in the amounts of $30,844,339, and $32,424,954 as of December
31, 1994 and 1993, respectively, net of accumulated depreciation, based on the
lower of cost or fair value at the date of deed transfer or ISF. The financial
statement presentation is independent of the characterization of the bonds as
loans for federal income tax purposes and the tax-exempt nature of the mortgage
revenue bond interest.
In connection with the transfers of properties to nominees of the
Partnership, the Partnership obtained an opinion from its former independent
accounting firm in July of 1991 that the reduction in pay rate and compounding
of unpaid base interest at the original base interest rate would not cause a
reissuance of the bonds under Internal Revenue Code (IRC) Section 103 (which
would cause the bonds to lose their tax-exempt status). The Partnership also
obtained opinions from certain bond counsel that transfers of the properties to
Partnership nominees would not cause the Partnership to become a substantial
user of the projects pursuant to IRC Section 103 (which also could have caused
the bonds to lose their tax-exempt status.) The bond counsel opinions were
obtained in connection with the Observatory II, Royal Oaks, Trailway Pond and
Valley Creek transfers.
In 1991, the U. S. Supreme Court decided a case, Cottage Savings
Association v. Commissioner, that could be interpreted to compromise the tax-
exempt status of mortgage revenue bonds which have been modified. In response
to this decision, in December 1992, the Internal Revenue Service (IRS) issued
proposed regulations in connection with the modification
F-54
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Investments - continued
of debt instruments. If the regulations are adopted in their present form, they
would alter existing authority and curtail the type and extent of modifications
that could be made by a bond owner/lender without adversely affecting the tax-
exempt status of bonds. It is not clear at this time what effect the Cottage
Savings decision or the proposed regulations may have on the Partnership with
respect to the bonds secured by loans on properties currently held by nominees.
The General Partner continues to believe that these bonds remain tax-exempt.
The General Partner will continue its efforts, which include the transfer of
title on the properties to nominees, in an attempt to protect the tax-exempt
status of the bonds and the interest thereon. However, in light of the
Cottage Savings decision and the proposed regulations, there can be no assurance
- - - - ---------------
that the General Partner will be successful in its efforts.
Based on current market conditions, to maximize overall yields and residual
proceeds upon the sale or refinancing of the properties acquired in settlement
of loans, it may be necessary for the nominees to hold the properties through
longer periods within the terms of the respective mortgage revenue bonds, rather
than the shorter existing loan terms. On an ongoing basis, the General Partner
monitors the real estate market to assess an appropriate holding period for the
properties. If conditions warrant in future years, the General Partner may
recommend for investor approval extension of certain mortgage loan maturity
dates and arrange for related adjustments of the pertinent mortgage revenue
bonds, as needed.
In conjunction with the transfer of the Royal Oaks deed to a nominee, the
Royal Oaks mortgage revenue bond was modified. The Partnership, based on
information and advice from outside counsel, believes that the modification does
not adversely affect the tax-exempt nature of the Royal Oaks bond interest.
The modification complied with IRS guidance in effect at that time. The IRS has
since issued proposed regulations which could be interpreted as adversely
affecting the tax-exempt nature of the modified mortgage revenue bond. However,
the IRS has stated that the regulations will apply only to modifications made on
or after 30 days from the final publication of the regulations in the Federal
Register. As of March 7, 1995, the regulations have not been finalized and no
changes to these positions have been announced by the IRS. The Partnership
believes the interest on the Royal Oaks bond should continue to be tax-exempt.
No valuation adjustments were necessary on the Series I investments in
1994, 1993 or 1992.
SERIES II
---------
The consolidated balance sheets reflect the Investments in Real Estate
discussed above in the amounts of $46,900,416 and $48,943,710 as of December
31, 1994 and 1993, respectively, net of accumulated depreciation, based on the
lower of cost or fair value at the date
F-55
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Investments - continued
of deed transfer or ISF. The financial statement presentation is independent of
the characterization of the bonds as loans for federal income tax purposes and
the tax-exempt nature of the mortgage revenue bond interest.
In connection with the transfers of properties to nominees of the
Partnership, the Partnership obtained an opinion from its former independent
accounting firm in July of 1991 that the reduction in pay rate and compounding
of unpaid base interest at the original base interest rate would not cause a
reissuance of the bonds under IRC Section 103 (which would cause the bonds to
lose their tax-exempt status). The Partnership also obtained opinions from
certain bond counsel that transfers of the properties to Partnership nominees
would not cause the Partnership to become a substantial user of the projects
pursuant to IRC Section 103 (which also could have caused the bonds to lose
their tax-exempt status). The bond counsel opinions were obtained in connection
with the Ethan's Ridge and Ethan's Glen IIB, Fountain Place and Trailway Pond II
transfers.
In 1991, the U. S. Supreme Court decided a case, Cottage Savings
---------------
Association v. Commissioner, that could be interpreted to compromise the tax-
- - - - ---------------------------
exempt status of mortgage revenue bonds which have been modified. In response
to this decision, in December 1992, the IRS issued proposed regulations in
connection with the modification of debt instruments. If the regulations are
adopted in their present form, they would alter existing authority and curtail
the type and extent of modifications that could be made by a bond owner/lender
without adversely affecting the tax-exempt status of bonds. It is not clear at
this time what effect the Cottage Savings decision or the proposed regulations
---------------
may have on the Partnership with respect to the bonds secured by loans on
properties currently held by nominees. The General Partner continues to believe
that these bonds remain tax-exempt. The General Partner will continue its
efforts, which include the transfer of title on the properties to nominees, in
an attempt to protect the tax-exempt status of the bonds and the interest
thereon. However, in light of the Cottage Savings decision and the proposed
---------------
regulations, there can be no assurance that the General Partner will be
successful in its efforts.
Based on current market conditions, to maximize overall yields and residual
proceeds upon the sale or refinancing of the properties acquired in settlement
of loans, it may be necessary for the nominees to hold the properties through
longer periods within the terms of the respective mortgage revenue bonds, rather
than the shorter existing loan terms. On an ongoing basis, the General Partner
monitors the real estate market to assess an appropriate holding period for the
properties. If conditions warrant in future years, the General Partner may
recommend for investor approval extension of certain mortgage loan maturity
dates and arrange for related adjustments of the pertinent mortgage revenue
bonds, as needed.
F-56
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Investments - continued
No valuation adjustments were necessary in 1994 or 1992. A reversal of a
valuation adjustment of $416,432 on James Street Crossing was realized in 1993,
as discussed below.
James Street Crossing
---------------------
The nominee owner of James Street Crossing may be required to fund
approximately $100,000 to $150,000 for environmental mitigation if such an
obligation is determined to run with the land at the property. If
required, such funding could be provided from the property's cash flow or
from existing replacement reserves. Because the nominee owner of James
Street Crossing believes that the obligation does not run with the land at
the property, the financial statements do not include an adjustment for
this obligation.
As illustrated in the table below, as of December 31, 1994, the Partnership
accounts for all of its investments in mortgage revenue bonds except Observatory
II as real estate for financial statement purposes, due to receipt of deeds in
lieu of foreclosure.
<TABLE>
<CAPTION>
Change in
Depletion of Commencement Management
Borrower and of ISF Date of Company to
Name of Investment Debt Service Accounting Deed in Lieu/ Affiliate of the
Rental Property Reserves(1) Treatment Foreclosure Partnerships(2)
- - - - -------------------- --------------- ------------ ---------------- -------------------
<S> <C> <C> <C> <C>
Series I
--------
Observatory II (3) 1990 3/14/90 9/14/90 N/A
Royal Oaks 1991 12/31/90 6/27/91 1/01/92
Trailway Pond 1992 12/31/90 1/02/91 1/01/92
Valley Creek 1991 12/31/90 1/02/91 7/01/92
White Bear Woods 1991 12/31/90 1/02/92 10/01/91
Series II
---------
Ethan's Ridge and
Ethan's IIB 1991 4/15/90 4/15/90(4) 6/01/92
Fountain Place 1990 6/01/90 1/02/91 N/A
James Street
Crossing 1993 12/31/90 3/31/93(5) 5/01/93
Trailway Pond II 1991 12/31/90 1/02/91 1/01/92
</TABLE>
(1) Due to the depletion of borrower and debt service reserves, base interest
payments made to the Partnership are solely in the form of cash flow from
the property's operations.
(2) CRICO or CRICO Minnesota, affiliates of the General Partner, assumed
property management responsibilities on the indicated dates. On February
1, 1994, CRICO and CRICO Minnesota contributed their property management
contracts and personnel to CAPREIT. CAPREIT was formed by CRI but is not
currently owned or controlled by CRI and/or its affiliates.
(3) On March 31, 1992, the Observatory II investment, foreclosed on in 1990 and
accounted for as an asset held for sale as of December 31, 1991, was sold
for $450,000 in cash and $1,600,000 in tax-exempt mortgage revenue bond
financing, with interest only, payable monthly at 8% per annum. The
nominee of the Partnership sold this property for the following reasons:
(1) due to the size of the property (75-units) and because it was the
second "phase" of a project, it was difficult to operate the property
F-57
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Investments - continued
efficiently and could not recognize economies of scale and (2) the first
"phase" was not owned by the Partnership and had been sold to an unrelated
third party, thereby decreasing the ability of the Partnership to exert
control of the operations of the joint properties (both phases had
originally been owned by the same borrower). The General Partner believes
this sale is an isolated incident because of the above-described reasons.
The net cash proceeds of $365,544 (approximately $0.16 per BAC), which is
net of expenses of the sale and repayment of the $61,068 loaned to the
Observatory II property from the Partnership's working capital reserve in
1991, were distributed to BAC Holders of record as of March 31, 1992
with the distribution paid on August 28, 1992. The mortgage is current as
of December 31, 1994.
(4) Effective July 6, 1990, the nominee limited partnership holding Ethan's
Ridge and Ethan's Glen IIB was expanded so that two unaffiliated
individuals acquired a 98.99% interest in the nominee as limited partners
in consideration for certain capital contributions, plus their undertaking
to form an investor partnership entity to admit additional partners in
exchange for further capital contributions. In November 1991, the nominee
partnership was further expanded to admit the investor partnership entity.
Although the investor limited partner is presently in default with respect
to the pay-in schedule, it proposed bringing additional investors into the
investor partnership with an adjusted payment schedule. Negotiations are
ongoing.
(5) Effective March 31, 1993, the borrower of James Street Crossing gave a
nominee of the Partnership a deed in lieu of foreclosure. In addition, the
Partnership received a judgment for the outstanding guarantee amount of
$454,255 and a junior lien against the already encumbered assets of two
of the three guarantors. At December 31, 1992, the Partnership accrued
approximately $621,000 representing the net liability associated with James
Street Crossing, which was expected to be assumed by the Partnership upon
deed in lieu of foreclosure. Included in this amount was approximately
$416,000 which was owed to the former general partner of James Street
Crossing. This liability was not assumed by the nominee of the Partnership
when it received the deed in lieu of foreclosure effective March 31, 1993;
as such, this liability was reversed and has been treated as an
extraordinary gain in the statement of operations.
Interest
- - - - --------
The mortgage loans, and accordingly the mortgage revenue bonds, bear
interest at a base interest rate and provide for contingent interest, payable as
described below, in an amount equal to the difference between the base mortgage
interest rate and an annual noncompounding rate of return to the Partnership of
16% per annum. The mortgage loans provide for base mortgage interest which is
unconditional and payable monthly, in arrears. However, due to depletion of the
properties' reserves, the payment of base mortgage interest is solely from cash
flow from these properties' operations. The unpaid base mortgage interest bears
interest at the base mortgage interest rate and is to be repaid prior to
contingent interest.
Contingent interest will be equal to the sum of (i) 100% of the project
cash flow for each year up to an amount which provides the Partnership a
noncompounded interest rate between 1.5% and 2.0% over the base mortgage
interest rate in effect, and (ii) 50% to 60% of remaining cash flow (subject to
certain priority payments) to provide the Partnership a total return of 16% per
annum. Contingent interest is payable quarterly on an estimated basis, in
arrears, but only to the extent of available net cash flow, if any. Contingent
interest is recognized as revenue when collected. No contingent interest was
received or accrued by either Series I or Series II during these years.
Contingent interest due for Series I as of December 31, 1994, 1993 and 1992
amounted to $17,441,428, $14,799,693 and $12,157,958, respectively. Contingent
interest
F-58
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Investments - continued
due for Series II as of December 31, 1994, 1993 and 1992 amounted to
$23,723,272, $19,548,999 and $15,374,726, respectively.
To the extent that the aggregate of all interest payments, including
contingent interest, for any period after completion of construction does not
equal 16% per annum, the difference will be deferred (without interest on
contingent interest) until the mortgaged property is sold or the mortgage loan
is otherwise repaid and will only be payable if sufficient proceeds exist. The
amount of deferred contingent interest payable in such event will equal the sum
of (i) 100% of the sale or repayment proceeds (after certain priority payments)
up to the amount necessary for the Partnership to achieve a noncompounded return
at a rate 1.5% to 2.0% over the base mortgage interest rate and (ii) 50% to 60%
of any excess sale or repayment proceeds for the Partnership to achieve a total
return of 16% per annum. Consequently, the ability of the Partnership to collect
all contingent interest will be dependent upon the mortgaged property's
operating performance and the sale or repayment proceeds. Because the
Partnership may not be able ultimately to collect contingent interest, the
Partnership has not recorded any contingent interest since inception of the
Partnership.
Terms
- - - - -----
In general, the terms of the mortgage loans extend for 10 years after the
completion of construction. The corresponding bonds contain provisions
requiring payment or redemption of the bonds upon maturity of the related loan.
The Partnership may seek authority from investors to hold the mortgage revenue
bonds with respect to the mortgaged properties through longer periods within the
mortgage revenue bond terms, as described below, if necessary, in an effort to
maximize overall yields and residual proceeds upon the sale or refinancing of
the underlying properties.
The principal of the mortgage revenue bonds will not be amortized during
the term of the bond and will be required to be repaid in a lump-sum balloon
payment at the expiration of the loan term or at such earlier time as the loan
may require. Each mortgage loan is non-assumable and due on sale of the
mortgaged property. Prepayment and sale of the mortgaged property is prohibited
during the first seven years of the mortgage loan following the completion of
construction. Thereafter, prepayment in full is permitted under the mortgage
loan subject to the payment to the Partnership of:
(1) the contingent interest payable from 100% of project cash flow accrued
to the date of prepayment; and
(2) additional interest in an amount equal to the highest total amount of
contingent interest paid in any of the three years preceding the date
of prepayment, compounded at the base mortgage interest rate then in
effect.
F-59
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Investments - continued
The Partnership may require prepayment upon the occurrence of an "event of
taxability" which would include, among others, any act or event which presents
significant risk that interest on the mortgage revenue bonds would be subjected
to federal taxation. As of December 31, 1994, the Partnership is aware of no
"event of taxability" which has occurred.
6. Income taxes
For income tax purposes, base interest income is accrued when earned. The
accrual of interest is discontinued when, at the time of accrual, ultimate
collectibility of the interest due is considered unlikely. Once a loan has been
placed in a non-accrual status, income is recorded only as cash payments are
received from the borrower until such time as the uncertainty of collection of
unpaid base interest is eliminated. No loans were in a non-accrual status for
income tax purposes in 1992. All loans except Observatory II and James Street
Crossing were on non-accrual status throughout 1993; therefore, for income tax
purposes, income was recognized to the extent of cash received. James Street
Crossing was placed on non-accrual status during 1993. All loans except
Observatory II were on a non-accrual status throughout 1994. Contingent
interest from the investment is recognized as revenue when collected. No
contingent interest was recognized for the years ended December 31, 1994, 1993
or 1992.
SERIES I
--------
As discussed in Note 5, four of the five Series I mortgage revenue bonds
are accounted for as real estate for financial statements purposes as of
December 31, 1994. However, for federal income tax purposes, the investments in
all of the mortgage revenue bonds are treated as loans, interest on which is
exempt from regular federal income tax. A reconciliation of the primary
differences between the financial statement net income and municipal income for
tax purposes is as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Financial statement net income $ 1,013,639 $ 451,381 $ 282,877
Municipal interest income not recognized (1) 2,697,463 2,444,174 4,167,062
Rental income, net (2) (1,056,573) (512,569) (326,545)
Accrued interest on delinquent interest (3) -- -- 171,740
Expenses not allowed for tax purposes 2,703 633 --
----------- ---------- ----------
Municipal income, net for tax purposes $ 2,657,232 $2,383,619 $4,295,134
=========== ========== ==========
Municipal income per BAC outstanding $ 1.15 $ 1.03 $ 1.86
=========== ========== ==========
</TABLE>
(1) Represents the adjustment for interest income received or receivable during
the period, which was previously eliminated from net income for financial
statement purposes.
(2) Represents net income from investments accounted for as real estate.
(3) Represents interest on delinquent base interest, for loans on accrual
status for income tax purposes, compounded monthly at the base rate of
interest of the applicable loan.
F-60
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Income taxes - continued
As discussed in Note 5, during 1992 the mortgage revenue bond for the
Observatory II property was exchanged for a newly issued mortgage revenue bond
in a qualified refunding. The qualified refunding was necessary because the
Observatory II property was sold by a nominee of the Partnership on March 31,
1992 at a price less than Series I's tax basis in the original mortgage revenue
bond. The sale resulted in a $2,073,456 long-term capital loss for Series I for
federal income tax purposes. The Partnership believes, based on opinion of
counsel, that the interest earned on the new mortgage revenue bond is tax-
exempt.
Although the Partnership accounted for four of the five mortgage loan
investments as real estate for financial statement purposes during 1994 and
reclassified the cash flow from the properties as rental income and expense, the
Partnership continued to charge the borrowers and nominees interest under the
terms of the original mortgages and interest on unpaid base mortgage interest.
The Observatory II mortgage revenue bond investment is not shown in the table
below since it pays all debt service currently. The following tables summarize
the full interest payments for the years ended December 31, 1994, 1993 and 1992
that are due to the Partnership from the properties:
<TABLE>
<CAPTION>
For the year ended December 31, 1994
---------------------------------------------------------------------------
Base Interest Base Interest Cumulative
Paid From Paid From Current Base Unpaid
Current Base Properties' Non-Operating Interest Full Base
Interest Due(1) Operations Sources(2) Not Paid Interest
--------------- ------------- ---------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Royal Oaks $1,069,296 $ 754,518 $ -- $ 314,778 $1,362,473
Trailway Pond 460,488 252,168 -- 208,320 636,832
Valley Creek 1,326,353 821,503 -- 504,850 2,369,307
White Bear Woods 1,310,925 873,476 -- 437,449 1,637,757
---------- ---------- ------------- ---------- ----------
$4,167,062 $2,701,665 $ -- $1,465,397 $6,006,369
========== ========== ============= ========== ==========
<CAPTION>
For the year ended December 31, 1993
---------------------------------------------------------------------------
Base Interest Base Interest Cumulative
Paid From Paid From Current Base Unpaid
Current Base Properties' Non-Operating Interest Full Base
Interest Due(1) Operations Sources(2) Not Paid Interest
--------------- ------------- ---------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Royal Oaks $1,069,296 $ 679,224 $ -- $ 390,072 $1,047,695
Trailway Pond 460,488 210,360 -- 250,128 428,512
Valley Creek 1,326,353 728,818 -- 597,535 1,864,457
White Bear Woods 1,310,925 791,512 -- 519,413 1,200,308
---------- ---------- ------------- ---------- ----------
$4,167,062 $2,409,914 $ -- $1,757,148 $4,540,972
========== ========== ============= ========== ==========
</TABLE>
F-61
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Income taxes - continued
<TABLE>
<CAPTION>
For the year ended December 31, 1992
---------------------------------------------------------------------------
Base Interest Base Interest Cumulative
Paid From Paid From Current Base Unpaid
Current Base Properties' Non-Operating Interest Full Base
Interest Due(1) Operations Sources(2) Not Paid Interest
--------------- ------------- ---------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Royal Oaks $1,069,296 $ 664,797 $ -- $ 404,499 $ 657,623
Trailway Pond 460,488 181,680 138,798 140,010 178,384
Valley Creek 1,326,353 720,038 -- 606,315 1,266,922
White Bear Woods 1,310,925 766,121 250 544,554 680,895
---------- ---------- -------- ---------- ----------
$4,167,062 $2,332,636 $139,048 $1,695,378 $2,783,824
========== ========== ======== ========== ==========
</TABLE>
(1) Although these loans were placed on non-accrual status for income tax
purposes, the Partnership continues to charge the borrowers interest
on unpaid base interest, which totalled $584,856, $370,558, and
$171,740 for 1994, 1993 and 1992, respectively.
(2) Amounts were funded from reserves provided for from the mortgage loan
proceeds.
SERIES II
---------
As discussed in Note 5, the five Series II mortgage revenue bonds are
accounted for as real estate for financial statement purposes as of December 31,
1994. However, for federal income tax purposes, the investments in these
mortgage revenue bonds are treated as loans, interest on which is exempt from
federal income tax. A reconciliation of the primary differences between the
financial statement net income and municipal income for tax purposes is as
follows:
<TABLE>
<CAPTION>
For the years ended December 31,
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Financial statement net income $ 1,375,553 $ 1,646,709 $ 300,355
Municipal interest income not recognized (1) 3,902,102 3,657,305 5,843,008
Rental income, net (2) (1,546,136) (1,511,870) (428,325)
Accrued interest on delinquent interest (3) -- -- 332,394
Expenses not allowed for tax purposes 3,401 863 --
Valuation adjustment on real estate -- (416,432) --
----------- ----------- ----------
Municipal income, net for tax purposes $ 3,734,920 $ 3,376,575 $6,047,432
=========== =========== ==========
Municipal income per weighted average BAC outstanding $ 1.14 $ 1.03 $ 1.85
=========== =========== ==========
</TABLE>
(1) Represents the adjustment for interest income received during the period,
which was previously eliminated from net income for financial statement
purposes.
(2) Represents net income from investments accounted for as real estate.
(3) Represents interest on delinquent base interest compounded monthly, for
loans on accrual status for income tax purposes, at the base rate of
interest of the applicable loan.
Although the Partnership accounted for all of the mortgage loan investments
as real estate for financial statement purposes during 1994 and reclassified the
cash flow from the properties as rental income and expense, the Partnership
continues to charge the borrowers and nominees interest under the terms of the
original mortgages and interest on unpaid base mortgage interest.
F-62
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Income taxes - continued
The following tables summarize the full interest payments for the years ended
December 31, 1994, 1993 and 1992 that are due to the Partnership from the
properties:
<TABLE>
<CAPTION>
For the year ended December 31, 1994
---------------------------------------------------------------------------
Base Interest Base Interest Cumulative
Paid From Paid From Current Base Unpaid
Current Base Properties' Non-Operating Interest Full Base
Interest Due(1) Operations Sources(2) Not Paid Interest
--------------- ------------- ---------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Ethan's Ridge and
Ethan's Glen IIB $1,518,750 $1,185,957 $ 27,500 $ 305,293 $1,698,524
Fountain Place 1,985,500 1,271,575 -- 713,925 4,494,367
James Street Crossing 1,335,758 879,491 -- 456,267 1,429,729
Trailway Pond II 1,003,000 460,387 -- 542,613 2,140,876
---------- ---------- ------------- ---------- ----------
$5,843,008 $3,797,410 $ 27,500 $2,018,098 $9,763,496
========== ========== ============= ========== ==========
For the year ended December 31, 1993
---------------------------------------------------------------------------
Base Interest Base Interest Cumulative
Paid From Paid From Current Base Unpaid
Current Base Properties' Non-Operating Interest Full Base
Interest Due(1) Operations Sources(2) Not Paid Interest
--------------- ------------- ---------------- ------------ -----------
Ethan's Ridge and
Ethan's Glen IIB $1,518,750 $1,051,763 $ -- $ 466,987 $1,393,231
Fountain Place 1,985,500 1,343,102 -- 642,398 3,780,442
James Street Crossing 1,335,758 767,321 23,288 545,149 973,462
Trailway Pond II 1,003,000 449,564 -- 553,436 1,598,263
---------- ---------- ------------- ---------- ----------
$5,843,008 $3,611,750 $ 23,288 $2,207,970 $7,745,398
========== ========== ============= ========== ==========
For the year ended December 31, 1992
---------------------------------------------------------------------------
Base Interest Base Interest Cumulative
Paid From Paid From Current Base Unpaid
Current Base Properties' Non-Operating Interest Full Base
Interest Due(1) Operations Sources(2) Not Paid Interest
--------------- ------------- ---------------- ------------ -----------
Ethan's Ridge and
Ethan's Glen IIB $1,518,750 $1,028,553 $ -- $ 490,197 $ 926,244
Fountain Place 1,985,500 1,078,123 -- 907,377 3,138,044
James Street Crossing 1,335,758 878,920 139,838 317,000 428,313
Trailway Pond II 1,003,000 469,880 -- 533,120 1,044,827
---------- ---------- ------------- ---------- ----------
$5,843,008 $3,455,476 $139,838 $2,247,694 $5,537,428
========== ========== ============= ========== ==========
</TABLE>
(1) Although these loans were placed on non-accrual status for income tax
purposes, the Partnership continues to charge the borrowers interest on
unpaid base interest, which, not including current base interest due,
totaled $932,242, $582,804 and $332,394 for 1994, 1993 and 1992,
respectively.
(2) Amounts were funded from reserves provided for from the mortgage loan
proceeds and/or from the general partners of the borrowers.
F-63
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
ASSETS
As of As of
September 30, December 31,
1995 1994
------------- ------------
(Unaudited)
Investments in
Real estate:
Land $ 10,228,056 $ 10,228,056
Buildings and personal property 71,895,919 71,895,919
------------ ------------
82,123,975 82,123,975
Less: accumulated depreciation (13,464,641) (11,343,330)
------------ ------------
68,659,334 70,780,645
Mortgage revenue bond and working
capital loan 8,254,707 8,254,707
------------ ------------
76,914,041 79,035,352
Cash and cash equivalents 131,737 100,513
Restricted cash and cash equivalents 2,113,785 1,345,940
Marketable securities 1,304,826 1,707,572
Working capital reserves invested in
marketable securities 4,001,726 3,846,520
Interest reserves invested in marketable
securities 298,750 414,326
Receivables and other assets 654,322 845,809
------------ ------------
Total assets $ 85,419,187 $ 87,296,032
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
F-64
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS - Continued
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
As of As of
September 30, December 31,
1995 1994
------------- ------------
(Unaudited)
Distributions payable $ 1,593,575 $ 2,177,886
Deferred revenue 1,490,624 1,507,697
Accrued mortgage administration and
servicing fees due to related parties 1,599,573 1,183,505
Other liabilities related to real estate
operations 1,101,278 804,592
Accounts payable and accrued expenses 360,304 145,954
----------- -----------
Total liabilities 6,145,354 5,819,634
----------- -----------
Partners' capital (deficit):
General Partner (404,862) (382,616)
Beneficial Assignee Certificates (BACs)
- 5,258,268 BACs issued and outstanding 79,678,695 81,859,014
----------- -----------
Total partners' capital 79,273,833 81,476,398
----------- -----------
Total liabilities and partners'
capital $85,419,187 $87,296,032
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
F-65
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
--------------------------- --------------------------
1995 1994 1995 1994
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Income from investment
in real estate:
Rental revenue $ 3,274,830 $ 3,527,455 $ 9,597,814 $ 9,594,664
Rental expenses (1,802,847) (2,317,149) (5,139,063) (5,474,394)
Depreciation (707,104) (725,885) (2,121,311) (2,177,654)
----------- ----------- ----------- -----------
Net rental income 764,879 484,421 2,337,440 1,942,616
Mortgage revenue
bond and working
capital loan 192,257 90,299 684,105 170,359
----------- ----------- ----------- -----------
957,136 574,720 3,021,545 2,112,975
----------- ----------- ----------- -----------
Other income (expenses):
Other interest
income 39,548 32,699 137,302 169,088
Merger-related
expenses (285,367) -- (285,367) --
General and adminis-
trative (51,732) (36,572) (238,628) (239,009)
Professional fees (19,068) (16,498) (56,692) (59,723)
----------- ----------- ----------- -----------
(316,619) (20,371) (443,385) (129,644)
----------- ----------- ----------- -----------
Net income $ 640,517 $ 554,349 $ 2,578,160 $ 1,983,331
=========== =========== =========== ===========
Net income allocated
to General Partner
(1.01%) $ 6,469 $ 5,599 $ 26,039 $ 20,032
=========== =========== =========== ===========
Net income allocated
to BAC Holders
(98.99%) $ 634,048 $ 548,750 $ 2,552,121 $ 1,963,299
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-66
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF INCOME - Continued
(Unaudited)
For the three months ended For the nine months ended
September 30, September 30,
--------------------------- --------------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
Net income per BAC $ 0.13 $ 0.10 $ 0.49 $ 0.37
========== ========== ========== ==========
BACs outstanding 5,258,268 5,258,268 5,258,268 5,258,268
========== ========== ========== ==========
The accompanying notes are an integral part
of these consolidated financial statements.
F-67
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the nine months ended September 30, 1995
(Unaudited)
Beneficial
Assignee
Certificate General
Holders Partner Total
----------- --------- -----------
Balance, December 31, 1994 $81,859,014 $(382,616) $81,476,398
Net income 2,552,121 26,039 2,578,160
Distributions paid or accrued
of $0.90 per BAC (including
return of capital of
$0.41 per BAC) (4,732,440) (48,285) (4,780,725)
----------- --------- -----------
Balance, September 30, 1995 $79,678,695 $(404,862) $79,273,833
=========== ========= ===========
The accompanying notes are an integral part
of these consolidated financial statements.
F-68
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the nine months ended
September 30,
1995 1994
---------- ----------
Cash flows from operating activities:
Net income $2,578,160 $1,983,331
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 2,121,311 2,177,654
Adjustment to reclass real estate to
mortgage revenue bond -- 281,657
Changes in assets and liabilities:
Increase in restricted cash
and cash equivalents (767,845) (897,915)
Decrease in receivables and other
assets 191,487 15,103
(Decrease) increase in deferred
revenue (17,073) 118,480
Increase in accrued mortgage admini-
stration and servicing fees due
to related parties 416,068 367,642
Increase in other liabilities related
to real estate operations 296,686 713,030
Increase (decrease) in accounts payable
and accrued expenses 214,350 (23,146)
---------- ----------
Net cash provided by operating
activities 5,033,144 4,735,836
---------- ----------
Cash flows from investing activities:
Net sales of marketable securities 402,746 8,446
(Deposits to) withdrawals from working
capital reserves invested in
marketable securities (155,206) 1,749,896
Withdrawals from interest reserves
invested in marketable securities 115,576 --
---------- ----------
Net cash provided by investing
activities 363,116 1,758,342
---------- ----------
The accompanying notes are an integral part
of these consolidated financial statements.
F-69
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(Unaudited)
For the nine months ended
September 30,
1995 1994
----------- -----------
Cash flows from financing activities:
Distributions paid to BAC Holders and
General Partner (5,365,036) (6,484,789)
----------- -----------
Net increase in cash and cash equivalents 31,224 9,389
Cash and cash equivalents, beginning of
period 100,513 66,833
----------- -----------
Cash and cash equivalents, end of period $ 131,737 $ 76,222
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
F-70
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of CRITEF III Associates Limited Partnership (the General
Partner), the accompanying unaudited consolidated financial statements of
Capital Realty Investors Tax Exempt Fund III Limited Partnership (the
Partnership) contain all adjustments of a normal recurring nature necessary to
present fairly the Partnership's consolidated financial position as of September
30, 1995 and December 31, 1994 and the results of its consolidated operations
for the three and nine months ended September 30, 1995 and 1994 and its
consolidated cash flows for the nine months ended September 30, 1995 and 1994.
These unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. While the General Partner believes
that the disclosures presented are adequate to make the information not
misleading, it is suggested that these consolidated financial statements be read
in conjunction with the consolidated financial statements and the notes included
in the Partnership's Annual Report filed on Form 10-K for the year ended
December 31, 1994.
The Partnership's consolidated balance sheets reflect the financial position
of seven properties for the dates presented. The Partnership's consolidated
statements of income include the rental income, rental expenses and depreciation
of the seven properties, exclusive of debt service due to the Partnership, as a
result of the receipt of deeds in lieu of foreclosure, transfer of partnership
interests (for Geary Courtyard) or upon acquisition, development or construction
(ADC) determination, as further discussed in Note 3. One property, Paces River
2, is not included in this consolidation due to the implementation of SFAS No.
114, as discussed below.
In May 1993, the FASB issued SFAS No. 114 "Accounting by Creditors for
Impairment of a Loan". This statement, as amended, addresses how a creditor
should measure impairment of a loan and requires that loans previously accounted
for as in-substance foreclosed (ISF) be accounted for in accordance with SFAS
No. 114. This statement is effective for fiscal years beginning after December
15, 1994 and was implemented by the Partnership in the first quarter of 1995.
The adoption of SFAS No. 114 resulted in the reclassification of the investment
in Paces River 2 from real estate to a loan. The investment in Paces River 2 is
now reflected on the Partnership's consolidated balance sheets as an investment
in mortgage revenue bond and working capital loan with a combined recorded
investment of $8,254,707, which represents the carrying value of the property,
net of accumulated depreciation and deferred revenue, as of September 30, 1995
and December 31, 1994. The mortgage revenue bond and working capital loan
original principal balances are $8,750,000 and $850,000, respectively. The
Partnership expects the full principal amounts of the loans to be repaid at
maturity in 2000. The Partnership recognizes the income from the Paces River 2
investment on an accrual basis.
F-71
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION - Continued
Certain amounts, including those relating to Paces River 2, in the 1994
consolidated financial statements have been reclassified to conform with the
1995 presentation in accordance with SFAS No. 114. Net rental income for Paces
River 2 of $90,299 and $170,359 for the three and nine months ended September
30, 1994, respectively, has been reclassified as mortgage revenue bond and
working capital loan interest. Actual Paces River 2 mortgage revenue bond
interest received by the Partnership during the three and nine months ended
September 30, 1994 was $172,811 and $525,726, respectively. Actual Paces River
2 working capital loan interest received by the Partnership during the three and
nine months ended September 30, 1994 was $9,564, and $35,213, respectively. The
reclassification of prior year net rental income for Paces River 2 did not
result in a restatement of prior year's Partner's Capital (Deficit).
2. MERGER PROPOSAL
On September 11, 1995, the Partnership and its General Partner entered into
a merger agreement, subject to BAC Holder approval, with an affiliate of Capital
Apartment Properties, Inc. (CAPREIT), a private real estate investment trust.
An affiliate of CAPREIT is the property manager for five of the eight properties
securing the bonds held by the Partnership. If the merger proposal is approved
by a majority vote of BAC Holders, all of the BACs in the Partnership will be
redeemed for cash and the interests represented by such BACs will be canceled.
The redemption price per BAC will be $14.360. In addition, the General Partner
will sell its 1.01% general partnership interest in the Partnership to CAPREIT
for $500,000. CAPREIT will also acquire an account receivable held by an
affiliate and a former affiliate of the General Partner for the accrued mortgage
servicing and administration fees on the related property mortgage loans by
paying the discounted amount of $1,620,966.
Consummation of the merger is contingent upon the approval of a majority of
BAC Holders. The proposed merger is also contingent upon receiving a favorable
opinion regarding the fairness of the redemption price to BAC Holders from a
financial point of view. A proxy statement is expected to be issued to BAC
Holders after it is filed with and reviewed by the Securities and Exchange
Commission. This proxy statement will include a full description of the
proposed merger and the independent fairness opinion.
3. INVESTMENTS
The Partnership invested in eight federally tax-exempt mortgage revenue
bonds with an aggregate principal amount of $97,101,000 and made three working
capital loans with an aggregate principal amount of $3,409,604. As discussed in
the Partnership's Annual Report filed on Form 10-K for the year ended December
31, 1994, six properties collateralizing certain of the mortgage revenue bonds
have been transferred by deed in lieu of foreclosure (or by transfer of
partnership interests in the borrower entity) to nominees of the Partnership. As
a result, the Partnership accounts for these investments as real estate for
financial statement purposes. Additionally, the Partnership accounts for the
Washington Ridge mortgage revenue bond as real estate in accordance with the
American Institute of Certified Public Accountants Notice
F-72
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENTS - Continued
to Practitioners - ADC Arrangements. Accordingly, the consolidated balance
sheets reflect these investments in the amount of $68,659,334 and $70,780,645 as
of September 30, 1995 and December 31, 1994, respectively, net of accumulated
depreciation, based on the lower of cost or fair value at the earlier of date of
deed in lieu of foreclosure, transfer of partnership interests, or acquisition,
development and construction (ADC) determination. The Partnership continues to
evaluate these investments on a lower of cost or net realizable basis, taking
into consideration the Partnership's intention for the nominees to hold these
properties for the long term if necessary, and with investor consent, in order
to recover its recorded investment. The financial statement presentation is
independent of the characterization of the bonds as loans for federal income tax
purposes and the tax-exempt nature of the mortgage revenue bond interest.
Additionally, the Partnership accounts for the investment in the Paces River 2
mortgage revenue bond and working capital loan as loans with a recorded
investment of $8,254,707 as of September 30, 1995 and December 31, 1994, in
accordance with SFAS No. 114, as discussed above.
In 1991, the U. S. Supreme Court decided a case, Cottage Savings Association
v. Commissioner (Cottage Savings), that could be interpreted to compromise the
tax-exempt status of mortgage revenue bonds which have been modified. In
response to this decision, in December 1992, the Internal Revenue Service issued
proposed regulations in connection with the modification of debt instruments.
If the regulations are adopted in their present form, they would alter existing
authority and curtail the type and extent of modifications that could be made by
a bond owner/lender without adversely affecting the tax-exempt status of bonds.
It is not clear at this time what effect the Cottage Savings decision or the
proposed regulations may have on the Partnership with respect to the bonds
secured by loans on properties currently held by nominees. The General Partner
continues to believe that these bonds remain tax-exempt. The General Partner
will continue its efforts to protect the tax-exempt status of the bonds and the
interest thereon. However, in light of the Cottage Savings decision and the
proposed regulations, there can be no assurance that the General Partner will be
successful in its efforts.
As of September 30, 1995, the Partnership had cash and cash equivalents of
$131,737, unrestricted marketable securities of $1,304,826 and restricted cash
and cash equivalents of $2,113,785. Marketable securities consist of tax-exempt
municipal bonds which generally contain a seven-day put option with established
banks or brokerage houses, and are stated at cost, which generally represents
par value and approximates market value. The Partnership has classified these
investments as Available for Sale in accordance with SFAS No. 115. Realized
gains and losses on the sale of marketable securities were determined on a
specific identification basis. There were no net unrealized holding gains or
losses recognized during the three and nine months ended September 30, 1995 as
there was no material difference between the cost for the tax-exempt municipal
bonds and fair value throughout the first three quarters of 1995.
Following are updates of significant events affecting the Partnership's
properties during the nine months ended September 30, 1995:
F-73
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENTS - Continued
Regency Woods
-------------
Shortfalls in interest payments from Regency Woods were being paid from
draws on a $250,000 irrevocable letter of credit. The Partnership drew
down the full amount remaining under the letter of credit in January 1995,
resulting in the default by the borrower on the working capital loan. The
borrower transferred the property by deed in lieu of foreclosure to a
nominee of the Partnership as of February 28, 1995.
Woodlane Place
--------------
In March 1994, the Partnership was notified by the management agent of
Woodlane Place that certain buildings at the property experienced damage
due to frost heaving. The nominee owner hired an engineer to analyze the
underlying problem of inadequate drainage at the property and to determine
the number of affected buildings and the severity of the drainage problem.
Based on this analysis, the costs associated with the correction of the
drainage problem are expected to be approximately $300,000, and will not be
covered by the property's insurance carrier. Property improvements
relating to the drainage problem totalling approximately $29,000 were
completed in the fourth quarter of 1994 and are included in buildings and
personal property in the consolidated balance sheets. As the remaining
costs to correct the drainage problem are capitalizable costs and the work
had not begun as of September 30, 1995, the consolidated financial
statements do not include an adjustment for the remaining estimated costs.
A contract for $55,000 in drainage work, representing the first phase of
the repairs, has been negotiated and work on the repairs began in October
1995. The remaining repairs are expected to be completed in 1996 and 1997.
Due to the nature of the drainage problem, occupancy levels at the property
are not expected to decrease as a result of the ongoing capital
improvements. Funding for these capital improvements may be provided from
the property's existing replacement reserves, future property cash flow,
and/or a loan to the property from the working capital reserves of the
Partnership.
The Partnership has joined with the property's insurance carrier in a
lawsuit against the original architect and general contractor of Woodlane
Place. The Partnership has joined on a contingent basis, with no legal
fees being incurred unless the Partnership receives a settlement or
judgement, and with other legal expenses estimated to be less than $20,000.
There is no assurance that the Partnership will receive any funds as a
result of this lawsuit.
F-74
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENTS - Continued
Ethan's Glen IIA
----------------
In April 1995, Ethan's Glen IIA suffered damage to certain roofs due to
a severe hail storm. The cost to repair the damaged roofs was paid by the
property's insurance carrier, less a minimal deductible.
4. DISTRIBUTIONS TO BAC HOLDERS
The Partnership expects to continue to make distributions to BAC Holders on
a quarterly basis. The proposed merger agreement stipulates that current year
distributions cannot exceed ten cents per BAC per month. The agreement also
stipulates that distributions during 1996 cannot exceed 95% of Cash Flow, as
defined in the Partnership Agreement. There are no other legal restrictions on
the Partnership's present or future ability to make cash distributions. The
distributions to BAC Holders have been funded from three primary sources: cash
flow from the underlying properties' operations, surplus working capital
reserves of the Partnership, and funds from property reserves/borrower
guarantees. However, because the surplus working capital reserves are almost
depleted and property reserves/borrower guarantees were depleted during the
first quarter of 1995, the Partnership will not be able to maintain the
distributions to BAC Holders at the 1994 level. It is expected that the 1995
distributions will be based primarily on cash flow from the Partnership's
operations. Cash flow from the Partnership's operations consists of cash flow
from six of the properties, plus specified interest payments from two properties
and contingent interest payments from one property, supplemented by any
available property reserves/borrower guarantees, less Partnership expenses. The
Partnership seeks to optimize cash flow from the properties owned by nominees.
Despite these efforts, the amounts paid to the Partnership from the properties'
operations may be expected to fluctuate from period to period due to changes in
occupancy rates, rental rates, operating expenses and other variables. Based
upon the current operations of the Partnership, the 1995 distribution is
expected to approximate $1.20 per BAC.
The following distributions were paid or accrued to BAC Holders of record
for the first three quarters of 1995 and 1994:
F-75
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. DISTRIBUTIONS TO BAC HOLDERS - Continued
<TABLE>
<CAPTION>
1995 1994
Distributions to Distributions to
BAC Holders BAC Holders
-------------------- ---------------------
Quarter Ended Total Per BAC Total Per BAC
- - - - ------------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C>
March 31, $1,577,480 $0.30 $2,103,307 $0.40
June 30, 1,577,480 0.30 2,155,890 0.41
September 30, 1,577,480 0.30 2,155,890 0.41
---------- ----- ----------- -----
Totals $4,732,440 $0.90 $6,415,087 $1.22
========== ===== =========== =====
</TABLE>
Distributions to BAC Holders for the three and nine months ended September
30, 1995 and 1994 were funded as follows:
For the three months ended
September 30,
--------------------------
1995 1994
---------- ----------
Cash flow (1) $1,442,204 $1,494,646
Withdrawals from working capital/interest
reserves 151,371 683,241
---------- ----------
Total cash available for distribution $1,593,575 $2,177,887
========== ==========
Distributions to:
General Partner (1.01%) 16,095 $ 21,997
========= ==========
BAC Holders (98.99%) $1,577,480 $2,155,890
========== ==========
F-76
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. DISTRIBUTION TO BAC HOLDERS - Continued
For the nine months ended
September 30,
-------------------------
1995 1994
------------ -----------
Cash flow (1) $4,820,355 $4,730,645
(Deposits to) withdrawals from working
capital/interest reserves (39,630) 1,749,896
---------- ----------
Total cash available for distribution $4,780,725 $6,480,541
========== ==========
Distributions to:
General Partner (1.01%) $ 48,285 $ 65,454
========== ==========
BAC Holders (98.99%) $4,732,440 $6,415,087
========== ==========
(1) As defined in the Partnership Agreement.
The General Partner expects the distribution for the quarter ending December
31, 1995 to be approximately $0.30 per BAC, payable on February 14, 1996, or
possibly earlier depending on the merger closing date, to BAC Holders of record
as of the last day in each month.
The Partnership has working capital reserves which may be available for the
ongoing costs of operating the Partnership, for supplementing distributions to
investors and for making working capital loans to the borrowers. As of
September 30, 1995 and December 31, 1994, the working capital reserves were
$4,001,726 and $3,846,520, respectively, both of which exceed the Partnership's
minimum working capital reserve balance of approximately $3,718,000. The minimum
working capital reserve balance may be increased or decreased from time to time
as deemed necessary by the General Partner. The surplus working capital reserve
balance of approximately $284,000 as of September 30, 1995 may be used to
supplement distributions to BAC Holders. Net withdrawals from the surplus
working capital reserves to fund distributions for the three and nine months
ended September 30, 1995, were $151,371 and $0, respectively. Net withdrawals
from the surplus working capital reserves to fund distributions for the three
and nine months ended September 30, 1994, were $683,241 and $1,749,896,
respectively.
Interest reserves relating to Regency Woods of $0 and $115,576 were
transferred to working capital reserves during the three and nine months ended
September 30, 1995, respectively, to fund distributions to BAC Holders. As of
September 30, 1995, interest reserves relating to Regency Woods had been
depleted, and interest reserves applicable to Washington Ridge were $298,750.
F-77
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. DISTRIBUTIONS TO BAC HOLDERS - Continued
As of December 31, 1994, interest reserves applicable to Regency Woods and
Washington Ridge were $414,326. No interest reserves were transferred to
working capital reserves during 1994.
5. INCOME TAXES
For income tax purposes, base interest income is accrued when earned. The
accrual of interest is discontinued, when at the time of accrual, collectibility
of the interest due is considered unlikely. Once a loan has been placed on a
non-accrual status, income is recorded only as cash payments are received from
the borrower or nominee until such time as the uncertainty of collection of
unpaid base interest is eliminated. In 1993, Geary Courtyard, Woodlane Place
and Valley Creek II were placed on a non-accrual status for income tax purposes;
therefore, income is recognized only to the extent of cash received. Contingent
interest from the investment is recognized as revenue when collected.
Contingent interest of $9,775 and $56,522 was recognized from Washington Ridge
for the three and nine months, respectively, ended September 30, 1995. No
contingent interest was recognized for the three or nine months ended September
30, 1994.
As discussed in Note 3, seven of the eight investments in mortgage revenue
bonds and two of the three working capital loans are accounted for as
investments in real estate for financial statement purposes as of September 30,
1995. However, for federal income tax purposes the investments in all of the
mortgage revenue bonds and working capital loans are treated as loans. Interest
on the investment in mortgage revenue bonds, which represents approximately 96%
of the Partnership's income for tax purposes, is exempt from federal income tax.
A reconciliation of the primary differences between the financial statement net
income and municipal income for tax purposes is as follows:
F-78
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. INCOME TAXES - Continued
For the three months ended For the nine months ended
September 30, September 30,
---------------------------- ---------------------------
1995 1994 1995 1994
------------- ------------- ------------- ------------
Financial statement
net income $ 640,517 $ 554,349 $ 2,578,160 $ 1,983,331
Municipal interest
income not
recognized(1) 1,717,069 1,254,333 4,884,282 4,587,585
Rental income,
net (2) (764,879) (484,421) (2,337,440) (1,942,616)
Accrued interest
on delinquent
interest (3) 41,297 31,882 116,279 86,892
Excess amortization
for tax purposes (36,150) (36,150) (108,450) (108,450)
Taxable income on
working capital
loans not
recognized (1) 43,565 63,009 80,964 189,025
---------- ---------- ----------- -----------
Municipal income,
net for tax
purposes $1,641,419 $1,383,002 $ 5,213,795 $ 4,795,767
========== ========== =========== ===========
Municipal income
per BAC $0.31 $0.26 $0.98 $0.90
========== ========== =========== ===========
(1) Represents the adjustment for interest income received or receivable during
the period which was previously eliminated from net income for financial
statement purposes.
(2) Represents net rental income from investments accounted for as real estate.
(3) Represents interest on delinquent base interest, for loans on accrual
status for income tax purposes, compounded monthly at the base rate of
interest of the applicable loan.
Although the Partnership accounted for seven of the eight mortgage loan
investments and two of the three working capital loans as real estate for
financial statement purposes, the Partnership continued to charge all of the
borrowers interest under the terms of the original loans and interest on unpaid
F-79
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. INCOME TAXES - Continued
base interest. The following tables summarize the full base interest payments
for the nine months ended September 30, 1995 and 1994 that are due to the
Partnership from the loans and properties:
<TABLE>
<CAPTION>
For the nine months ended September 30, 1995
--------------------------------------------------------
Base Base
Interest Interest Current
Current Base Paid From Paid From Base
Interest Properties' Non-Operating Interest
Due(1) Operations Sources(2) Not Paid
------------ ----------- ------------- ----------
<S> <C> <C> <C> <C>
Ethan's Glen IIA $ 690,703 $ 547,277 $ -- $ 143,426
Geary Courtyard 1,305,450 577,000 -- 728,450
Ocean Walk 1,330,820 1,209,332 -- 121,488
Paces River 2 576,769 607,835 -- --
Regency Woods 520,094 333,562 17,834 168,698
Valley Creek II 689,325 520,052 -- 169,273
Washington Ridge 656,250 656,250 -- --
Woodlane Place 1,055,250 707,716 -- 347,534
---------- ---------- -------- ----------
$6,824,661 $5,159,024 $ 17,834 $1,678,869
========== ========== ======== ==========
<CAPTION>
For the nine months ended September 30, 1994
--------------------------------------------------------
Base Base
Interest Interest Current
Current Base Paid From Paid From Base
Interest Properties' Non-Operating Interest
Due(1) Operations Sources(2) Not Paid
------------ ---------- ------------- ----------
<S> <C> <C> <C> <C>
Ethan's Glen IIA $ 690,703 $ 546,087 $ 65,654 $ 78,962
Geary Courtyard 1,305,450 451,329 -- 854,121
Ocean Walk 1,330,820 1,087,162 35,838 207,820
Paces River 2 576,769 560,939 -- 15,830
Regency Woods 520,094 408,055 112,039 --
Valley Creek II 689,325 387,959 -- 301,366
Washington Ridge 656,250 656,250 -- --
Woodlane Place 1,055,250 600,917 -- 454,333
---------- ---------- -------- ----------
$6,824,661 $4,698,698 $213,531 $1,912,432
========== ========== ======== ==========
</TABLE>
F-80
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. INCOME TAXES - Continued
(1) Although three of these loans were placed on non-accrual status for income
tax purposes, the Partnership also charges the borrowers interest on
unpaid base interest, which totalled $762,676 and $565,512 for the nine
months ended September 30, 1995 and 1994, respectively.
(2) Amounts were funded from reserves from the mortgage loan proceeds and/or
funds from the general partners of the borrowers.
6. LITIGATION
On September 22, 1995, a purported class-action lawsuit (styled Zakin v.
Dockser, et. al.) was filed by Irving Zakin (the Plaintiff), a BAC Holder of the
Partnership against the Partnership, its general partner (CRITEF III Associates
Limited Partnership), its Assignor Limited Partner (CRITEF III, Inc.), C.R.I.,
Inc., William B. Dockser, H. William Willoughby, Capital Realty Investors Tax
Exempt Fund Limited Partnership, CRITEF Associates Limited Partnership, CRITEF,
Inc., and CAPREIT (collectively, the Defendants) in Chancery Court for the State
of Delaware. The lawsuit alleges, among other matters, that certain of the
Defendants breached their fiduciary duty to the BAC Holders by failing to fully
disclose their intentions regarding the proposed merger. The lawsuit also
alleges that the Defendants' merger negotiations have not been conducted at
arms-length, resulting in self-dealing among certain of the Defendants. The
lawsuit seeks, among other things, to enjoin the proposed merger, to require
arms-length negotiations purportedly to increase the price to be paid to BAC
Holders, to evaluate alternatives to the proposed merger, and to pay Plaintiff's
costs.
On October 5, 1995, a second purported class-action lawsuit (styled Wingard
v. Dockser, et. al.) was filed by David and Johanna Wingard, BAC Holders of an
affiliate of the Partnership, against the same Defendants, in Chancery Court for
the State of Delaware. The second lawsuit makes the same allegations as the
first lawsuit. A request to the court has been made by the Plaintiffs in both
lawsuits to consolidate the two complaints.
The Partnership Agreement provides that the costs incurred in connection
with any litigation in which the Partnership is involved be borne by the
Partnership itself. At this time, there is no estimate as to the timing or
amount, if any, of the lawsuits, therefore, the Partnership's financial
statements do not include any adjustment that might result from the outcome of
the lawsuits. The Defendants believe that the lawsuits are without merit and
intend to defend themselves vigorously against the allegations contained in both
lawsuits.
7. RELATED-PARTY TRANSACTIONS
The General Partner and its affiliates are entitled to receive
reimbursements from the Partnership for actual costs and expenses incurred in
connection with the operation of the Partnership. During the three and nine
months ended September 30, 1995, the General Partner and its affiliates were
reimbursed $28,425 and $124,568, respectively, and $44,029 and $145,735 for the
F-81
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. RELATED-PARTY TRANSACTION - Continued
three and nine months ended September 30, 1994, respectively. These expenses are
included in general and administrative expenses and merger-related expenses in
the consolidated statements of income.
CRICO Mortgage Company, Inc. (CRICO Mortgage), a former affiliate of the
General Partner, was entitled to annual mortgage administration and servicing
fees from the borrowers which were payable from operating revenues each month
after payment of debt service on the mortgage loans. On June 30, 1995, CRICO
Mortgage merged with and into an affiliate of CRIIMI MAE Inc., a publicly traded
real estate investment trust (the REIT). The REIT was originally sponsored by
C.R.I., Inc. (CRI), the general partner of the General Partner, but is not
controlled by CRI, although the CRI stockholders are officers and major
stockholders of the REIT. Pursuant to the REIT merger agreement, the right to
receive the accrued and unpaid mortgage administration and servicing fees as of
the date of the REIT merger was distributed by CRICO Mortgage to its
shareholders and contributed by them to CRI. As of June 30, 1995, the mortgage
administration and servicing are being performed by an affiliate of the REIT and
mortgage administration and servicing fees are paid to that entity. This merger
did not result in any increase in fees or changes in the amount of fees which
are currently payable. Total unpaid fees, including those relating to Paces
River 2, of $1,599,573 and $1,183,505 were due to CRI as of September 30, 1995
and December 31, 1994, respectively. Total unpaid fees, including those
relating to Paces River 2, of $141,667 were due to the affiliate of the REIT as
of September 30, 1995, and are included in other liabilities related to real
estate operations in the consolidated balance sheets. The unpaid fees are
payable from available cash flow after payment of all current and delinquent
base interest and accrued interest on delinquent base interest. If available
cash flow from the borrower is insufficient to pay the fee, it is payable on the
earlier of prepayment or maturity of the loan, after debt repayment. Any
payments made with respect to unpaid fees will be applied against the oldest
outstanding fees first. During the six months ended June 30, 1995, the fees
paid by the borrowers to CRICO Mortgage totalled $49,312. During the three
months ended September 30, 1995, the fees paid by the borrowers to the affiliate
of the REIT totalled $18,750. Fees paid by the borrowers to CRICO Mortgage for
the three and nine months ended September 30, 1994 were $30,562 and $113,614,
respectively.
In addition, CRICO Management of Minnesota, Inc. (CRICO Minnesota), an
affiliate of the General Partner, performed property management services for
Valley Creek II, Woodlane Place, Ethan's Glen IIA and Ocean Walk through January
31, 1994. On February 1, 1994, CRICO Minnesota contributed its property
management contracts and personnel to CAPREIT Residential Corporation
(Residential). Residential was formed by CRI but is not owned or controlled by
CRI and/or its affiliates. Management fees of $21,399 were paid or accrued to
the affiliates for the month ended January 31, 1994.
F-82
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Partners and Beneficial Assignee Certificate Holders of
Capital Realty Investors Tax Exempt Fund III Limited Partnership:
We have audited the accompanying consolidated balance sheets of Capital Realty
Investors Tax Exempt Fund III Limited Partnership (the Partnership, a Delaware
limited partnership) as of December 31, 1994 and 1993, and the related
consolidated statements of income, changes in partners' capital (deficit) and
cash flows for the years ended December 31, 1994, 1993 and 1992. 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 borrowers
(Washington Ridge, Regency Woods and Paces River 2 in 1994 and Washington Ridge
and Regency Woods in 1993 and 1992) which received the proceeds of the
Partnership's investments in mortgage revenue bonds, which combined statements
reflect total assets of 15 percent and 15 percent, respectively of 1994 and 1993
consolidated totals, and total revenues of 20 percent, 21 percent and 21
percent, respectively, of 1994, 1993 and 1992 consolidated totals. Those
statements were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to the amounts included for these
borrowers, is based solely on 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 and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Capital Realty Investors Tax Exempt
Fund III Limited Partnership as of December 31, 1994 and 1993, and the results
of its operations and its cash flows for the years ended December 31, 1994, 1993
and 1992, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
March 20, 1995
F-83
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
ASSETS
As of December 31,
1994 1993
------------ -----------
Investment in real estate:
Land $ 10,913,453 $10,913,453
Buildings and personal property 80,960,522 80,663,261
------------ -----------
91,873,975 91,576,714
Less: accumulated depreciation (12,469,377) (9,165,960)
------------ -----------
79,404,598 82,410,754
Cash and cash equivalents 100,513 66,833
Restricted cash and cash equivalents 1,345,940 1,210,484
Marketable securities 1,707,572 1,736,606
Working capital reserves invested in
marketable securities 3,846,520 5,764,473
Interest reserves invested in
marketable securities 414,326 414,326
Receivables and other assets 845,809 692,729
------------ -----------
Total assets $ 87,665,278 $92,296,205
============ ===========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Distributions payable $ 2,177,886 $ 2,182,135
Deferred revenue 1,876,943 1,691,402
Accrued mortgage administration and
servicing fees due to related parties 1,318,505 821,007
Other liabilities related to real estate
operations 669,592 576,965
Accounts payable and accrued expenses 145,954 146,185
----------- -----------
Total liabilities 6,188,880 5,417,694
----------- -----------
Partners' capital (deficit):
General Partner (382,616) (328,055)
Beneficial Assignee Certificates
(BACs) - 5,258,268 BACs issued
and outstanding 81,859,014 87,206,566
----------- -----------
Total partners' capital 81,476,398 86,878,511
----------- -----------
Total liabilities and
partners' capital $87,665,278 $92,296,205
=========== ===========
The accompanying notes are an integral
part of these consolidated financial statements.
F-84
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the years ended December 31,
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Income from investment in real estate:
Rental revenue $14,367,365 $13,433,679 $12,172,297
Rental expense (7,634,048) (7,144,288) (6,465,055)
Depreciation (3,303,417) (3,466,782) (3,508,917)
----------- ----------- -----------
Net rental income 3,429,900 2,822,609 2,198,325
----------- ----------- -----------
Other income (expenses):
Other interest income 214,004 345,366 486,411
General and administrative (314,850) (446,474) (330,725)
Professional fees (72,740) (111,222) (105,275)
AMEX Listing -- (18,517) --
----------- ----------- -----------
(173,586) (230,847) 50,411
----------- ----------- -----------
Net income $ 3,256,314 $ 2,591,762 $ 2,248,736
=========== =========== ===========
Net income allocated to General
Partner (1.01%) $ 32,889 $ 26,177 $ 22,712
=========== =========== ===========
Net income allocated to
BAC Holders (98.99%) $ 3,223,425 $ 2,565,585 $ 2,226,024
=========== =========== ===========
Net income per BAC $ 0.61 $ 0.49 $ 0.42
=========== =========== ===========
BACs outstanding 5,258,268 5,258,268 5,258,268
=========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-85
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
Beneficial
Assignee
Certificate General
Holders Partner Total
------------- ---------- -------------
<S> <C> <C> <C>
Balance, December 31, 1991 $99,504,329 $(202,591) $99,301,738
Distributions of $1.63 per BAC
(including return of capital of
$1.20 per BAC) (8,544,686) (87,171) (8,631,857)
Net income 2,226,024 22,712 2,248,736
----------- --------- -----------
Balance, December 31, 1992 93,185,667 (267,050) 92,918,617
Distributions of $1.63 per BAC
(including return of capital of
$1.14 per BAC) (8,544,686) (87,182) (8,631,868)
Net income 2,565,585 26,177 2,591,762
----------- --------- -----------
Balance, December 31, 1993 87,206,566 (328,055) 86,878,511
Distributions of $1.63 per BAC
(including return of capital of
$1.02 per BAC) (8,570,977) (87,450) (8,658,427)
Net income 3,223,425 32,889 3,256,314
----------- --------- -----------
Balance, December 31, 1994 $81,859,014 $(382,616) $81,476,398
=========== ========= ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-86
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December 31,
1994 1993 1992
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,256,314 $ 2,591,762 $ 2,248,736
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 3,303,417 3,466,782 3,508,917
Changes in assets and liabilities:
(Increase) decrease in restricted cash
and cash equivalents (135,456) 577,009 (1,145,590)
(Increase) decrease in receivables and other
assets (153,080) 61,100 (433,470)
Increase in deferred revenue 185,541 252,996 733,688
Increase in accrued mortgage administration
and servicing fees due to related parties 497,498 416,811 268,226
Increase (decrease) in other liabilities
related to real estate operations 92,627 (277,563) 844,912
(Decrease) increase in accounts payable and
accrued expenses (231) 3,203 7,159
------------ ------------ ------------
Net cash provided by operating activities 7,046,630 7,092,100 6,032,578
------------ ------------ ------------
Cash flows from investing activities:
Purchase of personal property (297,261) -- --
Sale of marketable securities 10,618,490 14,418,516 20,030,927
Purchase of marketable securities (10,589,456) (14,398,858) (19,984,099)
Deposits to working capital reserves invested
in marketable securities -- (98,939) (469,906)
Withdrawals from working capital reserves invested
in marketable securities 1,917,953 1,652,326 2,392,085
Withdrawals from interest reserves invested
in marketable securities -- 15,000 649,854
------------ ------------ ------------
Net cash provided by investing activities 1,649,726 1,588,045 2,618,861
------------ ------------ ------------
Cash flows from financing activities:
Distributions to BAC Holders and General Partner (8,662,676) (8,620,184) (8,971,819)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 33,680 59,961 (320,380)
Cash and cash equivalents, beginning of year 66,833 6,872 327,252
------------ ------------ ------------
Cash and cash equivalents, end of year $ 100,513 $ 66,833 $ 6,872
============ ============ ============
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-87
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
Capital Realty Investors Tax Exempt Fund III Limited Partnership (the
Partnership) was organized on September 1, 1987 under the Delaware Revised
Uniform Limited Partnership Act and will continue until December 31, 2017,
unless dissolved earlier in accordance with the Partnership Agreement. The
Partnership was formed to acquire a portfolio of tax-exempt mortgage revenue
bonds, issued by various state or local governments or their agencies or
authorities and collateralized by nonrecourse participating first mortgage
loans on multifamily residential developments. Additionally, the Partnership
was permitted to use up to 5% of its gross offering proceeds to make taxable
working capital loans to borrowers to cover certain expenses which could not
be financed from the proceeds of the mortgage revenue bonds.
The Partnership received initial capital contributions from the General
Partner and the Assignor Limited Partner. The General Partner is CRITEF III
Associates Limited Partnership (CRITEF III Associates) whose managing general
partner is C.R.I., Inc. (CRI). The limited partners of CRITEF III Associates
include the shareholders of CRI and a partnership comprised of certain
employees of CRI and others. The Assignor Limited Partner is CRITEF III, Inc.
whose outstanding shares of stock are owned by the shareholders of CRI. The
Assignor Limited Partner has assigned certain of the ownership attributes of
its limited partnership interest, including rights to a percentage of the
income, gains, losses, deductions and distributions of the Partnership, to the
purchasers of the Beneficial Assignee Certificates (BACs) on the basis of one
unit of limited partnership interest for one BAC.
A Form S-11 Registration Statement was filed with the Securities and
Exchange Commission (SEC) and became effective on February 3, 1988 for a
maximum offering of 10,000,000 BACs at $25 per BAC. The Registration
Statement provided, as was allowed for in the Partnership Agreement, that the
BACs could be issued in a series at the discretion of the General Partner. On
February 8, 1989, CRITEF III Series A completed its tenth and final investor
closing after raising $131,456,700 from the sale of 5,258,268 BACs. The
Partnership suspended selling the remaining 4,741,732 BACs as Series B
effective April 3, 1989. All funds held in escrow pending issuance of the
Series B BACs were refunded to investors. On February 28, 1990, Post-
Effective Amendment No. 3 was filed at the SEC deregistering the Partnership's
remaining unsold BACs.
On July 1, 1993, the General Partner listed the BACs on the American
Stock Exchange (AMEX) with a trading symbol of CRL. The General Partner
believes that the benefits from listing the BACs on AMEX include increased
liquidity and reduced transaction costs. However, a publicly traded
partnership is treated as a corporation for income tax purposes unless it
meets certain exceptions. In 1994, the Partnership met these exceptions and
was not taxed as a corporation.
F-88
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of significant accounting policies
Method of accounting
--------------------
The consolidated financial statements of the Partnership are
prepared on the accrual basis of accounting in accordance with generally
accepted accounting principles.
The Partnership's consolidated balance sheets reflect the financial
position of the properties for the dates presented. The Partnership's
consolidated statements of income include the rental income, rental
expenses and depreciation of the properties, exclusive of debt service
due to the Partnership as of the date of deed in lieu of foreclosure,
transfer of partnership interests (for Geary Courtyard), when considered
in-substance foreclosed (ISF) or upon acquisition, development or
construction (ADC) determination.
Mortgage loans are deemed to be ISF, according to generally accepted
accounting principles, when a determination has been made that the
borrower meets all of the following criteria:
1. The borrower has little or no equity in the collateral, considering
the current fair value of the collateral;
2. Proceeds for repayment of the loan can be expected to come only from
the operation or sale of the collateral; and
3. The borrower has either:
a. formally or effectively abandoned control of the collateral to
the creditor; or
b. retained control of the collateral but, because of the current
financial condition of the borrower or the economic prospects
for the borrower and/or the collateral in the foreseeable
future, it is doubtful that the borrower will be able to
rebuild equity in the collateral or otherwise repay the loan
in the foreseeable future.
Reclassifications
-----------------
Certain amounts in the consolidated financial statements as of
December 31, 1993 and for the years ended December 31, 1993 and 1992 have
been reclassified to conform with the 1994 presentation.
Investments in mortgage revenue bonds and working capital loans
---------------------------------------------------------------
The Partnership accounts for its investment in mortgage revenue
bonds in accordance with the American Institute of Certified Public
Accountants (AICPA) "Notice to Practitioners - ADC Arrangements" (the
Notice). Under the Notice, loans qualifying as ADC arrangements follow
real estate or joint venture accounting policies if the lender
F-89
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of significant accounting policies - Continued
effectively has the risks and rewards of an owner or investor in real
estate. Generally, the lender has the same risks and rewards as an owner
or investor if the borrower has little or no equity in the project and if
the lender expects to participate in residual profits (as defined in the
Notice) of the project. Accordingly, the Partnership accounts for the
Washington Ridge investment as real estate. In addition, prior to
December 31, 1994, the Partnership accounted for the Regency Woods
investment as an investment in real estate due to ADC determination. As
of December 31, 1994, the Regency Woods investment was considered ISF.
Investment in real estate
-------------------------
As further described in Note 5, as of December 31, 1994, the
Partnership accounts for all of its investments in mortgage revenue bonds
as real estate. Investments in mortgage revenue bonds that were
previously accounted for as loans are accounted for as real estate on the
earlier of the date upon ADC determination, deed in lieu of foreclosure,
transfer of partnership interests, or ISF, and are recorded at the lower
of (a) the carrying value of the loan and related accrued interest or (b)
the estimated fair value of the property including other net assets of
the property. The estimated fair values of the properties are the
amounts the owners of the properties could reasonably expect to receive
in an as-is sale between a willing buyer and a willing seller. The
General Partner determined the estimated fair value of the properties
acquired based upon information obtained from independent real estate
appraisers and/or its own market analyses. To the extent fair value was
less than carrying value, direct write-downs were recorded to establish
a new basis for these assets.
The Partnership continues to evaluate its recorded investment in the
properties on a lower of cost or net realizable value basis, under the
guidance of AICPA Statement of Position 92-3 "Accounting for Foreclosed
Assets." The Partnership's net realizable value determination takes into
account the Partnership's intention to hold these properties for the long
term, if necessary, to recover its recorded investment. If the
Partnership determines that its estimated net realizable value is less
than the recorded investment in the property, then an additional
valuation adjustment is recorded if the decline is considered permanent.
It may be necessary to hold the properties through longer periods within
the terms of the mortgage revenue bonds, rather than the shorter existing
loan terms, in which event investor approval of the extension of the
mortgage term will be sought.
F-90
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of significant accounting policies - Continued
Depreciation
------------
Depreciation of real estate is based on the estimated useful lives
of the properties, which consist of 27.5 years for building and 7 years
for personal property. The straight-line method is used for building,
and the double declining balance method is used for personal property.
Cash and cash equivalents
-------------------------
Cash and cash equivalents consist of tax-exempt money market funds
with original maturities of three months or less.
Restricted cash and cash equivalents
------------------------------------
Restricted cash and cash equivalents consist of the following funds
obtained from the former borrowers on the Ethan's Glen IIA, Woodlane
Place, Valley Creek II, Ocean Walk, Geary Courtyard and Regency Woods
loans in connection with the actual or expected transfer of the
properties to nominees of the Partnership: (i) escrow deposits restricted
for tax and insurance payments and for replacement of fixed assets; and
(ii) operating and debt service reserves, if any, restricted for payment
of base mortgage interest on the mortgage revenue bond and contingencies
relating to the properties. These accounts were established under the
terms of the original mortgage loans and escrow agreements and are
maintained in interest-bearing savings and money market accounts.
Marketable securities
---------------------
Marketable securities, consisting of tax-exempt municipal bonds with
carrying amounts of $1,707,572 and $1,736,606 as of December 31, 1994 and
1993, respectively, are stated at cost, which generally represents par
value and approximates market value. The Partnership has the option to
resell certain bonds to the seller on seven days' notice at the bonds'
par value. Proceeds from the sale of marketable securities totalled
$12,536,443, $16,085,842 and $23,072,866 for the years ended December 31,
1994, 1993 and 1992, respectively. Realized gains and losses on these
sales were determined on a specific identification basis. The interest
rate on the bonds is generally adjusted weekly.
In May 1993, the Financial Accounting Standards Board issued
Statement on Financial Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS 115). This
statement requires that most investments in securities be classified into
one of the following investment categories based upon circumstances under
which securities might be sold: Held to Maturity, Available for Sale,
F-91
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of significant accounting policies - Continued
and Trading. Generally, investments in securities for which an enterprise
has both the ability and the intent to hold to maturity should be
accounted for using the amortized cost method and all other securities
must be recorded at their fair values. The Partnership implemented SFAS
115 in 1994, and has classified its investments in marketable securities
into the Available for Sale category. There were no net unrealized
holding gains or losses recognized during 1994 as the cost for the tax-
exempt municipal bonds approximated market value throughout 1994.
As of December 31, 1994, the Partnership had aggregate investments
in marketable securities (including those held in working capital and
interest reserves, as discussed below) with the following maturities:
Amount Maturity
---------- --------
$1,931,570 Within one year
296,402 Between one and five years
670,714 Between five and ten years
3,069,732 After ten years
----------
$5,968,418
==========
Consolidated statements of cash flows
-------------------------------------
The consolidated statements of cash flows are intended to reflect
only cash receipt and cash payment activity; therefore, the statements do
not reflect non-cash investing and financing activities that affect the
consolidated balance sheets. Investments in mortgage revenue bonds and
working capital loans which, through deeds in lieu of foreclosures or
other transfers, resulted in ownership of the underlying properties by
nominees of the Partnership, represent non-cash investing activities for
financial statement purposes.
Working capital reserves
------------------------
The Partnership has working capital reserves which may be available
for the ongoing costs of operating the Partnership, for supplementing
distributions to investors and for making working capital loans to the
borrowers. As of December 31, 1994 and 1993, the working capital reserves
were $3,846,520 and $5,764,473, respectively, both of which exceed the
Partnership's minimum working capital reserve balance of approximately
$3,718,000. The minimum working capital reserve balance may be increased
or decreased from time to time as deemed necessary by the General Partner.
The surplus working capital reserve balance of approximately $128,000 as
of December 31, 1994 may be used to supplement distributions to BAC
Holders. Of the total distributions made during 1994,
F-92
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of significant accounting policies - Continued
1993 and 1992, $1,917,953, $1,499,326 and $2,392,085, respectively, were
funded from the surplus working capital reserves.
Interest reserves
-----------------
The Partnership established interest reserves which represent the
General Partner's estimate of the total base interest on the investment in
mortgage revenue bonds and working capital loans to be deferred during the
deferral period, generally, the project construction period as defined by
the respective loan agreements. The interest reserves also included debt
service reserves established by the Partnership for six mortgage loans.
Funds in the interest reserves are invested in tax-exempt municipal bonds
with terms similar to the Partnership's marketable securities and are
stated at cost, which generally represents par value and approximates
market value. The interest reserves may be used to supplement
distributions to BAC Holders in an amount sufficient to achieve an
equivalent gross base interest rate as if the full amount of base interest
had been paid to the Partnership during the deferral period. Interest
reserves were $414,326 as of December 31, 1994 and 1993. There were no
interest reserves established during 1994, 1993 or 1992. During 1994, 1993
and 1992, amounts of $0, $15,000 and $649,854, respectively, were
transferred to working capital reserves to fund distributions to BAC
Holders from the debt service reserve or used to fund distributions to BAC
Holders from the deferred interest reserve.
Income taxes
------------
No provision has been made for federal, state or local income taxes
in the consolidated financial statements since the General Partner and the
BAC Holders are required to report on their individual tax returns their
allocable share of taxable income, gains, losses, deductions and credits
of the Partnership. For federal income tax purposes, the Partnership's
investment in mortgage revenue bonds and working capital loans is carried
at cost in the aggregate amount of $100,510,604 as of both December 31,
1994 and 1993, since they are interest-only loans. Interest income from
the mortgage revenue bonds is exempt from regular federal income tax, as
discussed in Notes 5 and 6.
Net income and distributions per BAC
------------------------------------
Net income and distributions per BAC represent 98.99% of net income
and distributions declared, respectively, divided by the number of BACs
outstanding during the year.
F-93
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of significant accounting policies - Continued
Implementation of Accounting Standards
--------------------------------------
In May 1993, the FASB issued SFAS No. 114 "Accounting by Creditors
for Impairment of a Loan". This statement, as amended, addresses how a
creditor should measure impairment of a loan and requires that loans
previously accounted for as ISF be accounted for in accordance with SFAS
114. This statement is effective for fiscal years beginning after
December 15, 1994 and will be implemented by the Partnership in the first
quarter of 1995. The Partnership has determined that the adoption of SFAS
114 will result in certain reclassifications but the ultimate impact on
net income and Partner capital will be immaterial.
3. Related party transactions
The General Partner has the authority and responsibility for, among other
things, the overall management and control of the Partnership. The General
Partner and its affiliates do not receive any fees from the Partnership for
their services to the Partnership, but are reimbursed by the Partnership for
any actual costs and expenses incurred in connection with the operation of the
Partnership. During 1994, 1993 and 1992, $191,411, $163,540 and $185,310,
respectively, were reimbursed for such costs and are included in general and
administrative expense in the consolidated statements of income.
CRICO Mortgage Company, Inc., an affiliate of the General Partner, is
entitled to annual mortgage administration and servicing fees from each
borrower which are payable from operating revenues each month after payment of
debt service on the mortgage loan. Unpaid fees of $1,318,505 and $821,007 were
due to the affiliate as of December 31, 1994 and 1993, respectively. The
unpaid fees are payable from available cash flow after payment of all current
and delinquent base interest and accrued interest on delinquent base interest.
If available cash flow from the borrower is insufficient to pay the fee, it is
payable on the earlier of prepayment or maturity of the loan, after debt
repayment. During the years ended December 31, 1994, 1993 and 1992 the fees
paid by the borrowers or from funds advanced to the borrowers from the
Partnership's working capital reserves totalled $144,175, $212,359 and
$360,935, respectively.
CRICO Mortgage Company, Inc. and two other affiliates of the General
Partner are currently considering a merger with a publicly traded REIT. If
the merger is completed, the right to receive all or a substantial portion of
the accrued and unpaid mortgage administration and servicing fees as of the
date of the merger will be transferred from CRICO Mortgage Company, Inc. to
CRI or an affiliate of CRI. After the merger, the mortgage administration and
servicing fees will be performed by an affiliate of the REIT and mortgage
administration and servicing fees will be paid to that entity. This proposed
merger will not result in any increase in fees or changes in the amount of
fees which are currently payable. The merger is subject to the performance of
certain conditions and there is no guarantee the merger will be consummated.
F-94
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Related party transactions - Continued
CRICO Management Corporation (CRICO), an affiliate of the General Partner,
assumed the property management responsibilities for Woodlane Place on October
1, 1991, and for Ethan's Glen IIA on June 1, 1992. The General Partner
engaged CRICO Management of Minnesota, Inc. (CRICO Minnesota), another
affiliate of the General Partner, as management agent for the Valley Creek II
and Ocean Walk properties on July 1, 1992 and November 1, 1993, respectively.
Effective August 1, 1992, CRICO transferred its property management
responsibilities for Woodlane Place and Ethan's Glen IIA to CRICO Minnesota.
Management fees of $21,399 were paid or accrued to the affiliates of the
General Partner by the properties for the month ended January 31, 1994. In
addition, 1993 incentive management fees of $9,990 relating to Woodlane Place
were paid to CRICO Minnesota in December 1994. Management fees of $198,645
and $121,976 were paid or accrued during 1993 and 1992, respectively. The
amount paid under each management contract represented a base fee equal to
3.75% of total gross revenues of the property, plus an additional incentive
fee of .50% payable only if certain performance standards were met.
On February 1, 1994, CRICO and CRICO Minnesota contributed their property
management contracts and personnel to CAPREIT Residential Corporation
(CAPREIT). CAPREIT was formed by CRI but is not currently owned or controlled
by CRI and/or its affiliates. This change did not result in any increase in
property management fees.
Existing nominee entities formed to take title to properties are
structured as limited partnerships. The nominee entities and the managing
general partner of the General Partner have primarily common ownership (except
for Ethan's Glen IIA) and are under common control. The nominees, rather
than the Partnership, became holders of title to the properties in an effort
to maintain the tax exempt nature of the interest on the mortgage revenue
bonds. No compensation or fees were paid by the Partnership to the nominee
entities or their principal in connection with the transfers of ownership.
The limited partner interests in CRICO of Valley Creek II Limited
Partnership and CRICO of Woodlane Place Limited Partnership were transferred
to a newly formed S corporation for tax purposes effective January 1, 1992.
The transaction costs for the transfer of partnership interests were nominal.
4. Profits, losses and cash distributions to Partners
Cash available for distribution (defined below) is distributed on a
quarterly basis within 45 days after the end of each quarter. Each year, cash
available for distribution is distributed 98.99% to the BAC Holders and 1.01%
to the General Partner for each year until the BAC Holders receive a
noncumulative return equal to 10% per annum of their adjusted capital
contribution (adjusted for any return of capital contributions and by any
distributions of residual or liquidation proceeds from the sale of mortgaged
properties or the dissolution of the Partnership, described below).
Thereafter, during such year, the balance of all such cash
F-95
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Profits, losses and cash distributions to Partners - Continued
available for distribution will be distributed 90% to the BAC Holders and 10%
to the General Partner.
Cash available for distribution, as defined in the Partnership Agreement,
is as follows:
(1) all revenues received by the Partnership, plus
(2) any amounts released by the General Partner from the working capital
reserves, plus
(3) any amounts released from the interest reserves after completion of
any applicable interest deferral period with respect to the mortgage
loan in connection with such mortgaged property, less:
(i) payments from revenues of operating expenses and Partnership
indebtedness, and
(ii) any amounts set aside for deposit into the working capital
reserves.
All cash receipts of the Partnership arising from a sale or other
disposition of a mortgaged property or the repayment of the principal and the
payment of interest, if any, payable upon the redemption or remarketing of the
applicable mortgage revenue bond (residual proceeds) will be distributed as
follows:
(1) to the payment of debts and liabilities of the Partnership (including
any expenses of the Partnership incident to a sale or repayment),
including loans or other debts and liabilities of the Partnership to
any Partner or any affiliate (such debts and liabilities, in the case
of a nonliquidating distribution, to be only those which are then
required to be paid or, in the judgment of the General Partner,
required to be provided for) and to any additions to the working
capital reserves as the General Partner deems reasonably necessary
for contingent, unmatured or unforeseen liabilities or obligations of
the Partnership;
(2) to the General Partner and BAC Holders in the total amount of their
capital contributions reduced (but not below zero) by any return of
capital contributions previously made to the General Partner and BAC
Holders and by the total amount of all prior distributions of
residual proceeds to them; and
(3) to the General Partner and BAC Holders, in accordance with the
respective positive balances in their capital accounts as of the date
of sale or repayment, adjusted for operations and distributions to
that date, and after allocation of any profits from such sale or
repayment.
All cash receipts other than residual proceeds arising from the
dissolution of the Partnership and the liquidation of the Partnership's assets
less the amounts utilized to pay the
F-96
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Profits, losses and cash distributions to Partners - Continued
expenses of such liquidation (liquidation proceeds) will be allocated in the
same order as residual proceeds.
All profits and losses not arising from a sale of a mortgaged property or
repayment of a mortgage loan shall be allocated 98.99% to the BAC Holders and
1.01% to the General Partner until the BAC Holders have received any unpaid
portion of the preferred cash flow return. Thereafter, such profits and
losses shall be allocated 90% to the BAC Holders and 10% to the General
Partner.
Profits arising from a sale of a mortgaged property or repayment of a
mortgage loan will be allocated to the General Partner and BAC Holders as
follows: (i) that portion of profits as of the date immediately prior to the
date of sale or repayment shall be allocated in proportion to the negative
balances in their capital accounts, if any, to bring such negative balances in
their capital accounts to zero; (ii) to the General Partner and BAC Holders in
the amount of their capital contributions reduced (but not below zero) by any
return of capital contributions previously made to them and reduced by the sum
of (a) the total amount of all prior distributions of residual proceeds made
to them, plus (b) the positive balance in their respective capital accounts
prior to this allocation; (iii) of the remainder, 98.99% to the BAC Holders
and 1.01% to the General Partner, until the BAC Holders have received an
allocation equal to any unpaid portion of an amount which equals an annual
noncompounded return of 10% on their adjusted capital contributions (the
Preferred Cash Flow Return); provided however, that the allocation to the
General Partner pursuant to this provision will be deferred until after the
BAC Holders have been allocated an amount equal to any unpaid portion of the
Preferred Cash Flow Return; and (iv) the remainder, 90% to the BAC Holders and
10% to the General Partner. No proceeds were received in connection with any
transfers of properties to nominees.
Losses from such a sale or repayment shall be allocated as follows: (i) an
amount of loss to the Partners and BAC Holders to the extent and in such
proportions as shall be necessary such that, after giving effect thereto, the
respective balances in all Partners' and BAC Holders' capital accounts are
proportionate to their interests; (ii) an amount of loss, if any, to the
Partners and BAC Holders until each Partners' and BAC Holders' capital account
equals his capital contributions to the Partnership; (iii) an amount of loss
to the Partners and BAC Holders to the extent of and in proportion to the
Partners' and BAC Holders' capital accounts after the above-described
adjustments; and (iv) any remaining loss to the Partners and BAC Holders in
accordance with the manner in which they bear the economic risk of loss or, if
none, in accordance with their interests.
The Partnership expects to continue to make distributions to BAC Holders
on a quarterly basis. There are no legal restrictions on the Partnership's
present or future ability to make cash distributions. The distributions to
BAC Holders have been funded from three primary sources: cash flow from the
underlying properties' operations, surplus working capital reserves of the
F-97
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Profits, losses and cash distributions to Partners - Continued
Partnership, and funds from property reserves/borrower guarantees. However,
because the surplus working capital reserves are almost depleted and property
reserves/borrower guarantees are expected to be depleted during the first
quarter of 1995, the Partnership will not be able to maintain the
distributions to BAC Holders at the current level. It is expected that the
1995 distributions will be based primarily on cash flow from the Partnership's
operations. Cash flow from the Partnership's operations consists of cash flow
from six of the properties, plus specified interest payments from two
properties, supplemented by any available property reserves/borrower
guarantees, less Partnership expenses. The General Partner seeks to optimize
cash flow from the properties owned by nominees. Despite these efforts, the
amounts paid to the Partnership from the properties' operations may be
expected to fluctuate from period to period due to changes in occupancy rates,
rental rates, operating expenses and other variables. Based upon the current
operations of the Partnership, the General Partner expects the 1995
distribution to approximate $1.20 per BAC.
The following distributions were paid or accrued to BAC Holders of record
during 1994, 1993 and 1992:
<TABLE>
<CAPTION>
1994 1993 1992
Distributions to Distributions to Distributions to
BAC Holders BAC Holders BAC Holders
-------------------- -------------------- -------------------------
Quarter Ended Total Per BAC Total Per BAC Total Per BAC
- - - - ---------------- ----------- ------- ----------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
March 31 $2,103,307 $0.40 $2,106,988 $0.40 $2,124,340 $0.40
June 30 2,155,890 0.41 2,135,908 0.41 2,124,340 0.40
September 30 2,155,890 0.41 2,141,693 0.41 2,147,477 0.41
December 31 2,155,890 0.41 2,160,097 0.41 2,148,529 0.42
---------- ----- ---------- ----- ---------- -----
Total $8,570,977 $1.63 $8,544,686 $1.63 $8,544,686 $1.63
========== ===== ========== ===== ========== =====
</TABLE>
Distributions to BAC Holders for the years ended December 31, 1994, 1993
and 1992 were funded as follows:
<TABLE>
<CAPTION>
For the years ended
December 31,
-----------------------------------------
1994 1993 1992
----------- ------------- -------------
<S> <C> <C> <C>
Cash flow from the Partnership's operations $6,740,474 $ 7,132,542 $ 6,239,773
Net withdrawals from working capital/interest reserves 1,917,953 1,499,326(1) 2,392,085(2)
---------- ------------ ------------
Total cash available for distribution $8,658,427 $ 8,631,868 $ 8,631,858
========== ============ ============
Distributions to:
General Partner (1.01%) $ 87,450 $ 87,182 $ 87,171
========== ============ ============
BAC Holders (98.99%) $8,570,977 $ 8,544,686 $ 8,544,686
========== ============ ============
</TABLE>
(1) Excludes working capital loan advances and repayments of $153,000 and
$83,939, respectively.
(2) Excludes payments of deferred interest from interest reserves of
$179,948.
F-98
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Profits, losses and cash distributions to Partners - Continued
Although distributions are paid on a quarterly basis, in July 1993,
the Partnership began declaring distributions on a monthly basis as a result
of listing the BACs on AMEX. Distributions to BAC Holders totalling $1,577,480
or $0.30 per BAC were declared for the quarter ending March 31, 1995, payable
to BAC Holders of record as of the last day of each month.
5. Investments
Description of the portfolio
----------------------------
The Partnership acquired a portfolio of eight tax-exempt mortgage revenue
bonds issued by various state and local governments or their agencies or
authorities. The proceeds from the mortgage revenue bonds were used by the
issuers to make nonrecourse participating mortgage loans to finance
construction and ownership of multifamily residential developments. The
mortgage revenue bond with respect to each mortgaged property is payable only
from payments made on the corresponding mortgage loan. None of the mortgage
revenue bonds constitutes a general obligation of any state or local
government agency or authority and no such government agency or authority is
liable for the mortgage revenue bonds.
The Partnership invested in eight Federally tax-exempt mortgage revenue
bonds with an aggregate principal amount of $97,101,000 and made three working
capital loans with an aggregate principal amount of $3,409,604. As discussed
below, as of December 31, 1994, five properties collateralizing certain of the
mortgage revenue bonds have been transferred by deed in lieu of foreclosure
(or by transfer of partnership interests in the borrower entity) to nominees
of the Partnership. A sixth property was transferred by deed in lieu of
foreclosure to a nominee of the Partnership on February 28, 1995. As a
result, the Partnership accounts for these investments, as well as an
additional property that was determined to be ISF in accordance with the
Partnership's ISF accounting policy, as real estate for financial statement
purposes. Additionally, the Partnership accounts for the Washington Ridge
mortgage revenue bond as real estate in accordance with the Notice.
Accordingly, the consolidated balance sheets reflect these investments in the
amounts of $79,404,598 and $82,410,754 as of December 31, 1994 and 1993,
respectively, net of accumulated depreciation, based on the lower of cost or
fair value at the earlier of date of deed in lieu of foreclosure, transfer of
partnership interests, ISF or acquisition, development or construction (ADC)
determination.
Base interest income on the mortgage loans is funded from property
operations, certain borrowers' operating deficit guarantees and reserves, if
any, established at the time of closing on the acquisition of the mortgage
revenue bonds. If base interest payments cannot be fully satisfied, the
General Partner evaluates various courses of action, including sale,
recapitalization, loan modification, deed in lieu of foreclosure or
foreclosure.
F-99
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Investments - Continued
Following are updates of significant events affecting the Partnership's
properties during 1994:
Ocean Walk
----------
In March 1994, Ocean Walk experienced fire damage of approximately
$135,000. The fire was caused by the negligence of a resident. The
property's insurance carrier has covered the cost of the repairs less a
minimal deductible. The cost of repairing the fire damage and the
insurance carrier's reimbursement are reflected in rental expenses and
rental revenue, respectively, in the consolidated statement of income.
Repairs to the property relating to the fire damage were completed during
the third quarter of 1994. In addition, the insurance carrier reimbursed
the property approximately $27,000 in 1995 to cover lost rental revenue
due to units taken off the market in 1994 as a result of the fire. As of
December 31, 1994, all units were fully operational.
Woodlane Place
--------------
In March 1994, the Partnership was notified by the management agent
of Woodlane Place that certain buildings at the property experienced
damage due to frost heaving. The cost to repair the damage of
approximately $237,000, less a minimal deductible, was covered by the
property's insurance carrier. The cost of repairing the damage and the
insurance carrier's reimbursement are reflected in rental expenses and
rental revenue, respectively, in the consolidated statement of income.
These repairs were completed in the fourth quarter of 1994.
The nominee owner hired an engineer to analyze the underlying
problem of inadequate drainage at the property and to determine the
number of affected buildings and the severity of the drainage problem.
Based on this analysis, the costs associated with the correction of the
drainage problem are expected to be approximately $300,000, and will not
be covered by the property's insurance carrier. Property improvements
relating to the drainage problem totalling approximately $29,000 were
completed in the fourth quarter of 1994 and are included in buildings and
personal property in the consolidated balance sheet. As the remaining
costs to correct the drainage problem are capitalizable costs and the
work is not anticipated to be completed until the summer of 1995, the
consolidated financial statements do not include an adjustment for the
remaining estimated costs. Due to the nature of the drainage problem,
occupancy levels at the property are not expected to decrease as a result
of the ongoing capital improvements. Funding for these capital
improvements may be provided from the property's existing replacement
reserves, future property cash flow, and/or a loan to the property from
the working capital reserves of the Partnership.
F-100
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Investments - Continued
A description of the portfolio acquired with the proceeds of the offering
is as follows:
<TABLE>
<CAPTION>
Investment Information Mortgage Information Real Estate Information
- - - - ---------------------------------------------- ----------------------------------- ------------------------------------------------
Date of Permanent Commencement Buildings Carrying
No. of Acquisition Loan Loan of ISF/ADC and Amount of
Rental or Date of Origination Maturity Accounting Personal Investments
Name and Location Units Construction Date Face Amount Date Treatment Land Property at 12/31/94
- - - - -------------------------- ------ ------------ ----------- ----------- --------- ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ETHAN'S GLEN IIA
KANSAS CITY, MO (1a) 242 2/88 8/18/88 $ 10,525,000 3/31/2000 4/15/90 $ 887,222 $ 8,943,985 $ 9,831,207
GEARY COURTYARD
SAN FRANCISCO, CA (1a,2) 164 2/89 8/18/88 18,900,000 9/01/2000 12/31/90 2,679,666 16,716,243 19,395,909
OCEAN WALK
KEY WEST, FL (1a) 296 1/89 1/27/89 19,826,000 4/01/2000 9/30/91 3,580,530 13,387,656 16,968,186
PACES RIVER 2
ROCK HILL, SC (2,3) 230 10/89 7/28/88 9,600,000 2/02/2000 12/31/91 685,397 9,064,603 9,750,000
REGENCY WOODS
WEST DES MOINES, IA
(1b,2) 200 1/90 1/29/90 7,559,604 2/01/2000 12/31/91 552,938 6,382,591 6,935,529
VALLEY CREEK II
WOODBURY, MN (1a) 177 5/89 2/21/89 10,100,000 7/01/2000 12/31/90 107,964 8,416,883 8,524,847
WASHINGTON RIDGE
KNOXVILLE, TN (3) 248 9/90 12/14/88 10,000,000 7/01/2000 12/31/91 1,697,677 6,492,192 8,189,869
WOODLANE PLACE
WOODBURY, MN (1a) 216 2/88 9/16/88 14,000,000 11/01/1999 12/31/90 722,059 11,556,369 12,278,428
----- ------------ ----------- ----------- -----------
1,773 $100,510,604 $10,913,453 $80,960,522 91,873,975
===== ============ =========== ===========
Less: Accumulated depreciation as of December 31, 1994 (12,469,377)
-----------
$79,404,598
===========
</TABLE>
(1) As discussed herein, as of December 31, 1994, these properties are
accounted for as real estate at their fair value at date of the actual
or deemed transfer due to: (a) deed in lieu of foreclosure or other
transfers or (b) in-substance foreclosure of the mortgage loan.
(2) The amount listed under face amount of mortgage includes both the first
lien tax-exempt loan and the second lien working capital loan.
(3) This loan has the characteristics of real estate and, therefore, is
accounted for as such in accordance with the policy discussed in Note 2.
F-101
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Investments - Continued
Collateral
----------
The mortgage revenue bonds are secured by mortgage loans which are
collateralized by first mortgages on the properties, assignments of existing
and future rents and security agreements with respect to personal property
evidenced by the filing of Uniform Commercial Code (UCC) financing statements.
Additionally, the Partnership required the borrowers to establish operating
reserves, replacement reserves, tax and insurance escrows and debt service
reserves and provide operating deficit guarantees. As a result of various
circumstances, including, but not limited to, slow rent-up of the properties,
unstable operations and depletion of certain properties' operating and debt
service reserves, nominees of the Partnership had received title to five of
the properties as of December 31, 1994. In addition, on February 28, 1995, a
nominee of the Partnership received title to the Regency Woods property. This
collateral and the collateral for the Paces River 2 mortgage and working
capital loans, in addition to Washington Ridge, are classified as Investment
in Real Estate in the accompanying balance sheet as of December 31, 1994.
In connection with the transfers of properties to nominees of the
Partnership, the Partnership obtained an opinion from its former independent
accounting firm in July of 1991 that the reduction in pay rate and compounding
of unpaid base interest at the original base interest rate would not cause a
reissuance of the bonds under Internal Revenue Code (IRC) Section 103 (which
would cause the bonds to lose their tax-exempt status). The Partnership also
obtained opinions from certain bond counsel that transfers of the properties
to Partnership nominees would not cause the Partnership to become a
substantial user of the projects pursuant to IRC Section 103 (which also could
have caused the bonds to lose their tax-exempt status). The bond counsel
opinions were obtained in connection with the Ethan's Glen IIA and Ocean Walk
transfers.
In 1991, the U. S. Supreme Court decided a case, Cottage Savings
Association v. Commissioner, that could be interpreted to compromise the tax-
exempt status of mortgage revenue bonds which have been modified. In response
to this decision, in December 1992, the Internal Revenue Service issued
proposed regulations in connection with the modification of debt instruments.
If the regulations are adopted in their present form, they would alter
existing authority and curtail the type and extent of modifications that
could be made by a bond owner/lender without adversely affecting the tax-
exempt status of bonds. It is not clear at this time what effect the Cottage
Savings decision or the proposed regulations may have on the Partnership with
respect to the bonds secured by loans on properties currently held by
nominees. The General Partner continues to believe that these bonds remain
tax-exempt. The General Partner will continue its efforts, which include the
transfer of title on the properties to nominees, in an attempt to protect the
tax-exempt status of the bonds and the interest thereon. However, in light of
the Cottage Savings decision and the proposed regulations, there can be no
assurance that the General Partner will be successful in its efforts.
F-102
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Investments - Continued
In March 1995, the Partnership was notified by the Paces River 2 borrower
that the property may not be currently in compliance with the low to moderate
income requirements required under the tax-exempt bonds. The borrower has
applied tenant certification criteria consistent with that used by state
authorities. Further, state authorities have reviewed and approved the
compliance on an annual basis. However, the borrower believes that certain
technical aspects of the tenant certification criteria may not have been
appropriately applied.
The borrower is currently reviewing these criteria and is planning to
clarify them with the state authorities. The borrower has a period, as
determined by the state authorities, during which to cure the potential
default. Once the criteria has been clarified, the borrower intends to apply
it to all new tenants to ensure compliance with the requirements for tax-
exempt status. There can be no assurance that the borrower will be successful
in its efforts to comply with the requirements. If the borrower is
unsuccessful, the interest income received by the Partnership from the Paces
River 2 mortgage revenue bond would no longer be tax-exempt.
Based on current market conditions, to maximize overall yields and
residual proceeds upon the sale or refinancing of the properties acquired in
settlement of loans, it may be necessary for the nominees to hold the
properties through longer periods within the terms of the respective mortgage
revenue bonds, rather than the shorter existing loan terms. On an ongoing
basis, the General Partner monitors the real estate market to assess an
appropriate holding period for the properties. If conditions warrant in
future years, the General Partner may recommend for investor approval
extension of certain mortgage loan maturity dates and arrange for related
adjustments of the pertinent mortgage revenue bonds, as needed.
No valuation adjustments were necessary on the properties in 1994, 1993
or 1992.
As illustrated in the table below, as of December 31, 1994, the
Partnership accounts for all of its investments in mortgage revenue bonds as
real estate for financial statement purposes due to the receipt of deeds in
lieu of foreclosure or transfer of partnership interests, when considered ISF
or in accordance with the Notice.
F-103
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Investments - Continued
<TABLE>
<CAPTION>
Change in
Depletion of Commencement Management
Borrower and of ISF/ADC Date of Company to
Name of Investment Debt Service Accounting Deed in Lieu Affiliate of the
Rental Property Reserves(1) Treatment or Transfer Partnerships(2)
- - - - -------------------- --------------- ------------ --------------- -------------------
<S> <C> <C> <C> <C>
Ethan's Glen IIA 1993 4/15/90 4/15/90(3) 6/01/92
Geary Courtyard 1991 12/31/90 6/30/93(4) N/A
Ocean Walk 1992 9/30/91 3/16/93(5) 11/01/93
Paces River 2 1992 12/31/91 N/A (6) N/A
Regency Woods N/A 12/31/91 2/28/95(7) N/A
Valley Creek II 1993 12/31/90 1/02/93 7/01/92
Washington Ridge N/A 12/31/91 N/A (8) N/A
Woodlane Place 1991 12/31/90 1/02/92 10/01/91
</TABLE>
(1) Due to the depletion of borrower and debt service reserves, base
interest payments made to the Partnership are solely in the form of cash
flow from the property's operations.
(2) CRICO or CRICO Minnesota, affiliates of the General Partner, assumed
property management responsibilities on the indicated dates. On February
1, 1994, CRICO and CRICO Minnesota contributed their property management
contracts and personnel to CAPREIT. CAPREIT was formed by CRI but is not
currently owned or controlled by CRI and/or its affiliates.
(3) During 1990, the nominee limited partnership holding Ethan's Glen IIA was
expanded so that two individuals unaffiliated with the Partnership
acquired a 98.99% interest in the nominee as limited partners in
consideration for certain capital contributions, plus their undertaking
to form an investor limited partnership to admit additional partners in
exchange for further capital contributions. In November 1991, the nominee
partnership was further expanded to admit the investor partnership
entity. Although the investor limited partner entity is presently in
default with respect to the pay-in schedule, it has proposed bringing
additional investors into the investor partnership with an adjusted
payment schedule. Negotiations are ongoing.
(4) In 1991, the Partnership entered into a workout agreement with the
borrower pursuant to which the borrower would pay all cash flow to the
Partnership, with certain agreed upon minimum performance goals. The
borrower, at that time, deposited a deed in lieu of foreclosure in escrow
that would be recorded if the borrower defaulted under the workout or
failed to cure all arrearages by June 1, 1992. The borrower transferred
its partnership interests in Geary Courtyard Associates, a California
Limited Partnership, as a result of the default by the borrower on the
loan workout agreement.
(5) A deed in lieu of foreclosure was obtained in exchange for a release of
the General Partners' unsecured operating deficit guarantee.
(6) In March 1993, the Partnership finalized a three-year workout agreement
(the Workout) with the borrower. The balance of the borrower's guarantee
amount has been paid in full. The Workout requires the borrower to pay
the base interest on the tax-exempt loan in full on a monthly basis,
while allowing all or a portion of the interest on the working capital
loan to accrue (the amount adjusts annually). Upon the occurrence of a
monetary default during the term of the Workout, the Partnership may
direct the release of the deed currently held in escrow to be recorded in
lieu of foreclosure. Currently, the borrower is in compliance with the
terms of the Workout.
(7) Shortfalls in interest payments from Regency Woods were being paid from
draws on a $250,000 irrevocable letter of credit. The Partnership drew
down the full amount remaining under the letter of credit in January
1995, resulting in the default by the borrower on the working capital
loan. The borrower transferred the property by deed in lieu of
foreclosure to a nominee of the Partnership on February 28, 1995.
(8) In the first quarter of 1992, the borrower on Washington Ridge informed
the Partnership that six months of break-even operations occurred and
subsequently provided documentation to the Partnership from the
borrower's independent accounting firm to support this conclusion.
Therefore, the outstanding operating deficit guarantee was reduced
pursuant to the terms of the loan agreement to $500,000. Currently, the
borrower is paying full debt service solely from property operations. In
the fourth quarter of 1994, the borrower informed the Partnership that
the debt service coverage requirement had been met. As of March 8, 1995,
the General Partner is reviewing documentation from the borrower's
independent accounting firm, and anticipates the release of the operating
deficit guarantee in the first half of 1995.
F-104
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Investments - Continued
Interest
--------
The mortgage loans, and correspondingly the mortgage revenue bonds, bear
interest at a base interest rate and provide for contingent interest,
payable as described below, in an amount equal to the difference between the
base mortgage interest rate and an annual noncompounding rate of return to the
Partnership of 16% per annum. The mortgage loans provide for base mortgage
interest which is unconditional and payable monthly, in arrears. After
depletion of properties' reserves, the payment of base interest from
properties currently owned by nominees of the Partnership will be solely from
cash flow from the properties' operations. The mortgage loan on the Regency
Woods property provided that only a portion of the base mortgage interest is
required to be paid on a current basis during an initial period of the loan,
not to exceed three years from acquisition of the mortgage revenue bond. The
deferred base mortgage interest is unconditionally due and payable upon sale
of the project or repayment of the loan. The unpaid base mortgage interest
bears interest at the base mortgage interest rate and is to be repaid prior to
contingent interest.
Contingent interest will be equal to the sum of (i) 100% of the project
cash flow for each year up to an amount which provides the Partnership a
noncompounded interest rate between 1.5% and 2.25% over the base mortgage
interest rate in effect, and (ii) 42.5% to 60% of remaining cash flow (subject
to certain priority payments including any currently payable interest with
respect to a working capital loan to such borrower) to provide the Partnership
a total return of 16% per annum. Contingent interest is payable quarterly on
an estimated basis, in arrears but only to the extent of available net cash
flow, if any. Contingent interest is recognized as revenue when collected.
Contingent interest due as of December 31, 1994, 1993 and 1992 amounted to
$30,841,439, $23,977,293 and $17,149,226, respectively. No contingent
interest was received or accrued by the Partnership during these years. The
Partnership has determined that contingent interest of approximately $27,000
is currently due from Washington Ridge for the year ended December 31, 1994.
As of March 8, 1995, no payment of contingent interest has been received from
Washington Ridge. The Partnership will not recognize the contingent interest
as revenue until it is collected.
To the extent that the aggregate of all interest payments, including
contingent interest, for any period after completion of construction does not
equal 16% per annum, the difference will be deferred (without interest on
contingent interest) until the mortgaged property is sold or the mortgage loan
is otherwise repaid and will be payable if sufficient proceeds exist. The
amount of deferred contingent interest payable in such event will equal the
sum of (i) 100% of the sale or repayment proceeds (after certain priority
payments) up to the amount necessary for the Partnership to achieve the full
amount of the 100% participation, to the extent that such amount was
previously deferred, and/or (ii)(a) with respect to mortgage loans for to-be-
constructed or rehabilitated mortgaged properties, 50% of the sale or
repayment proceeds, or (b) with respect to mortgage loans for existing
mortgaged properties, up to 42.5% to 60% of
F-105
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Investments - Continued
the sale or repayment proceeds, in either instance after the payment of any
100% participation, if applicable, up to the amount necessary for the
Partnership to achieve a total return of 16% per annum. Consequently, the
ability of the Partnership to collect all contingent interest will be
dependent upon the mortgaged property's operating performance and the sale or
repayment proceeds. Because the Partnership may not be able ultimately to
collect contingent interest, the Partnership has not recorded any contingent
interest since inception of the Partnership.
Terms
-----
In general, the terms of the mortgage loans extend for 10 years after the
completion of construction, except for Regency Woods which is for 10 years
from the commencement of the mortgage loan. The corresponding bonds contain
provisions requiring payment or redemption of the bonds upon maturity of the
related loan. The Partnership may seek authority from investors to hold the
mortgage revenue loans with respect to the mortgaged properties through longer
periods within the mortgage revenue bond terms, as described below, if
necessary, in an effort to maximize overall yields and residual proceeds upon
the sale or refinancing of the underlying properties.
The principal of the mortgage revenue bonds will not be amortized during
the terms of the bond and will be required to be repaid in a lump-sum balloon
payment at the expiration of the loan term or at such earlier time as the loan
may require. Each mortgage loan is non-assumable and due on sale of the
mortgaged property. Prepayment and sale of a mortgaged property is prohibited
during the first seven years of a mortgage loan following completion of
construction. Prepayment of the Regency Woods loan (or sale of the Regency
Woods property) is prohibited during the first seven years following the
Partnership's acquisition of that bond. Thereafter, prepayment in full is
permitted under any mortgage loan, subject to the payment to the Partnership
of:
(1) any 100% participation contingent interest accrued to the date of
prepayment, and
(2) additional interest in an amount equal to the highest total amount
of all contingent interest paid by the borrower in any of the three
years preceding the date of prepayment, capitalized at the base
mortgage loan interest rate then in effect.
The Partnership may require prepayment upon the occurrence of an "event
of taxability" which would include, among others, any act or event which
presents significant risk that interest on the mortgage revenue bonds would be
subjected to federal taxation. As of December 31, 1994 the Partnership is
aware of no "event of taxability" which has occurred.
F-106
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Investments - Continued
Working capital loans
---------------------
The Partnership was permitted to use up to 5% of its gross offering
proceeds to make working capital loans to borrowers to cover certain expenses
which were not financeable from the proceeds of the mortgage revenue bonds.
The interest on the working capital loans is subject to federal income tax.
As of December 31, 1994, the Partnership had made taxable working capital
loans to Paces River 2, Geary Courtyard and Regency Woods in the amounts of
$850,000, $900,000 and $1,659,604, respectively. These loans are
collateralized by second deeds of trust on the properties and mature on
February 1, 2000, September 1, 2000 and February 1, 2000, respectively. The
investments in working capital loans are accounted for as real estate as of
December 31, 1994.
The principal of the working capital loans will not be amortized during
the terms of the loans and will be required to be repaid in a lump-sum balloon
payment at the expiration of the loan term or at such earlier time as the loan
terms may require. Each working capital loan is nonassumable and due on sale
of the mortgaged property. Prepayment and sale of the mortgaged property is
prohibited during the first seven years after the commencement dates. The
working capital loans provide for base interest during the construction and
permanent phases of the loans and contingent interest, which commenced after
the completion of construction of the applicable project, on a basis similar
to the mortgage revenue bonds.
6. Income taxes
For income tax purposes, base interest income is accrued when earned.
The accrual of interest is discontinued, when at the time of accrual,
collectibility of the interest due is considered unlikely. Once a loan has
been placed in a non-accrual status, income is recorded only as cash payments
are received from the borrower or nominee until such time as the uncertainty
of collection of unpaid base interest is eliminated. No loans were on non-
accrual status for income tax purposes in 1992. Loans relating to Geary
Courtyard, Valley Creek II and Woodlane Place were placed on non-accrual
status in 1993; therefore, for income tax purposes, income was recognized to
the extent of cash received. Loans relating to Geary Courtyard, Valley Creek
II and Woodlane Place were on non-accrual status throughout 1994. Contingent
interest from the investment is recognized as revenue when collected. No
contingent interest was recognized for the years ended December 31, 1994, 1993
and 1992.
As discussed in Note 5, the investments in mortgage revenue bonds are
accounted for as investments in real estate. However, for federal income tax
purposes, the investments in these mortgage revenue bonds are treated as
loans, interest on which is exempt from federal income tax. A reconciliation
of the primary differences between the financial statement net income and
municipal income for tax purposes is as follows:
F-107
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Income taxes - Continued
<TABLE>
<CAPTION>
For the years ended December 31,
1994 1993 1992
------------ ---------------- ---------------
<S> <C> <C> <C>
Financial statement net income $ 3,256,314 $ 2,591,726 $ 2,248,736
Municipal interest income not recognized (1) 7,101,650 6,830,474 8,801,215
Rental income, net (2) (3,429,900) (2,822,609) (2,198,325)
Accrued interest on delinquent interest (3) -- -- 284,752
Investment expenses and losses not allowable
for tax purposes 25,344 720,849 21,272
Excess amortization for tax purposes (144,600) (144,600) (144,600)
Taxable income on working capital loans, net -- (252,033) --
----------- ----------- -----------
Municipal income, net for tax purposes $ 6,808,808 $ 6,923,807 $ 9,013,050
=========== =========== ===========
Municipal income per BAC $ 1.28 $ 1.30 $ 1.70
=========== =========== ===========
</TABLE>
(1) Represents the adjustment for interest income received or receivable
during the period, which was previously eliminated from net income
for financial statement purposes.
(2) Represents net rental income from investments accounted for as real
estate.
(3) Represents interest on delinquent base interest, for loans on
accrual status for income tax purposes, compounded monthly at the
base rate of interest of the applicable loan.
Although the Partnership accounted for all of the mortgage loan
investments and working capital loans as real estate, and reclassified the
cash flow from the properties as rental income and expense, the Partnership
continues to charge the borrowers and nominees interest under the terms of the
original loans and interest on unpaid base mortgage interest. The following
tables summarize the full interest payments for the years ended December 31,
1994, 1993 and 1992 that are due to the Partnership from the properties:
<TABLE>
<CAPTION>
For the year ended December 31, 1994
-------------------------------------------------------------------------
Base Interest Base Interest Cumulative
Paid From Paid From Current Base Unpaid
Current Base Properties' Non-Operating Interest Base
Interest Due(1) Operations Sources (2) Not Paid Interest
--------------- ------------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Ethan's Glen IIA $ 920,937 $ 776,803 $ 65,654 $ 78,480 $ 155,225
Geary Courtyard 1,740,600 601,329 -- 1,139,271 4,743,903
Ocean Walk 1,774,427 1,571,022 35,838 167,567 1,340,829
Paces River 2 769,025 743,314 -- 25,711 223,856
Regency Woods 693,458 544,268 149,190 -- 57,788
Valley Creek II 919,100 614,332 -- 304,768 510,606
Washington Ridge 875,000 875,000 -- -- 72,917
Woodlane Place 1,407,000 979,747 -- 427,253 2,209,886
---------- ---------- -------- ---------- ----------
$9,099,547 $6,705,815 $250,682 $2,143,050 $9,315,010
========== ========== ======== ========== ==========
</TABLE>
F-108
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Income taxes - Continued
<TABLE>
<CAPTION>
For the year ended December 31, 1993
---------------------------------------------------------------------------
Base Interest Base Interest Cumulative
Paid From Paid From Current Base Unpaid
Current Base Properties' Non-Operating Interest Base
Interest Due(1) Operations Sources (2) Not Paid Interest
--------------- ------------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Ethan's Glen IIA $ 920,937 $ 811,075 $109,862 $ -- $ 76,745
Geary Courtyard 1,740,600 687,267 -- 1,053,333 3,604,632
Ocean Walk 1,774,427 1,560,048 -- 214,379 1,173,262
Paces River 2 769,025 706,634 142,848 (80,457) 198,145
Regency Woods 673,303 538,836 134,467 -- 57,788
Valley Creek II 919,100 554,970 234,883 129,247 205,838
Washington Ridge 875,000 875,000 -- -- 72,917
Woodlane Place 1,407,000 880,463 -- 526,537 1,782,633
---------- ---------- -------- ---------- ----------
$9,079,392 $6,614,293 $622,060 $1,843,039 $7,171,960
========== ========== ======== ========== ==========
<CAPTION>
For the year ended December 31, 1992
--------------------------------------------------------------------------
Base Interest Base Interest Cumulative
Paid From Paid From Current Base Unpaid
Current Base Properties' Non-Operating Interest Base
Interest Due(1) Operations Sources (2) Not Paid Interest
------------ ------------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Ethan's Glen IIA $ 920,937 $ 568,480 $352,457 $ -- $ 76,745
Geary Courtyard 1,740,600 178,811 -- 1,561,789 2,551,299
Ocean Walk 1,774,427 1,129,283 -- 645,144 958,883
Paces River 2 769,025 601,946 47,981 119,098 278,602
Regency Woods 572,508 572,508 -- -- 57,788
Valley Creek II 919,100 464,701 454,399 -- 76,591
Washington Ridge 875,000 875,000 -- -- 72,917
Woodlane Place 1,407,000 682,318 -- 724,682 1,256,096
---------- ---------- -------- ---------- ----------
$8,978,597 $5,073,047 $854,837 $3,050,713 $5,328,921
========== ========== ======== ========== ==========
</TABLE>
(1) Although three of these loans were placed on non-accrual status for
income tax purposes, the Partnership continues to charge all of the
borrowers interest on unpaid base interest, which, not including current
base interest due, totaled $803,279, $518,381 and $284,752 for 1994, 1993
and 1992, respectively.
(2) Amounts were funded from reserves provided for from the mortgage loan
proceeds and/or funds from the general partners of the borrowers.
F-109
<PAGE>
APPENDIX A-1
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
AMONG
WATERMARK PARTNERS, L.P.,
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED
PARTNERSHIP
AND
CRITEF ASSOCIATES LIMITED PARTNERSHIP,
<PAGE>
================================================================================
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
among
WATERMARK PARTNERS, L.P.,
CAPITAL REALTY INVESTORS TAX EXEMPT
FUND LIMITED PARTNERSHIP
and
CRITEF ASSOCIATES LIMITED PARTNERSHIP
--------------------------------------
Dated: March 14, 1996
--------------------------------------
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
1. The Merger......................................................... 2
1.1 The Merger.................................................... 2
1.2 Surviving Partnership......................................... 2
1.3 Effective Time of the Merger.................................. 2
1.4 Certificate of Limited Partnership............................ 2
1.5 Partnership Agreement......................................... 2
2. Conversion of Partnership Interests................................ 2
2.1 Conversion of Partnership Interests........................... 2
2.2 Redemption of BACs............................................ 5
2.4 Additional Rights; Taking of Necessary Action; Further Action. 6
2.5 Federal Income Tax Considerations............................. 7
2.6 Deposit....................................................... 7
2.7 Disclosure Schedule........................................... 8
3. Representations and Warranties of the Merger Partnership........... 8
3.1 Organization and Qualification................................ 9
3.2 Authority Relative to this Agreement.......................... 9
3.3 No Conflicts.................................................. 9
3.4 Governmental Approvals........................................ 10
3.5 No Prior Activities........................................... 10
3.6 Brokers....................................................... 10
4. Representations and Warranties of the Partnership.................. 10
4.1 Organization and Qualification............................... 11
4.2 No Subsidiaries.............................................. 11
4.3 Capitalization............................................... 11
4.4 Authority Relative to this Agreement......................... 12
4.5 No Conflicts................................................. 12
4.6 Governmental Approvals....................................... 13
4.7 Commission Filings; Financial Statements..................... 13
4.8 No Undisclosed Liabilities................................... 14
4.9 Absence of Certain Changes or Events......................... 14
4.10 Litigation................................................... 15
4.11 Taxes........................................................ 15
4.12 Assets....................................................... 15
4.13 Transactions with Affiliates................................. 15
4.14 Disclosure................................................... 16
4.15 Brokers...................................................... 16
4.16 General Partner Recommendation............................... 16
4.17 Compliance with Law.......................................... 16
4.18 Mortgage Revenue Bonds and Mortgage Revenue Documents........ 16
-i-
<PAGE>
Page
----
5. Representations and Warranties of the Owner Partnerships........... 17
5.1 Organization and Qualification............................... 17
5.2 No Subsidiaries.............................................. 18
5.3 Partners and Capitalization.................................. 18
5.4 Authority Relative to this Agreement......................... 18
5.5 No Conflicts................................................. 19
5.6 Governmental Approvals....................................... 19
5.7 Financial Statements......................................... 19
5.8 No Undisclosed Liabilities................................... 20
5.9 Absence of Certain Changes or Events......................... 20
5.10 Mortgaged Properties......................................... 21
5.11 No Action.................................................... 21
5.12 Taxes........................................................ 22
5.13 Compliance with Law.......................................... 22
5.14 Disclosure................................................... 22
6. Conduct of Business Pending the Merger............................. 22
6.1 Conduct of Business by the Partnership Pending the Merger.... 22
6.2 Conduct of Business by the Owner Partnerships
Pending the Merger........................................... 24
7. Additional Agreements.............................................. 26
7.1 Proxy Statement; Other Filings............................... 26
7.2 Meeting of the Limited Partners.............................. 27
7.3 Fees and Expenses............................................ 28
7.4 Further Agreements........................................... 31
7.5 Shop Limitation.............................................. 32
7.6 Additional Financial Statements.............................. 33
7.7 Access to Information; Confidentiality....................... 33
7.8 Public Announcements......................................... 34
7.9 Agreement to Defend and Indemnify............................ 34
7.10 Notification of Certain Matters.............................. 34
7.11 Cooperation.................................................. 35
7.12 Acquisition.................................................. 35
7.13 Treatment of Owner Partnerships.............................. 36
7.15 Tax Returns.................................................. 37
7.16 Notice of Failure to Satisfy Closing Conditions.............. 37
8. Conditions......................................................... 37
8.1 Conditions to Obligation of Each Party to Effect
the Transaction.............................................. 37
8.2 Additional Conditions to the Obligation of the
Partnership.................................................. 38
8.3 Additional Conditions to the Obligations of the
Merger Partnership........................................... 39
-ii-
<PAGE>
Page
----
9. Termination, Amendment and Waiver.................................. 41
9.1 Termination.................................................. 41
9.2 Effect of Termination........................................ 43
9.3 Amendment.................................................... 43
9.4 Waiver....................................................... 43
10. General Provisions................................................. 44
10.1 Notices...................................................... 44
10.2 Certain Definitions.......................................... 45
10.3 Representations and Warranties; Etc.......................... 50
10.4 Validity..................................................... 50
10.5 Descriptive Headings......................................... 50
10.6 Parties in Interest.......................................... 50
10.7 Incorporation of Recitals.................................... 51
10.8 Miscellaneous................................................ 51
Exhibit A Certificate of Limited Partnership
Exhibit B Amended and Restated Agreement of
Limited Partnership
Exhibit C Form of Escrow Agreement
Exhibit D Side Letter
Exhibit E Financing Term Sheet
Exhibit F Cash at Closing
Exhibit G Form of Opinion of Partnership's Counsel
-iii-
<PAGE>
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
-------------------------------------------------
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of March
14, 1996, among WATERMARK PARTNERS, L.P., a Delaware limited partnership (the
"Merger Partnership"), CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED
PARTNERSHIP, a Delaware limited partnership (the "Partnership"), CRITEF
ASSOCIATES LIMITED PARTNERSHIP, a Delaware limited partnership (the "Partnership
GP"), and the other parties listed on the signature pages hereof.
The Merger Partnership was recently formed solely for the purpose of
being merged with and into the Partnership in accordance with the Revised
Uniform Limited Partnership Act of the State of Delaware (the "Partnership Act")
and the terms hereof in the merger (the "Merger") contemplated hereby. The
Merger Partnership has no assets other than the cash initially contributed by
Capital Apartment Properties, Inc., a Maryland corporation ("CAPREIT"), which is
its sole general partner (the "Merger Partnership GP"), and the cash initially
contributed by CAPREIT Limited Partnership, a Maryland limited partnership,
which is its sole limited partner (the "Merger Partnership LP"). In the Merger,
all partnership interests in the Partnership, other than those to be issued to
or acquired pursuant hereto by CAPREIT, or its Affiliates, will be redeemed in
cash as specified herein.
The general partners of each of the Partnership and the Merger
Partnership have approved the Merger in accordance with the Partnership Act and
the other transactions contemplated hereby and have recommended that their
respective limited partners approve and adopt the Merger and the other
transactions contemplated hereby.
The parties hereto entered into an Agreement and Plan of Merger, dated
as of September 11, 1995, executed Amendment No. 1 to such Agreement and Plan of
Merger on January 31, 1996, and they now desire to amend certain provisions of
such Agreement and Plan of Merger, as amended, and restate it in its entirety as
provided herein.
Accordingly, in consideration of the premises and the mutual covenants
herein contained and intending to be legally bound hereby, the parties hereby
agree as follows:
Certain capitalized terms used herein are defined in Section 10.2
hereof.
-1-
<PAGE>
1. The Merger.
----------
1.1 The Merger. At the Effective Time, and subject to the terms and
----------
conditions of this Agreement and the Partnership Act, the Merger Partnership
shall be merged with and into the Partnership in the Merger, the separate
existence of the Merger Partnership shall thereupon cease, and the Partnership
shall be the surviving partnership in the Merger (the "Surviving Partnership").
1.2 Surviving Partnership. At the Effective Time, the Partnership
---------------------
shall continue in existence under the laws of the State of Delaware as the
Surviving Partnership and shall thereupon and thereafter, without further act or
deed, succeed to and possess all the rights, privileges and powers of the Merger
Partnership, and all property, real, personal and mixed, and all debts due to
the Merger Partnership, as well as all other things and causes of action
belonging to the Merger Partnership, shall be vested in the Surviving
Partnership, and shall thereafter be the property of the Surviving Partnership
as they were of the Merger Partnership, and the title to any real property
vested by deed or otherwise, under the laws of the State of Delaware, in the
Merger Partnership shall not revert or be in any way impaired by reason of the
Merger, but all rights of creditors and all liens upon any property of the
Merger Partnership shall be preserved unimpaired, and all debts, liabilities and
duties of the Merger Partnership shall thenceforth attach to the Surviving
Partnership and may be enforced against it to the same extent as if said debts,
liabilities and duties have been incurred or contracted by it.
1.3 Effective Time of the Merger. The Merger shall be effected as
----------------------------
of the date and time of filing of the certificate of merger (the "Certificate of
Merger") with the Secretary of State of the State of Delaware in accordance with
the Partnership Act (or at such later time specified as the effective time in
the Certificate of Merger) (the "Effective Time"), which filing the parties
hereto shall cause to occur as soon as practicable after the satisfaction or
waiver of the conditions hereinafter set forth.
1.4 Certificate of Limited Partnership. As a result of the Merger,
----------------------------------
the Certificate of Limited Partnership of the Partnership (the "Partnership
Certificate"), as in effect immediately prior to the Effective Time, shall be
the Certificate of Limited Partnership of the Surviving Partnership, as amended
and restated substantially in the form set forth as Exhibit A hereto, until
thereafter amended as provided therein and under the Partnership Act.
1.5 Partnership Agreement. The partnership agreement attached
---------------------
hereto as Exhibit B shall be the agreement of limited
-2-
<PAGE>
partnership of the Surviving Partnership unless and until amended in accordance
with its terms and applicable law. The name of the Surviving Partnership shall
be Watermark Partners, L.P.
2. Conversion of Partnership Interests.
-----------------------------------
2.1 Conversion of Partnership Interests. At the Effective Time, by
-----------------------------------
virtue of the Merger and without any action on the part of the Merger
Partnership, the Partnership or the holders of any of the following securities:
2.1.1 (a) Each Beneficial Assignee Certificate ("BAC") (other
than any BACs held by CAPREIT or its affiliates or the Partnership) which
represents the assignment of 1 unit of beneficial interest of the limited
partnership interest in the Partnership issued to the Assignor Limited Partner,
together with the underlying limited partner interest, shall be cancelled and
extinguished and converted into and represent the right to receive an amount per
BAC in cash equal to $14.41, in the case of Series I, and $14.24, in the case of
Series II, subject to adjustment, in each case, as set forth in subsection (b)
or (c) below (the "Merger Consideration").
(b) The aggregate amount of Merger Consideration payable with respect
to the BACs, in the case of Series I, shall be increased by the Series I Excess
Amount (as defined below), if any, and the aggregate amount of Merger
Consideration payable with respect to the BACs, in the case of Series II, shall
be increased by the Series II Excess Amount, if any. In each case, the amount
of the increase, if any, shall be prorated among all of the issued and
outstanding BACs of such series and the price per BAC set forth in subsection
(a) above shall be increased accordingly.
(c) The aggregate amount of Merger Consideration payable with respect
to the BACs, in the case of Series I, shall be reduced by the Series I Shortfall
Amount (as defined below), if any, and the aggregate amount of Merger
Consideration payable with respect to the BACs, in the case of Series II, shall
be reduced by the Series II Shortfall Amount, if any. In each case, the amount
of the reduction, if any, shall be pro rated among all of the issued and
outstanding BACs of such series and the price per BAC set forth in subsection
(a) above shall be reduced accordingly.
(d) The amount by which the Partnership's Available Cash (defined
below) is greater than $2,606,482, in the case of Series I, shall be the "Series
I Excess Amount". The amount by which the Partnership's Available Cash is
greater than $3,869,290, in the case of Series II, shall be the "Series II
Excess Amount"; provided, however, that regardless of the actual amount of
-------- -------
Available Cash, the Series I
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Excess Amount shall not exceed $319,200, and the Series II Excess Amount shall
not exceed $453,426.
(e) The amount by which the Partnership's Available Cash, is less
than $2,606,482, in the case of Series I, shall be the "Series I Shortfall
Amount". The amount by which the Partnership's Available Cash is less than
$3,869,290, in the case of Series II, shall be the "Series II Shortfall Amount";
provided, however, that regardless of the actual amount of Available Cash, the
- - - - -------- -------
Series I Shortfall Amount shall not exceed $319,200, and the Series II Shortfall
Amount shall not exceed $453,426.
(f) As of any date, for purposes of this calculation and not the
calculation under Section 8.3.2, "Available Cash" means the amount of cash and
cash equivalents held by or at the direction of the Partnership after deducting
any amounts then owed, accrued or reserved by the Partnership for goods,
services or liabilities of any nature or description (which liabilities shall
not include any liabilities of the Mortgaged Properties, including accrued real
estate taxes and insurance); provided, that all amounts held in tax and
---------
insurance escrows for all the Mortgaged Properties and all amounts held in
replacement reserves for the benefit of the Owner Partnerships shall be deemed
to be part of the Available Cash.
(g) The Partnership agrees not to incur any expenses, in connection
with the Merger, which are not reasonably necessary, customary and appropriate.
2.1.2 The 1.01% general partner interest in the Partnership, which
will be held by the CAPREIT General Partner (as defined) as a result its
admission as the replacement general partner as contemplated by Section 2.3
below, shall be converted into and represent a 1.01% general partner interest in
the Surviving Partnership.
2.1.3 Any limited partner interests in the Partnership issued
to any designee of CAPREIT pursuant to Section 7.14, or BACs purchased by
CAPREIT or its Affiliates as contemplated by Section 2.4.1, and held by such
designee or purchaser immediately prior to the Effective Time, shall be
converted into a limited partner interest in the Surviving Partnership.
2.1.4 Any and all BACs that are owned by the Partnership shall be
cancelled and extinguished and no consideration shall be paid therefor.
2.1.5 The 21% general partner interest in the Merger Partnership
held by the Merger Partnership GP immediately prior to the Effective Time shall
be cancelled and the Merger
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Partnership GP shall receive the $21 initially contributed by it to the Merger
Partnership in exchange therefor.
2.1.6 The 79% limited partner interest in the Merger Partnership
held by Merger Partnership LP immediately prior to the Effective Time shall be
cancelled and the Merger Partnership LP shall receive the $79 initially
contributed by it to the Merger Partnership in exchange therefor.
2.1.7 The 98.99% limited partner interest of the Assignor Limited
Partner in the Partnership shall be cancelled and extinguished and no
consideration (other than the Merger Consideration paid to the holders of BACs
pursuant to Section 2.2.1 above) shall be paid therefor.
2.2 Redemption of BACs.
------------------
2.2.1 From and after the Effective Time, a bank or trust
company designated by the Merger Partnership and the Partnership prior to the
Effective Time (the "Redemption Agent") shall act as redemption agent in
effecting the redemption for cash of certificates which, prior to the Effective
Time, represented BACs entitled to payment pursuant to Section 2.1.1 hereof.
Upon the surrender of each such certificate the holder thereof shall be paid,
without interest thereon, the amount of cash to which such holder is entitled
hereunder (net of any required withholding) and such BAC shall forthwith be
cancelled. Until so surrendered and exchanged, each such certificate shall
represent, for all purposes, solely the right to receive cash pursuant to
Section 2.1.1 hereof. If any cash to be paid in the Merger is to be paid to a
Person other than the holder in whose name the certificate representing BACs
surrendered in redemption therefor is registered, it shall be a condition of
such redemption that the certificate so surrendered shall be properly endorsed
or otherwise in proper form for transfer and that the Person requesting such
redemption shall pay to the Redemption Agent any transfer or other taxes
required by reason of the payment of such cash to a Person other than the
registered holder of the certificate surrendered, or shall establish to the
satisfaction of the Redemption Agent that such tax has been paid or is not
applicable. Notwithstanding the foregoing, neither the Redemption Agent nor any
party hereto shall be liable to a holder of BACs for any cash delivered pursuant
hereto to a public official pursuant to applicable abandoned property laws.
2.2.2 At the Effective Time, the Surviving Partnership shall
deposit in trust with the Redemption Agent proceeds from the Financing in an
aggregate amount equal to the Merger Consideration (the "Redemption Fund"). The
Redemption Fund shall be invested by the Redemption Agent, as directed by the
Surviving Partnership, and any net earnings with respect
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thereto shall be paid to the Surviving Partnership as and when requested by the
Surviving Partnership.
2.2.3 The Redemption Agent shall, pursuant to irrevocable
instructions, make the payments referred to in Section 2.1.1 hereof out of the
Redemption Fund. The Redemption Fund shall not be used for any other purpose,
except as provided herein. Promptly following the date which is six months
after the Effective Time, the Redemption Agent shall return to the Surviving
Partnership all cash, certificates and other instruments in its possession
relating to the transactions described in this Agreement, and the Redemption
Agent's duties shall terminate. Thereafter, each holder of a BAC entitled to
receive at the Effective Time cash therefor may surrender such BAC to the
Surviving Partnership and (subject to applicable abandoned property, escheat and
similar laws) receive in redemption therefor the Merger Consideration, without
interest, but shall have no greater rights against the Surviving Partnership
than may be accorded to general creditors of the Surviving Partnership under
applicable law.
2.2.4 Promptly after the Effective Time, the Redemption Agent
shall mail to each record holder of BACs a form of letter of transmittal and
instructions for use in surrendering such certificates and receiving payment
therefor.
2.2.5 After the Effective Time, no BACs shall be deemed to be
outstanding and holders of BACs shall cease to have any rights except as
provided in this Agreement or by law.
2.3 Removal and Admission of General Partner.
----------------------------------------
2.3.1 Immediately prior to the Effective Time, pursuant to
Section 6.04 of the Agreement of Limited Partnership of the Partnership (the
"Partnership Agreement"), conditioned upon prior BAC Holder Approval, the
Partnership GP shall be removed as general partner on the Partnership and a
designee of CAPREIT (the "CAPREIT General Partner") shall be simultaneously
admitted as a replacement general partner of the Partnership.
2.3.2 The CAPREIT General Partner shall file an amendment to
the Partnership Certificate that reflects the fact that the CAPREIT General
Partner who shall continue the business of the Partnership as the remaining
general partner, is the sole general partner of the Partnership upon
consummation of the Mergers.
2.3.3 On the Closing Date, CAPREIT shall pay $500,000 to the
Partnership GP as consideration for its general partner interest in the
Partnership.
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<PAGE>
2.3.4 The parties acknowledge that the provisions of this Section 2.3
shall not be effective if the Merger is not consummated, notwithstanding the BAC
Holder Approval to remove and replace the Partnership GP.
2.4 Additional Rights; Taking of Necessary Action; Further Action.
-------------------------------------------------------------
2.4.1 CAPREIT and its Affiliates reserve the right prior to
the Effective Time, and in accordance with applicable law, from time to time to
make open market or privately negotiated purchases of BACs. CAPREIT shall
promptly notify the Partnership of the occurrence of any such purchase.
2.4.2 The Merger Partnership and the Partnership shall each
use its best efforts to take all such action as may be necessary or appropriate
in order to effectuate the Merger under the Partnership Act as promptly as
possible, including, without limitation, the due execution and filing under the
Partnership Act of the Certificate of Merger consistent with the terms of this
Agreement. If at any time after the Effective Time, any further action is
necessary or desirable to carry out the purposes of this Agreement and to vest
the Surviving Partnership with full right, title and possession to all assets,
property, rights, privileges, powers, and franchises of either of the Merger
Partnership or the Partnership, the general partners of each of the Merger
Partnership and the Partnership are fully authorized in its name or otherwise to
take, and shall take, all such lawful and necessary action.
2.5 Federal Income Tax Considerations. (a) Notwithstanding any
---------------------------------
provision of this Agreement to the contrary, it is the intention of the parties
hereto that the payment of the Merger Consideration pursuant to Section 2.1.1
hereof shall constitute, for all income tax purposes, a redemption or
liquidation of the BAC holders' limited partnership interests in the Partnership
pursuant to Section 731(a) of the Code and that the consummation of the
transactions contemplated by this Agreement will not result in a termination of
the Partnership pursuant to Section 708(b)(1)(B) of the Code. The Partnership
and the Partnership GP hereby agree not to take any action inconsistent with the
foregoing without the prior written consent of CAPREIT.
(b) For state law purposes, the transaction
contemplated by this Agreement shall be treated as a merger.
2.6 Deposit. (a) On the business day immediately prior to the
-------
Mailing Date, CAPREIT shall pay into escrow the amount of $1,000,000 (the
"Deposit") to be held by an independent third party escrow agent pursuant to an
escrow agreement in the form of Exhibit C hereto.
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<PAGE>
(b) If the Closing shall occur, then the Deposit and any interest
earned thereon shall be paid on the Closing Date to CAPREIT or as CAPREIT shall
direct.
(c) If the Closing shall not occur on or prior to the Termination
Date and the failure of the Closing to occur shall be due to: (i) the failure
of any of the conditions to Closing set forth in Section 8.1 or 8.3 (other than
Section 8.3.7); (ii) a termination of this Agreement pursuant to Section 9.1
(other than Section 9.1.3 or 9.1.8); (iii) a breach of the Commitment Letter by
the party issuing such Commitment Letter; or (iv) a change in any statute, law
or regulation which affects the tax exempt status of the Mortgage Revenue Bonds,
then the Deposit and any interest earned thereon shall be paid to CAPREIT or as
CAPREIT shall direct on the earlier of the Termination Date or the date of
termination of this Agreement.
(d) If the Closing shall not occur on or prior to the Termination
Date and the failure of the Closing to occur shall be due to the failure of the
condition to Closing set forth in Section 8.3.7, which failure occurred because
of the failure of a condition to funding set forth in the Commitment Letter,
then one-half of the Deposit and any interest earned thereon shall be paid to
the Partnership and one-half of the Deposit and any interest earned thereon
shall be paid to CAPREIT or as CAPREIT shall direct on the earlier of the
Termination Date or the date on which the party issuing the Commitment Letter
notifies the Merger Partnership or CAPREIT that it will not consummate the
Financing.
(e) If the Deposit shall not be paid pursuant to paragraph (b), (c)
or (d), the Deposit and any interest earned thereon shall be paid to the
Partnership on the earlier of the Termination Date or the date of termination of
this Agreement. If such payment is made, such payment shall be made to the
Partnership as liquidated damages in full satisfaction of all of the Merger
Partnership's or CAPREIT's liabilities or obligations hereunder, including,
without limitation, any obligation to pay or reimburse the Partnership's
expenses pursuant to Section 7.3.2 below.
2.7 Disclosure Schedule. The parties acknowledge that this
-------------------
Agreement has been executed prior to delivery of the Disclosure Schedule by the
Partnership. The Partnership agrees that it will (a) deliver a preliminary
draft of the Disclosure Schedule to the Merger Partnership no later than 10 days
from the date hereof and (b) deliver a final Disclosure Schedule no later than
30 days from the date hereof; and that failure to do so shall constitute a
material breach hereof. Subject to the right of the Merger Partnership to
invoke the condition to Closing set forth in Section 8.3.11 below with respect
to any information obtained from the Disclosure Schedule, any information set
forth
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<PAGE>
in the Disclosure Schedule shall be deemed incorporated into the relevant
representations and warranties set forth in Sections 4 and 5 below, and there
shall be no independent liability therefor pursuant to this Section 2.7.
3. Representations and Warranties of the Merger Partnership.
--------------------------------------------------------
Subject to Section 10.3 below, the Merger Partnership represents and
warrants to the Partnership as follows:
3.1 Formation and Qualification. The Merger Partnership is a
---------------------------
limited partnership duly formed, validly existing and in good standing under the
laws of the State of Delaware, and has the requisite power to carry on its
business as now conducted. The Merger Partnership is duly qualified, licensed
and authorized as a foreign limited partnership to do business, and is in good
standing, in each jurisdiction where the character of its properties owned or
leased or the nature of its activities makes such qualification necessary,
except for failures to be so qualified which would not, in the aggregate, have a
material adverse effect on the Condition of the Merger Partnership. Copies of
the Certificate of Limited Partnership of the Merger Partnership (the "MP
Certificate") and the Agreement of Limited Partnership of the Merger Partnership
(the "MP Agreement") heretofore delivered to the Partnership are accurate and
complete as of the date hereof. The Merger Partnership is not in default under
or in violation of any provision of the MP Agreement.
3.2 Authority Relative to this Agreement. The Merger Partnership
------------------------------------
has the requisite power and authority to enter into this Agreement and to
perform its obligations hereunder. The execution and delivery of this Agreement
by the Merger Partnership and the consummation by the Merger Partnership of the
transactions contemplated hereby have been duly authorized by all necessary
action on the part of the Merger Partnership and the Merger Partnership GP, and
no other action on the part of the Merger Partnership or the Merger Partnership
GP is necessary to authorize this Agreement, the Merger and the transactions
contemplated hereby. This Agreement has been duly executed and delivered by the
Merger Partnership and constitutes a valid and binding obligation of the Merger
Partnership, enforceable against the Merger Partnership in accordance with its
terms.
3.3 No Conflicts. Neither the execution and delivery of this
------------
Agreement by the Merger Partnership nor the consummation of the transactions
contemplated hereby nor compliance by the Merger Partnership with any of the
provisions hereof will (i) violate, conflict with, or result in a breach of any
provision of, or constitute a default (or an event which, with notice or lapse
of time or both, would constitute a default) under, or result in the termination
of, or accelerate the performance
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<PAGE>
required by, or result in a right of termination or acceleration under, or
result in the creation of any Lien upon any of the properties or assets of the
Merger Partnership under, any of the terms, conditions or provisions of (x) the
MP Certificate or the MP Agreement or (y) any note, bond, mortgage, indenture,
deed of trust, license, lease, agreement or other instrument or obligation to
which the Merger Partnership is a party, or to which it, or any of its
properties or assets, may be subject, or (ii) subject to compliance with the
statutes and regulations referred to in Section 3.4, violate any Order, statute,
rule or regulation applicable to the Merger Partnership or any of its properties
or assets, except, in the case of each of clauses (i) and (ii) above, for such
violations, conflicts, breaches, defaults terminations, accelerations or
creations of Liens which, in the aggregate, would not have any material adverse
effect on the Condition of the Merger Partnership.
3.4 Governmental Approvals. Other than in connection with or in
----------------------
compliance with the provisions of the Partnership Act, the Exchange Act, the
Securities Act, the "takeover" laws of various states, the Hart-Scott-Rodino
Act, and except for any notices, filings, authorizations, consents or approvals
which are required because of the regulatory status, if any, of the Partnership
or the Merger Partnership or facts specifically pertaining to it, no notice to,
filing with, or authorization, consent or approval of, any domestic or foreign
public body or authority is necessary for the consummation by the Merger
Partnership of the transactions contemplated by this Agreement.
3.5 No Prior Activities. The Merger Partnership has not incurred,
-------------------
directly or through any Subsidiary, any liabilities or obligations, except those
incurred in connection with its organization or with the negotiation of this
Agreement, the performance thereof and the consummation of the transactions
contemplated hereby, including the Merger and the Financing. Except as
contemplated by the foregoing sentence, the Merger Partnership has not engaged,
directly or through any Subsidiary, in any business activities of any type or
kind whatsoever, or entered into any agreements or arrangements with any Person,
or is subject to or bound by any obligation or undertaking.
3.6 Brokers. No broker, finder or investment banker is entitled to
-------
any brokerage, finder's or other fee or commission in connection with the
Transaction based upon arrangements made by or on behalf of the Merger
Partnership or the Merger Partnership GP.
4. Representations and Warranties of the Partnership. All
-------------------------------------------------
information within the Merger Partnership's Knowledge shall be deemed to have
been disclosed by the Partnership in connection with the representations and
warranties set forth below. Notwithstanding anything to the contrary in this
Agree-
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<PAGE>
ment, the Partnership makes no representation or warranty, express or implied,
concerning the tax exempt status of the Mortgage Revenue Bonds and the interest
thereon, the ability of the Partnership or the Surviving Partnership to
consummate any modifications of the Mortgage Revenue Bonds and related
instruments, or the ability of the Partnership or the Surviving Partnership to
obtain any governmental or governmental agency consents in connection therewith.
Subject to Section 10.3 below, the Partnership represents and warrants
to the Merger Partnership as follows:
4.1 Formation and Qualification. Each of the Partnership and the
---------------------------
Partnership GP is a limited partnership duly formed, validly existing and in
good standing under the laws of the State of Delaware and has the requisite
power to carry on its business as now conducted. Each of the Partnership and
the Partnership GP is duly qualified, licensed and authorized as a foreign
limited partnership to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or leased or the nature
of its activities makes such qualification or licensing necessary, except for
failures to be so qualified which would not, in the aggregate, have a material
adverse effect on the Condition of the Partnership or the Partnership GP, as the
case may be. Copies of the Partnership Certificate, the Partnership Agreement,
the Certificate of Limited Partnership of the Partnership GP (the "Partnership
GP Certificate") and the Agreement of Limited Partnership of the Partnership GP
(the "Partnership GP Agreement") heretofore delivered or made available to the
Merger Partnership are accurate and complete as of the date hereof. The
Partnership is not in default under or in violation of any provision of the
Partnership Agreement, and the Partnership GP is not in default under or in
violation of any provision of the Partnership GP Agreement, except, in each
case, for such defaults or violations which would not have any material adverse
effect on the Condition of the Partnership or the Partnership GP.
4.2 No Subsidiaries. The Partnership has no Subsidiaries and no
---------------
equity or similar interest, whether voting or non-voting, in any Person.
4.3 Capitalization. As of the date hereof, the outstanding partner
--------------
interests of the Partnership consist of (i) a 1.01% general partner interest in
the profits, losses, distributions and credits of the Partnership held by the
Partnership GP, and (ii) a 98.99% limited partner interest in the profits,
losses, distributions and credits of the Partnership held by the Assignor
Limited Partner. The Assignor Limited Partner is authorized to issue up to
12,000,000 BACs, representing the assignments of units of beneficial interest of
the limited partner interest in the Partnership issued to the Assignor
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<PAGE>
Limited Partner, of which (x) 2,280,000 are outstanding, in the case of Series
I, and (y) 3,238,760 are outstanding, in the case of Series II. There are no
outstanding options, warrants, calls, subscriptions or other rights or other
agreements or commitments obligating the Partnership or any of its Affiliates to
issue, transfer or sell (a) any additional partnership interests of the
Partnership or (b) any BACs, except as contemplated herein. All issued and
outstanding BACs and partnership interests in the Partnership are validly
issued, and the purchase price therefor has been paid in full.
4.4 Authority Relative to this Agreement. Each of the Partnership
------------------------------------
and the Partnership GP has the requisite power and authority to enter into this
Agreement and to perform its obligations hereunder. The execution and delivery
of this Agreement by each of the Partnership and the Partnership GP and the
consummation by each of the Partnership and the Partnership GP of the
transactions contemplated hereby have been duly authorized by all necessary
action on the part of each of the Partnership and the Partnership GP and, except
for the BAC Holder Approval as set forth in Section 7.2 hereof, no other
proceedings on the part of the Partnership and the Partnership GP are necessary
to authorize this Agreement, the Merger and the transactions contemplated
hereby. This Agreement has been duly executed and delivered by each of the
Partnership and the Partnership GP and constitutes a valid and binding
obligation of each of the Partnership and the Partnership GP enforceable against
each of the Partnership and the Partnership GP in accordance with its terms.
4.5 No Conflicts. Except as set forth in the Disclosure Schedule,
------------
neither the execution and delivery of this Agreement by each of the Partnership
and the Partnership GP nor the consummation of the transactions contemplated
hereby (excluding the Financing and the Bond Refinancing) nor compliance by the
Partnership and the Partnership GP with any of the provisions hereof will (i)
violate, conflict with, or result in a breach of any provision of, or constitute
a default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or acceleration
under, or result in the creation of any Lien upon any of the properties or
assets of the Partnership or the Partnership GP under, any of the terms,
conditions or provisions of (x) the Partnership Certificate, the Partnership
Agreement, the Partnership GP Certificate or the Partnership GP Agreement, as
the case may be, or (y) any note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument or obligation to which the
Partnership or the Partnership GP is a party or to which either of them or
either of their properties or assets may be subject, or (ii) subject to
compliance with the statutes and regulations referred to in Section 4.6, to the
Partnership's Knowledge, violate any Order, statute, rule or regulation appli-
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<PAGE>
cable to the Partnership or the Partnership GP or any of their properties or
assets, except, in the case of each of clauses (i) and (ii) above, for such
violations, conflicts, breaches, defaults, terminations, accelerations or
creations of Liens which would not, in the aggregate, have any material adverse
effect on the Condition of the Partnership or the Partnership GP.
4.6 Governmental Approvals. Except as set forth in the Disclosure
----------------------
Schedule, other than in connection with or in compliance with the provisions of
the Partnership Act, the Exchange Act, the Securities Act, the "takeover" laws
of various states, and the Hart-Scott-Rodino Act, and except for any notices,
filings, authorizations, consents or approvals which are required because of the
regulatory status, if any, of the Merger Partnership or facts specifically
pertaining to it, to the Partnership's Knowledge, no notice to, filing with, or
authorization, consent or approval of, any domestic or foreign public body or
authority is necessary for the consummation by each of the Partnership and the
Partnership GP of the transactions contemplated by this Agreement (excluding the
Financing and the Bond Refinancing).
4.7 Commission Filings; Financial Statements. The Partnership has
----------------------------------------
heretofore delivered or made available to the Merger Partnership its (i) Annual
Report on Form 10-K for the fiscal years ended December 31, 1994, 1993, 1992,
1991 and 1990, as filed with the Commission, (ii) Quarterly Reports on Form 10-Q
for the quarters ended March 31, 1995 and June 30, 1995, (iii) investor letters
or similar documents mailed to the holders of BACs (whether annual or special)
since January 1, 1990, (iv) all other reports (including any Form 8-K's) or
registration statements filed by the Partnership with the Commission since
January 1, 1990 (the documents described in clauses (i) through (iv) above,
including any exhibits and schedules thereto and documents incorporated by
reference therein, being the "SEC Filings"), and (v) the unaudited consolidated
interim financial statements of the Partnership for the six months ended June
30, 1995 (the "Interim Financial Statements"). As of their respective dates,
each SEC Filing complied in all material respects with the requirements of the
Exchange Act or the Securities Act, as applicable, and did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The audited
consolidated financial statements and unaudited consolidated interim financial
statements of the Partnership included or incorporated by reference in such
reports and the Interim Financial Statements (collectively, the "Partnership
Financial Statements") have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto), and fairly present the
consolidated financial
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<PAGE>
position of the Partnership as of the dates thereof and the results of their
operations and changes in their financial position for the periods then ended.
The consolidated balance sheet of the Partnership as at March 31, 1995,
including the notes thereto, is referred to as the "Balance Sheet," and March
31, 1995, is referred to as the "Balance Sheet Date."
4.8 No Undisclosed Liabilities. At the Balance Sheet Date, the
--------------------------
Partnership did not have any direct or indirect liabilities, obligations,
indebtedness, claims, losses, damages, deficiencies or responsibilities, known
or unknown, fixed or unfixed, choate or inchoate, liquidated or unliquidated,
secured or unsecured, accrued, absolute or contingent, including, without
limitation, by way of setoffs or counterclaims ("Liabilities"), not reflected or
disclosed in the Balance Sheet which were required to be reflected or disclosed
therein in accordance with generally accepted accounting principles. Since the
Balance Sheet Date, except as disclosed in the Disclosure Schedule, the
Partnership has not incurred any such Liabilities.
4.9 Absence of Certain Changes or Events. Except as and to the
------------------------------------
extent set forth on the Balance Sheet, or as set forth on the Disclosure
Schedule, since the Balance Sheet Date, there has not been (a) any material
adverse change in the Condition of the Partnership; (b) any entry by the
Partnership into any commitment or transaction material to the Partnership,
which is not in the ordinary course of business and consistent with past
practices; (c) any material change by the Partnership in accounting principles
or methods except insofar as may be required by a change in generally accepted
accounting principles; (d) except as required by the American Stock Exchange,
any declaration, payment or setting aside for payment of any distributions
(whether in cash or property) in respect to the partnership interests of the
Partnership, or direct or indirect redemption, purchase or other acquisition of
any BACs or other securities of the Partnership; (e) any revaluation by the
Partnership of any of its assets, including without limitation, writing off of
notes or accounts receivable, except any revaluation required by generally
accepted accounting principles based on the value of the Merger Consideration ;
(f) any action taken by the Partnership of the type referred to in Section 6.1.4
or 6.1.5 hereof; (g) any agreement by the Partnership to take, whether in
writing or otherwise, any action which, if taken prior to the date of this
Agreement, would have made any representation or warranty in this Section 4
untrue or incorrect; (h) any damage, destruction or loss, whether covered by
insurance or not, having a material adverse effect upon the Condition of the
Partnership; (i) any issuance, grant, sale or pledge or agreement to issue,
grant, sell or pledge by the Partnership, with any Person other than an
Affiliate of the Merger Partnership, any BACs or other partnership interests or
securities convertible into or exchangeable or exercisable for, or otherwise
evidencing a right to acquire, BACs or other part-
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<PAGE>
nership interests; (j) any acquisition of assets by the Partnership, other than
personal property not material to the Partnership acquired in the ordinary
course of business and consistent with past practices, or (k) any disposition,
encumbrance or mortgage of any assets or properties of the Partnership, other
than personal property not material to the Partnership disposed of in the
ordinary course of business and consistent with past practices.
4.10 Litigation. There is no action or proceeding or investigation
----------
pending or, to the Partnership's Knowledge, threatened against or involving the
Partnership, any properties or rights of the Partnership or, to the
Partnership's Knowledge, any Mortgaged Property which if adversely determined
would, individually or in the aggregate, have a material adverse effect on the
Condition of the Partnership nor is the Partnership, its assets or, to the
Partnership's Knowledge, any Mortgaged Property subject to any Order which would
have such an effect.
4.11 Taxes. To the Partnership's Knowledge, except as set forth on
-----
the Disclosure Schedule, the Partnership has duly filed all tax returns that it
was required to file, all such tax returns were correct and complete in all
material respects and all taxes shown on such returns as due, if any, have been
paid. The Partnership constitutes a partnership for all income tax purposes
rather than a corporation or association taxable as a corporation. The
Partnership does not have in effect an election pursuant to Section 754 of the
Code. The Partnership's tax basis in the Mortgage Revenue Bonds, including the
interest receivable, is $130,450,406 as of December 31, 1994.
4.12 Assets. The Partnership has no assets other than the Mortgage
------
Revenue Bonds, the Liens represented by the Mortgage Revenue Documents, cash on
hand (including operating cash and marketable securities) in the amount of
$5,827,513 as of June 30, 1995, and personal property not material to the
Partnership held in the ordinary course of business and consistent with past
practices. The Partnership GP has no assets other than its partnership interest
in the Partnership.
4.13 Transactions with Affiliates. Except as described in the
----------------------------
Disclosure Schedule or the SEC Filings, the Partnership has not entered into any
of the following transactions with any Affiliate or Individual Affiliate in
connection with which the Partnership has continuing obligations in effect as of
the date of this Agreement: the direct or indirect purchase, acquisition or
lease of any property from, or the sale, transfer or lease of any property to,
or the borrowing of any money from, or the guarantee of any obligation of, or
the acquisition of any stock, obligations or securities of, or the entering into
of any merger or consolidation agreement, or any management, consulting,
employment or similar fee arrangement or
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<PAGE>
the entering into of any other transaction or arrangement with, or the making of
any payment to, an Individual Affiliate, in the ordinary course of business or
otherwise, which is not on terms at least as favorable to the Partnership as
would have been applicable if such transaction had been entered into on an
arm's-length basis with an unaffiliated third party.
4.14 Disclosure. To the Partnership's Knowledge, no written
----------
statement, certificate, schedule, list or other written information furnished by
or on behalf of the Partnership to the Merger Partnership pursuant to this
Agreement contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact necessary in order to make the
statements herein or therein, in light of the circumstances under which they
were made, not misleading.
4.15 Brokers. No broker, finder or investment banker is entitled to
-------
any brokerage, finder's or other fee or commission in connection with the
Transaction based upon arrangements made by or on behalf of the Partnership or
the Partnership GP.
4.16 General Partner Recommendation. The Partnership GP has approved
------------------------------
and adopted the Transaction, has determined that the Transaction is fair to the
holders of BACs, and has recommended that the holders of BACs approve the
Transaction; provided, that the Partnership GP's continued recommendation shall
--------
be subject to its receipt of a favorable Fairness Opinion. The Partnership has
no general partners or holders of general partnership interests other than the
Partnership GP.
4.17 Compliance with Law. The Partnership has conducted its
-------------------
business so as to comply with all applicable Requirements of Law relating to or
affecting the operations, conduct or ownership of the property or business of
the Partnership, the failure to comply with which would, individually or in the
aggregate, have a material adverse effect on the Condition of the Partnership,
provided, for purposes of this Section 4.17, the existence of any statute, law,
- - - - --------
treaty, rule, regulation or ordinance referred to in clause (ii) of the
definition of Requirements of Law shall be subject to the Partnership's
Knowledge.
4.18 Mortgage Revenue Bonds and Mortgage Revenue Documents.
-----------------------------------------------------
4.18.1 The Partnership has herewith or heretofore delivered or
made available to the Merger Partnership a true, correct and complete set of all
of the files, documents and other written materials relating to the Mortgage
Revenue Bonds and the Mortgage Revenue Documents, and to each Mortgaged Property
(and, where relevant, to each Owner Partnership's obtaining title to its
Mortgaged Property), that are in the
-16-
<PAGE>
possession or control of the Partnership and all documents related thereto that
were executed by or on behalf of the Partnership or any Owner Partnership,
including, without limitation, copies of the Mortgage Revenue Bonds, the
Mortgage Revenue Documents, Environmental Reports, any letters of credit or
other credit enhancement instruments currently in effect, title insurance
policies, hazard insurance policies, flood insurance policies and other
insurance policies, all balance sheets, operating statements and other financial
statements, all existing engineering reports, soil studies and reports, plans,
specifications, architectural and engineering drawings, completion bonds,
arrangements, warranties, commitments and other similar reports, studies and
items, leases and contracts, property management and leasing brokerage
agreements and other writings whatsoever. Notwithstanding the foregoing, with
respect to such files, documents and other written materials that were prepared,
received or stored by C.R.I., Inc.'s former housing acquisition department
during the time that Richard L. Kadish was supervising such department (the
"Housing Acquisition Department Files"), the Partnership represents and warrants
only that it has herewith or heretofore delivered or made available to the
Merger Partnership a true, correct and, to the Partnership's Knowledge, complete
set of the Housing Acquisition Department Files.
4.18.2 The Partnership is the sole legal and beneficial owner
and holder of the Mortgage Revenue Bonds and the Mortgage Revenue Documents,
free and clear of any Lien, and, at the Effective Time, the Surviving
Partnership will be the sole legal and beneficial owner and holder of the
Mortgage Revenue Bonds and the Mortgage Revenue Documents, free and clear of any
Lien (without taking into account the Financing or the Bond Refinancing or any
act of the Merger Partnership). The Partnership has not endorsed, granted,
assigned, transferred or otherwise pledged, encumbered or set over the Mortgage
Revenue Bonds and/or the Mortgage Revenue Documents to any Person.
4.18.3 The amounts of unpaid principal balance of each of the
Mortgage Revenue Bonds and the amount of accrued and unpaid base interest
thereunder, specifying the amounts of deferred construction period base
interest, past due base interest and interest on such interest, are set forth in
the Disclosure Schedule.
5. Representations and Warranties of the Owner Partnerships.
--------------------------------------------------------
Subject to Section 10.3 below, each of the Owner Partnerships (or, as
specified below, the Designated Owner Partnership) represents and warrants, as
to itself only, to the Merger Partnership as follows:
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<PAGE>
5.1 Formation and Qualification. Such Owner Partnership is a limited
---------------------------
partnership duly formed, validly existing and in good standing under the laws of
the State set forth opposite its name on the Disclosure Schedule and has the
requisite power to carry on its business as now conducted. Such Owner
Partnership is duly qualified, licensed and authorized as a foreign limited
partnership to do business, and is in good standing, in each jurisdiction where
the character of its properties owned or leased or the nature of its activities
makes such qualification or licensing necessary, except for failures to be so
qualified which would not, in the aggregate, have a material adverse effect on
its Condition. Copies of the certificate of limited partnership and the
agreement of limited partnership for such Owner Partnership have heretofore been
delivered or made available to the Merger Partnership and are accurate and
complete as of the date hereof. Such Owner Partnership is not in default under
or in violation of any provision of its limited partnership agreement, except
for such defaults or violations which would not have any material adverse effect
on the Condition of such Owner Partnership.
5.2 No Subsidiaries. Such Owner Partnership does not have any
---------------
Subsidiaries or any equity or similar interest, whether voting or non-voting, in
any Person. The only real and personal property owned or leased by such Owner
Partnership is the applicable Mortgaged Property owned by it as set forth in the
Disclosure Schedule, other than personal property held in the ordinary course of
business and consistent with past practices. The sole business and purpose of
such Owner Partnership is to own, manage, operate and lease the applicable
Mortgaged Property owned by it.
5.3 Partners and Capitalization. Set forth on the Disclosure
---------------------------
Schedule is a list of all of the partners in such Owner Partnership and their
respective partnership interests therein, and all of the direct and indirect
beneficial owners in each such partner and their respective ownership interests
therein. There are no outstanding options, warrants, calls, subscriptions or
other rights or other agreements or commitments obligating such Owner
Partnership or any of its Affiliates to issue, transfer or sell any additional
partnership interests of such Owner Partnership. All issued and outstanding
partnership interests of such Owner Partnership are validly issued, and the
purchase price therefor has been paid in full.
5.4 Authority Relative to this Agreement. Such Owner Partnership
------------------------------------
has the requisite power and authority to enter into this Agreement and to
perform its obligations hereunder. The execution and delivery of this Agreement
by such Owner Partnership and the consummation by such Owner Partnership of the
transactions contemplated hereby have been duly authorized by all necessary
action on the part of such Owner Partnership and no
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<PAGE>
other proceedings on the part of such Owner Partnership are necessary to
authorize this Agreement and the transactions contemplated hereby. This
Agreement has been duly executed and delivered by such Owner Partnership and
constitutes a valid and binding obligation of such Owner Partnership enforceable
against such Owner Partnership in accordance with its terms.
5.5 No Conflicts. With respect only to the Designated Owner
------------
Partnership, except as set forth in the Disclosure Schedule, neither the
execution and delivery of this Agreement by the Designated Owner Partnership nor
the consummation of the transactions contemplated hereby (excluding the
Financing and the Bond Refinancing) nor compliance by the Designated Owner
Partnership with any of the provisions hereof will (i) violate, conflict with,
or result in a breach of any provision of, or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a default) under,
or result in the termination of, or accelerate the performance required by, or
result in a right of termination or acceleration under, or result in the
creation of any Lien upon any of the properties or assets of the Designated
Owner Partnership under any of the terms, conditions or provisions of (x) the
certificate of limited partnership of the Designated Owner Partnership or the
agreement of limited partnership of the Designated Owner Partnership or (y) any
note, bond, mortgage, indenture, deed of trust, license, lease, material
agreement or other material instrument or obligation to which the Designated
Owner Partnership is a party or to which it or any of its properties or assets
may be subject, or (ii) subject to compliance with the statutes and regulations
referred to in Section 5.6 below, to the Designated Owner Partnership's
Knowledge, violate any Order, statute, rule or regulation applicable to the
Designated Owner Partnership or any of its properties or assets, except, in the
case of each of clauses (i) and (ii) above, for such violations, conflicts,
breaches, defaults, terminations, accelerations, or creations of Liens which
would not, in the aggregate, have any material adverse effect on the Condition
of the Designated Owner Partnership.
5.6 Governmental Approvals. With respect only to the Designated
----------------------
Owner Partnership, except as set forth in the Disclosure Schedule, other than in
connection with or in compliance with the provisions of the limited partnership
act of the state of its formation, the Exchange Act, the Securities Act, the
"takeover" laws of various states, and the Hart-Scott-Rodino Act, to the
Designated Owner Partnership's Knowledge no notice to, filing with, or
authorization, consent or approval of any domestic or foreign public body or
authority is necessary for the consummation by the Designated Owner Partnership
of the transactions contemplated by this Agreement (excluding the Financing and
the Bond Refinancing).
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<PAGE>
5.7 Financial Statements. With respect only to the Designated Owner
--------------------
Partnership, the Designated Owner Partnership has heretofore delivered or made
available to the Merger Partnership its annual financial statements, which
financial statements are listed on the Disclosure Schedule, all of which
financial statements have been prepared in accordance with the principles of the
income tax basis of accounting applied on a consistent basis during the periods
involved (except as may be indicated in the notes thereto), and fairly present
the financial position of the Designated Owner Partnership as of the date
thereof and the results of its operations and changes in its financial position
for the periods then ended.
5.8 No Undisclosed Liabilities. With respect only to the Designated
--------------------------
Owner Partnership, the Designated Owner Partnership does not have any
Liabilities not reflected or disclosed in its financial statements referred to
in Section 5.7 above which were required to be reflected or disclosed therein in
accordance with the principles of the income tax basis of accounting. Since the
date of its financial statements referred to in Section 5.7 above, except as may
otherwise be disclosed in the Disclosure Schedule, the Designated Owner
Partnership has not incurred any such Liabilities.
5.9 Absence of Certain Changes or Events. With respect only to the
------------------------------------
Designated Owner Partnership, except as and to the extent set forth on its
applicable financial statements referred to in Section 5.7 above, or except as
described in the Disclosure Schedule, since the date of such financial
statements, there has not been (a) any material adverse change in its Condition;
(b) any entry by it into any commitment or transaction which is not in the
ordinary course of its business and consistent with past practices; (c) any
material change by it in accounting principles or methods except insofar as may
be required by a change in principles of the income tax basis of accounting; (d)
any declaration, payment or setting aside for payment of any distributions
(whether in cash or property) in respect to its partnership interests or any
other of its securities; (e) any revaluation by it of any of its assets,
including without limitation, writing off of notes or accounts receivable other
than in the ordinary course of business and consistent with past practices; (f)
any action taken by it of the type referred to in Section 6.2.4 or 6.2.5 hereof;
(g) any agreement by it to take, whether in writing or otherwise, any action
which, if taken prior to the date of this Agreement, would have made any
representation or warranty in this Section 5 untrue or incorrect; (h) any
damage, destruction or loss, whether covered by insurance or not, having an
adverse effect upon its Condition; (i) any issuance, grant, sale or pledge or
agreement to issue, grant, sell or pledge by it, with any Person other than an
Affiliate of the Merger Partnership, any partnership interests or securities
convertible into or exchangeable or exercisable
-20-
<PAGE>
for, or otherwise evidencing a right to acquire, partnership interests; (j) any
acquisition of assets by it other than in the ordinary course of business and
consistent with past practices; or (k) any disposition, encumbrance or mortgage
of any of its assets or properties other than in the ordinary course of business
and consistent with past practices.
5.10 Mortgaged Properties.
--------------------
5.10.1 With respect only to the Designated Owner Partnership,
the Designated Owner Partnership has herewith or heretofore delivered or made
available to the Merger Partnership a true, correct and complete set of all the
files, documents and other written materials relating to the Mortgaged Property
owned by the Designated Owner Partnership (and to its obtaining title to such
Mortgaged Property), or the Mortgage Revenue Bonds and the Mortgage Revenue
Documents related thereto, that are in the possession or control of the
Designated Owner Partnership and all documents related thereto that were
executed by or on behalf of the Partnership or the Designated Owner Partnership,
including, without limitation, copies of such Mortgage Revenue Bonds, such
Mortgage Revenue Documents, Environmental Reports, any letters of credit or
other credit enhancement instruments, title insurance policies, hazard insurance
policies, flood insurance policies and other insurance policies, all balance
sheets, operating statements and other financial statements, all existing
engineering reports, soil studies and reports, plans, specifications,
architectural and engineering drawings, completion bonds, arrangements,
warranties, commitments and other similar reports, studies and items, leases and
contracts, property management and leasing brokerage agreements and other
writings whatsoever. Notwithstanding the foregoing, with respect to the Housing
Acquisition Department Files, the Designated Owner Partnership represents and
warrants only that the Designated Owner Partnership has herewith or heretofore
delivered or made available to the Merger Partnership, a true, correct and, to
the Designated Owner Partnership's Knowledge, complete set of the Housing
Acquisition Department Files.
5.10.2 With respect only to each Designated Owner Partnership,
the Designated Owner Partnership has good and marketable title to the Mortgaged
Property owned by it. To the Designated Owner Partnership's Knowledge, neither
the Mortgaged Property nor other assets of the Designated Owner Partnership is
subject to any Lien except (a) Liens securing the Mortgage Revenue Bonds, (b)
Permitted Statutory Liens, (c) Liens for taxes not yet delinquent or the
validity of which are being contested in good faith by appropriate actions and
for which appropriate reserves have been made, and (d) Liens which do not in the
aggregate have an adverse effect on the Condition of the Designated Owner
Partnership.
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<PAGE>
5.11 No Action. With respect only to the Designated Owner
---------
Partnership, except for landlord/tenant collection and eviction actions or as
set forth on the Disclosure Schedule, there is no action or proceeding or
investigation pending or, to the Designated Owner Partnership's Knowledge,
threatened against or involving the Designated Owner Partnership, any properties
or rights of the Designated Owner Partnership or the Mortgaged Property owned by
it which if adversely determined would, individually or in the aggregate, have
an adverse effect on the Condition of the Designated Owner Partnership nor is
the Designated Owner Partnership, its assets or such Mortgaged Property subject
to any Order which would have such an effect. Without limiting the generality
of the foregoing, the Designated Owner Partnership is not a debtor in any state
or federal bankruptcy, insolvency, liquidation, reorganization, receivership or
arrangement proceeding, and no such proceeding is pending or has been threatened
in writing.
5.12 Taxes. Except as may otherwise be set forth on the Disclosure
-----
Schedule, to such Owner Partnership's Knowledge, such Owner Partnership has duly
filed all tax returns that it was required to file and all such tax returns were
correct and complete. Such Owner Partnership constitutes a partnership for all
income tax purposes rather than a corporation or association taxable as a
corporation.
5.13 Compliance with Law. With respect only to the Designated Owner
-------------------
Partnership, the Designated Owner Partnership has conducted its business so as
to comply with all applicable Requirements of Law relating to or affecting the
operations, conduct or ownership of the property or business of such Designated
Owner Partnership, failure to comply with which would, individually or in the
aggregate, have a material adverse effect on the Condition of the Designated
Owner Partnership, provided, for purposes of this Section 5.13, the existence of
--------
any statute, law, treaty, rule, regulation or ordinance referred to in clause
(ii) of the definition of Requirements of Law shall be subject to the Designated
Owner Partnership's Knowledge.
5.14 Disclosure. With respect only to the Designated Owner
----------
Partnership, to the Designated Owner Partnership's Knowledge, no written
statement, certificate, schedule, list or other written information furnished by
or on behalf of the Designated Owner Partnership, or otherwise made available,
to the Merger Partnership pursuant to this Agreement contains or will contain
any untrue statement of a material fact or omits or will omit to state a
material fact necessary in order to make the statements herein or therein, in
light of the circumstances under which they were made, not misleading.
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<PAGE>
6. Conduct of Business Pending the Merger.
--------------------------------------
6.1 Conduct of Business by the Partnership Pending the Merger. The
---------------------------------------------------------
Partnership covenants and agrees that, from the date of this Agreement until the
Effective Time, unless the Merger Partnership shall otherwise agree in writing
or as otherwise expressly contemplated by this Agreement:
6.1.1 The business of the Partnership shall be conducted only
in, and the Partnership shall not take any action except in, the ordinary course
of business and consistent with past practices, and the Partnership shall use
all commercially reasonable efforts to maintain and preserve its business
organization, assets, prospects and advantageous business relationships.
6.1.2 Except as contemplated hereby, the Partnership shall not
directly or indirectly do any of the following: (i) sell, transfer, pledge,
dispose of or encumber, except in the ordinary course of business and consistent
with past practices, any properties or assets of the Partnership (including,
without limitation, any indebtedness owed to it, including any Mortgage Revenue
Bonds, or any claims held by it); (ii) whether or not in the ordinary course of
business, sell or dispose of any property or asset which is material to the
Partnership; (iii) whether or not in the ordinary course of business, permit any
property or assets to become subject to any material Lien, other than Permitted
Statutory Liens; (iv) amend or propose to amend the Partnership Agreement, the
Partnership Certificate or similar organizational documents, any tax returns or
any Mortgage Revenue Bonds or Mortgage Revenue Documents; (v) declare, set aside
or pay any distribution, payable in cash, securities, property or otherwise,
with respect to any of its partnership interests or BACs; provided, however,
-------- -------
that, subject to Sections 501, 502, 504, 503, 511, 512 and 513 of the American
Stock Exchange Guide, the Partnership may accrue, on a monthly basis, an amount
up to $.09417 per BAC for Series I, and $.09667 for Series II, in calendar year
1996, and pay, on a semi-annual basis, such accrued amount to the BAC holders;
(vi) redeem, purchase or otherwise acquire or offer to redeem, purchase or
otherwise acquire any partnership interests or BACs; or (vii) authorize or
propose any of the foregoing, or enter into any contract, agreement, commitment,
or arrangement to do any of the foregoing.
6.1.3 Except as contemplated hereby, the Partnership shall
not, directly or indirectly, (i) issue, sell, pledge or dispose of, or
authorize, propose or agree to the issuance, sale, pledge or disposition of, any
BACs or partnership interests, or any options, warrants or rights of any kind to
acquire any shares of, or any securities convertible into or exchangeable for
any BACs or partnership interests, or any other
-23-
<PAGE>
securities in respect of, in lieu of, or in substitution for, BACs or
partnership interests outstanding on the date hereof; (ii) acquire (by merger,
consolidation, or acquisition of stock or assets) any other Person, or make any
investment either by purchase of stock or securities, contributions to capital,
property transfer, or, except in the ordinary course of business and consistent
with past practices, purchase of any property or assets of any other Person;
(iii) incur any indebtedness for money borrowed or issue any debt securities or
assume or guarantee any of the foregoing, except short-term indebtedness
incurred in the ordinary course of business and consistent with past practices;
(iv) endorse, or otherwise as an accommodation become responsible for, the
obligations of any other Person, or make any loans or advances other than in the
ordinary course of business and consistent with past practices; (v) voluntarily
incur any other liability or obligation (absolute, accrued, contingent or
otherwise), except in the ordinary course of business and consistent with past
practices; (vi) waive, release, grant or transfer any rights of material value
or modify or change in any material respect any agreement with or arrangement
relating to any existing material license, lease, contract or other document,
other than in the ordinary course of business and consistent with past
practices; (vii) authorize or effect any material change in its capitalization;
or (viii) authorize or commit to any of the actions prohibited in this Section
6.1.3, or enter into or modify any contract, agreement, commitment or
arrangement to do any of the actions prohibited in this Section 6.1.3.
6.1.4 The Partnership shall not make any tax election which
may have a material adverse effect on the Condition of the Partnership or the
Merger Partnership, change any material tax accounting method or settle or
compromise any material federal, state, local or foreign income tax liability.
The Partnership GP shall halt, suspend or limit trading of BACs to the extent
necessary to prevent a termination of the Partnership for income tax purposes as
a result of such trading or such trading in combination with the consummation of
the Transaction.
6.1.5 The Partnership shall not take any action or agree, in
writing or otherwise, to take any of the actions prohibited by this Section 6.1
or any action which would make any representation or warranty in Section 4
hereof untrue or incorrect in any material respect.
6.2 Conduct of Business by the Owner Partnerships Pending the
---------------------------------------------------------
Merger. Each of the Owner Partnerships covenants and agrees, for itself only,
that, from the date of this Agreement until the Effective Time, unless the
Merger Partnership shall otherwise agree in writing or as otherwise expressly
contemplated by this Agreement:
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<PAGE>
6.2.1 The business of such Owner Partnership shall be conducted only
in, and such Owner Partnership shall not take any action except in, the ordinary
course of business and consistent with past practices, and such Owner
Partnership shall use all commercially reasonable efforts to maintain and
preserve its business organization, assets, prospects and advantageous business
relationships.
6.2.2 Except as contemplated hereby, such Owner Partnership
shall not directly or indirectly do any of the following: (i) sell, transfer,
pledge, dispose of or encumber, any properties or assets of such Owner
Partnership (including, without limitation, any Mortgaged Property, any
indebtedness owed to it or any claims held by it), other than personal property
not material to such Owner Partnership which is sold or disposed of in the
ordinary course of business consistent with past practices; (ii) permit any
property or assets to become subject to any material Lien, other than Permitted
Statutory Liens; (iii) amend or propose to amend the agreement of limited
partnership, the certificate of limited partnership or similar organizational
documents of such Owner Partnership, any tax returns or any Mortgage Revenue
Bonds or Mortgage Revenue Documents; (iv) declare, set aside or pay any
distribution, payable in cash, securities, property or otherwise, with respect
to any of its partnership interests; (v) redeem, purchase or otherwise acquire
or offer to redeem, purchase or otherwise acquire any partnership interests; or
(vi) authorize or propose any of the foregoing, or enter into any contract,
agreement, commitment, or arrangement to do any of the foregoing.
6.2.3 Except as contemplated hereby, such Owner Partnership
shall not, directly or indirectly, (i) issue, sell, pledge or dispose of, or
authorize, propose or agree to the issuance, sale, pledge or disposition of, any
partnership interests, or any options, warrants or rights of any kind to acquire
any shares of, or any securities convertible into or exchangeable for any
partnership interests, or any other securities in respect of, in lieu of, or in
substitution for, partnership interests outstanding on the date hereof; (ii)
acquire (by merger, consolidation, or acquisition of stock or assets) any other
Person, or make any investment either by purchase of stock or securities,
contributions to capital, property transfer, or purchase of any property or
assets of any other Person (other than personal property with a fair market
value of $10,000 or less purchased in the ordinary course of business and
consistent with past practices); (iii) incur any indebtedness for money borrowed
or issue any debt securities or assume or guarantee any of the foregoing, except
short-term indebtedness incurred in the ordinary course of business and
consistent with past practices; (iv) endorse, or otherwise as an accommodation
become responsible for, the obligations of any other Person, or make any loans
or advances (other than loans and
-25-
<PAGE>
advances not material to such Owner Partnership made in the ordinary course of
business and consistent with past practices); (v) voluntarily incur any other
liability or obligation (absolute, accrued, contingent or otherwise), except in
the ordinary course of business and consistent with past practices; (vi) waive,
release, grant or transfer any rights of material value or modify or change in
any material respect any agreement with or arrangement relating to any existing
material license, lease, contract or other document; (vii) authorize or effect
any material change in its capitalization; or (viii) authorize or commit to any
of the actions prohibited in this Section 6.2.3, or enter into or modify any
contract, agreement, commitment or arrangement to do any of the actions
prohibited in this Section 6.2.3. Notwithstanding the foregoing, the parties
hereby agree that each Owner Partnership may make unbudgeted expenditures of up
to $10,000 in the aggregate without the consent of the Merger Partnership.
6.2.4 Such Owner Partnership shall not make any material tax
election, change any material tax accounting method or settle or compromise any
material federal, state, local or foreign income tax liability. Such Owner
Partnership shall be permitted to file and contest any pending real estate tax
assessment appeal in the ordinary course business and consistent with past
practices, provided, that if such Owner Partnership is a Designated Owner
--------
Partnership, it shall promptly notify the Merger Partnership of any proposed or
pending increases to the valuation of its real property or the amount or rate of
real estate taxes payable thereon.
6.2.5 Such Owner Partnership shall not take any action or
agree, in writing or otherwise, to take any of the actions prohibited by this
Section 6.2 or any action which would make any representation or warranty in
Section 5 hereof untrue or incorrect in any material respect.
7. Additional Agreements.
---------------------
7.1 Proxy Statement; Other Filings. As promptly as practicable
------------------------------
after the date hereof, the Partnership and the Merger Partnership shall jointly
prepare and the Partnership shall file with the Commission under the Exchange
Act, and shall use all commercially reasonable efforts to have cleared by the
Commission, and promptly thereafter the Partnership shall mail to its limited
partners and holders of BACs, a proxy statement and form of proxy with respect
to the meeting of the partners of the Partnership referred to in Section 7.2
hereof, all the costs of which shall be advanced by the Merger Partnership. The
term "Proxy Statement" shall mean such proxy statement at the time it initially
is mailed to the limited partners of the Partnership and the holders of BACs and
all amendments or supplements thereto, if any, similarly filed and mailed. As
soon as
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<PAGE>
practicable after the date of this Agreement, the Partnership and the Merger
Partnership shall promptly prepare and file any other filings required under the
Exchange Act, or any other federal or state securities laws relating to the
Merger and the transactions contemplated herein ("Other Filings"). The
Partnership shall notify the Merger Partnership promptly of the receipt of any
comments of the Commission and of any request by the Commission for amendments
or supplements to the Proxy Statement or by any other governmental official with
respect to any Other Filing or for additional information and will supply the
Merger Partnership with copies of all correspondence between the Partnership and
its representatives, on the one hand, and the Commission or the members of its
staff or any other appropriate government official on the other hand, with
respect to the Proxy Statement and any Other Filings. The Partnership and the
Merger Partnership each shall use all commercially reasonable efforts to obtain
and furnish the information required to be included in the Proxy Statement and
any Other Filing; and the Partnership, after consultation with the Merger
Partnership, shall use all commercially reasonable efforts to respond promptly
to any comments made by the Commission with respect to the Proxy Statement and
any Other Filing and any preliminary version thereof and cause the Proxy
Statement and related form of proxy to be mailed to the limited partners of the
partnership and holders of BACs at the earliest practicable time. The
Partnership shall notify the Merger Partnership of its intention to mail the
Proxy Statement to the limited partners of the Partnership and the holders of
BACs, both orally and in writing, at least 48 hours prior to the intended time
of such mailing. The information provided and to be provided by the Merger
Partnership and the Partnership, respectively, for use in the Proxy Statement
and any Other Filings shall, on the date the Proxy Statement is first mailed to
the limited partners of the Partnership and the holders of BACs or any Other
Filing is filed with the appropriate governmental official and in each case on
the date of the meeting of the limited partners of the Partnership and the
holders of BACs referred to in Section 7.2 hereof, be true and correct in all
material respects and shall not omit to state any material fact required to be
stated therein or necessary in order to make such information not false or
misleading, and the Partnership and the Merger Partnership each agree to correct
any such information provided by it for use in the Proxy Statement or any Other
Filing which shall have become false or misleading. The Proxy Statement and any
Other Filing, when filed with the Commission, shall comply as to form in all
material respects with all applicable requirements of law.
7.2 Meeting of the Limited Partners. The Partnership shall take all
-------------------------------
action necessary, in accordance with the Partnership Act, the Partnership
Certificate and the Partnership Agreement to duly call, give notice of, convene
and hold a meeting of the limited partners of the Partnership as promptly as
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practicable to consider and vote upon and obtain BAC Holder Approval of the
Transaction, including, without limitation, the Merger, this Agreement, the
replacement of the Partnership GP with the CAPREIT General Partner pursuant to
Section 2.3, and certain amendments to the Partnership Agreement (including,
without limitation, to expressly authorize the Merger, this Agreement and the
transactions contemplated hereby and the issuance of a limited partner interest
in the Partnership pursuant to Section 7.14 below) (the "Meeting"). The Proxy
Statement shall contain the determinations and recommendations of the
Partnership GP as to the Transaction as set forth in Section 4.16 hereof. The
Partnership shall use all commercially reasonable efforts to solicit from
holders of BACs proxies in favor of adoption and approval of the Transaction and
to take all other action necessary or, in the reasonable judgment of the Merger
Partnership, helpful to secure the BAC Holder Approval of the Transaction. At
any such Meeting, CAPREIT shall vote, or cause to be voted, all of the
partnership interests in the Partnership then owned by CAPREIT or any of its
Affiliates in favor of the Transaction.
7.3 Fees and Expenses.
-----------------
7.3.1 If this Agreement or the transactions contemplated
hereby are terminated or abandoned, and
(i) such termination or abandonment results from the breach
by the Partnership of the covenant set forth in Section 7.5, from a
Fiduciary Out Termination or from a wilful and material breach by the
Partnership of any of its covenants or agreements set forth in this
Agreement (specifically excluding any representations and warranties
set forth in Section 4); or
(ii) after the date of this Agreement and prior to or
contemporaneously with such termination or abandonment, (A) the
Partnership or the Partnership GP enters into any letter of intent or
agreement with any Person (including the Partnership or any of its
Affiliates and excluding the Merger Partnership and its Affiliates) or
group (as defined in Section 13(d)(3) of the Exchange Act)
(collectively, the "Designated Persons") relating to a (x) tender
offer or exchange offer for any class of outstanding BACs at a per BAC
price in excess of the Merger Consideration for Series I or Series II,
as applicable or (y) a Business Combination with or involving the
Partnership or any of its Affiliates, or any transaction involving a
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transfer of beneficial ownership of BACs representing at least 10% of
any class of outstanding BACs, (B) the Partnership or the Partnership
GP shall file with the Commission a Schedule 14D-9 or similar
document, or make any public announcement or communication, (x)
recommending, endorsing or supporting a proposal, plan or intention by
the Partnership or another Designated Person to effect any of the
foregoing transactions or (y) failing to recommend, endorse and
support the Transaction (unless the investment banking firm retained
by the Partnership does not deliver a Fairness Opinion), or (C) any
Designated Person shall have acquired beneficial ownership of at least
33 1/3% of any class of outstanding BACs (the foregoing events are
herein collectively referred to as "Triggering Events"); or
(iii) Within 270 days from the date of termination or abandonment
of this Agreement, a Triggering Event shall have resulted in the
Partnership or holders of any class of outstanding BACs receiving
consideration (determined on a per BAC basis) in excess of the Merger
Consideration applicable to such class.
then the Partnership shall pay to the Merger Partnership, within seven business
days of written request therefor, a fee in the amount of $2.25 million in cash.
The parties intend that the payment of such fee and the payment of expenses as
provided in Section 7.3.2 shall be the sole remedy for breach of this Agreement
by the Partnership or any Owner Partnership and shall be made as liquidated
damages in full satisfaction of the Partnership's or any Owner Partnership's
liabilities or obligations hereunder.
7.3.2 (a) If the Transaction is terminated or abandoned due to
(w) a wilful and material breach of the Merger Agreement by the Partnership or
any Owner Partnership (other than a breach consisting solely of a breach of any
representations or warranties set forth in Section 4 or 5), (x) the failure to
fulfill the conditions specified in Section 8.3.1 or 8.3.3 (solely as it relates
to Section 8.3.1) by the Partnership or any Owner Partnership, (y) a Fiduciary
Out Termination or (z) the election by the Merger Partnership to terminate this
Agreement pursuant to Section 9.1.9, the Partnership shall bear all of its own
expenses and, in addition, shall promptly reimburse the Merger Partnership and
its Affiliates for all reasonable out-of-pocket expenses (including, without
limitation, all fees and expenses of counsel, outside accountants, investment
banking firms, financing sources, third party experts and third party
consultants to the Merger Partnership and its Affiliates) incurred by them or on
their behalf in connection with the
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Transaction and the Proxy Statement, provided, that if and only if a payment is
--------
due under this Section 7.3.2(a) and the closing under the Other Merger Agreement
shall have occurred, then the amount payable under this Section 7.3.2(a) shall
not exceed a maximum amount equal to the sum of (i) the amount of all such
reasonable out-of-pocket expenses directly allocable to the transactions
contemplated by this Agreement and (ii) 50% of the aggregate amount of any other
such expenses incurred in connection both with the transactions contemplated by
this Agreement and the transactions contemplated by the Other Merger Agreement
and not directly allocable to the transactions contemplated by the Other Merger
Agreement. Notwithstanding anything to the contrary herein, the aggregate
amount payable by the Partnership to the Merger Partnership and its Affiliates
pursuant to this Section 7.3.2(a) shall not exceed $2 million.
(b) Unless the Transaction is terminated or abandoned due to (w) a
wilful and material breach by the Partnership or any Owner Partnership of this
Agreement, (x) the failure to fulfill the conditions specified in Section 8.3.1,
8.3.3 (solely as it relates to Section 8.3.1), or 8.3.11 by the Partnership or
any Owner Partnership, (y) a Fiduciary Out Termination or (z) the election by
the Merger Partnership to terminate this Agreement pursuant to Section 9.1.9 or
9.1.10, the fees and expenses listed below shall be paid as follows:
The Merger Partnership shall pay or reimburse the costs of (i)
preparing, filing, printing and distributing the Proxy Statement and reasonable
legal fees and expenses of counsel to the Merger Partnership and counsel to the
Partnership, including in its capacity as counsel for the Owner Partnerships,
and accounting fees and expenses of the Partnership's and the Owner
Partnerships' outside accountants (such fees and expenses of the Partnership's
counsel and accountants to be directly related to the Proxy Statement and the
Transaction only), (ii) any fees to lenders in connection with obtaining the
Commitment Letter or consummating the Financing or the Bond Refinancing, (iii)
any transfer taxes and/or other reasonable out-of-pocket costs payable in
connection with the Transaction, except as provided below, and (iv) the costs of
any due diligence performed by or on behalf of the Merger Partnership, including
any costs incurred by the Partnership in connection with such due diligence, but
only with the prior approval by the Merger Partnership of any such cost
incurrence. The Partnership shall pay the costs of (A) obtaining the Fairness
Opinion and related legal and accounting fees and expenses, (B) the legal and
accounting fees and expenses of the Partnership incurred in connection with the
negotiation of this Agreement and (C) reimbursement of staff time and other
internal costs of the Partnership GP and its Affiliates.
(c) The Partnership agrees that, without at least 14 days' prior
notice to the Merger Partnership and the prior
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written consent of the Merger Partnership, the Partnership shall not pay or
incur in excess of $75,000 for reimbursement of staff time or other internal
costs of the Partnership GP and its Affiliates through December 31, 1995. If
the Closing Date shall not occur on or prior to December 31, 1995, the
Partnership shall prepare new projections of such expenses by calendar quarter,
subject to the approval by the Merger Partnership in its reasonable judgement,
and shall not pay or incur expenses in excess of such projections.
(d) Any request for reimbursement under Section 7.3.2(a) or (b) shall
be made together with itemized invoices or other appropriate expense
documentation.
(e) Except as provided in this Section 7.3.2 or otherwise in this
Agreement, all costs and expenses incurred in connection with the Transaction
shall be paid by the party incurring such expenses, whether or not the
Transaction is consummated and, in any case, the Partnership GP shall pay its
own legal fees and other expenses.
7.4 Further Agreements.
------------------
7.4.1 Subject to the terms and conditions herein provided,
each of the parties hereto agrees to use all commercially reasonable efforts to
take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective as
promptly as practicable the transactions contemplated by this Agreement and to
cooperate with each other in connection with the foregoing, including (i) using
all commercially reasonable efforts to obtain all necessary waivers, consents
and approvals from other parties to loan agreements, leases and other contracts
and instruments; (ii) using all commercially reasonable efforts (a) to obtain
all necessary consents, approvals and authorizations as are required to be
obtained under any federal, state or foreign law or regulations, (b) to defend
all lawsuits or other legal proceedings challenging this Agreement or the
consummation of the transactions contemplated hereby (collectively, "Designated
Actions"), (c) to lift or rescind any injunction or restraining order or other
order adversely affecting the ability of the parties to consummate the
transactions contemplated hereby, and (d) to effect all necessary registrations
and filings, including, but not limited to, filings under the Hart-Scott-Rodino
Act, if any, and submissions of information requested by governmental
authorities. For purposes of the foregoing sentence, the obligations of the
Partnership and the Merger Partnership to use "all commercially reasonable
efforts" to obtain waivers, consents and approvals to loan agreements, leases
and other contracts shall not include any obligation to agree to an adverse
modification of the terms of
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such documents or to pay or incur additional obligations to such other parties.
7.4.2 In connection with any Designated Action, the
Partnership hereby agrees to: (i) promptly deliver to the Merger Partnership
copies of all complaints, pleadings and other filings relating to any Designated
Action; (ii) provide drafts of its reply, motions and other pleadings to the
Merger Partnership for review and comment prior to filing or serving any such
reply, motion or pleading and not to file any such reply, motion or pleading
until the earlier of (x) receipt of consent from the Merger Partnership or (y)
the day of the deadline for such motion, reply or pleading; and (iii) consult
with the Merger Partnership in a timely manner prior to taking any other action.
7.5 Shop Limitation.
---------------
7.5.1 Subject to Section 7.5.2 below, each of the Partnership
and the Partnership GP will not, directly or indirectly, through any general
partner, officer, director, agent, or Affiliate of any of the foregoing, or
otherwise (i) solicit, initiate or invite the submission of inquiries, proposals
or offers from any Person relating to any Business Combination, or (ii) enter
into or participate in any discussions or negotiations regarding any of the
foregoing, or furnish to any Person any information with respect to the
business, properties or assets of the Partnership or any of the foregoing, or
(iii) otherwise cooperate in any way with, or assist or participate in,
facilitate or encourage, any effort or attempt by any Person to do or seek any
of the foregoing. The Partnership shall immediately notify the Merger
Partnership if any such proposal or offer, or any inquiry or contact with any
Person with respect thereto, is made.
7.5.2 If the Partnership GP is required because of its
fiduciary obligations to the holders of BACs to respond to an unsolicited
inquiry, contact or proposal related to a Business Combination made by a third
party to the Partnership (an "Alternative Proposal"), nothing in this Agreement
shall prohibit the Partnership GP or the Partnership from responding to such
Alternative Proposal, making any required disclosures under federal securities
laws, providing information regarding the Partnership to the party making such
Alternative Proposal, negotiating with such party in good faith, terminating
this Agreement or taking any other action otherwise prohibited by Section 7.5.1
above because it is required to by fiduciary obligations to accept an
Alternative Proposal (a "Fiduciary Out Termination"); provided, however, that
-------- -------
the Partnership agrees to give the Merger Partnership reasonable notice of any
such response, negotiations or other matters, as well as a reasonable
opportunity to respond, taking into account in good faith the
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facts and circumstances prevailing at the time of such response, negotiation or
other matters.
7.6 Additional Financial Statements. (a) As soon as reasonably
-------------------------------
practicable after they become publicly available, the Partnership shall furnish
the Merger Partnership with (i) a consolidated balance sheet of the Partnership
and related consolidated statements of operations and cash flows for all
quarterly periods subsequent to the Balance Sheet Date and prior to the
Effective Time, accompanied by statements by the Partnership GP that, in the
opinion of the Partnership GP, such financial statements of the Partnership have
been prepared pursuant to the rules and regulations of the Commission and fairly
present (subject, in the case of unaudited financial statements, to changes
resulting from year-end audit adjustments and other adjustments of a normal and
recurring nature) the consolidated financial condition and results of operations
of the Partnership, as of the dates and for the periods covered by such
statements and (ii) any other financial statements that the Partnership shall
prepare for any interim period subsequent to the Balance Sheet Date and prior to
the Effective Time.
(b) As soon as reasonably practicable after they are prepared, each
Owner Partnership shall furnish the Merger Partnership with (i) a balance sheet
of such Owner Partnership and related statements of operations, changes in
partners' deficit and cash flows for all annual periods subsequent to the date
hereof and prior to the Effective Time, accompanied by statements by its general
partner that, in the opinion of such general partner, such financial statements
have been prepared in conformity with the income tax basis of accounting applied
on a consistent basis and fairly present (subject, in the case of unaudited
financial statements, to changes resulting from year-end audit adjustments) the
financial condition, results of operations and cash flows of such Owner
Partnership, as of the dates and for the periods covered by such statements and
(ii) any other financial statements that such Owner Partnership shall prepare
for any interim period subsequent to the date hereof and prior to the Effective
Time.
7.7 Access to Information; Confidentiality.
--------------------------------------
7.7.1 Each of the Partnership and the Owner Partnerships
shall, and shall cause its employees, consultants, accountants, counsel and
agents to, afford to the Merger Partnership and its representatives and to the
banks, lenders, financial institutions and others providing financing for the
Transaction and others, complete access at all reasonable times to, from the
date of this Agreement until the Effective Time, its offices, facilities,
personnel, properties, books, records and contracts, and shall furnish the
Merger Partnership and its representatives and such banks, lenders, financial
institutions
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and others all financial, operating and other data and information as the Merger
Partnership and its representatives and such banks, lenders, financial
institutions and others, through their respective officers, employees or agents,
may reasonably request.
7.7.2 The confidentiality agreement, dated February 10, 1995,
between CAPREIT and the Partnership shall remain in full force and effect in
accordance with its terms and shall apply to any information provided pursuant
to this Section 7.7 or otherwise under this Agreement. The Merger Partnership
hereby adopts and agrees on behalf of itself and its Affiliates to be bound by
all of the terms and conditions of such confidentiality agreement, as if
restated in full herein.
7.7.3 No investigation pursuant to this Section 7.7 shall
affect any representations or warranties of the parties herein or the conditions
to the obligations of the parties hereto.
7.8 Public Announcements. No press release or announcement
--------------------
concerning this Agreement or the Transaction shall be issued without advance
approval of the form and substance thereof by the Partnership and the Merger
Partnership. Notwithstanding the foregoing, each of the Partnership and the
Merger Partnership will use all commercially reasonable efforts to consult with
each other before issuing any press release or otherwise making any public
statements with respect hereto, provided, such obligation to use all
--------
commercially reasonable efforts shall be deemed satisfied if a draft of a press
release or announcement is delivered for comment at least 24 hours prior to
public release.
7.9 Agreement to Defend and Indemnify. For a period of 3 years and
---------------------------------
6 months from and after the Effective Time, the Surviving Partnership will
continue in full force and effect for the benefit of the Partnership GP, the
Assignor Limited Partner and their Affiliates the provisions of the Partnership
Agreement, as currently in effect, related to indemnification of the Partnership
GP, the Assignor Limited Partner and their Affiliates as if the Partnership GP
and the Assignor Limited Partner continued to serve the Partnership as general
partner and assignor limited partner, respectively, after the Effective Time.
CAPREIT hereby guarantees the obligations of the Surviving Partnership under
this Section 7.9 as if it were the indemnifying party thereunder, except that
its obligations shall not be limited to the assets of the Surviving Partnership.
For purposes of this Section 7.9 only, the term Affiliates shall have the
meaning ascribed to such term in the Partnership Agreement.
7.10 Notification of Certain Matters. Each of the Partnership and
-------------------------------
the Owner Partnerships shall give prompt notice
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to the Merger Partnership, and the Merger Partnership and its Affiliates shall
give prompt notice to the Partnership and the pertinent Owner Partnership, as
the case may be, of (i) the occurrence, or failure to occur, of any event which
occurrence or failure would be likely to cause any representation or warranty
contained in this Agreement and made by it to be untrue or inaccurate in any
material respect at any time from the date hereof to the Effective Time, and
(ii) any material failure of the Partnership, any Owner Partnership or the
Merger Partnership, as the case may be, or of any general partner, officer,
director, employee or agent of any thereof, to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder, provided, however, that no such notifications shall affect the
-------- -------
representations or warranties of the parties or the conditions to the
obligations of the parties hereunder.
7.11 Cooperation. Each of the Partnership and the Partnership GP
-----------
shall use all commercially reasonable efforts to assist, and cooperate with, the
Merger Partnership, CAPREIT and their respective Affiliates in consummating the
Financing, the Bond Refinancing and related transactions. In this regard, the
Partnership and the Partnership GP consent to, and shall use all commercially
reasonable efforts to assist, and cooperate with, the Merger Partnership,
CAPREIT and their respective Affiliates with respect to, contacts by
representatives of the Merger Partnership, CAPREIT and their Affiliates with
issuers of the Mortgage Revenue Bonds and their representatives; provided, that
--------
no Bond Refinancing shall close prior to the Effective Time. The Partnership
and the Partnership GP shall be reimbursed for all reasonable out-of-pocket
costs incurred by them in connection with such assistance and cooperation.
7.12 Acquisition. (a) On the Closing Date, C.R.I., Inc. ("CRI")
-----------
shall sell, assign and transfer to a designee of CAPREIT its rights under the
agreement pursuant to which the mortgage servicing and administrative fees are
payable to CRI by the owners of the Mortgaged Properties, including the right to
all fees thereunder for a price of $511,680, in the case of Series I, and,
$770,835, in the case of Series II, in cash, payable to CRI for servicing and
administrative fees accrued through June 30, 1995.
(b) On the Closing Date and subject to the approval of its board of
directors and further subject to any necessary modification of the Memorandum of
Understanding (as defined in Section 8.1.4), CRIIMI Mae Services Limited
Partnership ("CRIIMI") shall sell, assign and transfer to a designee of CAPREIT
its rights under the agreement pursuant to which mortgage servicing and
administrative fees are payable to CRIIMI by the owners of the Mortgaged
Properties, including the right to all fees thereunder, whether accrued as of
the date hereof or that shall accrue or become payable from and after the
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date hereof, for a price of $265,968, in the case of Series I, and $391,296, in
the case of Series II, in cash, payable to CRIIMI for servicing and
administrative fees accrued from July 1, 1995 through the Closing Date (the
"Accrued Fee Amount"), provided, that if the Closing shall occur after June 30,
--------
1996, then the Accrued Fee Amount shall be increased at the rate of $22,164 per
month for Series I, and $32,608 per month for Series II, it being understood
that any partial month shall be pro rated according to the actual number of days
elapsed.
7.13 Treatment of Owner Partnerships. At the sole discretion of
-------------------------------
CAPREIT, each of the Owner Partnerships shall be treated as provided in one or
more of the following subsections:
(a) On the Closing Date, each of the partners of the Owner
Partnerships shall sell, assign and transfer to CAPREIT or a designee thereof,
for no additional consideration, all of the partnership interests in such Owner
Partnership, all on terms and conditions to be determined by CAPREIT and the
Owner Partnership;
(b) On the Closing Date, each of the partners of each of the Owner
Partnerships shall admit CAPREIT or its designee as the managing general partner
of each of the Owner Partnerships, the partnership interests of each of the
other partners of each of the Owner Partnerships shall be converted into limited
partner interests in the applicable Owner Partnership, which limited partner
interests shall not be transferable, and CAPREIT shall have the option to
purchase such limited partner interests at any time during the five (5) year
period following the Closing Date for fair market value, which fair market value
shall be deemed for the purposes hereof to be the proportionate interest of such
limited partner in the value of the property as encumbered; as managing general
partner, CAPREIT or its designee shall have exclusive power and authority to
consummate any Bond Refinancings without the consent of any of the other
partners; or
(c) On the Closing Date, each of the Owner Partnerships shall sell,
assign and transfer to CAPREIT or its designee, for no additional consideration
and at no additional cost to the Owner Partnerships, all of the real property
and other assets of such Owner Partnerships, all on terms and conditions to be
determined by CAPREIT and the Owner Partnerships.
7.14 Partnership Interests. On the Closing Date and concurrently
---------------------
with or immediately prior to the Merger, at the request of CAPREIT, the
Partnership shall issue to a designee of CAPREIT a limited partner interest in
the Partnership in exchange for a capital contribution of certain real
properties and/or other assets, all on terms and conditions to be determined by
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CAPREIT and the Partnership; provided that such issuance of a limited
--------
partnership interest shall not be effective unless the Merger is consummated.
7.15 Tax Returns. (a) Neither the Merger Partnership nor CAPREIT
-----------
shall cause the Surviving Partnership to, and the Surviving Partnership shall
not, (x) amend any portion of any tax returns for years ending prior to the
Effective Time to the extent that such portion relates to the accrual of
interest on the Mortgage Revenue Bonds or (y) without the prior consent of the
Partnership GP or its designee, which consent shall not be unreasonably
withheld, otherwise amend, in any material respect, tax returns for years ending
prior to the Effective Time.
(b) The Surviving Partnership, CAPREIT and the Partnership GP shall
use all commercially reasonable efforts to cooperate with and assist each other
so that, after the Closing Date, all tax returns of the Partnership for the
period ending on the Closing Date shall be timely filed and that Schedules K-1
shall be timely delivered to those Persons who were holders of BACs prior to the
Closing Date. The cost of such filing and delivery shall be borne by the
Surviving Partnership.
7.16 Notice of Failure to Satisfy Closing Conditions.
-----------------------------------------------
(a) In the event that the Merger Partnership determines, on or after
the date that the Partnership shall deliver a final Disclosure Schedule pursuant
to Section 2.7 above and on or prior to the Closing Date, that any condition to
the Merger Partnership's or the Partnership's obligation to close pursuant to
Section 8 will not be satisfied on or prior to the Closing Date, the Merger
Partnership shall give prompt notice to the Partnership and, in the case of
Sections 8.1 and 8.3, shall provide the Partnership a period of ten business
days for the Partnership to satisfy all such conditions.
(b) In the event that the Partnership determines on or prior to the
Closing Date that any condition to the Partnership's or the Merger Partnership's
obligation to close pursuant to Section 8 will not be satisfied on or prior to
the Closing Date, the Partnership shall give prompt notice to the Merger
Partnership and, in the case of Sections 8.1 and 8.2, shall provide the Merger
Partnership a period of ten business days for the Merger Partnership to satisfy
all such conditions.
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8. Conditions.
----------
8.1 Conditions to Obligation of Each Party to Effect the
----------------------------------------------------
Transaction. The respective obligations of each party to effect the Transaction
shall be subject to the fulfillment at or prior to the Effective Time of each of
the following conditions:
8.1.1 All approvals, notices, filings, registrations and
authorizations of any governmental authority required for consummation of the
Transaction, including, without limitation, under the Hart-Scott-Rodino Act,
shall have been obtained or made.
8.1.2 BAC Holder Approval for the Transaction shall have been
obtained in accordance with the Partnership Act and the Partnership Agreement.
8.1.3 No preliminary or permanent injunction or other order,
decree or ruling issued by a court of competent jurisdiction or by a
governmental, regulatory or administrative agency or commission, nor any
statute, rule, regulation or executive order promulgated or enacted by a
governmental authority shall be in effect which would prevent the consummation
of the Transaction.
8.1.4 A court of competent jurisdiction shall have approved of
the settlement of the cases captioned Zakin v. Dockser, et. al. and Wingard v.
------------------------- ----------
Dockser, et. al. (the "Suits") filed in connection with the transactions
- - - - ----------------
contemplated hereunder, substantially as such settlement is set forth in the
Memorandum of Understanding, dated as of January 31, 1996, among the counsel to
the plaintiffs and the defendants named in the Suits, or as otherwise agreed to
by the parties, and such approval shall be final and non-appealable.
8.2 Additional Conditions to the Obligation of the Partnership. The
----------------------------------------------------------
obligation of the Partnership to effect the Transaction is also subject to the
fulfillment at or prior to the Effective Time of each of the following
conditions:
8.2.1 The Merger Partnership shall in all material respects
have performed each obligation to be performed by it hereunder on or prior to
the Effective Time.
8.2.2 The representations and warranties of the Merger
Partnership set forth in this Agreement shall be true and correct in all
material respects at and as of the Effective Time as if made at and as of such
time, except to the extent that any such representation or warranty is made as
of a specified date, in which case such representation or warranty shall have
been true and correct as of such date.
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8.2.3 The Partnership shall have received a certificate of the Merger
Partnership, dated the Closing Date, signed by the Merger Partnership GP, to the
effect that the conditions specified in Sections 8.2.1 and 8.2.2 have been
fulfilled.
8.2.4 A favorable opinion (the "Fairness Opinion") of an
investment banking firm reasonably acceptable to the Partnership as to the
fairness of the Merger Consideration to the holders of the BACs, from a
financial point of view, shall have been delivered to the Partnership.
8.2.5 No later than the earlier of (x) May 1, 1996 or (y) the
Mailing Date (the earlier of (x) or (y) being, the "Commitment Date"), the
Merger Partnership shall have delivered to the Partnership a Commitment Letter
executed by a financial institution or other financing source providing for debt
financing of the Transaction in an amount at least equal to $64,558,000 and on
terms consistent with the term sheet attached hereto as Exhibit E and otherwise
commercially reasonable from the point of view of the Partnership as the selling
party in the Transaction; provided, that unless the Partnership gives notice to
--------
the Merger Partnership (x) within ten days after the delivery of a copy of the
Commitment Letter to the Partnership, that the Commitment Letter does not
satisfy the condition set forth in this Section 8.2.5 or (y) if the Commitment
Letter shall not be delivered prior to the Commitment Date, within two business
days after the Commitment Date that the Partnership has no obligation to effect
the Transaction because of the failure of the condition set forth in this
Section 8.2.5, such condition shall be deemed to be waived.
8.3 Additional Conditions to the Obligations of the Merger
------------------------------------------------------
Partnership. The obligation of the Merger Partnership to effect the Transaction
- - - - -----------
is also subject to the fulfillment at or prior to the Effective Time, or such
earlier date as specified therein, of each of the following conditions:
8.3.1 Each of the Partnership and the Owner Partnerships shall
in all material respects have performed each obligation to be performed by it
hereunder on or prior to the Effective Time.
8.3.2 The Partnership shall have cash available and not
restricted equal to at least to $2,787,500 and replacement reserves held for the
Owner Partnerships equal to at least $1,777,831 as set forth in Exhibit F
hereto, which Exhibit reflects projected balances as of December 31, 1995. If
the Closing Date does not occur on or before December 31, 1995, the Partnership
shall prepare new projections of cash available and not restricted and
replacement reserves by calendar quarter, subject to the approval of the Merger
Partnership in its
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reasonable business judgment; provided, however, that any new projections will
-------- -------
provide for cash available and not restricted at least equal to the amount set
forth in this Section 8.3.2. Also, notwithstanding anything to the contrary
herein, the cash available and not restricted reflected herein may be reduced by
(x) up to $812,500 to the extent used to settle or compromise Designated Actions
and (y) amounts used for replacement reserve purposes for which the owner or
manager of the Mortgaged Property has not yet made its related draw request to
the loan servicer for reimbursement from the replacement reserve (provided that
the Partnership can provide reasonable documentation from such owner or manager
to explain any such reduction in cash available and not restricted), without
resulting in a failure of this condition to Closing. For informational purposes
only, Exhibit F also includes projections of tax and insurance escrows held by
the Partnership's loan servicer for each of the Mortgaged Properties. These
escrows are not owned by the Partnership. The balance in the tax and insurance
escrows may fluctuate due to the timing of tax and insurance payments, but will
always contain an amount at least equal to the amount of such tax and insurance
payments then due and owing. The Partnership has little control over the use of
replacement reserves by owners of the Mortgaged Properties that are not Owner
Partnerships.
8.3.3 The Merger Partnership shall have received certificates
of each of the Partnership and the Owner Partnerships, dated the Closing Date,
signed by the Partnership GP or the general partner of the Owner Partnerships,
as applicable, to the effect that the conditions specified in Sections 8.3.1 and
8.3.2 have been fulfilled.
8.3.4 The Merger Partnership shall have received evidence, in
form and substance reasonably satisfactory to its counsel, that such licenses,
permits, consents, approvals, waivers, authorizations, qualifications and orders
of domestic governmental authorities and parties to contracts and leases with
the Partnership or any Owner Partnership as are necessary in connection with the
consummation of the transactions contemplated hereby (excluding (a) licenses,
permits, consents, approvals, authorizations, qualifications or orders, the
failure to obtain which after the consummation of the transactions contemplated
hereby, in the aggregate, will not have a material adverse effect on the
Condition of the Partnership or any Owner Partnership and (b) consents of
issuers with respect to modification of the Mortgage Revenue Bonds), have been
obtained, provided, that unless the Merger Partnership gives notice to the
--------
Partnership prior to the Mailing Date that the Merger Partnership has no
obligation to effect the Transaction because of the failure of the condition set
forth in this Section 8.3.4, such condition shall be deemed waived.
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8.3.5 No action, suit or proceeding before any court or governmental
authority shall have been commenced and be pending by any Person against the
Partnership or the Merger Partnership or any of their Affiliates, partners,
officers or directors seeking to restrain, prevent, change or delay in any
material respect any of the terms or provisions of the Transaction or seeking
material damages in connection therewith.
8.3.6 The Merger Partnership, CAPREIT and its lenders shall
have received the favorable legal opinion of Arent Fox Kintner Plotkin & Kahn,
counsel to the Partnership, and Richards, Layton & Finger, special Delaware
counsel to the Partnership, taken together, substantially to the effect set
forth in Exhibit G.
8.3.7 The Financing shall have been consummated in accordance
with the terms of the Commitment Letter.
8.3.8 Neither the Partnership nor any Owner Partnership shall
have undergone a material adverse change in its Condition or its ability to
perform its obligations under this Agreement. For purposes of this Section
8.3.8, the discovery after the Mailing Date of a fact which fact is materially
adverse to the Condition of the Partnership or any Owner Partnership and which
could not have been reasonably discovered by the Merger Partnership or its
Affiliates on or prior to the Mailing Date shall be deemed to be a material
adverse change to the Condition of the Partnership or such Owner Partnership or
such Mortgaged Property.
8.3.9 In connection with the removal and replacement of the
Partnership GP, the Partnership GP shall have transferred its 1.01% general
partnership interest in the Partnership to CAPREIT or a designee thereof.
8.3.10 The closing of the merger under the Other Merger Agreement
shall be occurring concurrently with the Merger.
8.3.11 The Merger Partnership shall have determined that the legal,
accounting and business due diligence investigation of the Partnership and the
Owner Partnerships to be conducted by or on behalf of the Merger Partnership,
including, without limitation, any information obtained from the Disclosure
Schedule, has not revealed that proceeding with the Transaction would be
inadvisable or contrary to the Merger Partnership's best interests, provided,
--------
that, unless the Merger Partnership gives notice to the Partnership prior to the
Mailing Date that the Merger Partnership has no obligation to effect the
Transaction because of the failure of the condition set forth in this Section
8.3.11, such condition shall be deemed to be waived.
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<PAGE>
8.3.12 All of the partnership or other interests in each of the Owner
Partnerships shall be concurrently transferred to CAPREIT or a designee thereof
pursuant to Section 7.13 above, except as otherwise provided in Section 7.13.
8.3.13 The Series I Shortfall Amount shall not exceed $319,200,
and the Series II Shortfall Amount shall not exceed $453,426, in each case,
calculated as set forth in Section 2.1.1.
9. Termination, Amendment and Waiver.
---------------------------------
9.1 Termination. This Agreement may be terminated and the
-----------
Transaction contemplated hereby may be abandoned, by written notice promptly
given to the other parties hereto, at any time prior to the Effective Time,
whether prior to or after BAC Holder Approval of the Transaction:
9.1.1 By mutual written consent of the Merger Partnership and
the Partnership;
9.1.2 By either the Merger Partnership or the Partnership, if
a court of competent jurisdiction or governmental, regulatory or administrative
agency or commission shall have issued an order, decree or ruling or taken any
other action, in each case permanently restraining, enjoining or otherwise
prohibiting the transactions contemplated by this Agreement and such order,
decree, ruling or other action shall have become final and nonappealable;
9.1.3 By either the Merger Partnership or the Partnership, if
the Effective Time shall not have occurred on or before the Termination Date,
unless the absence of such occurrence shall be due to the failure of the party
seeking to terminate this Agreement to perform in all material respects each of
its obligations under this Agreement required to be performed by it prior to the
Effective Time;
9.1.4 By either the Merger Partnership or the Partnership, if
at the Meeting (including any adjournment thereof) BAC Holder Approval of the
Transaction shall not be obtained;
9.1.5 By the Merger Partnership, if the Partnership or the
Partnership GP shall have (i) withdrawn, modified or amended in any respect its
approval or recommendation of the Transaction as set forth in Section 4.16
hereof, (ii) failed to include in the Proxy Statement such recommendation
(including the recommendation that the holders of each class of outstanding BACs
vote in favor of the Transaction), or (iii) taken any public position
inconsistent with such recommendation;
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<PAGE>
9.1.6 By the Merger Partnership, if the Partnership or any Owner
Partnership fails to perform in all material respects its obligations under this
Agreement;
9.1.7 By the Merger Partnership, if there shall have occurred
a material adverse change in the Condition of the Partnership or any Owner
Partnership since the date of this Agreement; or
9.1.8 By the Partnership, if the Merger Partnership fails to
perform in all material respects its obligations under this Agreement.
9.1.9 By the Merger Partnership, if the Partnership shall have
settled or compromised any Designated Action without the prior written consent
of the Merger Partnership, unless such settlement or compromise (i) requires the
payment of money by the Partnership in an amount which, when aggregated with the
amount of money paid or payable in connection with all other Designated Actions,
does not exceed $812,500 and (ii) does not include any other material term or
condition to which the Merger Partnership shall reasonably object.
9.1.10 By the Merger Partnership, if, prior to the Effective
Time, the representations and warranties of each of the Partnership and the
Owner Partnerships set forth in this Agreement shall not be true and correct in
all material respects at any time as if made as of such time, except to the
extent that any such representation or warranty is made as of a specific date,
in which case such representation or warranty shall have been true and correct
as of such date, provided, that for purposes of this Section 9.1.10, (x) the
--------
representations and warranties set forth in Sections 4.14 and 5.14 shall be
deemed to have been made irrespective of the qualification contained therein as
to the Knowledge of the Partnership or the Designated Owner Partnership, and (y)
the representations and warranties set forth in Sections 5.5, 5.6, 5.9, 5.10,
5.11, 5.12 and 5.13 shall not be deemed to have been breached solely as the
result of any act or omission occurring after November 1, 1995.
9.1.11 By the Partnership, in accordance with Section 8.2.5, if
there shall have been a failure of the condition set forth therein.
9.2 Effect of Termination. In the event of the termination of this
---------------------
Agreement and abandonment of the Transaction as provided in Section 9.1 hereof,
this Agreement shall forthwith become void and there shall be no liability on
the part of the Merger Partnership or the Partnership, except as set forth in
Section 7.3 hereof and Section 7.7.2 hereof and except to the extent that such
termination results from the wilful breach of a
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party hereto of any of its covenants or agreements set forth in this Agreement.
9.3 Amendment. This Agreement may not be amended except by an
---------
instrument in writing signed on behalf of each of the parties hereto; provided,
--------
however, that after the BAC Holder Approval of the Transaction has been
- - - - -------
obtained, no amendment may be made which changes the amount of cash to be paid
for the BACs, or effects any change which would adversely affect the holders of
BACs without the further BAC Holder Approval.
9.4 Waiver. At any time prior to the Effective Time, whether before
------
or after the Meeting, any party hereto, by a writing executed by its general
partner, may (i) extend the time for the performance of any of the obligations
or other acts of any other party hereto or (ii) subject to the proviso contained
in Section 9.3 hereof, waive compliance with any of the agreements of any other
party or with any conditions to its own obligations, except that the Partnership
may not waive the condition set forth in Section 8.1.4.
10. General Provisions.
------------------
10.1 Notices. All notices and other communications hereunder shall
-------
be in writing and shall be deemed to have been duly given if delivered
personally or sent by telegram, telecopier or three business days after it is
sent by registered or certified mail, return receipt requested, postage prepaid,
to the parties at the following addresses or at such other addresses as shall be
specified by the parties by like notice:
(a) if to the Merger Partnership or CAPREIT:
Watermark Partners, L.P.
c/o Capital Apartment Properties, Inc.
11200 Rockville Pike
Rockville, Maryland 20852
Attention: Richard Kadish, President
Facsimile: (301) 231-0391
with copies to:
Apollo Real Estate Advisors, L.P.
1301 Avenue of the Americas
38th Floor
New York, New York, 10019
Attention: Ronald Kravit
Facsimile: (212) 261-4060
and
Schulte Roth & Zabel
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<PAGE>
900 Third Avenue
New York, New York 10022
Attention: Burton Lehman, Esq.
Facsimile: (212) 593-5955
(b) if to the Partnership, the Partnership GP or any Owner
Partnership:
c/o C.R.I., Inc.
11200 Rockville Pike
Rockville, Maryland 20852
Attention: William B. Dockser, Chairman,
and H. William Willoughby, President
Facsimile: (301) 231-0396
with a copy to:
Melissa Lackey, General Counsel
Facsimile: (301) 468-3150
and
Arent Fox Kintner Plotkin & Kahn
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036-5339
Attention: Robert B. Hirsch, Esq.
Facsimile: (202) 857-6395
10.2 Certain Definitions. As used in this Agreement, the following
-------------------
terms shall have the meanings indicated below:
"Affiliate" means, with respect to any Person, any other Person
---------
controlling, controlled by or under common control with, or the parents, spouse,
lineal descendants or beneficiaries of, such Person, provided, that, in any
case, (i) the following Persons shall be deemed to be Affiliates of the
Partnership: CRITEF Associates Limited Partnership, C.R.I., Inc. and CRITEF,
Inc. and (ii) the following Persons shall be deemed Affiliates of the Merger
Partnership: CAPREIT and CAPREIT Residential Corporation.
"Assignor Limited Partner" means CRITEF, Inc., a Delaware corporation
-------------------------
and the sole limited partner of the Partnership.
"BAC Holder Approval" means the approval of the limited partners of
-------------------
the Partnership, with the Assignor Limited Partner, pursuant to the Partnership
Agreement, voting as instructed by the holders of the BACs.
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"Bond Refinancing" means the transaction pursuant to which the
----------------
Mortgage Revenue Bonds will be sold, amended, refinanced, or reissued, the
closing of which shall not occur until after the Effective Time.
"Business Combination" means any acquisition or purchase of assets of,
--------------------
or any equity interest in, the Partnership or any tender offer (including a self
tender offer), exchange offer, merger, consolidation, business combination, sale
of substantial assets or of a substantial amount of assets, sale of securities,
recapitalization, reorganization, refinancing, refunding, liquidation,
dissolution or similar transactions involving the Partnership or other
transactions involving any vote or consent of the holders of any class of BACs.
"Closing Date" means the date upon which the Merger occurs.
------------
"Code" means the Internal Revenue Code of 1986, as amended from time
----
to time, and, unless the context otherwise requires, the rules and regulations
promulgated thereunder, from time to time.
"Commission" means the Securities and Exchange Commission or any
----------
successor agency.
"Commitment Letter" means one or more commitment letters or loan,
-----------------
securities purchase, financing or similar agreements providing a financial
commitment or obligation to provide debt financing for the Transaction.
"Condition" means, with respect to any Person, the business, assets,
---------
properties, results of operations, financial or other condition or prospects of
such Person and its Subsidiaries, taken as a whole.
"Designated Owner Partnership" means CRICO of Fountain Place Limited
----------------------------
Partnership.
"Disclosure Schedule" means the Disclosure Schedule setting forth
-------------------
certain information concerning the Partnership and its assets required to be
delivered by the Partnership to the Merger Partnership pursuant to Section 2.7
above.
"Environmental Laws" includes the Comprehensive Environmental
------------------
Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. 9601 et seq, as
amended; the Resource Conservation and Recovery Act ("RCRA), 42 U.S.C. 6901 et
seq, as amended; the Clean Air Act ("CAA"), 42 U.S.C. 7401 et seq, as amended;
the Clean Water Act ("CWA"), 33 U.S.C. 1251 et seq., as amended; the
Occupational Safety and Health Act ("OSHA"), 29
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<PAGE>
U.S.C. 655 et seq., and any other federal, state, local or municipal laws,
statutes, regulations, rules or ordinances imposing liability or establishing
standards of conduct for protection of the environment.
"Environmental Reports" means all environmental site assessments,
---------------------
remedial investigations/feasibility studies, reports, studies, tests or other
documents relating to environmental compliance or the presence of Hazardous
Materials at any of properties presently or formerly owned or operated by the
Partnership or any predecessor in interest or any Mortgaged Property, at any
facility which may have received Hazardous Materials generated by any property
currently or formerly owned or operated by the Partnership or at any Mortgaged
Property.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
"Financing" means the debt financing of the Merger and the other
---------
transactions contemplated hereby.
"Hart-Scott-Rodino Act" means the Hart-Scott-Rodino Antitrust
---------------------
Improvements Act of 1976, as amended, and the rules and regulations thereunder.
"Individual Affiliate" means any Person who is now, or at any time
--------------------
since January 1, 1990 has been, (a) a Partner of the Partnership, (b) a director
or officer of the corporate general partner of the Partnership GP, (c) a
director, officer or shareholder of the Assignor Limited Partner or (d) any
"associate" (as defined in the rules pursuant to the Exchange Act) of any of the
above.
"Knowledge" means (i) with respect to the Partnership, the knowledge
---------
of (a) the Partnership GP, (b) the general partners of the Partnership GP and
(c) with respect to the entities referred to in the preceding clause (b) any of
such entities current officers and directors; (ii) with respect to each Owner
Partnership or the Designated Owner Partnership, the knowledge of (a) any
general partner of such Owner Partnership or the Designated Owner Partnership
and (b) any of such general partner's current officers or directors; and (iii)
with respect to the Merger Partnership, the knowledge of CAPREIT and its
Affiliates and their current officers and directors.
"Lien" means any lien, pledge, mortgage, security interest, claim,
----
lease, charge, option, right of first refusal, easement, servitude, encumbrance,
participation interest, assignment, or other restriction or limitation.
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"Mailing Date" means the first day on which the Proxy Statement is
------------
mailed to the holders of BACs pursuant to Section 7.1 above.
"Mortgaged Property" means the land and the buildings thereon and
------------------
other assets securing the payment of the Mortgage Revenue Bonds.
"Mortgage Revenue Bonds" means the mortgage revenue bonds owned by the
----------------------
Partnership, as described on the Disclosure Schedule.
"Mortgage Revenue Documents" means all notes, loan agreements,
--------------------------
indentures, land use restriction agreements, security agreements, mortgages and
other agreements, instruments or documents, including all amendments and
releases, evidencing, relating to or executed in connection with the Mortgage
Revenue Bonds or any security interest in the Mortgaged Properties.
"Order" means any judgement, ruling, order, writ, injunction, decree,
-----
determination or requirement of any arbitrator or court or of any governmental
or regulatory body, authority or agency, whether federal, state or local,
domestic or foreign.
"Other Merger Agreement" means the Agreement and Plan of Merger, dated
----------------------
as of the date hereof, among Watermark III Partners, L.P., Capital Realty
Investors Tax Exempt Fund III Limited Partnership and CRITEF III Associates
Limited Partnership.
"Owner Partnerships" means the Designated Owner Partnership, Ethans,
------------------
CRICO of Royal Oaks Limited Partnership, CRICO of Trailway Pond I Limited
Partnership, CRICO of Valley Creek I Limited Partnership, CRICO of White Bear
Woods I Limited Partnership, CRICO of James Street Crossing Limited Partnership,
and CRICO of Trailway Pond II Limited Partnership.
"Permitted Statutory Liens" means statutory Liens of landlords,
-------------------------
carriers, warehousemen, mechanics and materialmen and other similar Liens
imposed by law and incurred in the ordinary course of business for sums not yet
delinquent.
"Person" means any individual, corporation, partnership, limited
------
liability company, firm, joint venture, association, joint-stock company, trust,
unincorporated organization, governmental body or other entity.
"Requirements of Law" means (i) the certificate of limited partnership
-------------------
of each of the Partnership and the Owner Partnerships, the agreements of limited
partnership or other organizational or governing documents of each of the
Partnership
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<PAGE>
and the Owner Partnerships, (ii) any statute, law, treaty, rule, regulation or
ordinance applicable to the Partnership or the Owner Partnerships, their
respective assets or any Mortgaged Property (including, without limitation,
Environmental Laws and occupational health and safety and food and drug
regulations) or (iii) any judgment, decree, injunction, order or determination
of any arbitrator or of any court or other governmental or regulatory authority
or agency, whether federal, state or local, domestic or foreign, applicable to
the Partnership or the Owner Partnerships, their respective assets or any
Mortgaged Property.
"Securities Act" means the Securities Act of 1933, as amended.
--------------
"Subsidiary" means, with respect to any Person, any corporation at
----------
least a majority of whose outstanding voting securities, or any other Person at
least a majority of whose total equity interest, is owned by such Person.
"Termination Date" means June 30, 1996.
----------------
"Transaction" means (i) the sale of the Partnership GP's general
-----------
partnership interest pursuant to Section 2.1, (ii) the issuance of a limited
partnership interest in the Partnership pursuant to Section 7.14, (iii) the
Merger, (iv) the transfer of the interests in the Owner Partnerships pursuant to
Section 7.13 and (v) certain amendments to the Partnership Agreement necessary
to consummate the Merger (including, without limitation, providing for the
redemption of partnership interests). The term "Transaction" does not include
the Bond Refinancing.
The following terms are defined in the corresponding Sections listed
below:
Term Section
---- -----------
Accrued Fee Amount.................... 7.12
Alternative Proposal.................. 7.5.2
Available Cash........................ 2.1.1(f)
BAC................................... 2.1.1(a)
Balance Sheet......................... 4.7
Balance Sheet Date.................... 4.7
CAPREIT............................... Recitals
CAPREIT General Partner............... 2.3.1
Certificate of Merger................. 1.3
Commitment Date....................... 8.2.5
CRI................................... 7.12(a)
CRIIMI................................ 7.12
Deposit............................... 2.6(a)
Designated Actions.................... 7.4.1
Designated Persons.................... 7.3.1(ii)
Effective Time........................ 1.3
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Ethans................................ 5.3
Fairness Opinion...................... 8.2.4
Fiduciary Out Termination............. 7.5.2
Housing Acquisition Department Files.. 4.18.1
Interim Financial Statements.......... 4.7
Liabilities........................... 4.8
Meeting............................... 7.2
Merger................................ Recitals
Merger Consideration.................. 2.2.1
Merger Partnership GP................. Recitals
Merger Partnership LP................. Recitals
MP Agreement.......................... 3.1
MP Certificate........................ 3.1
Other Filings......................... 7.1
Partnership Act....................... Recitals
Partnership Agreement................. 2.3.1
Partnership Certificate............... 1.4
Partnership Financial Statements...... 4.7
Partnership GP........................ Recitals
Partnership GP Agreement.............. 4.1
Partnership GP Certificate............ 4.1
Proxy Statement....................... 7.1
Redemption Agent...................... 2.3.1
Redemption Fund....................... 2.3.2
SEC Filings........................... 4.7
Series I Excess Amount................ 2.1.1(d)
Series I Shortfall Amount............. 2.1.1(e)
Series II Excess Amount............... 2.1.1(d)
Series II Shortfall Amount............ 2.1.1(e)
Suits................................. 8.14
Surviving Partnership................. 1.1
Triggering Events..................... 7.3.1(ii)
10.3 Representations and Warranties; Etc. (a) The respective
------------------------------------
representations and warranties of the Partnership, each Owner Partnership and
the Merger Partnership contained herein shall expire with, and be terminated and
extinguished upon, consummation of the Merger, and thereafter none of the
Partnership, any Owner Partnership or the Merger Partnership, or any general
partner or principal of any thereof, shall be under any liability whatsoever
with respect to any such representation or warranty. This Section 10.3 shall
have no effect upon any other obligation of the parties hereto, whether to be
performed before or after the consummation of the Merger.
(b) Notwithstanding anything to the contrary herein, there shall be no
liability whatsoever for breach of any of the representations and warranties set
forth in Section 4 or 5, the parties agreeing that the Merger Partnership's sole
remedy therefor shall be to invoke the condition to Closing set forth in Section
8.3.2.
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10.4 Validity. The invalidity or unenforceability of any provision
--------
of this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
10.5 Descriptive Headings. The descriptive headings herein are
--------------------
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.
10.6 Parties in Interest. This Agreement shall be binding upon and
-------------------
inure solely to the benefit of each party hereto, and nothing in this Agreement,
express or implied, is intended to confer upon any other Person any rights or
remedies of any nature whatsoever under or by reason of this Agreement except
the right of the holders of BACs to receive cash as provided in Section 2.2.1
hereof (subject in each case to the consummation of the Transaction pursuant to
this Agreement).
10.7 Incorporation of Recitals. The recitals hereto are incorporated
-------------------------
into this Agreement as if fully restated herein.
10.8 Miscellaneous. This Agreement (i) constitutes the entire
-------------
agreement and supersedes all other prior agreements and undertakings, both
written and oral, between the parties with respect to the subject matter hereof;
(ii) may not be assigned, except that the Merger Partnership may assign its
rights hereunder in whole or in part to one or more of its direct or indirect
Subsidiaries or Affiliates, each of which, in written instruments reasonably
satisfactory to the Partnership, shall agree to assume all of the Merger
Partnership's obligations hereunder so assigned to it and be bound by all of the
terms and conditions of this Agreement; and (iii) shall be governed in all
respects, including validity, interpretation and effect, by the laws of the
State of New York applicable to agreements made and to be performed entirely
within such State. This Agreement may be executed in one or more counterparts
which together shall constitute a single agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first above written.
WATERMARK PARTNERS, L.P.
By: Capital Apartment Properties, Inc., its general partner
By: /s/ Richard Kadish
--------------------------------
Name:
Title:
CAPITAL REALTY INVESTORS TAX EXEMPT
FUND LIMITED PARTNERSHIP
By: CRITEF Associates Limited Partnership,
its general partner
By: /s/ William B. Dockser
--------------------------------
Name:
Title:
CRITEF ASSOCIATES LIMITED PARTNERSHIP
By: C.R.I., Inc., its general partner
By: /s/ William B. Dockser
--------------------------------
Name:
Title:
WILLIAM B. DOCKSER
/s/ William B. Dockser
--------------------------------
H. WILLIAM WILLOUGHBY
/s/ H. William Willoughby
--------------------------------
CAPITAL APARTMENT PROPERTIES, INC.
By: /s/ Richard Kadish
--------------------------------
Name:
Title:
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CRICO OF FOUNTAIN PLACE LIMITED PARTNERSHIP
By: CRICO of Fountain Place, Inc., its general partner
By: /s/ William B. Dockser
--------------------------------
Name:
Title:
CRICO OF ROYAL OAKS LIMITED PARTNERSHIP
By: CRICO of Royal Oaks, Inc., its general partner
By: /s/ William B. Dockser
--------------------------------
Name:
Title:
CRICO OF TRAILWAY POND I LIMITED PARTNERSHIP
By: CRICO of Trailway Pond I, Inc., its general partner
By: /s/ William B. Dockser
--------------------------------
Name:
Title:
CRICO OF VALLEY CREEK I LIMITED PARTNERSHIP
By: CRICO of Valley Creek I, Inc., its general partner
By: /s/ William B. Dockser
--------------------------------
Name:
Title:
CRICO OF WHITE BEAR WOODS I LIMITED PARTNERSHIP
By: CRICO of White Bear Woods I, Inc., its general partner
By: /s/ William B. Dockser
--------------------------------
Name:
Title:
CRICO OF ETHAN'S I LIMITED PARTNERSHIP
By: CRICO of Ethan's I, Inc., its general partner
By: /s/ William B. Dockser
--------------------------------
Name:
Title:
CRICO OF JAMES STREET CROSSING LIMITED PARTNERSHIP
By: CRICO of James Steet, Inc., its general partner
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By: /s/ William B. Dockser
--------------------------------
Name:
Title:
CRICO OF TRAILWAY POND II LIMITED PARTNERSHIP
By: CRICO of Trailway Pond II, Inc., its general
partner
By: /s/ William B. Dockser
--------------------------------
Name:
Title:
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<PAGE>
APPENDIX A-2
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
AMONG
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III
LIMITED PARTNERSHIP,
CRITEF III ASSOCIATES LIMITED PARTNERSHIP,
AND
WATERMARK III PARTNERS, L.P.
<PAGE>
================================================================================
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
among
WATERMARK III PARTNERS, L.P.,
CAPITAL REALTY INVESTORS TAX EXEMPT FUND
III LIMITED PARTNERSHIP
and
CRITEF III ASSOCIATES LIMITED PARTNERSHIP
--------------------------------------
Dated: March 14, 1996
--------------------------------------
================================================================================
1
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
1. The Merger.............................................................. 1
1.1 The Merger......................................................... 1
1.2 Surviving Partnership.............................................. 2
1.3 Effective Time of the Merger....................................... 2
1.4 Certificate of Limited Partnership................................. 2
1.5 Partnership Agreement.............................................. 2
2. Conversion of Partnership Interests..................................... 3
2.1 Conversion of Partnership Interests................................ 3
2.2 Redemption of BACs................................................. 4
2.3 Removal and Admission of General Partner........................... 6
2.4 Additional Rights; Taking of Necessary Action; Further Action...... 6
2.5 Federal Income Tax Considerations.................................. 7
2.6 Deposit............................................................ 7
2.7 Disclosure Schedule................................................ 8
3. Representations and Warranties of the Merger Partnership................ 8
3.1 Formation and Qualification........................................ 8
3.2 Authority Relative to this Agreement............................... 9
3.3 No Conflicts....................................................... 9
3.4 Governmental Approvals............................................. 9
3.5 No Prior Activities................................................ 10
3.6 Brokers............................................................ 10
4. Representations and Warranties of the Partnership....................... 10
4.1 Formed and Qualification.......................................... 10
4.2 No Subsidiaries................................................... 11
4.3 Capitalization.................................................... 11
4.4 Authority Relative to this Agreement.............................. 11
4.5 No Conflicts...................................................... 12
4.6 Governmental Approvals............................................ 12
4.7 Commission Filings; Financial Statements.......................... 12
4.8 No Undisclosed Liabilities........................................ 13
4.9 Absence of Certain Changes or Events.............................. 13
4.10 Litigation........................................................ 14
4.11 Taxes............................................................. 14
4.12 Assets............................................................ 15
4.13 Transactions with Affiliates...................................... 15
4.14 Disclosure........................................................ 15
4.15 Brokers........................................................... 15
4.16 General Partner Recommendation.................................... 15
4.17 Compliance with Law............................................... 16
4.18 Mortgage Revenue Bonds and Mortgage Revenue
Documents......................................................... 16
5. Representations and Warranties of the Owner Partnerships................ 17
5.1 Formation and Qualification....................................... 17
5.2 No Subsidiaries................................................... 17
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5.3 Partners and Capitalization....................................... 18
5.4 Authority Relative to this Agreement.............................. 18
5.5 No Conflicts...................................................... 18
5.6 Governmental Approvals............................................ 19
5.7 Financial Statements.............................................. 19
5.8 No Undisclosed Liabilities........................................ 19
5.9 Absence of Certain Changes or Events.............................. 19
5.10 Mortgaged Properties.............................................. 20
5.11 No Action......................................................... 21
5.12 Taxes............................................................. 21
5.13 Compliance with Law............................................... 22
5.14 Disclosure........................................................ 22
6. Conduct of Business Pending the Merger.................................. 22
6.1 Conduct of Business by the Partnership Pending the Merger......... 22
6.2 Conduct of Business by the Owner Partnerships
Pending the Merger................................................ 24
7. Additional Agreements................................................... 26
7.1 Proxy Statement; Other Filings.................................... 26
7.2 Meeting of the Limited Partners................................... 27
7.3 Fees and Expenses................................................. 27
7.4 Further Agreements................................................ 30
7.5 Shop Limitation................................................... 31
7.6 Additional Financial Statements................................... 32
7.7 Access to Information; Confidentiality............................ 33
7.8 Public Announcements.............................................. 33
7.9 Agreement to Defend and Indemnify................................. 34
7.10 Notification of Certain Matters................................... 34
7.11 Cooperation....................................................... 34
7.12 Acquisition....................................................... 35
7.13 Treatment of Owner Partnerships................................... 35
7.14 Partnership Interests............................................. 36
7.15 Tax Returns....................................................... 36
7.16 Notice of Failure to Satisfy Closing Conditions................... 36
8. Conditions.............................................................. 37
8.1 Conditions to Obligation of Each Party to Effect the Transaction.. 37
8.2 Additional Conditions to the Obligation of the Partnership........ 37
8.3 Additional Conditions to the Obligations of the
Merger Partnership................................................ 38
9. Termination, Amendment and Waiver....................................... 41
9.1 Termination....................................................... 41
9.2 Effect of Termination............................................. 43
9.3 Amendment......................................................... 43
9.4 Waiver............................................................ 43
10. General Provisions...................................................... 43
10.1 Notices........................................................... 43
10.2 Certain Definitions............................................... 44
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10.3 Representations and Warranties; Etc............................... 49
10.4 Validity.......................................................... 50
10.5 Descriptive Headings.............................................. 50
10.6 Parties in Interest............................................... 50
10.7 Incorporation of Recitals......................................... 50
10.8 Miscellaneous..................................................... 50
Exhibit A Certificate of Limited Partnership
Exhibit B Amended and Restated Agreement of
Limited Partnership
Exhibit C Form of Escrow Agreement
Exhibit D Side Letter
Exhibit E Financing Term Sheet
Exhibit F Cash at Closing
Exhibit G Form of Opinion of Partnership's Counsel
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AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
-------------------------------------------------
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated March 14,
1996, among WATERMARK III PARTNERS, L.P., a Delaware limited partnership (the
"Merger Partnership"), CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED
PARTNERSHIP, a Delaware limited partnership (the "Partnership"), CRITEF III
ASSOCIATES LIMITED PARTNERSHIP, a Delaware limited partnership (the "Partnership
GP"), and the other parties listed on the signature pages hereof.
The Merger Partnership was formed solely for the purpose of being
merged with and into the Partnership in accordance with the Revised Uniform
Limited Partnership Act of the State of Delaware (the "Partnership Act") and the
terms hereof in the merger (the "Merger") contemplated hereby. The Merger
Partnership has no assets other than the cash initially contributed by Capital
Apartment Properties, Inc., a Maryland corporation ("CAPREIT"), which is its
sole general partner (the "Merger Partnership GP"), and the cash initially
contributed by CAPREIT Limited Partnership, a Maryland limited partnership,
which is its sole limited partner (the "Merger Partnership LP"). In the Merger,
all partnership interests in the Partnership, other than those to be issued to
or acquired pursuant hereto by CAPREIT, or its Affiliates, will be redeemed in
cash as specified herein.
The general partners of each of the Partnership and the Merger
Partnership have approved the Merger in accordance with the Partnership Act and
the other transactions contemplated hereby and have recommended that their
respective limited partners approve and adopt the Merger and the other
transactions contemplated hereby.
The parties hereto entered into an Agreement and Plan of Merger, dated
as of September 11, 1995, executed Amendment No. 1 to such Agreement and Plan of
Merger on January 31, 1996, and they now desire to amend such Agreement and Plan
of Merger, as amended, and to restate it as provided herein.
Accordingly, in consideration of the premises and the mutual covenants
herein contained and intending to be legally bound hereby, the parties hereby
agree as follows:
Certain capitalized terms used herein are defined in Section 10.2
hereof.
1. The Merger.
----------
1.1 The Merger. At the Effective Time, and subject to the terms and
----------
conditions of this Agreement and the Partnership
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Act, the Merger Partnership shall be merged with and into the Partnership in the
Merger, the separate existence of the Merger Partnership shall thereupon cease,
and the Partnership shall be the surviving partnership in the Merger (the
"Surviving Partnership").
1.2 Surviving Partnership. At the Effective Time, the Partnership
---------------------
shall continue in existence under the laws of the State of Delaware as the
Surviving Partnership and shall thereupon and thereafter, without further act or
deed, succeed to and possess all the rights, privileges, and powers of the
Merger Partnership, and all property, real personal and mixed, and all debts due
to the Merger Partnership, as well as all other things and causes of action
belonging to the Merger Partnership, shall be vested in the Surviving
Partnership, and shall thereafter be the property of the Surviving Partnership
as they were of the Merger Partnership, and the title to any real property
vested by deed or otherwise, under the laws the State of Delaware, in the Merger
Partnership shall not revert or be in any way impaired by reason of the Merger,
but all rights of creditors and all liens upon any property of the Merger
Partnership shall be preserved unimpaired, and all debts, liabilities and duties
of the Merger Partnership shall thenceforth attach to the Surviving Partnership
and may be enforced against it to the same extent as if said debts, liabilities
and duties have been incurred or contracted by it.
1.3 Effective Time of the Merger. The Merger shall be effected as
----------------------------
of the date and time of filing of the certificate of merger (the "Certificate of
Merger") with the Secretary of State of the State of Delaware in accordance with
the Partnership Act (or at such later time specified as the effective time in
the Certificate of Merger) (the "Effective Time"), which filing the parties
hereto shall cause to occur as soon as practicable after the satisfaction or
waiver of the conditions hereinafter set forth.
1.4 Certificate of Limited Partnership. As a result of the Merger,
----------------------------------
the Certificate of Limited Partnership of the Partnership (the "Partnership
Certificate"), as in effect immediately prior to the Effective Time, shall be
the Certificate of Limited Partnership of the Surviving Partnership, as amended
and restated substantially in the form set forth as Exhibit A hereto, until
thereafter amended as provided therein and under the Partnership Act.
1.5 Partnership Agreement. The partnership agreement attached
---------------------
hereto as Exhibit B shall be the agreement of limited partnership of the
Surviving Partnership unless and until amended in accordance with its terms and
applicable law. The name of the Surviving Partnership shall be Watermark
Partners, L.P.
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2. Conversion of Partnership Interests.
-----------------------------------
2.1 Conversion of Partnership Interests. At the Effective Time, by
-----------------------------------
virtue of the Merger and without any action on the part of the Merger
Partnership, the Partnership or the holders of any of the following securities:
2.1.1 (a) Each Beneficial Assignee Certificate ("BAC") (other than
any BACs owned by CAPREIT or its affiliates or the Partnership) which represents
the assignment of 1 unit of beneficial interest of the limited partnership
interest in the Partnership issued to the Assignor Limited Partner, together
with the underlying limited partner interest, shall be cancelled and
extinguished and converted into and represent the right to receive an amount per
BAC in cash equal to $15.18, subject to adjustment, in each case, as set forth
in subsection (b) or (c) below (the "Merger Consideration").
(b) The aggregate amount of Merger Consideration payable with respect to
the BACs shall be increased by the Excess Amount (as defined below), if any.
The amount of the increase, if any, shall be prorated among all of the issued
and outstanding BACs and the price per BAC set forth in subsection (a) above
shall be increased accordingly.
(c) The aggregate amount of Merger Consideration payable with respect to
the BACs shall be reduced by the Shortfall Amount (as defined below), if any.
The amount of the reduction, if any, shall be pro rated among all of the issued
and outstanding BACs and the price per BAC set forth in subsection (a) above
shall be reduced accordingly.
(d) The amount by which the Partnership's Available Cash (defined below)
is greater than $5,924,228 shall be the "Excess Amount"; provided, however, that
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regardless of the actual amount of Available Cash, the Excess Amount shall not
exceed $735,158.
(e) The amount by which the Partnership's Available Cash, is less than
$5,924,228 shall be the "Shortfall Amount"; provided, however, that regardless
-------- -------
of the actual amount of Available Cash, the Shortfall Amount shall not exceed
$735,158.
(f) As of any date, for purposes of this calculation and not the
calculation under Section 8.3.2, "Available Cash" means the amount of cash and
cash equivalents held by or at the direction of the Partnership after deducting
any amounts then owed, accrued or reserved by the Partnership for goods,
services or liabilities of any nature or description (which liabilities shall
not include any liabilities of the Mortgaged Properties, including accrued real
estate taxes and insurance); provided, that all amounts held in tax and
---------
insurance escrows for all the Mortgaged Properties and all amounts held in
replacement reserves
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for the benefit of the Owner Partnerships shall be deemed to be part of the
Available Cash.
(g) The Partnership agrees not to incur any expenses, in connection with
the Merger, which are not reasonably necessary, customary and appropriate.
2.1.2 The 1.01% general partner interest in the Partnership, which
will be held by the CAPREIT General Partner (as defined) as the result of its
admission as the replacement general partner as contemplated by Section 2.3
below, shall be converted into and represent a 1.01% general partner interest in
the Surviving Partnership.
2.1.3 Any limited partner interests in the Partnership issued
to any designee of CAPREIT pursuant to Section 7.14, or BACs purchased by
CAPREIT or its Affiliates as contemplated by Section 2.4.1, and held by such
designee or purchaser immediately prior to the Effective Time, shall be
converted into a limited partner interest in the Surviving Partnership.
2.1.4 Any and all BACs that are owned by the Partnership shall be
cancelled and extinguished and no consideration shall be paid therefor.
2.1.5 The 21% general partner interest in the Merger Partnership
held by the Merger Partnership GP immediately prior to the Effective Time shall
be cancelled and the Merger Partnership GP shall receive the $21 initially
contributed by it to the Merger Partnership in exchange therefor.
2.1.6 The 79% limited partner interest in the Merger Partnership
held by Merger Partnership LP immediately prior to the Effective Time shall be
cancelled and the Merger Partnership LP shall receive the $79 initially
contributed by it to the Merger Partnership in exchange therefor.
2.1.7 The 98.99% limited partner interest of the Assignor Limited
Partner in the Partnership shall be cancelled and extinguished and no
consideration (other than the Merger Consideration paid to the holders of BACs
pursuant to Section 2.2.1 above) shall be paid therefor.
2.2 Redemption of BACs.
------------------
2.2.1 From and after the Effective Time, a bank or trust
company designated by the Merger Partnership and the Partnership prior to the
Effective Time (the "Redemption Agent") shall act as redemption agent in
effecting the redemption for cash of certificates which, prior to the Effective
Time, represented BACs entitled to payment pursuant to Section 2.1.1 hereof.
Upon the surrender of each such certificate the holder
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<PAGE>
thereof shall be paid, without interest thereon, the amount of cash to which
such holder is entitled hereunder (net of any required withholding) and such BAC
shall forthwith be cancelled. Until so surrendered and exchanged, each such
certificate shall represent, for all purposes, solely the right to receive cash
pursuant to Section 2.1.1 hereof. If any cash to be paid in the Merger is to be
paid to a Person other than the holder in whose name the certificate
representing BACs surrendered in redemption therefor is registered, it shall be
a condition of such redemption that the certificate so surrendered shall be
properly endorsed or otherwise in proper form for transfer and that the Person
requesting such redemption shall pay to the Redemption Agent any transfer or
other taxes required by reason of the payment of such cash to a Person other
than the registered holder of the certificate surrendered, or shall establish to
the satisfaction of the Redemption Agent that such tax has been paid or is not
applicable. Notwithstanding the foregoing, neither the Redemption Agent nor any
party hereto shall be liable to a holder of BACs for any cash delivered pursuant
hereto to a public official pursuant to applicable abandoned property laws.
2.2.2 At the Effective Time, the Surviving Partnership shall
deposit in trust with the Redemption Agent proceeds from the Financing in an
aggregate amount equal to the Merger Consideration (the "Redemption Fund"). The
Redemption Fund shall be invested by the Redemption Agent, as directed by the
Surviving Partnership, and any net earnings with respect thereto shall be paid
to the Surviving Partnership as and when requested by the Surviving Partnership.
2.2.3 The Redemption Agent shall, pursuant to irrevocable
instructions, make the payments referred to in Section 2.1.1 hereof out of the
Redemption Fund. The Redemption Fund shall not be used for any other purpose,
except as provided herein. Promptly following the date which is six months
after the Effective Time, the Redemption Agent shall return to the Surviving
Partnership all cash, certificates and other instruments in its possession
relating to the transactions described in this Agreement, and the Redemption
Agent's duties shall terminate. Thereafter, each holder of a BAC entitled to
receive at the Effective Time cash therefor may surrender such BAC to the
Surviving Partnership and (subject to applicable abandoned property, escheat and
similar laws) receive in redemption therefor the Merger Consideration, without
interest, but shall have no greater rights against the Surviving Partnership
than may be accorded to general creditors of the Surviving Partnership under
applicable law.
2.2.4 Promptly after the Effective Time, the Redemption Agent
shall mail to each record holder of BACs a form of letter of transmittal and
instructions for use in surrendering such certificates and receiving payment
therefor.
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<PAGE>
2.2.5 After the Effective Time, no BACs shall be deemed to be
outstanding and holders of BACs shall cease to have any rights except as
provided in this Agreement or by law.
2.3 Removal and Admission of General Partner.
----------------------------------------
2.3.1 Immediately prior to the Effective Time, pursuant to
Section 6.04 of the Agreement of Limited Partnership of the Partnership (the
"Partnership Agreement"), conditional upon prior BAC Holder Approval, the
Partnership GP shall be removed as general partner of the Partnership and a
designee of CAPREIT (the "CAPREIT General Partner") shall be simultaneously
admitted as a replacement general partner of the Partnership.
2.3.2 The CAPREIT General Partner shall file an amendment to
the Partnership Certificate that reflects the fact that the CAPREIT General
Partner who shall continue the business of the Partnership as the remaining
general partner, is the sole general partner of the Partnership upon
consummation of the Merger.
2.3.3 On the Closing Date, CAPREIT shall pay $500,000 to the
Partnership GP as consideration for its general partner interest in the
Partnership.
2.3.4 the parties acknowledge that the provisions of this
Section 2.3 shall not be effective if the Merger is not consummated,
notwithstanding the BAC Holder Approval to remove and replace the Partnership
GP.
2.4 Additional Rights; Taking of Necessary Action; Further Action.
-------------------------------------------------------------
2.4.1 CAPREIT and its Affiliates reserve the right prior to
the Effective Time, and in accordance with applicable law, from time to time to
make open market or privately negotiated purchases of BACs. CAPREIT shall
promptly notify the Partnership of the occurrence of any such purchase.
2.4.2 The Merger Partnership and the Partnership shall each
use its best efforts to take all such action as may be necessary or appropriate
in order to effectuate the Merger under the Partnership Act as promptly as
possible, including, without limitation, the due execution and filing under the
Partnership Act of the Certificate of Merger consistent with the terms of this
Agreement. If at any time after the Effective Time, any further action is
necessary or desirable to carry out the purposes of this Agreement and to vest
the Surviving Partnership with full right, title and possession to all assets,
property, rights, privileges, powers, and franchises of either of the Merger
Partnership or the Partnership, the general partners of
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<PAGE>
each of the Merger Partnership and the Partnership are fully authorized in its
name or otherwise to take, and shall take, all such lawful and necessary action.
2.5 Federal Income Tax Considerations. (a) Notwithstanding any
---------------------------------
provision of this Agreement to the contrary, it is the intention of the parties
hereto that the payment of the Merger Consideration pursuant to Section 2.1.1
hereof shall constitute, for all income tax purposes, a redemption or
liquidation of the BAC holders' limited partnership interests in the Partnership
pursuant to Section 731(a) of the Code and that the consummation of the
transactions contemplated by this Agreement will not result in a termination of
the Partnership pursuant to Section 708(b)(1)(B) of the Code. The Partnership
and the Partnership GP hereby agree not to take any action inconsistent with the
foregoing without the prior written consent of CAPREIT.
(b) For state law purposes, the transactions
contemplated by this Agreement shall be treated as a merger.
2.6 Deposit. (a) On the business day immediately prior to the
-------
Mailing Date, CAPREIT shall pay into escrow the amount of $1,000,000 (the
"Deposit") to be held by an independent third party escrow agent pursuant to an
escrow agreement in the form of Exhibit C hereto.
(b) If the Closing shall occur, then the Deposit and any interest
earned thereon shall be paid on the Closing Date to CAPREIT or as CAPREIT shall
direct.
(c) If the Closing shall not occur on or prior to the Termination
Date and the failure of the Closing to occur shall be due to: (i) the failure
of any of the conditions to Closing set forth in Section 8.1 or 8.3 (other than
Section 8.3.7); (ii) a termination of this Agreement pursuant to Section 9.1
(other than Section 9.1.3 or 9.1.8); (iii) a breach of the Commitment Letter by
the party issuing such Commitment Letter; or (iv) a change in any statute, law
or regulation which affects the tax exempt status of the Mortgage Revenue Bonds,
then the Deposit and any interest earned thereon shall be paid to CAPREIT or as
CAPREIT shall direct on the earlier of the Termination Date or the date of
termination of this Agreement.
(d) If the Closing shall not occur on or prior to the Termination
Date and the failure of the Closing to occur shall be due to the failure of the
condition to Closing set forth in Section 8.3.7, which failure occurred because
of the failure of a condition to funding set forth in the Commitment Letter,
then one-half of the Deposit and any interest earned thereon shall be paid to
the Partnership and one-half of the Deposit and any interest earned thereon
shall be paid to CAPREIT
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<PAGE>
or as CAPREIT shall direct on the earlier of the Termination Date or the date on
which the party issuing the Commitment Letter notifies the Merger Partnership or
CAPREIT that it will not consummate the Financing.
(e) If the Deposit shall not be paid pursuant to paragraph (b), (c)
or (d), the Deposit and any interest earned thereon shall be paid to the
Partnership on the earlier of the Termination Date or the date of termination of
this Agreement. If such payment is made, such payment shall be made to the
Partnership as liquidated damages in full satisfaction of all of the Merger
Partnership's or CAPREIT's liabilities or obligations hereunder, including,
without limitation, any obligation to pay or reimburse the Partnership's
expenses pursuant to Section 7.3.2 below.
2.7 Disclosure Schedule. The parties acknowledge that this
-------------------
Agreement has been executed prior to delivery of the Disclosure Schedule by the
Partnership. The Partnership agrees that it will (a) deliver a preliminary
draft of the Disclosure Schedule to the Merger Partnership no later than 10 days
from the date hereof and (b) deliver a final Disclosure Schedule no later than
30 days from the date hereof; and that failure to do so shall constitute a
material breach hereof. Subject to the right of the Merger Partnership to
invoke the condition to Closing set forth in Section 8.3.11 below with respect
to any information obtained from the Disclosure Schedule, any information set
forth in the Disclosure Schedule shall be deemed incorporated into the relevant
representations and warranties set forth in Sections 4 and 5 below, and there
shall be no independent liability therefor pursuant to this Section 2.7.
3. Representations and Warranties of the Merger Partnership.
--------------------------------------------------------
Subject to Section 10.3 below, the Merger Partnership represents and
warrants to the Partnership as follows:
3.1 Formation and Qualification. The Merger Partnership is a
---------------------------
limited partnership duly formed, validly existing and in good standing under the
laws of the State of Delaware, and has the requisite power to carry on its
business as now conducted. The Merger Partnership is duly qualified, licensed
and authorized as a foreign limited partnership to do business, and is in good
standing, in each jurisdiction where the character of its properties owned or
leased or the nature of its activities makes such qualification necessary,
except for failures to be so qualified which would not, in the aggregate, have a
material adverse effect on the Condition of the Merger Partnership. Copies of
the Certificate of Limited Partnership of the Merger Partnership (the "MP
Certificate") and the Agreement of Limited Partnership of the Merger Partnership
(the "MP Agreement") heretofore delivered to
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<PAGE>
the Partnership are accurate and complete as of the date hereof. The Merger
Partnership is not in default under or in violation of any provision of the MP
Agreement.
3.2 Authority Relative to this Agreement. The Merger Partnership
------------------------------------
has the requisite power and authority to enter into this Agreement and to
perform its obligations hereunder. The execution and delivery of this Agreement
by the Merger Partnership and the consummation by the Merger Partnership of the
transactions contemplated hereby have been duly authorized by all necessary
action on the part of the Merger Partnership and the Merger Partnership GP, and
no other action on the part of the Merger Partnership or the Merger Partnership
GP is necessary to authorize this Agreement, the Merger and the transactions
contemplated hereby. This Agreement has been duly executed and delivered by the
Merger Partnership and constitutes a valid and binding obligation of the Merger
Partnership, enforceable against the Merger Partnership in accordance with its
terms.
3.3 No Conflicts. Neither the execution and delivery of this
------------
Agreement by the Merger Partnership nor the consummation of the transactions
contemplated hereby nor compliance by the Merger Partnership with any of the
provisions hereof will (i) violate, conflict with, or result in a breach of any
provision of, or constitute a default (or an event which, with notice or lapse
of time or both, would constitute a default) under, or result in the termination
of, or accelerate the performance required by, or result in a right of
termination or acceleration under, or result in the creation of any Lien upon
any of the properties or assets of the Merger Partnership under, any of the
terms, conditions or provisions of (x) the MP Certificate or the MP Agreement or
(y) any note, bond, mortgage, indenture, deed of trust, license, lease,
agreement or other instrument or obligation to which the Merger Partnership is a
party, or to which it, or any of its properties or assets, may be subject, or
(ii) subject to compliance with the statutes and regulations referred to in
Section 3.4, violate any Order, statute, rule or regulation applicable to the
Merger Partnership or any of its properties or assets, except, in the case of
each of clauses (i) and (ii) above, for such violations, conflicts, breaches,
defaults terminations, accelerations or creations of Liens which, in the
aggregate, would not have any material adverse effect on the Condition of the
Merger Partnership.
3.4 Governmental Approvals. Other than in connection with or in
----------------------
compliance with the provisions of the Partnership Act, the Exchange Act, the
Securities Act, the "takeover" laws of various states, the Hart-Scott-Rodino
Act, and except for any notices, filings, authorizations, consents or approvals
which are required because of the regulatory status, if any, of the Partnership
or the Merger Partnership or facts specifically pertaining to it, no notice to,
filing with, or authorization, consent
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<PAGE>
or approval of, any domestic or foreign public body or authority is necessary
for the consummation by the Merger Partnership of the transactions contemplated
by this Agreement.
3.5 No Prior Activities. The Merger Partnership has not incurred,
-------------------
directly or through any Subsidiary, any liabilities or obligations, except those
incurred in connection with its organization or with the negotiation of this
Agreement, the performance thereof and the consummation of the transactions
contemplated hereby, including the Merger and the Financing. Except as
contemplated by the foregoing sentence, the Merger Partnership has not engaged,
directly or through any Subsidiary, in any business activities of any type or
kind whatsoever, or entered into any agreements or arrangements with any Person,
or is subject to or bound by any obligation or undertaking.
3.6 Brokers. No broker, finder or investment banker is entitled to
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any brokerage, finder's or other fee or commission in connection with the
Transaction based upon arrangements made by or on behalf of the Merger
Partnership or the Merger Partnership GP.
4. Representations and Warranties of the Partnership. All
-------------------------------------------------
information within the Merger Partnership's Knowledge shall be deemed to have
been disclosed by the Partnership in connection with the representations and
warranties set forth below. Notwithstanding anything to the contrary in this
Agreement, the Partnership makes no representation or warranty, express or
implied, concerning the tax exempt status of the Mortgage Revenue Bonds and the
interest thereon, the ability of the Partnership or the Surviving Partnership to
consummate any modifications of the Mortgage Revenue Bonds and related
instruments, or the ability of the Partnership or the Surviving Partnership to
obtain any governmental or governmental agency consents in connection therewith.
Subject to Section 10.3 below, the Partnership represents and warrants
to the Merger Partnership as follows:
4.1 Formation and Qualification. Each of the Partnership and the
---------------------------
Partnership GP is a limited partnership duly formed, validly existing and in
good standing under the laws of the State of Delaware and has the requisite
power to carry on its business as now conducted. Each of the Partnership and
the Partnership GP is duly qualified, licensed and authorized as a foreign
limited partnership to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or leased or the nature
of its activities makes such qualification or licensing necessary, except for
failures to be so qualified which would not, in the aggregate, have a material
adverse effect on the Condition of the Partnership or the Partnership GP, as the
case may be. Copies of the Partnership Certificate, the Partner-
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<PAGE>
ship Agreement, the Certificate of Limited Partnership of the Partnership GP
(the "Partnership GP Certificate") and the Agreement of Limited Partnership of
the Partnership GP (the "Partnership GP Agreement") heretofore delivered or made
available to the Merger Partnership are accurate and complete as of the date
hereof. The Partnership is not in default under or in violation of any
provision of the Partnership Agreement, and the Partnership GP is not in default
under or in violation of any provision of the Partnership GP Agreement, except,
in each case, for such defaults or violations which would not have any material
adverse effect on the Condition of the Partnership or the Partnership GP.
4.2 No Subsidiaries. The Partnership has no Subsidiaries and no
---------------
equity or similar interest, whether voting or non-voting, in any Person.
4.3 Capitalization. As of the date hereof, the outstanding partner
--------------
interests of the Partnership consist of (i) a 1.01% general partner interest in
the profits, losses, distributions and credits of the Partnership held by the
Partnership GP, and (ii) a 98.99% limited partner interest in the profits,
losses, distributions and credits of the Partnership held by the Assignor
Limited Partner. The Assignor Limited Partner is authorized to issue up to
10,000,000 BACs, representing the assignments of units of beneficial interest of
the limited partner interest in the Partnership issued to the Assignor Limited
Partner, of which 5,258,268 are outstanding. There are no outstanding options,
warrants, calls, subscriptions or other rights or other agreements or
commitments obligating the Partnership or any of its Affiliates to issue,
transfer or sell (a) any additional partnership interests of the Partnership or
(b) any BACs, except as contemplated herein. All issued and outstanding BACs
and partnership interests in the Partnership are validly issued, and the
purchase price therefor has been paid in full.
4.4 Authority Relative to this Agreement. Each of the Partnership
------------------------------------
and the Partnership GP has the requisite power and authority to enter into this
Agreement and to perform its obligations hereunder. The execution and delivery
of this Agreement by each of the Partnership and the Partnership GP and the
consummation by each of the Partnership and the Partnership GP of the
transactions contemplated hereby have been duly authorized by all necessary
action on the part of each of the Partnership and the Partnership GP and, except
for the BAC Holder Approval as set forth in Section 7.2 hereof, no other
proceedings on the part of the Partnership and the Partnership GP are necessary
to authorize this Agreement, the Merger and the transactions contemplated
hereby. This Agreement has been duly executed and delivered by each of the
Partnership and the Partnership GP and constitutes a valid and binding
obligation of each of the Partnership and the Partnership GP enforceable against
each of the Partnership and the Partnership GP in accordance with its terms.
-11-
<PAGE>
4.5 No Conflicts. Except as set forth in the Disclosure Schedule,
------------
neither the execution and delivery of this Agreement by each of the Partnership
and the Partnership GP nor the consummation of the transactions contemplated
hereby (excluding the Financing and the Bond Refinancing) nor compliance by the
Partnership and the Partnership GP with any of the provisions hereof will (i)
violate, conflict with, or result in a breach of any provision of, or constitute
a default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or acceleration
under, or result in the creation of any Lien upon any of the properties or
assets of the Partnership or the Partnership GP under, any of the terms,
conditions or provisions of (x) the Partnership Certificate, the Partnership
Agreement, the Partnership GP Certificate or the Partnership GP Agreement, as
the case may be, or (y) any note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument or obligation to which the
Partnership or the Partnership GP is a party or to which either of them or
either of their properties or assets may be subject, or (ii) subject to
compliance with the statutes and regulations referred to in Section 4.6, to the
Partnership's Knowledge, violate any Order, statute, rule or regulation
applicable to the Partnership or the Partnership GP or any of their properties
or assets, except, in the case of each of clauses (i) and (ii) above, for such
violations, conflicts, breaches, defaults, terminations, accelerations or
creations of Liens which would not, in the aggregate, have any material adverse
effect on the Condition of the Partnership or the Partnership GP.
4.6 Governmental Approvals. Except as set forth in the Disclosure
----------------------
Schedule, other than in connection with or in compliance with the provisions of
the Partnership Act, the Exchange Act, the Securities Act, the "takeover" laws
of various states, and the Hart-Scott-Rodino Act, and except for any notices,
filings, authorizations, consents or approvals which are required because of the
regulatory status, if any, of the Merger Partnership or facts specifically
pertaining to it, to the Partnership's Knowledge, no notice to, filing with, or
authorization, consent or approval of, any domestic or foreign public body or
authority is necessary for the consummation by each of the Partnership and the
Partnership GP of the transactions contemplated by this Agreement (excluding the
Financing and the Bond Refinancing).
4.7 Commission Filings; Financial Statements. The Partnership has
----------------------------------------
heretofore delivered or made available to the Merger Partnership its (i) Annual
Report on Form 10-K for the fiscal years ended December 31, 1994, 1993, 1992,
1991 and 1990, as filed with the Commission, (ii) Quarterly Reports on Form 10-Q
for the quarters ended March 31, 1995 and June 30, 1995, (iii) investor letters
or similar documents mailed to the holders of
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<PAGE>
BACs (whether annual or special) since January 1, 1990, (iv) all other reports
(including any Form 8-K's) or registration statements filed by the Partnership
with the Commission since January 1, 1990 (the documents described in clauses
(i) through (iv) above, including any exhibits and schedules thereto and
documents incorporated by reference therein, being the "SEC Filings"), and (v)
the unaudited consolidated interim financial statements of the Partnership for
the six months ended June 30, 1995 (the "Interim Financial Statements"). As of
their respective dates, each SEC Filing complied in all material respects with
the requirements of the Exchange Act or the Securities Act, as applicable, and
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The audited consolidated financial statements and unaudited
consolidated interim financial statements of the Partnership included or
incorporated by reference in such reports and the Interim Financial Statements
(collectively, the "Partnership Financial Statements") have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto), and fairly present the consolidated financial position of the
Partnership as of the dates thereof and the results of their operations and
changes in their financial position for the periods then ended. The
consolidated balance sheet of the Partnership as at March 31, 1995, including
the notes thereto, is referred to as the "Balance Sheet," and March 31, 1995, is
referred to as the "Balance Sheet Date."
4.8 No Undisclosed Liabilities. At the Balance Sheet Date, the
--------------------------
Partnership did not have any direct or indirect liabilities, obligations,
indebtedness, claims, losses, damages, deficiencies or responsibilities, known
or unknown, fixed or unfixed, choate or inchoate, liquidated or unliquidated,
secured or unsecured, accrued, absolute or contingent, including, without
limitation, by way of setoffs or counterclaims ("Liabilities"), not reflected or
disclosed in the Balance Sheet which were required to be reflected or disclosed
therein in accordance with generally accepted accounting principles. Since the
Balance Sheet Date, except as disclosed in the Disclosure Schedule, the
Partnership has not incurred any such Liabilities.
4.9 Absence of Certain Changes or Events. Except as and to the
------------------------------------
extent set forth on the Balance Sheet, or as set forth on the Disclosure
Schedule, since the Balance Sheet Date, there has not been (a) any material
adverse change in the Condition of the Partnership; (b) any entry by the
Partnership into any commitment or transaction material to the Partnership,
which is not in the ordinary course of business and consistent with past
practices; (c) any material change by the Partnership in accounting principles
or methods except insofar as may be required by a
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<PAGE>
change in generally accepted accounting principles; (d) except as required by
the American Stock Exchange, any declaration, payment or setting aside for
payment of any distributions (whether in cash or property) in respect to the
partnership interests of the Partnership, or direct or indirect redemption,
purchase or other acquisition of any BACs or other securities of the
Partnership; (e) any revaluation by the Partnership of any of its assets,
including without limitation, writing off of notes or accounts receivable,
except any revaluation required by generally accepted accounting principles
based on the value of the Merger Consideration ; (f) any action taken by the
Partnership of the type referred to in Section 6.1.4 or 6.1.5 hereof; (g) any
agreement by the Partnership to take, whether in writing or otherwise, any
action which, if taken prior to the date of this Agreement, would have made any
representation or warranty in this Section 4 untrue or incorrect; (h) any
damage, destruction or loss, whether covered by insurance or not, having a
material adverse effect upon the Condition of the Partnership; (i) any issuance,
grant, sale or pledge or agreement to issue, grant, sell or pledge by the
Partnership, with any Person other than an Affiliate of the Merger Partnership,
any BACs or other partnership interests or securities convertible into or
exchangeable or exercisable for, or otherwise evidencing a right to acquire,
BACs or other partnership interests; (j) any acquisition of assets by the
Partnership, other than personal property not material to the Partnership
acquired in the ordinary course of business and consistent with past practices,
or (k) any disposition, encumbrance or mortgage of any assets or properties of
the Partnership, other than personal property not material to the Partnership
disposed of in the ordinary course of business and consistent with past
practices.
4.10 Litigation. There is no action or proceeding or investigation
----------
pending or, to the Partnership's Knowledge, threatened against or involving the
Partnership, any properties or rights of the Partnership or, to the
Partnership's Knowledge, any Mortgaged Property which if adversely determined
would, individually or in the aggregate, have a material adverse effect on the
Condition of the Partnership nor is the Partnership, its assets or, to the
Partnership's Knowledge, any Mortgaged Property subject to any Order which would
have such an effect.
4.11 Taxes. To the Partnership's Knowledge, except as set forth on
-----
the Disclosure Schedule, the Partnership has duly filed all tax returns that it
was required to file, all such tax returns were correct and complete in all
material respects and all taxes shown on such returns as due, if any, have been
paid. The Partnership constitutes a partnership for all income tax purposes
rather than a corporation or association taxable as a corporation. The
Partnership does not have in effect an election pursuant to Section 754 of the
Code. The Partnership's tax basis in the Mortgage Revenue Bonds and the working
capital loans,
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<PAGE>
including the interest receivable, is $112,625,954 as of December 31, 1994.
4.12 Assets. The Partnership has no assets other than the Mortgage
------
Revenue Bonds, the Liens represented by the Mortgage Revenue Documents, working
capital loans (not including accrued interest) made to Owner Partnerships in the
aggregate outstanding amount of $3,409,604 as of June 30, 1995 cash on hand
(including operating cash and marketable securities) in the amount of $5,622,136
as of June 30, 1995, and personal property not material to the Partnership held
in the ordinary course of business and consistent with past practices. The
Partnership GP has no assets other than its partnership interest in the
Partnership.
4.13 Transactions with Affiliates. Except as described in the
----------------------------
Disclosure Schedule or the SEC Filings, the Partnership has not entered into any
of the following transactions with any Affiliate or Individual Affiliate in
connection with which the Partnership has continuing obligations in effect as of
the date of this Agreement: the direct or indirect purchase, acquisition or
lease of any property from, or the sale, transfer or lease of any property to,
or the borrowing of any money from, or the guarantee of any obligation of, or
the acquisition of any stock, obligations or securities of, or the entering into
of any merger or consolidation agreement, or any management, consulting,
employment or similar fee arrangement or the entering into of any other
transaction or arrangement with, or the making of any payment to, an Individual
Affiliate, in the ordinary course of business or otherwise, which is not on
terms at least as favorable to the Partnership as would have been applicable if
such transaction had been entered into on an arm's-length basis with an
unaffiliated third party.
4.14 Disclosure. To the Partnership's Knowledge, no written
----------
statement, certificate, schedule, list or other written information furnished by
or on behalf of the Partnership to the Merger Partnership pursuant to this
Agreement contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact necessary in order to make the
statements herein or therein, in light of the circumstances under which they
were made, not misleading.
4.15 Brokers. No broker, finder or investment banker is entitled to
-------
any brokerage, finder's or other fee or commission in connection with the
Transaction based upon arrangements made by or on behalf of the Partnership or
the Partnership GP.
4.16 General Partner Recommendation. The Partnership GP has approved
------------------------------
and adopted the Transaction, has determined that the Transaction is fair to the
holders of BACs, and has recommended that the holders of BACs approve the
Transaction; provided, that the Partnership GP's continued recommendation
--------
-15-
<PAGE>
shall be subject to its receipt of a favorable Fairness Opinion. The
Partnership has no general partners or holders of general partnership interests
other than the Partnership GP.
4.17 Compliance with Law. The Partnership has conducted its
-------------------
business so as to comply with all applicable Requirements of Law relating to or
affecting the operations, conduct or ownership of the property or business of
the Partnership, the failure to comply with which would, individually or in the
aggregate, have a material adverse effect on the Condition of the Partnership,
provided, for purposes of this Section 4.17, the existence of any statute, law,
- - - - --------
treaty, rule, regulation or ordinance referred to in clause (ii) of the
definition of Requirements of Law shall be subject to the Partnership's
Knowledge.
4.18 Mortgage Revenue Bonds and Mortgage Revenue Documents.
-----------------------------------------------------
4.18.1 The Partnership has herewith or heretofore delivered or
made available to the Merger Partnership a true, correct and complete set of all
of the files, documents and other written materials relating to the Mortgage
Revenue Bonds and the Mortgage Revenue Documents, and to each Mortgaged Property
(and, where relevant, to each Owner Partnership's obtaining title to its
Mortgaged Property), that are in the possession or control of the Partnership
and all documents related thereto that were executed by or on behalf of the
Partnership or any Owner Partnership, including, without limitation, copies of
the Mortgage Revenue Bonds, the Mortgage Revenue Documents, Environmental
Reports, any letters of credit or other credit enhancement instruments currently
in effect, title insurance policies, hazard insurance policies, flood insurance
policies and other insurance policies, all balance sheets, operating statements
and other financial statements, all existing engineering reports, soil studies
and reports, plans, specifications, architectural and engineering drawings,
completion bonds, arrangements, warranties, commitments and other similar
reports, studies and items, leases and contracts, property management and
leasing brokerage agreements and other writings whatsoever. Notwithstanding the
foregoing, with respect to such files, documents and other written materials
that were prepared, received or stored by C.R.I., Inc.'s former housing
acquisition department during the time that Richard L. Kadish was supervising
such department (the "Housing Acquisition Department Files"), the Partnership
represents and warrants only that it has herewith or heretofore delivered or
made available to the Merger Partnership a true, correct and, to the
Partnership's Knowledge, complete set of the Housing Acquisition Department
Files.
4.18.2 The Partnership is the sole legal and beneficial owner
and holder of the Mortgage Revenue Bonds and the
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<PAGE>
Mortgage Revenue Documents, free and clear of any Lien, and, at the Effective
Time, the Surviving Partnership will be the sole legal and beneficial owner and
holder of the Mortgage Revenue Bonds and the Mortgage Revenue Documents, free
and clear of any Lien (without taking into account the Financing or the Bond
Refinancing or any act of the Merger Partnership). The Partnership has not
endorsed, granted, assigned, transferred or otherwise pledged, encumbered or set
over the Mortgage Revenue Bonds and/or the Mortgage Revenue Documents to any
Person.
4.18.3 The amounts of unpaid principal balance of each of the
Mortgage Revenue Bonds and the amount of accrued and unpaid base interest
thereunder, specifying the amounts of deferred construction period base
interest, past due base interest and interest on such interest, are set forth in
the Disclosure Schedule.
5. Representations and Warranties of the Owner Partnerships.
--------------------------------------------------------
Subject to Section 10.3 below, each of the Owner Partnerships (or, as
specified below, the Designated Owner Partnership) represents and warrants, as
to itself only, to the Merger Partnership as follows:
5.1 Formation and Qualification. Such Owner Partnership is a
---------------------------
limited partnership duly formed, validly existing and in good standing under the
laws of the State set forth opposite its name on the Disclosure Schedule and has
the requisite power to carry on its business as now conducted. Such Owner
Partnership is duly qualified, licensed and authorized as a foreign limited
partnership to do business, and is in good standing, in each jurisdiction where
the character of its properties owned or leased or the nature of its activities
makes such qualification or licensing necessary, except for failures to be so
qualified which would not, in the aggregate, have a material adverse effect on
its Condition. Copies of the certificate of limited partnership and the
agreement of limited partnership for such Owner Partnership have heretofore been
delivered or made available to the Merger Partnership and are accurate and
complete as of the date hereof. Such Owner Partnership is not in default under
or in violation of any provision of its limited partnership agreement, except
for such defaults or violations which would not have any material adverse effect
on the Condition of such Owner Partnership.
5.2 No Subsidiaries. Such Owner Partnership does not have any
---------------
Subsidiaries or any equity or similar interest, whether voting or non-voting, in
any Person. The only real and personal property owned or leased by such Owner
Partnership is the applicable Mortgaged Property owned by it as set forth in the
Disclosure Schedule, other than personal property held in the
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<PAGE>
ordinary course of business and consistent with past practices. The sole
business and purpose of such Owner Partnership is to own, manage, operate and
lease the applicable Mortgaged Property owned by it.
5.3 Partners and Capitalization. Set forth on the Disclosure
---------------------------
Schedule is a list of all of the partners in such Owner Partnership and their
respective partnership interests therein, and all of the direct and indirect
beneficial owners in each such partner and their respective ownership interests
therein. There are no outstanding options, warrants, calls, subscriptions or
other rights or other agreements or commitments obligating such Owner
Partnership or any of its Affiliates to issue, transfer or sell any additional
partnership interests of such Owner Partnership. All issued and outstanding
partner interests of such Owner Partnership are validly issued, and the purchase
price therefor has been paid in full.
5.4 Authority Relative to this Agreement. Such Owner Partnership
------------------------------------
has the requisite power and authority to enter into this Agreement and to
perform its obligations hereunder. The execution and delivery of this Agreement
by such Owner Partnership and the consummation by such Owner Partnership of the
transactions contemplated hereby have been duly authorized by all necessary
action on the part of such Owner Partnership and no other proceedings on the
part of such Owner Partnership are necessary to authorize this Agreement and the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by such Owner Partnership and constitutes a valid and binding
obligation of such Owner Partnership enforceable against such Owner Partnership
in accordance with its terms.
5.5 No Conflicts. With respect only to the Designated Owner
------------
Partnership, except as set forth in the Disclosure Schedule, neither the
execution and delivery of this Agreement by the Designated Owner Partnership nor
the consummation of the transactions contemplated hereby (excluding the
Financing and the Bond Refinancing) nor compliance by the Designated Owner
Partnership with any of the provisions hereof will (i) violate, conflict with,
or result in a breach of any provision of, or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a default) under,
or result in the termination of, or accelerate the performance required by, or
result in a right of termination or acceleration under, or result in the
creation of any Lien upon any of the properties or assets of the Designated
Owner Partnership under any of the terms, conditions or provisions of (x) the
certificate of limited partnership of the Designated Owner Partnership or the
agreement of limited partnership of the Designated Owner Partnership or (y) any
note, bond, mortgage, indenture, deed of trust, license, lease, material
agreement or other material instrument or obligation to which the Designated
-18-
<PAGE>
Owner Partnership is a party or to which it or any of its properties or assets
may be subject, or (ii) subject to compliance with the statutes and regulations
referred to in Section 5.6 below, to the Designated Owner Partnership's
Knowledge, violate any Order, statute, rule or regulation applicable to the
Designated Owner Partnership or any of its properties or assets, except, in the
case of each of clauses (i) and (ii) above, for such violations, conflicts,
breaches, defaults, terminations, accelerations, or creations of Liens which
would not, in the aggregate, have any material adverse effect on the Condition
of the Designated Owner Partnership.
5.6 Governmental Approvals. With respect only to the Designated
----------------------
Owner Partnership, except as set forth in the Disclosure Schedule, other than in
connection with or in compliance with the provisions of the limited partnership
act of the state of its formation, the Exchange Act, the Securities Act, the
"takeover" laws of various states, and the Hart-Scott-Rodino Act, to the
Designated Owner Partnership's Knowledge no notice to, filing with, or
authorization, consent or approval of any domestic or foreign public body or
authority is necessary for the consummation by the Designated Owner Partnership
of the transactions contemplated by this Agreement (excluding the Financing and
the Bond Refinancing).
5.7 Financial Statements. With respect only to the Designated
--------------------
Owner Partnership, the Designated Owner Partnership has heretofore delivered or
made available to the Merger Partnership its annual financial statements, which
financial statements are listed on the Disclosure Schedule, all of which
financial statements have been prepared in accordance with the principles of the
income tax basis of accounting applied on a consistent basis during the periods
involved (except as may be indicated in the notes thereto), and fairly present
the financial position of the Designated Owner Partnership as of the date
thereof and the results of its operations and changes in its financial position
for the periods then ended.
5.8 No Undisclosed Liabilities. With respect only to the Designated
--------------------------
Owner Partnership, the Designated Owner Partnership does not have any
Liabilities not reflected or disclosed in its financial statements referred to
in Section 5.7 above which were required to be reflected or disclosed therein in
accordance with the principles of the income tax basis of accounting. Since the
date of its financial statements referred to in Section 5.7 above, except as may
otherwise be disclosed in the Disclosure Schedule, the Designated Owner
Partnership has not incurred any such Liabilities.
5.9 Absence of Certain Changes or Events. With respect only to the
------------------------------------
Designated Owner Partnership, except as and to the extent set forth on its
applicable financial statements
-19-
<PAGE>
referred to in Section 5.7 above, or except as described in the Disclosure
Schedule, since the date of such financial statements, there has not been (a)
any material adverse change in its Condition; (b) any entry by it into any
commitment or transaction which is not in the ordinary course of its business
and consistent with past practices; (c) any material change by it in accounting
principles or methods except insofar as may be required by a change in
principles of the income tax basis of accounting; (d) any declaration, payment
or setting aside for payment of any distributions (whether in cash or property)
in respect to its partnership interests or any other of its securities; (e) any
revaluation by it of any of its assets, including without limitation, writing
off of notes or accounts receivable other than in the ordinary course of
business and consistent with past practices; (f) any action taken by it of the
type referred to in Section 6.2.4 or 6.2.5 hereof; (g) any agreement by it to
take, whether in writing or otherwise, any action which, if taken prior to the
date of this Agreement, would have made any representation or warranty in this
Section 5 untrue or incorrect; (h) any damage, destruction or loss, whether
covered by insurance or not, having an adverse effect upon its Condition; (i)
any issuance, grant, sale or pledge or agreement to issue, grant, sell or pledge
by it, with any Person other than an Affiliate of the Merger Partnership, any
partnership interests or securities convertible into or exchangeable or
exercisable for, or otherwise evidencing a right to acquire, partnership
interests; (j) any acquisition of assets by it other than in the ordinary course
of business and consistent with past practices; or (k) any disposition,
encumbrance or mortgage of any of its assets or properties other than in the
ordinary course of business and consistent with past practices.
5.10 Mortgaged Properties.
--------------------
5.10.1 With respect only to the Designated Owner Partnership,
the Designated Owner Partnership has herewith or heretofore delivered or made
available to the Merger Partnership a true, correct and complete set of all the
files, documents and other written materials relating to the Mortgaged Property
owned by the Designated Owner Partnership (and to its obtaining title to such
Mortgaged Property), or the Mortgage Revenue Bonds and the Mortgage Revenue
Documents related thereto, that are in the possession or control of the
Designated Owner Partnership and all documents related thereto that were
executed by or on behalf of the Partnership or the Designated Owner Partnership,
including, without limitation, copies of such Mortgage Revenue Bonds, such
Mortgage Revenue Documents, Environmental Reports, any letters of credit or
other credit enhancement instruments, title insurance policies, hazard insurance
policies, flood insurance policies and other insurance policies, all balance
sheets, operating statements and other financial statements, all existing
engineering reports, soil studies and reports, plans, specifica-
-20-
<PAGE>
tions, architectural and engineering drawings, completion bonds, arrangements,
warranties, commitments and other similar reports, studies and items, leases and
contracts, property management and leasing brokerage agreements and other
writings whatsoever. Notwithstanding the foregoing, with respect to the Housing
Acquisition Department Files, the Designated Owner Partnership represents and
warrants only that the Designated Owner Partnership has herewith or heretofore
delivered or made available to the Merger Partnership, a true, correct and, to
the Designated Owner Partnership's Knowledge, complete set of the Housing
Acquisition Department Files.
5.10.2 With respect only to each Designated Owner Partnership,
the Designated Owner Partnership has good and marketable title to the Mortgaged
Property owned by it. To the Designated Owner Partnership's Knowledge, neither
the Mortgaged Property nor other assets of the Designated Owner Partnership is
subject to any Lien except (a) Liens securing the Mortgage Revenue Bonds, (b)
Permitted Statutory Liens, (c) Liens for taxes not yet delinquent or the
validity of which are being contested in good faith by appropriate actions and
for which appropriate reserves have been made, and (d) Liens which do not in the
aggregate have an adverse effect on the Condition of the Designated Owner
Partnership.
5.11 No Action. With respect only to the Designated Owner
---------
Partnership, except for landlord/tenant collection and eviction actions or as
set forth on the Disclosure Schedule, there is no action or proceeding or
investigation pending or, to the Designated Owner Partnership's Knowledge,
threatened against or involving the Designated Owner Partnership, any properties
or rights of the Designated Owner Partnership or the Mortgaged Property owned by
it which if adversely determined would, individually or in the aggregate, have
an adverse effect on the Condition of the Designated Owner Partnership nor is
the Designated Owner Partnership, its assets or such Mortgaged Property subject
to any Order which would have such an effect. Without limiting the generality
of the foregoing, the Designated Owner Partnership is not a debtor in any state
or federal bankruptcy, insolvency, liquidation, reorganization, receivership or
arrangement proceeding, and no such proceeding is pending or has been threatened
in writing.
5.12 Taxes. Except as may otherwise be set forth on the Disclosure
-----
Schedule, to such Owner Partnership's Knowledge, such Owner Partnership has duly
filed all tax returns that it was required to file and all such tax returns were
correct and complete. Such Owner Partnership constitutes a partnership for all
income tax purposes rather than a corporation or association taxable as a
corporation.
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<PAGE>
5.13 Compliance with Law. With respect only to the Designated Owner
-------------------
Partnership, the Designated Owner Partnership has conducted its business so as
to comply with all applicable Requirements of Law relating to or affecting the
operations, conduct or ownership of the property or business of such Designated
Owner Partnership, failure to comply with which would, individually or in the
aggregate, have a material adverse effect on the Condition of the Designated
Owner Partnership, provided, for purposes of this Section 5.13, the existence of
--------
any statute, law, treaty, rule, regulation or ordinance referred to in clause
(ii) of the definition of Requirements of Law shall be subject to the Designated
Owner Partnership's Knowledge.
5.14 Disclosure. With respect only to the Designated Owner
----------
Partnership, to the Designated Owner Partnership's Knowledge, no written
statement, certificate, schedule, list or other written information furnished by
or on behalf of the Designated Owner Partnership, or otherwise made available,
to the Merger Partnership pursuant to this Agreement contains or will contain
any untrue statement of a material fact or omits or will omit to state a
material fact necessary in order to make the statements herein or therein, in
light of the circumstances under which they were made, not misleading.
6. Conduct of Business Pending the Merger.
--------------------------------------
6.1 Conduct of Business by the Partnership Pending the Merger. The
---------------------------------------------------------
Partnership covenants and agrees that, from the date of this Agreement until the
Effective Time, unless the Merger Partnership shall otherwise agree in writing
or as otherwise expressly contemplated by this Agreement:
6.1.1 The business of the Partnership shall be conducted only
in, and the Partnership shall not take any action except in, the ordinary course
of business and consistent with past practices, and the Partnership shall use
all commercially reasonable efforts to maintain and preserve its business
organization, assets, prospects and advantageous business relationships.
6.1.2 Except as contemplated hereby, the Partnership shall not
directly or indirectly do any of the following: (i) sell, transfer, pledge,
dispose of or encumber, except in the ordinary course of business and consistent
with past practices, any properties or assets of the Partnership (including,
without limitation, any indebtedness owed to it, including any Mortgage Revenue
Bonds, or any claims held by it); (ii) whether or not in the ordinary course of
business, sell or dispose of any property or asset which is material to the
Partnership; (iii) whether or not in the ordinary course of business, permit any
property or assets to become subject to any material Lien, other than Permitted
Statutory Liens; (iv) amend
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<PAGE>
or propose to amend the Partnership Agreement, the Partnership Certificate or
similar organizational documents, any tax returns or any Mortgage Revenue Bonds
or Mortgage Revenue Documents; (v) declare, set aside or pay any distribution,
payable in cash, securities, property or otherwise, with respect to any of its
partnership interests or BACs; provided, however, that, subject to Sections 501,
-------- -------
502, 503, 504, 511, 512 and 513 of the American Stock Exchange Guide, the
Partnership may accrue, on a monthly basis, an amount up to $.10 per BAC, in
calendar year 1996, and pay, on a quarterly basis, such accrued amount to the
holders of BACs; (vi) redeem, purchase or otherwise acquire or offer to redeem,
purchase or otherwise acquire any partnership interests or BACs; or (vii)
authorize or propose any of the foregoing, or enter into any contract,
agreement, commitment, or arrangement to do any of the foregoing.
6.1.3 Except as contemplated hereby, the Partnership shall
not, directly or indirectly, (i) issue, sell, pledge or dispose of, or
authorize, propose or agree to the issuance, sale, pledge or disposition of, any
BACs or partnership interests, or any options, warrants or rights of any kind to
acquire any shares of, or any securities convertible into or exchangeable for
any BACs or partnership interests, or any other securities in respect of, in
lieu of, or in substitution for, BACs or partnership interests outstanding on
the date hereof; (ii) acquire (by merger, consolidation, or acquisition of stock
or assets) any other Person, or make any investment either by purchase of stock
or securities, contributions to capital, property transfer, or, except in the
ordinary course of business and consistent with past practices, purchase of any
property or assets of any other Person; (iii) incur any indebtedness for money
borrowed or issue any debt securities or assume or guarantee any of the
foregoing, except short-term indebtedness incurred in the ordinary course of
business and consistent with past practices; (iv) endorse, or otherwise as an
accommodation become responsible for, the obligations of any other Person, or
make any loans or advances other than in the ordinary course of business and
consistent with past practices; (v) voluntarily incur any other liability or
obligation (absolute, accrued, contingent or otherwise), except in the ordinary
course of business and consistent with past practices; (vi) waive, release,
grant or transfer any rights of material value or modify or change in any
material respect any agreement with or arrangement relating to any existing
material license, lease, contract or other document, other than in the ordinary
course of business and consistent with past practices; (vii) authorize or effect
any material change in its capitalization; or (viii) authorize or commit to any
of the actions prohibited in this Section 6.1.3, or enter into or modify any
contract, agreement, commitment or arrangement to do any of the actions
prohibited in this Section 6.1.3.
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6.1.4 The Partnership shall not make any tax election which may have a
material adverse effect on the Condition of the Partnership or the Merger
Partnership, change any material tax accounting method or settle or compromise
any material federal, state, local or foreign income tax liability. The
Partnership GP shall halt, suspend or limit trading of BACs to the extent
necessary to prevent a termination of the Partnership for income tax purposes as
a result of such trading or such trading in combination with the consummation of
the Transaction.
6.1.5 The Partnership shall not take any action or agree, in
writing or otherwise, to take any of the actions prohibited by this Section 6.1
or any action which would make any representation or warranty in Section 4
hereof untrue or incorrect in any material respect.
6.2 Conduct of Business by the Owner Partnerships Pending the
---------------------------------------------------------
Merger. Each of the Owner Partnerships covenants and agrees, for itself only,
- - - - ------
that, from the date of this Agreement until the Effective Time, unless the
Merger Partnership shall otherwise agree in writing or as otherwise expressly
contemplated by this Agreement:
6.2.1 The business of such Owner Partnership shall be
conducted only in, and such Owner Partnership shall not take any action except
in, the ordinary course of business and consistent with past practices, and such
Owner Partnership shall use all commercially reasonable efforts to maintain and
preserve its business organization, assets, prospects and advantageous business
relationships.
6.2.2 Except as contemplated hereby, such Owner Partnership
shall not directly or indirectly do any of the following: (i) sell, transfer,
pledge, dispose of or encumber, any properties or assets of such Owner
Partnership (including, without limitation, any Mortgaged Property, any
indebtedness owed to it or any claims held by it), other than personal property
not material to such Owner Partnership which is sold or disposed of in the
ordinary course of business consistent with past practices; (ii) permit any
property or assets to become subject to any material Lien, other than Permitted
Statutory Liens; (iii) amend or propose to amend the agreement of limited
partnership, the certificate of limited partnership or similar organizational
documents of such Owner Partnership, any tax returns or any Mortgage Revenue
Bonds or Mortgage Revenue Documents; (iv) declare, set aside or pay any
distribution, payable in cash, securities, property or otherwise, with respect
to any of its partnership interests; (v) redeem, purchase or otherwise acquire
or offer to redeem, purchase or otherwise acquire any partnership interests; or
(vi) authorize or propose any of the foregoing, or
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enter into any contract, agreement, commitment, or arrangement to do any of the
foregoing.
6.2.3 Except as contemplated hereby, such Owner Partnership
shall not, directly or indirectly, (i) issue, sell, pledge or dispose of, or
authorize, propose or agree to the issuance, sale, pledge or disposition of, any
partnership interests, or any options, warrants or rights of any kind to acquire
any shares of, or any securities convertible into or exchangeable for any
partnership interests, or any other securities in respect of, in lieu of, or in
substitution for, partnership interests outstanding on the date hereof; (ii)
acquire (by merger, consolidation, or acquisition of stock or assets) any other
Person, or make any investment either by purchase of stock or securities,
contributions to capital, property transfer, or purchase of any property or
assets of any other Person (other than personal property with a fair market
value of $10,000 or less purchased in the ordinary course of business and
consistent with past practices); (iii) incur any indebtedness for money borrowed
or issue any debt securities or assume or guarantee any of the foregoing, except
short-term indebtedness incurred in the ordinary course of business and
consistent with past practices; (iv) endorse, or otherwise as an accommodation
become responsible for, the obligations of any other Person, or make any loans
or advances (other than loans and advances not material to such Owner
Partnership made in the ordinary course of business and consistent with past
practices); (v) voluntarily incur any other liability or obligation (absolute,
accrued, contingent or otherwise), except in the ordinary course of business and
consistent with past practices; (vi) waive, release, grant or transfer any
rights of material value or modify or change in any material respect any
agreement with or arrangement relating to any existing material license, lease,
contract or other document; (vii) authorize or effect any material change in its
capitalization; or (viii) authorize or commit to any of the actions prohibited
in this Section 6.2.3, or enter into or modify any contract, agreement,
commitment or arrangement to do any of the actions prohibited in this Section
6.2.3. Notwithstanding the foregoing, the parties hereby agree that each Owner
Partnership may make unbudgeted expenditures of up to $10,000 in the aggregate
without the consent of the Merger Partnership.
6.2.4 Such Owner Partnership shall not make any material tax
election, change any material tax accounting method or settle or compromise any
material federal, state, local or foreign income tax liability. Such Owner
Partnership shall be permitted to file and contest any pending real estate tax
assessment appeal in the ordinary course business and consistent with past
practices, provided, that if such Owner Partnership is a Designated Owner
--------
Partnership, it shall promptly notify the Merger Partnership of any proposed or
pending increases to the
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valuation of its real property or the amount or rate of real estate taxes
payable thereon.
6.2.5 Such Owner Partnership shall not take any action or
agree, in writing or otherwise, to take any of the actions prohibited by this
Section 6.2 or any action which would make any representation or warranty in
Section 5 hereof untrue or incorrect in any material respect.
7. Additional Agreements.
---------------------
7.1 Proxy Statement; Other Filings. As promptly as practicable
------------------------------
after the date hereof, the Partnership and the Merger Partnership shall jointly
prepare and the Partnership shall file with the Commission under the Exchange
Act, and shall use all commercially reasonable efforts to have cleared by the
Commission, and promptly thereafter the Partnership shall mail to its limited
partners and holders of BACs, a proxy statement and form of proxy with respect
to the meeting of the partners of the Partnership referred to in Section 7.2
hereof, all the costs of which shall be advanced by the Merger Partnership. The
term "Proxy Statement" shall mean such proxy statement at the time it initially
is mailed to the limited partners of the Partnership and the holders of BACs and
all amendments or supplements thereto, if any, similarly filed and mailed. As
soon as practicable after the date of this Agreement, the Partnership and the
Merger Partnership shall promptly prepare and file any other filings required
under the Exchange Act, or any other federal or state securities laws relating
to the Merger and the transactions contemplated herein ("Other Filings"). The
Partnership shall notify the Merger Partnership promptly of the receipt of any
comments of the Commission and of any request by the Commission for amendments
or supplements to the Proxy Statement or by any other governmental official with
respect to any Other Filing or for additional information and will supply the
Merger Partnership with copies of all correspondence between the Partnership and
its representatives, on the one hand, and the Commission or the members of its
staff or any other appropriate government official on the other hand, with
respect to the Proxy Statement and any Other Filings. The Partnership and the
Merger Partnership each shall use all commercially reasonable efforts to obtain
and furnish the information required to be included in the Proxy Statement and
any Other Filing; and the Partnership, after consultation with the Merger
Partnership, shall use all commercially reasonable efforts to respond promptly
to any comments made by the Commission with respect to the Proxy Statement and
any Other Filing and any preliminary version thereof and cause the Proxy
Statement and related form of proxy to be mailed to the limited partners of the
partnership and holders of BACs at the earliest practicable time. The
Partnership shall notify the Merger Partnership of its intention to mail the
Proxy Statement to the limited partners of the
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Partnership and the holders of BACs, both orally and in writing, at least 48
hours prior to the intended time of such mailing. The information provided and
to be provided by the Merger Partnership and the Partnership, respectively, for
use in the Proxy Statement and any Other Filings shall, on the date the Proxy
Statement is first mailed to the limited partners of the Partnership and the
holders of BACs or any Other Filing is filed with the appropriate governmental
official and in each case on the date of the meeting of the limited partners of
the Partnership and the holders of BACs referred to in Section 7.2 hereof, be
true and correct in all material respects and shall not omit to state any
material fact required to be stated therein or necessary in order to make such
information not false or misleading, and the Partnership and the Merger
Partnership each agree to correct any such information provided by it for use in
the Proxy Statement or any Other Filing which shall have become false or
misleading. The Proxy Statement and any Other Filing, when filed with the
Commission, shall comply as to form in all material respects with all applicable
requirements of law.
7.2 Meeting of the Limited Partners. The Partnership shall take all
-------------------------------
action necessary, in accordance with the Partnership Act, the Partnership
Certificate and the Partnership Agreement to duly call, give notice of, convene
and hold a meeting of the limited partners of the Partnership as promptly as
practicable to consider and vote upon and obtain BAC Holder Approval of the
Transaction, including, without limitation, the Merger, this Agreement, the
replacement of the Partnership GP with the CAPREIT General Partner pursuant to
Section 2.3, and certain amendments to the Partnership Agreement (including,
without limitation, to expressly authorize the Merger, this Agreement and the
transactions contemplated hereby and the issuance of a limited partner interest
in the Partnership pursuant to Section 7.14 below) (the "Meeting"). The Proxy
Statement shall contain the determinations and recommendations of the
Partnership GP as to the Transaction as set forth in Section 4.16 hereof. The
Partnership shall use all commercially reasonable efforts to solicit from
holders of BACs proxies in favor of adoption and approval of the Transaction and
to take all other action necessary or, in the reasonable judgment of the Merger
Partnership, helpful to secure the BAC Holder Approval of the Transaction. At
any such Meeting, CAPREIT shall vote, or cause to be voted, all of the
partnership interests in the Partnership then owned by CAPREIT or any of its
Affiliates in favor of the Transaction.
7.3 Fees and Expenses.
-----------------
7.3.1 If this Agreement or the transactions contemplated
hereby are terminated or abandoned, and
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(i) such termination or abandonment results from the breach
by the Partnership of the covenant set forth in Section 7.5, from a
Fiduciary Out Termination or from a wilful and material breach by the
Partnership of any of its covenants or agreements set forth in this
Agreement (specifically excluding any representations and warranties
set forth in Section 4); or
(ii) after the date of this Agreement and prior to or
contemporaneously with such termination or abandonment, (A) the
Partnership or the Partnership GP enters into any letter of intent or
agreement with any Person (including the Partnership or any of its
Affiliates and excluding the Merger Partnership and its Affiliates) or
group (as defined in Section 13(d)(3) of the Exchange Act)
(collectively, the "Designated Persons") relating to a (x) tender
offer or exchange offer for any outstanding BACs at a per BAC price in
excess of the Merger Consideration or (y) a Business Combination with
or involving the Partnership or any of its Affiliates, or any
transaction involving a transfer of beneficial ownership of BACs
representing at least 10% of the outstanding BACs, (B) the Partnership
or the Partnership GP shall file with the Commission a Schedule 14D-9
or similar document, or make any public announcement or communication,
(x) recommending, endorsing or supporting a proposal, plan or
intention by the Partnership or another Designated Person to effect
any of the foregoing transactions or (y) failing to recommend, endorse
and support the Transaction (unless the investment banking firm
retained by the Partnership does not deliver a Fairness Opinion), or
(C) any Designated Person shall have acquired beneficial ownership of
at least 33 1/3% of the outstanding BACs (the foregoing events are
herein collectively referred to as "Triggering Events"); or
(iii) Within 270 days from the date of termination or abandonment
of this Agreement, a Triggering Event shall have resulted in the
Partnership or any holders of outstanding BACs receiving consideration
(determined on a per BAC basis) in excess of the Merger Consideration.
then the Partnership shall pay to the Merger Partnership, within seven business
days of written request therefor, a fee in the amount of $2.25 million cash. The
parties intend that the payment
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of such fee and the payment of expenses as provided in Section 7.3.2 shall be
the sole remedy for breach of this Agreement by the Partnership or any Owner
Partnership and shall be made as liquidated damages in full satisfaction of the
Partnership's or any Owner Partnership's liabilities or obligations hereunder.
7.3.2 (a) If the Transaction is terminated or abandoned due to
(w) a wilful and material breach of the Merger Agreement by the Partnership or
any Owner Partnership (other than a breach consisting solely of a breach of any
representations or warranties set forth in Section 4 or 5), (x) the failure to
fulfill the conditions specified in Section 8.3.1 or 8.3.3 (solely as it relates
to Section 8.3.1) by the Partnership or any Owner Partnership, (y) a Fiduciary
Out Termination or (z) the election by the Merger Partnership to terminate this
Agreement pursuant to Section 9.1.9, the Partnership shall bear all of its own
expenses and, in addition, shall promptly reimburse the Merger Partnership and
its Affiliates for all reasonable out-of-pocket expenses (including, without
limitation, all fees and expenses of counsel, outside accountants, investment
banking firms, financing sources, third party experts and third party
consultants to the Merger Partnership and its Affiliates) incurred by them or on
their behalf in connection with the Transaction and the Proxy Statement,
provided, that if and only if a payment is due under this Section 7.3.2(a) and
- - - - --------
the closing under the Other Merger Agreement shall have occurred, then the
amount payable under this Section 7.3.2(a) shall not exceed a maximum amount
equal to the sum of (i) the amount of all such reasonable out-of-pocket expenses
directly allocable to the transactions contemplated by this Agreement and (ii)
50% of the aggregate amount of any other such expenses incurred in connection
both with the transactions contemplated by this Agreement and the transactions
contemplated by the Other Merger Agreement and not directly allocable to the
transactions contemplated by the Other Merger Agreement. Notwithstanding
anything to the contrary herein, the aggregate amount payable by the Partnership
to the Merger Partnership and its Affiliates pursuant to this Section 7.3.2(a)
shall not exceed $2 million.
(b) Unless the Transaction is terminated or abandoned due to (w) a
wilful and material breach by the Partnership or any Owner Partnership of this
Agreement, (x) the failure to fulfill the conditions specified in Section 8.3.1,
8.3.3 (solely as it relates to Section 8.3.1), or 8.3.11 by the Partnership or
any Owner Partnership, (y) a Fiduciary Out Termination or (z) the election by
the Merger Partnership to terminate this Agreement pursuant to Section 9.1.9 or
9.1.10, the fees and expenses listed below shall be paid as follows:
The Merger Partnership shall pay or reimburse the costs of (i)
preparing, filing, printing and distributing the Proxy Statement and reasonable
legal fees and expenses of counsel to
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the Merger Partnership and counsel to the Partnership, including in its capacity
as counsel for the Owner Partnerships, and accounting fees and expenses of the
Partnership's and the Owner Partnerships' outside accountants (such fees and
expenses of the Partnership's counsel and accountants to be directly related to
the Proxy Statement and the Transaction only), (ii) any fees to lenders in
connection with obtaining the Commitment Letter or consummating the Financing or
the Bond Refinancing, (iii) any transfer taxes and/or other reasonable out-of-
pocket costs payable in connection with the Transaction, except as provided
below, and (iv) the costs of any due diligence performed by or on behalf of the
Merger Partnership, including any costs incurred by the Partnership in
connection with such due diligence, but only with the prior approval by the
Merger Partnership of any such cost incurrence. The Partnership shall pay the
costs of (A) obtaining the Fairness Opinion and related legal and accounting
fees and expenses, (B) the legal and accounting fees and expenses of the
Partnership incurred in connection with the negotiation of this Agreement and
(C) reimbursement of staff time and other internal costs of the Partnership GP
and its Affiliates.
(c) The Partnership agrees that, without at least 14 days' prior
notice to the Merger Partnership and the prior written consent of the Merger
Partnership, the Partnership shall not pay or incur in excess of $75,000 for
reimbursement of staff time or other internal costs of the Partnership GP and
its Affiliates through December 31, 1995. If the Closing Date shall not occur
on or prior to December 31, 1995, the Partnership shall prepare new projections
of such expenses by calendar quarter, subject to the approval by the Merger
Partnership in its reasonable judgement, and shall not pay or incur expenses in
excess of such projections.
(d) Any request for reimbursement under Section 7.3.2(a) or (b) shall
be made together with itemized invoices or other appropriate expense
documentation.
(e) Except as provided in this Section 7.3.2 or otherwise in this
Agreement, all costs and expenses incurred in connection with the Transaction
shall be paid by the party incurring such expenses, whether or not the
Transaction is consummated and, in any case, the Partnership GP shall pay its
own legal fees and other expenses.
7.4 Further Agreements.
------------------
7.4.1 Subject to the terms and conditions herein provided,
each of the parties hereto agrees to use all commercially reasonable efforts to
take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective as
promptly as practicable the transactions contemplated by this Agreement
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and to cooperate with each other in connection with the foregoing, including (i)
using all commercially reasonable efforts to obtain all necessary waivers,
consents and approvals from other parties to loan agreements, leases and other
contracts and instruments; (ii) using all commercially reasonable efforts (a) to
obtain all necessary consents, approvals and authorizations as are required to
be obtained under any federal, state or foreign law or regulations, (b) to
defend all lawsuits or other legal proceedings challenging this Agreement or the
consummation of the transactions contemplated hereby (collectively, "Designated
Actions"), (c) to lift or rescind any injunction or restraining order or other
order adversely affecting the ability of the parties to consummate the
transactions contemplated hereby, and (d) to effect all necessary registrations
and filings, including, but not limited to, filings under the Hart-Scott-Rodino
Act, if any, and submissions of information requested by governmental
authorities. For purposes of the foregoing sentence, the obligations of the
Partnership and the Merger Partnership to use "all commercially reasonable
efforts" to obtain waivers, consents and approvals to loan agreements, leases
and other contracts shall not include any obligation to agree to an adverse
modification of the terms of such documents or to pay or incur additional
obligations to such other parties.
7.4.2 In connection with any Designated Action, the
Partnership hereby agrees to: (i) promptly deliver to the Merger Partnership
copies of all complaints, pleadings and other filings relating to any Designated
Action; (ii) provide drafts of its reply, motions and other pleadings to the
Merger Partnership for review and comment prior to filing or serving any such
reply, motion or pleading and not to file any such reply, motion or pleading
until the earlier of (x) receipt of consent from the Merger Partnership or (y)
the day of the deadline for such motion, reply or pleading; and (iii) consult
with the Merger Partnership in a timely manner prior to taking any other action.
7.5 Shop Limitation.
---------------
7.5.1 Subject to Section 7.5.2 below, each of the Partnership
and the Partnership GP will not, directly or indirectly, through any general
partner, officer, director, agent, or Affiliate of any of the foregoing, or
otherwise (i) solicit, initiate or invite the submission of inquiries, proposals
or offers from any Person relating to any Business Combination, or (ii) enter
into or participate in any discussions or negotiations regarding any of the
foregoing, or furnish to any Person any information with respect to the
business, properties or assets of the Partnership or any of the foregoing, or
(iii) otherwise cooperate in any way with, or assist or participate in,
facilitate or encourage, any effort or attempt by any Person to do or seek any
of the foregoing. The Partnership shall
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<PAGE>
immediately notify the Merger Partnership if any such proposal or offer, or any
inquiry or contact with any Person with respect thereto, is made.
7.5.2 If the Partnership GP is required because of its
fiduciary obligations to the holders of BACs to respond to an unsolicited
inquiry, contact or proposal related to a Business Combination made by a third
party to the Partnership (an "Alternative Proposal"), nothing in this Agreement
shall prohibit the Partnership GP or the Partnership from responding to such
Alternative Proposal, making any required disclosures under federal securities
laws, providing information regarding the Partnership to the party making such
Alternative Proposal, negotiating with such party in good faith, terminating
this Agreement or taking any other action otherwise prohibited by Section 7.5.1
above because it is required to by fiduciary obligations to accept an
Alternative Proposal (a "Fiduciary Out Termination"); provided, however, that
-------- -------
the Partnership agrees to give the Merger Partnership reasonable notice of any
such response, negotiations or other matters, as well as a reasonable
opportunity to respond, taking into account in good faith the facts and
circumstances prevailing at the time of such response, negotiation or other
matters.
7.6 Additional Financial Statements. (a) As soon as reasonably
-------------------------------
practicable after they become publicly available, the Partnership shall furnish
the Merger Partnership with (i) a consolidated balance sheet of the Partnership
and related consolidated statements of operations and cash flows for all
quarterly periods subsequent to the Balance Sheet Date and prior to the
Effective Time, accompanied by statements by the Partnership GP that, in the
opinion of the Partnership GP, such financial statements of the Partnership have
been prepared pursuant to the rules and regulations of the Commission and fairly
present (subject, in the case of unaudited financial statements, to changes
resulting from year-end audit adjustments and other adjustments of a normal and
recurring nature) the consolidated financial condition and results of operations
of the Partnership, as of the dates and for the periods covered by such
statements and (ii) any other financial statements that the Partnership shall
prepare for any interim period subsequent to the Balance Sheet Date and prior to
the Effective Time.
(b) As soon as reasonably practicable after they are prepared, each
Owner Partnership shall furnish the Merger Partnership with (i) a balance sheet
of such Owner Partnership and related statements of operations, changes in
partners' deficit and cash flows for all annual periods subsequent to the date
hereof and prior to the Effective Time, accompanied by statements by its general
partner that, in the opinion of such general partner, such financial statements
have been prepared in conformity with the income tax basis of accounting applied
on a
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consistent basis and fairly present (subject, in the case of unaudited financial
statements, to changes resulting from year-end audit adjustments) the financial
condition, results of operations and cash flows of such Owner Partnership, as of
the dates and for the periods covered by such statements and (ii) any other
financial statements that such Owner Partnership shall prepare for any interim
period subsequent to the date hereof and prior to the Effective Time.
7.7 Access to Information; Confidentiality.
--------------------------------------
7.7.1 Each of the Partnership and the Owner Partnerships
shall, and shall cause its employees, consultants, accountants, counsel and
agents to, afford to the Merger Partnership and its representatives and to the
banks, lenders, financial institutions and others providing financing for the
Transaction and others, complete access at all reasonable times to, from the
date of this Agreement until the Effective Time, its offices, facilities,
personnel, properties, books, records and contracts, and shall furnish the
Merger Partnership and its representatives and such banks, lenders, financial
institutions and others all financial, operating and other data and information
as the Merger Partnership and its representatives and such banks, lenders,
financial institutions and others, through their respective officers, employees
or agents, may reasonably request.
7.7.2 The confidentiality agreement, dated February 10, 1995,
between CAPREIT and the Partnership shall remain in full force and effect in
accordance with its terms and shall apply to any information provided pursuant
to this Section 7.7 or otherwise under this Agreement. The Merger Partnership
hereby adopts and agrees on behalf of itself and its Affiliates to be bound by
all of the terms and conditions of such confidentiality agreement, as if
restated in full herein.
7.7.3 No investigation pursuant to this Section 7.7 shall
affect any representations or warranties of the parties herein or the conditions
to the obligations of the parties hereto.
7.8 Public Announcements. No press release or announcement
--------------------
concerning this Agreement or the Transaction shall be issued without advance
approval of the form and substance thereof by the Partnership and the Merger
Partnership. Notwithstanding the foregoing, each of the Partnership and the
Merger Partnership will use all commercially reasonable efforts to consult with
each other before issuing any press release or otherwise making any public
statements with respect hereto, provided, such obligation to use all
--------
commercially reasonable efforts shall be deemed satisfied if a draft of a press
release
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or announcement is delivered for comment at least 24 hours prior to public
release.
7.9 Agreement to Defend and Indemnify. For a period of 3 years and
---------------------------------
6 months from and after the Effective Time, the Surviving Partnership will
continue in full force and effect for the benefit of the Partnership GP, the
Assignor Limited Partner and their Affiliates the provisions of the Partnership
Agreement, as currently in effect, related to indemnification of the Partnership
GP, the Assignor Limited Partner and their Affiliates as if the Partnership GP
and the Assignor Limited Partner continued to serve the Partnership as general
partner and assignor limited partner, respectively, after the Effective Time.
CAPREIT hereby guarantees the obligations of the Surviving Partnership under
this Section 7.9 as if it were the indemnifying party thereunder, except that
its obligations shall not be limited to the assets of the Surviving Partnership.
For purposes of this Section 7.9 only, the term Affiliates shall have the
meaning ascribed to such term in Section 5.08 of the Partnership Agreement.
7.10 Notification of Certain Matters. Each of the Partnership and
-------------------------------
the Owner Partnerships shall give prompt notice to the Merger Partnership, and
the Merger Partnership and its Affiliates shall give prompt notice to the
Partnership and the pertinent Owner Partnership, as the case may be, of (i) the
occurrence, or failure to occur, of any event which occurrence or failure would
be likely to cause any representation or warranty contained in this Agreement
and made by it to be untrue or inaccurate in any material respect at any time
from the date hereof to the Effective Time, and (ii) any material failure of the
Partnership, any Owner Partnership or the Merger Partnership, as the case may
be, or of any general partner, officer, director, employee or agent of any
thereof, to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder, provided, however, that no such
-------- -------
notifications shall affect the representations or warranties of the parties or
the conditions to the obligations of the parties hereunder.
7.11 Cooperation. Each of the Partnership and the Partnership GP
-----------
shall use all commercially reasonable efforts to assist, and cooperate with, the
Merger Partnership, CAPREIT and their respective Affiliates in consummating the
Financing, the Bond Refinancing and related transactions. In this regard, the
Partnership and the Partnership GP consent to, and shall use all commercially
reasonable efforts to assist, and cooperate with, the Merger Partnership,
CAPREIT and their respective Affiliates with respect to, contacts by
representatives of the Merger Partnership, CAPREIT and their Affiliates with
issuers of the Mortgage Revenue Bonds and their representatives; provided, that
--------
no Bond Refinancing shall close prior to the Effective Time. The Partnership
and the Partnership GP shall be reimbursed for all
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reasonable out-of-pocket costs incurred by them in connection with such
assistance and cooperation.
7.12 Acquisition. (a) On the Closing Date, C.R.I., Inc. ("CRI")
-----------
shall sell, assign and transfer to a designee of CAPREIT its rights under the
agreement pursuant to which the mortgage servicing and administrative fees are
payable to CRI by the owners of the Mortgaged Properties, including the right to
all fees thereunder for a price of $667,485 in cash, payable to CRI for
servicing and administrative fees accrued through June 30, 1995.
(b) On the Closing Date and subject to the approval of its board of
directors and further subject to any necessary modification of the Memorandum of
Understanding (as defined in Section 8.1.4), CRIIMI Mae Services Limited
Partnership ("CRIIMI") shall sell, assign and transfer to a designee of CAPREIT
its rights under the agreement pursuant to which mortgage servicing and
administrative fees are payable to CRIIMI by the owners of the Mortgaged
Properties, including the right to all fees thereunder, whether accrued as of
the date hereof or that shall accrue or become payable from and after the date
hereof, for a price of $566,676 in cash, payable to CRIIMI for servicing and
administrative fees accrued from July 1, 1995 through the Closing Date (the
"Accrued Fee Amount"), provided, that if the Closing shall occur after June 30,
--------
1996, then the Accrued Fee Amount shall be increased at the rate of $47,223 per
month, it being understood that any partial month shall be pro rated according
to the actual number of days elapsed.
7.13 Treatment of Owner Partnerships. At the sole discretion of
-------------------------------
CAPREIT, each of the Owner Partnerships shall be treated as provided in one or
more of the following subsections:
(a) On the Closing Date, each of the partners of the Owner
Partnerships shall sell, assign and transfer to CAPREIT or a designee thereof,
for no additional consideration, all of the partnership interests in such Owner
Partnership, all on terms and conditions to be determined by CAPREIT and the
Owner Partnership;
(b) On the Closing Date, each of the partners of each of the Owner
Partnerships shall admit CAPREIT or its designee as the managing general partner
of each of the Owner Partnerships, the partnership interests of each of the
other partners of each of the Owner Partnerships shall be converted into limited
partner interests in the applicable Owner Partnership, which limited partner
interests shall not be transferable, and CAPREIT shall have the option to
purchase such limited partner interests at any time during the five (5) year
period following the Closing Date for fair market value, which fair market
value shall be deemed for the purposes hereof to be
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the proportionate interest of such limited partner in the value of the property
as encumbered; as managing general partner, CAPREIT or its designee shall have
exclusive power and authority to consummate any Bond Refinancings without the
consent of any of the partners; or
(c) On the Closing Date, each of the Owner Partnerships shall sell,
assign and transfer to CAPREIT or its designee, for no additional consideration
and at no additional cost to the Owner Partnerships, all of the real property
and other assets of such Owner Partnerships, all on terms and conditions to be
determined by CAPREIT and the Owner Partnerships.
7.14 Partnership Interests. On the Closing Date and concurrently
---------------------
with or immediately prior to the Merger, at the request of CAPREIT, the
Partnership shall issue to a designee of CAPREIT a limited partner interest in
the Partnership in exchange for a capital contribution of certain real
properties and/or other assets, all on terms and conditions to be determined by
CAPREIT and the Partnership; provided that such issuance of a limited
--------
partnership interest shall not be effective unless the Merger is consummated.
7.15 Tax Returns. (a) Neither the Merger Partnership nor CAPREIT
-----------
shall cause the Surviving Partnership to, and the Surviving Partnership shall
not, (x) amend any portion of any tax returns for years ending prior to the
Effective Time to the extent that such portion relates to the accrual of
interest on the Mortgage Revenue Bonds or (y) without the prior consent of the
Partnership GP or its designee, which consent shall not be unreasonably
withheld, otherwise amend, in any material respect, tax returns for years ending
prior to the Effective Time.
(b) The Surviving Partnership, CAPREIT and the Partnership GP shall
use all commercially reasonable efforts to cooperate with and assist each other
so that, after the Closing Date, all tax returns of the Partnership for the
period ending on the Closing Date shall be timely filed and that Schedules K-1
shall be timely delivered to those Persons who were holders of BACs prior to the
Closing Date. The cost of such filing and delivery shall be borne by the
Surviving Partnership.
7.16 Notice of Failure to Satisfy Closing Conditions.
-----------------------------------------------
(a) In the event that the Merger Partnership determines, on or after
the date that the Partnership shall deliver a final Disclosure Schedule pursuant
to Section 2.7 above and on or prior to the Closing Date, that any condition to
the Merger Partnership's or the Partnership's obligation to close pursuant to
Section 8 will not be satisfied on or prior to the Closing Date, the Merger
Partnership shall give prompt notice to
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the Partnership and, in the case of Sections 8.1 and 8.3, shall provide the
Partnership a period of ten business days for the Partnership to satisfy all
such conditions.
(b) In the event that the Partnership determines on or prior to the
Closing Date that any condition to the Partnership's or the Merger Partnership's
obligation to close pursuant to Section 8 will not be satisfied on or prior to
the Closing Date, the Partnership shall give prompt notice to the Merger
Partnership and, in the case of Sections 8.1 and 8.2, shall provide the Merger
Partnership a period of ten business days for the Merger Partnership to satisfy
all such conditions.
8. Conditions.
----------
8.1 Conditions to Obligation of Each Party to Effect the
----------------------------------------------------
Transaction. The respective obligations of each party to effect the Transaction
- - - - -----------
shall be subject to the fulfillment at or prior to the Effective Time of each of
the following conditions:
8.1.1 All approvals, notices, filings, registrations and
authorizations of any governmental authority required for consummation of the
Transaction, including, without limitation, under the Hart-Scott-Rodino Act,
shall have been obtained or made.
8.1.2 BAC Holder Approval for the Transaction shall have been
obtained in accordance with the Partnership Act and the Partnership Agreement.
8.1.3 No preliminary or permanent injunction or other order,
decree or ruling issued by a court of competent jurisdiction or by a
governmental, regulatory or administrative agency or commission, nor any
statute, rule, regulation or executive order promulgated or enacted by a
governmental authority shall be in effect which would prevent the consummation
of the Transaction.
8.1.4 A court of competent jurisdiction shall have approved of
the settlement of the cases captioned Zakin v. Dockser, et. al. and Wingard v.
------------------------- ----------
Dockser, et. al. (the "Suits") filed in connection with the transactions
- - - - ----------------
contemplated hereunder, substantially as such settlement is set forth in the
Memorandum of Understanding, dated as of January 31, 1996, among the counsel to
the plaintiffs and the defendants named in the Suits, or as otherwise agreed by
the parties, and such approval shall be final and non-appealable.
8.2 Additional Conditions to the Obligation of the Partnership. The
----------------------------------------------------------
obligation of the Partnership to effect the Transaction is also subject to the
fulfillment at or prior to the Effective Time of each of the following
conditions:
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8.2.1 The Merger Partnership shall in all material respects have
performed each obligation to be performed by it hereunder on or prior to the
Effective Time.
8.2.2 The representations and warranties of the Merger
Partnership set forth in this Agreement shall be true and correct in all
material respects at and as of the Effective Time as if made at and as of such
time, except to the extent that any such representation or warranty is made as
of a specified date, in which case such representation or warranty shall have
been true and correct as of such date.
8.2.3 The Partnership shall have received a certificate of the
Merger Partnership, dated the Closing Date, signed by the Merger Partnership GP,
to the effect that the conditions specified in Sections 8.2.1 and 8.2.2 have
been fulfilled.
8.2.4 A favorable opinion (the "Fairness Opinion") of an
investment banking firm reasonably acceptable to the Partnership as to the
fairness of the Merger Consideration to the holders of the BACs, from a
financial point of view, shall have been delivered to the Partnership.
8.2.5 No later than the earlier of (x) May 1, 1996 or (y) the
Mailing Date (the earlier of (x) or (y) being, the "Commitment Date"), the
Merger Partnership shall have delivered to the Partnership a Commitment Letter
executed by a financial institution or other financing source providing for debt
financing of the Transaction in an amount at least equal to $65,442,000 and on
terms consistent with the term sheet attached hereto as Exhibit E and otherwise
commercially reasonable from the point of view of the Partnership as the selling
party in the Transaction; provided, that unless the Partnership gives notice to
--------
the Merger Partnership (x) within ten days after the delivery of a copy of the
Commitment Letter to the Partnership, that the Commitment Letter does not
satisfy the condition set forth in this Section 8.2.5 or (y) if the Commitment
Letter shall not be delivered prior to the Commitment Date, within two business
days after the Commitment Date that the Partnership has no obligation to effect
the Transaction because of the failure of the condition set forth in this
Section 8.2.5, such condition shall be deemed to be waived.
8.3 Additional Conditions to the Obligations of the Merger
------------------------------------------------------
Partnership. The obligation of the Merger Partnership to effect the Transaction
- - - - -----------
is also subject to the fulfillment at or prior to the Effective Time, or such
earlier date as specified therein, of each of the following conditions:
8.3.1 Each of the Partnership and the Owner Partnerships shall
in all material respects have performed each
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obligation to be performed by it hereunder on or prior to the Effective Time.
8.3.2 The Partnership shall have cash available and not
restricted equal to at least to $3,987,500 and replacement reserves held for the
Owner Partnerships equal to at least $475,695 as set forth in Exhibit F hereto,
which Exhibit reflects projected balances as of December 31, 1995. If the
Closing Date does not occur on or before December 31, 1995, the Partnership
shall prepare new projections of cash available and not restricted and
replacement reserves by calendar quarter, subject to the approval of the Merger
Partnership in its reasonable business judgment; provided, however, that any new
-------- -------
projections will provide for cash available and not restricted at least equal to
the amount set forth in this Section 8.3.2. Also, notwithstanding anything to
the contrary herein, the cash available and not restricted reflected herein may
be reduced by (x) up to $812,500 to the extent used to settle or compromise
Designated Actions and (y) amounts used for replacement reserve purposes for
which the owner or manager of the Mortgaged Property has not yet made its
related draw request to the loan servicer for reimbursement from the replacement
reserve (provided that the Partnership can provide reasonable documentation from
such owner or manager to explain any such reduction in cash available and not
restricted), without resulting in a failure of this condition to Closing. For
informational purposes only, Exhibit F also includes projections of tax and
insurance escrows held by the Partnership's loan servicer for each of the
Mortgaged Properties. These escrows are not owned by the Partnership. The
balance in the tax and insurance escrows may fluctuate due to the timing of tax
and insurance payments, but will always contain an amount at least equal to the
amount of such tax and insurance payments then due and owing. The Partnership
has little control over the use of replacement reserves by owners of the
Mortgaged Properties that are not Owner Partnerships.
8.3.3 The Merger Partnership shall have received certificates
of each of the Partnership and the Owner Partnerships, dated the Closing Date,
signed by the Partnership GP or the general partner of the Owner Partnerships,
as applicable, to the effect that the conditions specified in Sections 8.3.1 and
8.3.2 have been fulfilled.
8.3.4 The Merger Partnership shall have received evidence, in
form and substance reasonably satisfactory to its counsel, that such licenses,
permits, consents, approvals, waivers, authorizations, qualifications and orders
of domestic governmental authorities and parties to contracts and leases with
the Partnership or any Owner Partnership as are necessary in connection with the
consummation of the transactions contemplated hereby (excluding (a) licenses,
permits, consents, approvals, authorizations, qualifications or orders, the
failure to obtain
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which after the consummation of the transactions contemplated hereby, in the
aggregate, will not have a material adverse effect on the Condition of the
Partnership or any Owner Partnership and (b) consents of issuers with respect to
modification of the Mortgage Revenue Bonds), have been obtained, provided, that
--------
unless the Merger Partnership gives notice to the Partnership prior to the
Mailing Date that the Merger Partnership has no obligation to effect the
Transaction because of the failure of the condition set forth in this Section
8.3.4, such condition shall be deemed waived.
8.3.5 No action, suit or proceeding before any court or
governmental authority shall have been commenced and be pending by any Person
against the Partnership or the Merger Partnership or any of their Affiliates,
partners, officers or directors seeking to restrain, prevent, change or delay in
any material respect any of the terms or provisions of the Transaction or
seeking material damages in connection therewith.
8.3.6 The Merger Partnership, CAPREIT and its lenders shall
have received the favorable legal opinion of Arent Fox Kintner Plotkin & Kahn,
counsel to the Partnership, and or Richards, Layton & Finger, Special Delaware
counsel to the Partnership, taken together, substantially to the effect set
forth in Exhibit G.
8.3.7 The Financing shall have been consummated in accordance
with the terms of the Commitment Letter.
8.3.8 Neither the Partnership nor any Owner Partnership shall
have undergone a material adverse change in its Condition or its ability to
perform its obligations under this Agreement. For purposes of this Section
8.3.8, the discovery after the Mailing Date of a fact which fact is materially
adverse to the Condition of the Partnership or any Owner Partnership and which
could not have been reasonably discovered by the Merger Partnership or its
Affiliates on or prior to the Mailing Date shall be deemed to be a material
adverse change to the Condition of the Partnership or such Owner Partnership or
such Mortgaged Property.
8.3.9 In connection with the removal and replacement of the
Partnership GP, the Partnership GP shall have transferred its 1.01% general
partnership interest in the Partnership to CAPREIT or a designee thereof.
8.3.10 The closing of the merger under the Other Merger
Agreement shall be occurring concurrently with the Merger.
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8.3.11 The Merger Partnership shall have determined that the legal,
accounting and business due diligence investigation of the Partnership and the
Owner Partnerships to be conducted by or on behalf of the Merger Partnership,
including, without limitation, any information obtained from the Disclosure
Schedule, has not revealed that proceeding with the Transaction would be
inadvisable or contrary to the Merger Partnership's best interests, provided,
--------
that, unless the Merger Partnership gives notice to the Partnership prior to the
Mailing Date that the Merger Partnership has no obligation to effect the
Transaction because of the failure of the condition set forth in this Section
8.3.11, such condition shall be deemed to be waived.
8.3.12 All of the partnership or other interests in each of the
Owner Partnerships shall be concurrently transferred to CAPREIT or a designee
thereof pursuant to Section 7.13 above, except as otherwise provided in Section
7.13.
8.3.13 The Shortfall Amount shall not exceed $735,138,
calculated as set forth in Section 2.1.1.
9. Termination, Amendment and Waiver.
---------------------------------
9.1 Termination. This Agreement may be terminated and the
-----------
Transaction contemplated hereby may be abandoned, by written notice promptly
given to the other parties hereto, at any time prior to the Effective Time,
whether prior to or after BAC Holder Approval of the Transaction:
9.1.1 By mutual written consent of the Merger Partnership and
the Partnership;
9.1.2 By either the Merger Partnership or the Partnership, if
a court of competent jurisdiction or governmental, regulatory or administrative
agency or commission shall have issued an order, decree or ruling or taken any
other action, in each case permanently restraining, enjoining or otherwise
prohibiting the transactions contemplated by this Agreement and such order,
decree, ruling or other action shall have become final and nonappealable;
9.1.3 By either the Merger Partnership or the Partnership, if
the Effective Time shall not have occurred on or before the Termination Date,
unless the absence of such occurrence shall be due to the failure of the party
seeking to terminate this Agreement to perform in all material respects each of
its obligations under this Agreement required to be performed by it prior to the
Effective Time;
9.1.4 By either the Merger Partnership or the Partnership, if
at the Meeting (including any adjournment
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thereof) BAC Holder Approval of the Transaction shall not be obtained;
9.1.5 By the Merger Partnership, if the Partnership or the
Partnership GP shall have (i) withdrawn, modified or amended in any respect its
approval or recommendation of the Transaction as set forth in Section 4.16
hereof, (ii) failed to include in the Proxy Statement such recommendation
(including the recommendation that the holders of each class of outstanding BACs
vote in favor of the Transaction), or (iii) taken any public position
inconsistent with such recommendation;
9.1.6 By the Merger Partnership, if the Partnership or any
Owner Partnership fails to perform in all material respects its obligations
under this Agreement;
9.1.7 By the Merger Partnership, if there shall have occurred
a material adverse change in the Condition of the Partnership or any Owner
Partnership since the date of this Agreement; or
9.1.8 By the Partnership, if the Merger Partnership fails to
perform in all material respects its obligations under this Agreement.
9.1.9 By the Merger Partnership, if the Partnership shall have
settled or compromised any Designated Action without the prior written consent
of the Merger Partnership, unless such settlement or compromise (i) requires the
payment of money by the Partnership in an amount which, when aggregated with the
amount of money paid or payable in connection with all other Designated Actions,
does not exceed $812,500 and (ii) does not include any other material term or
condition to which the Merger Partnership shall reasonably object.
9.1.10 By the Merger Partnership, if, prior to the Effective
Time, the representations and warranties of each of the Partnership and the
Owner Partnerships set forth in this Agreement shall not be true and correct in
all material respects at any time as if made as of such time, except to the
extent that any such representation or warranty is made as of a specific date,
in which case such representation or warranty shall have been true and correct
as of such date, provided, that for purposes of this Section 9.1.10, (x) the
--------
representations and warranties set forth in Sections 4.14 and 5.14 shall be
deemed to have been made irrespective of the qualification contained therein as
to the Knowledge of the Partnership or the Designated Owner Partnership, and (y)
the representations and warranties set forth in Sections 5.5, 5.6, 5.9, 5.10,
5.11, 5.12 and 5.13 shall not be deemed to have been breached solely as the
result of any act or omission occurring after November 1, 1995.
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9.1.11 By the Partnership, in accordance with Section 8.2.5, if there
shall have been a failure of the condition set forth therein.
9.2 Effect of Termination. In the event of the termination of this
---------------------
Agreement and abandonment of the Transaction as provided in Section 9.1 hereof,
this Agreement shall forthwith become void and there shall be no liability on
the part of the Merger Partnership or the Partnership, except as set forth in
Section 7.3 hereof and Section 7.7.2 hereof and except to the extent that such
termination results from the wilful breach of a party hereto of any of its
covenants or agreements set forth in this Agreement.
9.3 Amendment. This Agreement may not be amended except by an
---------
instrument in writing signed on behalf of each of the parties hereto; provided,
--------
however, that after the BAC Holder Approval of the Transaction has been
- - - - -------
obtained, no amendment may be made which changes the amount of cash to be paid
for the BACs, or effects any change which would adversely affect the holders of
BACs without the further BAC Holder Approval.
9.4 Waiver. At any time prior to the Effective Time, whether before
------
or after the Meeting, any party hereto, by a writing executed by its general
partner, may (i) extend the time for the performance of any of the obligations
or other acts of any other party hereto or (ii) subject to the proviso contained
in Section 9.3 hereof, waive compliance with any of the agreements of any other
party or with any conditions to its own obligations, except that the Partnership
may not waive the condition set forth in Section 8.1.4.
10. General Provisions.
------------------
10.1 Notices. All notices and other communications hereunder shall
-------
be in writing and shall be deemed to have been duly given if delivered
personally or sent by telegram, telecopier or three business days after it is
sent by registered or certified mail, return receipt requested, postage prepaid,
to the parties at the following addresses or at such other addresses as shall be
specified by the parties by like notice:
(a) if to the Merger Partnership or CAPREIT:
Watermark III Partners, L.P.
c/o Capital Apartment Properties, Inc.
11200 Rockville Pike
Rockville, Maryland 20852
Attention: Richard Kadish, President
Facsimile: (301) 231-0391
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with copies to:
Apollo Real Estate Advisors, L.P.
1301 Avenue of the Americas
38th Floor
New York, New York, 10019
Attention: Ronald Kravit
Facsimile: (212) 261-4060
and
Schulte Roth & Zabel
900 Third Avenue
New York, New York 10022
Attention: Burton Lehman, Esq.
Facsimile: (212) 593-5955
(b) if to the Partnership, the Partnership GP or any Owner
Partnership:
c/o C.R.I., Inc.
11200 Rockville Pike
Rockville, Maryland 20852
Attention: William B. Dockser, Chairman,
and H. William Willoughby, President
Facsimile: (301) 231-0396
with a copy to:
Melissa Lackey, General Counsel
Facsimile: (301) 468-3150
and
Arent Fox Kintner Plotkin & Kahn
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036-5339
Attention: Robert B. Hirsch, Esq.
Facsimile: (202) 857-6395
10.2 Certain Definitions. As used in this Agreement, the following
-------------------
terms shall have the meanings indicated below:
"Affiliate" means, with respect to any Person, any other Person
---------
controlling, controlled by or under common control with, or the parents, spouse,
lineal descendants or beneficiaries of, such Person, provided, that, in any
case, (i) the following Persons shall be deemed to be Affiliates of the
Partnership: CRITEF III Associates Limited Partnership, C.R.I., Inc. and CRITEF
III, Inc. and (ii) the following Persons shall be deemed
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Affiliates of the Merger Partnership: CAPREIT and CAPREIT Residential
Corporation.
"Assignor Limited Partner" means CRITEF III, Inc., a Delaware
-------------------------
corporation and the sole limited partner of the Partnership.
"BAC Holder Approval" means the approval of the limited partners of
-------------------
the Partnership, with the Assignor Limited Partner, pursuant to the Partnership
Agreement, voting as instructed by the holders of the BACs.
"Bond Refinancing" means the transaction pursuant to which the
----------------
Mortgage Revenue Bonds will be sold, amended, refinanced, or reissued, the
closing of which shall not occur until after the Effective Time.
"Business Combination" means any acquisition or purchase of assets of,
--------------------
or any equity interest in, the Partnership or any tender offer (including a self
tender offer), exchange offer, merger, consolidation, business combination, sale
of substantial assets or of a substantial amount of assets, sale of securities,
recapitalization, reorganization, refinancing, refunding, liquidation,
dissolution or similar transactions involving the Partnership or other
transactions involving any vote or consent of the holders of any class of BACs.
"Closing Date" means the date upon which the Merger occurs.
------------
"Code" means the Internal Revenue Code of 1986, as amended from time
----
to time, and, unless the context otherwise requires, the rules and regulations
promulgated thereunder, from time to time.
"Commission" means the Securities and Exchange Commission or any
----------
successor agency.
"Commitment Letter" means one or more commitment letters or loan,
-----------------
securities purchase, financing or similar agreements providing a financial
commitment or obligation to provide debt financing for the Transaction.
"Condition" means, with respect to any Person, the business, assets,
---------
properties, results of operations, financial or other condition or prospects of
such Person and its Subsidiaries, taken as a whole.
"Designated Owner Partnership" means Geary Courtyard Associates.
----------------------------
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"Disclosure Schedule" means the Disclosure Schedule setting forth
-------------------
certain information concerning the Partnership and its assets required to be
delivered by the Partnership to the Merger Partnership pursuant to Section 2.7
above.
"Environmental Laws" includes the Comprehensive Environmental
------------------
Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. 9601 et seq, as
amended; the Resource Conservation and Recovery Act ("RCRA), 42 U.S.C. 6901 et
seq, as amended; the Clean Air Act ("CAA"), 42 U.S.C. 7401 et seq, as amended;
the Clean Water Act ("CWA"), 33 U.S.C. 1251 et seq., as amended; the
Occupational Safety and Health Act ("OSHA"), 29 U.S.C. 655 et seq., and any
other federal, state, local or municipal laws, statutes, regulations, rules or
ordinances imposing liability or establishing standards of conduct for
protection of the environment.
"Environmental Reports" means all environmental site assessments,
---------------------
remedial investigations/feasibility studies, reports, studies, tests or other
documents relating to environmental compliance or the presence of Hazardous
Materials at any of properties presently or formerly owned or operated by the
Partnership or any predecessor in interest or any Mortgaged Property, at any
facility which may have received Hazardous Materials generated by any property
currently or formerly owned or operated by the Partnership or at any Mortgaged
Property.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
"Financing" means the debt financing of the Merger and the other
---------
transactions contemplated hereby.
"Hart-Scott-Rodino Act" means the Hart-Scott-Rodino Antitrust
---------------------
Improvements Act of 1976, as amended, and the rules and regulations thereunder.
"Individual Affiliate" means any Person who is now, or at any time
--------------------
since January 1, 1990 has been, (a) a Partner of the Partnership, (b) a director
or officer of the corporate general partner of the Partnership GP, (c) a
director, officer or shareholder of the Assignor Limited Partner or (d) any
"associate" (as defined in the rules pursuant to the Exchange Act) of any of the
above.
"Knowledge" means (i) with respect to the Partnership, the knowledge
---------
of (a) the Partnership GP, (b) the general partners of the Partnership GP and
(c) with respect to the entities referred to in the preceding clause (b) any of
such entities current officers and directors; (ii) with respect to each Owner
Partnership or the Designated Owner Partnership, the knowledge of (a) any
general partner of such Owner Partnership or the
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Designated Owner Partnership and (b) any of such general partner's current
officers or directors; and (iii) with respect to the Merger Partnership, the
knowledge of CAPREIT and its Affiliates and their current officers and
directors.
"Lien" means any lien, pledge, mortgage, security interest, claim,
----
lease, charge, option, right of first refusal, easement, servitude, encumbrance,
participation interest, assignment, or other restriction or limitation.
"Mailing Date" means the first day on which the Proxy Statement is
------------
mailed to the holders of BACs pursuant to Section 7.1 above.
"Mortgaged Property" means the land and the buildings thereon and
------------------
other assets securing the payment of the Mortgage Revenue Bonds.
"Mortgage Revenue Bonds" means the mortgage revenue bonds owned by the
----------------------
Partnership, as described on the Disclosure Schedule.
"Mortgage Revenue Documents" means all notes, loan agreements,
--------------------------
indentures, land use restriction agreements, security agreements, mortgages and
other agreements, instruments or documents, including all amendments and
releases, evidencing, relating to or executed in connection with the Mortgage
Revenue Bonds or any security interest in the Mortgaged Properties.
"Order" means any judgement, ruling, order, writ, injunction, decree,
-----
determination or requirement of any arbitrator or court or of any governmental
or regulatory body, authority or agency, whether federal, state or local,
domestic or foreign.
"Other Merger Agreement" means the Agreement and Plan of Merger, dated
----------------------
as of the date hereof, among Watermark Partners, L.P., Capital Realty Investors
Tax Exempt Fund Limited Partnership and CRITEF Associates Limited Partnership.
"Owner Partnerships" means the Designated Owner Partnership, Ethans,
------------------
CRICO of Regency Woods Limited Partnership, CRICO of Ocean Walk Limited
Partnership, CRICO of Valley Creek II Limited Partnership, and CRICO of Woodlane
Place Limited Partnership.
"Permitted Statutory Liens" means statutory Liens of landlords,
-------------------------
carriers, warehousemen, mechanics and materialmen and other similar Liens
imposed by law and incurred in the ordinary course of business for sums not yet
delinquent.
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"Person" means any individual, corporation, partnership, limited
------
liability company, firm, joint venture, association, joint-stock company, trust,
unincorporated organization, governmental body or other entity.
"Requirements of Law" means (i) the certificate of limited partnership
-------------------
of each of the Partnership and the Owner Partnerships, the agreements of limited
partnership or other organizational or governing documents of each of the
Partnership and the Owner Partnerships, (ii) any statute, law, treaty, rule,
regulation or ordinance applicable to the Partnership or the Owner Partnerships,
their respective assets or any Mortgaged Property (including, without
limitation, Environmental Laws and occupational health and safety and food and
drug regulations) or (iii) any judgment, decree, injunction, order or
determination of any arbitrator or of any court or other governmental or
regulatory authority or agency, whether federal, state or local, domestic or
foreign, applicable to the Partnership or the Owner Partnerships, their
respective assets or any Mortgaged Property.
"Securities Act" means the Securities Act of 1933, as amended.
--------------
"Subsidiary" means, with respect to any Person, any corporation at
----------
least a majority of whose outstanding voting securities, or any other Person at
least a majority of whose total equity interest, is owned by such Person.
"Termination Date" means June 30, 1996.
----------------
"Transaction" means (i) the sale of the Partnership GP's general
-----------
partnership interest pursuant to Section 2.1, (ii) the issuance of a limited
partnership interest in the Partnership pursuant to Section 7.14, (iii) the
Merger, (iv) the transfer of the interests in the Owner Partnerships pursuant to
Section 7.13 and (v) certain amendments to the Partnership Agreement necessary
to consummate the Merger (including, without limitation, providing for the
redemption of partnership interests). The term "Transaction" does not include
the Bond Refinancing.
The following terms are defined in the corresponding Sections listed
below:
Term Section
---- -------
Accrued Fee Amount..................... 7.12
Alternative Proposal................... 7.5.2
Available Cash......................... 2.2.1(f)
BAC.................................... 2.2.1
Balance Sheet.......................... 4.7
Balance Sheet Date..................... 4.7
CAPREIT................................ Recitals
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CAPREIT General Partner................ 2.3.1
Certificate of Merger.................. 1.3
Commitment Date........................ 8.2.5
CRIIMI................................. 7.12
Deposit................................ 2.6(a)
Designated Actions..................... 7.4.1
Designated Persons..................... 7.3.1(ii)
Effective Time......................... 1.3
Ethans................................. 5.3
Excess Amount.......................... 2.2.1(d)
Fairness Opinion....................... 8.2.4
Fiduciary Out Termination.............. 7.5.2
Housing Acquisition Department Files... 4.18.1
Interim Financial Statements........... 4.7
Liabilities............................ 4.8
Meeting................................ 7.2
Merger................................. Recitals
Merger Consideration................... 2.2.1
Merger Partnership GP.................. Recitals
Merger Partnership LP.................. Recitals
MP Agreement........................... 3.1
MP Certificate......................... 3.1
Other Filings.......................... 7.1
Partnership Act........................ Recitals
Partnership Agreement.................. 2.3.11
Partnership Certificate................ 1.4
Partnership Financial Statements....... 4.7
Partnership GP......................... Recitals
Partnership GP Agreement............... 4.1
Partnership GP Certificate............. 4.1
Proxy Statement........................ 7.1
Redemption Agent....................... 2.3.1
Redemption Fund........................ 2.3.2
SEC Filings............................ 4.7
Shortfall Amount....................... 2.2.1(e)
Suits.................................. 8.1.4
Surviving Partnership.................. 1.1
Triggering Events...................... 7.3.1(ii)
10.3 Representations and Warranties; Etc. (a) The respective
------------------------------------
representations and warranties of the Partnership, each Owner Partnership and
the Merger Partnership contained herein shall expire with, and be terminated and
extinguished upon, consummation of the Merger, and thereafter none of the
Partnership, any Owner Partnership or the Merger Partnership, or any general
partner or principal of any thereof, shall be under any liability whatsoever
with respect to any such representation or warranty. This Section 10.3 shall
have no effect upon any other obligation of the parties hereto, whether to be
performed before or after the consummation of the Merger.
-49-
<PAGE>
(b) Notwithstanding anything to the contrary herein, there shall be no
liability whatsoever for breach of any of the representations and warranties set
forth in Section 4 or 5, the parties agreeing that the Merger Partnership's sole
remedy therefor shall be to invoke the condition to Closing set forth in Section
8.3.2.
10.4 Validity. The invalidity or unenforceability of any provision
--------
of this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
10.5 Descriptive Headings. The descriptive headings herein are
--------------------
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.
10.6 Parties in Interest. This Agreement shall be binding upon and
-------------------
inure solely to the benefit of each party hereto, and nothing in this Agreement,
express or implied, is intended to confer upon any other Person any rights or
remedies of any nature whatsoever under or by reason of this Agreement except
the right of the holders of BACs to receive cash as provided in Section 2.2.1
hereof (subject in each case to the consummation of the Transaction pursuant to
this Agreement).
10.7 Incorporation of Recitals. The recitals hereto are incorporated
-------------------------
into this Agreement as if fully restated herein.
10.8 Miscellaneous. This Agreement (i) constitutes the entire
-------------
agreement and supersedes all other prior agreements and undertakings, both
written and oral, between the parties with respect to the subject matter hereof;
(ii) may not be assigned, except that the Merger Partnership may assign its
rights hereunder in whole or in part to one or more of its direct or indirect
Subsidiaries or Affiliates, each of which, in written instruments reasonably
satisfactory to the Partnership, shall agree to assume all of the Merger
Partnership's obligations hereunder so assigned to it and be bound by all of the
terms and conditions of this Agreement; and (iii) shall be governed in all
respects, including validity, interpretation and effect, by the laws of the
State of New York applicable to agreements made and to be performed entirely
within such State. This Agreement may be executed in one or more counterparts
which together shall constitute a single agreement.
-50-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first above written.
WATERMARK III PARTNERS, L.P.
By: Capital Apartment Properties, Inc., its general partner
By: /s/ Richard L. Kadish
----------------------------------
Name:
Title:
CAPITAL REALTY INVESTORS TAX EXEMPT FUND
III LIMITED PARTNERSHIP
By: CRITEF III Associates Limited Partnership, its general
partner
By: /s/ William B. Dockser
----------------------------------
Name:
Title:
CRITEF III ASSOCIATES LIMITED PARTNERSHIP
By: C.R.I., Inc., its general partner
By: /s/ William B. Dockser
----------------------------------
Name:
Title:
WILLIAM B. DOCKSER
/s/ William B. Dockser
-------------------------------------
H. WILLIAM WILLOUGHBY
/s/ William B. Dockser
-------------------------------------
CAPITAL APARTMENT PROPERTIES, INC.
By: /s/ Richard Kadish
-------------------------------------
Name:
Title:
-51-
<PAGE>
GEARY COURTYARD ASSOCIATES
By: CRICO of Geary Courtyard, Inc.,
its general partner
By: /s/ William B. Dockser
----------------------------------
Name:
Title:
CRICO OF ETHAN'S II LIMITED PARTNERSHIP
By: CRICO of Ethan's II, Inc.,
its general partner
By: /s/ William B. Dockser
----------------------------------
Name:
Title:
CRICO OF REGENCY WOODS LIMITED PARTNERSHIP
By: CRICO of Regency Woods, Inc.,
its general partner
By: /s/ William B. Dockser
----------------------------------
Name:
Title:
CRICO OF OCEAN WALK LIMITED PARTNERSHIP
By: CRICO of Ocean Walk, Inc.,
its general partner
By: /s/ William B. Dockser
----------------------------------
Name:
Title:
CRICO OF VALLEY CREEK II LIMITED PARTNERSHIP
By: CRICO of Valley Creek II, Inc.,
its general partner
By: /s/ William B. Dockser
----------------------------------
Name:
Title:
-52-
<PAGE>
CRICO OF WOODLANE PLACE LIMITED PARTNERSHIP
By: CRICO of Woodlane Place, Inc.,
its general partner
By: /s/ William B. Dockser
----------------------------------
Name:
Title:
-53-
<PAGE>
APPENDIX B-1
OPINION OF OPPENHEIMER & CO., INC.
DELIVERED TO
CAPITAL REALTY INVESTORS TAX EXEMPT FUND
LIMITED PARTNERSHIP, SERIES I
<PAGE>
[LETTEREHAD OF OPPENHEIMER & CO., INC.]
March 14, 1996
Capital Realty Investors Tax Exempt
Fund Limited Partnership
c/o The CRI Building
11200 Rockville Pike
Rockville, MD 20852
Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, of the redemption price to the holders (the "BAC Holders") of
Beneficial Assignee Certificates in Series I issued by Capital Realty Investors
Tax Exempt Fund Limited Partnership ("Fund I-II") with regard to the
acquisition of Fund I-II by Capital Apartment Properties, Inc. ("CAPREIT")
pursuant to the mergers (the "Mergers") of an affiliate of CAPREIT with and into
each of Fund I-II and Capital Realty Investors Tax Exempt Fund III Limited
Partnership. Unless otherwise defined in this Fairness Opinion, all capitalized
terms used herein which are not otherwise defined herein shall have the
respective meanings ascribed to them in the definitive proxy statement to be
used in connection with the Mergers (the "Proxy Statement").
Oppenheimer & Co., Inc. ("Oppenheimer"), as part of its investment banking
business, is regularly engaged in the valuation of businesses and securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for corporate, estate and other purposes. We have been
retained by Fund I-II for the purpose of, and will receive a fee for, rendering
this Fairness Opinion.
In connection with our Fairness Opinion, we have: reviewed the Fund I-II
Merger Agreement; reviewed documents relating to the issuance of Fund I-II's
mortgage revenue bonds ("Mortgage Revenue Bonds"); held discussions with CRITEF
Associates Limited Partnership (the "General Partner") or its representatives,
including employees of C.R.I., Inc. ("CRI"); inspected each of the properties
owned by the Partnership which secure the Mortgage Revenue Bonds and the multi-
family rental housing market in the geographic areas where the properties
securing the Mortgage Revenue Bonds are located; reviewed independent
engineering reports and phase I environmental reports for each property prepared
for CAPREIT by Law Engineering and Environmental Services; reviewed independent
engineering reports for each property prepared for CAPREIT by ValCon
Construction Consultants, Inc.; reviewed construction and site inspection
reports for each property prepared by The Related Companies; reviewed audited
financial statements of Fund I-II for the calendar years 1992, 1993, and 1994,
and unaudited financial statements of Fund I-II for the nine months ended
September 30, 1995; reviewed audited financial statements for each of the
properties which secure the Mortgage Revenue Bonds for the calendar years 1992,
1993 and 1994 (except Observatory II whose unaudited financial statements for
<PAGE>
calendar years 1993 and 1994 were reviewed), 1995 unaudited operating statements
for each property, and certain financial and other information relating to Fund
I-II that was publicly available or furnished to Oppenheimer by the General
Partner, including 1995 property operating budgets, certain internal financial
analyses, forecasts, and reports and other information prepared by or with the
approval of the General Partner or its representatives, or by CAPREIT
Residential, an affiliate of CAPREIT; reviewed the March 14, 1996 draft of the
Proxy Statement; reviewed a written analysis prepared by counsel to the General
Partner relating to those portions of the limited partnership agreement for Fund
I-II which govern the distribution of proceeds of Fund I-II upon a liquidation
or sale of all or substantially all of its assets; held discussions with the
General Partner and its representatives, including employees of CRI; and
conducted such other investigation, financial analysis and studies Oppenheimer
deemed appropriate for the purposes of its Fairness Opinion. Oppenheimer's
Fairness Opinion is based upon analyses of the foregoing factors in light of our
assessment of general economic, financial and market conditions as they exist on
the date hereof. Events occurring after such date could materially affect the
assumptions and conclusions contained in the Fairness Opinion. We have not been
requested or engaged and did not undertake to reaffirm or revise our Fairness
Opinion or otherwise comment upon any events occurring after the date thereof.
We have relied, without assuming responsibility for independent
verification or investigation, on the accuracy and completeness of all financial
and operating data, financial analysis, financial and operating forecasts,
reports and other information that were publicly available, compiled or approved
by or otherwise furnished or communicated to Oppenheimer by or on behalf of the
General Partner of Fund I-II. With respect to financial forecasts utilized by
Oppenheimer, the General Partner represented to Oppenheimer that they are
reasonable projections as to future financial performance, and that there is a
reasonable probability that the projections would prove to be substantially
correct. Oppenheimer did not make an independent evaluation or appraisal of the
assets or liabilities (contingent or otherwise) of Fund I-II nor was
Oppenheimer furnished with any such evaluations or appraisals.
In connection with the preparation of this Fairness Opinion, Oppenheimer
assumed that upon closing of the Mergers the actual Adjustment Amount for Series
I of Fund I-II does not exceed the maximum Adjustment Amount for such Series.
In addition, Oppenheimer also assumed that, prior to the closing of the Mergers,
the Zakin and Wingard Actions shall be subject to final and non-appealable
settlements.
Oppenheimer was not requested to serve as financial advisor to the General
Partner or Fund I-II or to assist the General Partner in the merger negotiations
or in the negotiations of the related transactions involving the General Partner
and its affiliates and CAPREIT. Oppenheimer was not requested to and does not
make any recommendation to the BAC Holders regarding the Mergers. Further,
Oppenheimer was not requested to and did not make any evaluation regarding any
other proposal submitted to the General Partner by third parties with regard to
any alternative transactions and Oppenheimer expresses no opinion on any such
proposed transaction, including whether such alternative transaction may be
superior for the BAC Holders to the Mergers. Also, Oppenheimer did not analyze
the impact of any federal, state or local income taxes to the BAC Holders
arising out of the Mergers. Additionally, Oppenheimer has not taken into
account any consideration paid to or other benefits to be received by the
General Partner and its affiliates, including CRI, or CRIIMI
<PAGE>
MAE Services Limited Partnership in connection with the Mergers and Oppenheimer
expresses no opinion thereon.
It is understood that this Fairness Opinion is not to be quoted, referred
to, excerpted or summarized in whole or in part, or used for any purpose,
without our written consent. We have been engaged by Fund I-II for the purpose
of rendering this Fairness Opinion, in connection with which we will receive a
fee payable in installments (i) upon engagement, (ii) the rendering of the
Fairness Opinion, and (iii) upon the consummation of, and contingent as to, the
Mergers.
Based upon and subject to the foregoing and based upon such other matters
as we consider relevant, it is our opinion that, as of the date hereof, the
Redemption Price offered is fair, from a financial point of view, to the BAC
Holders.
Very truly yours,
/s/ Oppenheimer & Co., Inc.
Oppenheimer & Co., Inc.
<PAGE>
APPENDIX B-2
OPINION OF OPPENHEIMER & CO., INC.
DELIVERED TO
CAPITAL REALTY INVESTORS TAX EXEMPT FUND
LIMITED PARTNERSHIP, SERIES II
<PAGE>
[LETTERHEAD OF OPPENHEIMER & CO., INC.]
March 14, 1996
Capital Realty Investors Tax Exempt
Fund Limited Partnership
c/o The CRI Building
11200 Rockville Pike
Rockville, MD 20852
Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, of the redemption price to the holders (the "BAC Holders") of
Beneficial Assignee Certificates in Series II issued by Capital Realty Investors
Tax Exempt Fund Limited Partnership ("Fund I-II") with regard to the
acquisition of Fund I-II by Capital Apartment Properties, Inc. ("CAPREIT")
pursuant to the mergers (the "Mergers") of an affiliate of CAPREIT with and into
each of Fund I-II and Capital Realty Investors Tax Exempt Fund III Limited
Partnership. Unless otherwise defined in this Fairness Opinion, all capitalized
terms used herein which are not otherwise defined herein shall have the
respective meanings ascribed to them in the definitive proxy statement to be
used in connection with the Mergers (the "Proxy Statement").
Oppenheimer & Co., Inc. ("Oppenheimer"), as part of its investment banking
business, is regularly engaged in the valuation of businesses and securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for corporate, estate and other purposes. We have been
retained by Fund I-II for the purpose of, and will receive a fee for, rendering
this Fairness Opinion.
In connection with our Fairness Opinion, we have: reviewed the Fund I-II
Merger Agreement; reviewed documents relating to the issuance of Fund I-II's
mortgage revenue bonds ("Mortgage Revenue Bonds"); held discussions with CRITEF
Associates Limited Partnership (the "General Partner") or its representatives,
including employees of C.R.I., Inc. ("CRI"); inspected each of the properties
owned by the Partnership which secure the Mortgage Revenue Bonds and the multi-
family rental housing market in the geographic areas where the properties
securing the Mortgage Revenue Bonds are located; reviewed independent
engineering reports and phase I environmental reports for each property prepared
for CAPREIT by Law Engineering and Environmental Services; reviewed independent
engineering reports for each property prepared for CAPREIT by ValCon
Construction Consultants, Inc.; reviewed construction and site inspection
reports for each property prepared by The Related Companies; reviewed audited
financial statements of Fund I-II for the calendar years 1992, 1993, and 1994,
and unaudited financial
<PAGE>
statements of Fund I-II for the nine months ended September 30, 1995; reviewed
audited financial statements for each of the properties which secure the
Mortgage Revenue Bonds for the calendar years 1992, 1993 and 1994, 1995
unaudited operating statements for each property, and certain financial and
other information relating to Fund I-II that was publicly available or furnished
to Oppenheimer by the General Partner, including 1995 property operating
budgets, certain internal financial analyses, forecasts, and reports and other
information prepared by or with the approval of the General Partner or its
representatives, or by CAPREIT Residential; reviewed the March 14, 1996 draft of
the Proxy Statement; reviewed a written analysis prepared by counsel to the
General Partner relating to those portions of the limited partnership agreement
for Fund I-II which govern the distribution of proceeds of Fund I-II upon a
liquidation or sale of all or substantially all of its assets; held discussions
with the General Partner and its representatives, including employees of CRI;
and conducted such other investigation, financial analysis and studies
Oppenheimer deemed appropriate for the purposes of its Fairness Opinion.
Oppenheimer's Fairness Opinion is based upon analyses of the foregoing factors
in light of our assessment of general economic, financial and market conditions
as they exist on the date hereof. Events occurring after such date could
materially affect the assumptions and conclusions contained in the Fairness
Opinion. We have not been requested or engaged and did not undertake to
reaffirm or revise our Fairness Opinion or otherwise comment upon any events
occurring after the date thereof.
We have relied, without assuming responsibility for independent
verification or investigation, on the accuracy and completeness of all financial
and operating data, financial analysis, financial and operating forecasts,
reports and other information that were publicly available, compiled or approved
by or otherwise furnished or communicated to Oppenheimer by or on behalf of the
General Partner of the Fund I-II. With respect to financial forecasts utilized
by Oppenheimer, the General Partner represented to Oppenheimer that they are
reasonable projections as to future financial performance, and that there is a
reasonable probability that the projections would prove to be substantially
correct. Oppenheimer did not make an independent evaluation or appraisal of the
assets or liabilities (contingent or otherwise) of Fund I-II nor was
Oppenheimer furnished with any such evaluations or appraisals.
In connection with the preparation of this Fairness Opinion, Oppenheimer
assumed that upon closing of the Mergers the actual Adjustment Amount for Series
II of Fund I-II does not exceed the maximum Adjustment Amount for such Series.
In addition, Oppenheimer also assumed that, prior to the closing of the Mergers,
the Zakin and Wingard Actions shall be subject to final and non-appealable
settlements.
Oppenheimer was not requested to serve as financial advisor to the General
Partner or Fund I-II or to assist the General Partner in the merger negotiations
or in the negotiations of the related transactions involving the General Partner
and its affiliates and CAPREIT. Oppenheimer was not requested to and does not
make any recommendation to the BAC Holders regarding the Mergers. Further,
Oppenheimer was not requested to and did not make any evaluation regarding any
other proposal submitted to the General Partner by third parties with regard to
any alternative transactions and Oppenheimer expresses no opinion on any such
proposed transaction, including whether such alternative transaction may be
superior for the BAC Holders to the Mergers. Also, Oppenheimer did not analyze
the impact of any federal, state or local income taxes to the BAC Holders
arising out of the Mergers. Additionally, Oppenheimer has not taken into
account any consideration paid to or
<PAGE>
other benefits to be received by the General Partner and its affiliates,
including CRI, or CRIIMI MAE Services Limited Partnership in connection with the
Mergers and Oppenheimer expresses no opinion thereon.
It is understood that this Fairness Opinion is not to be quoted, referred
to, excerpted or summarized in whole or in part, or used for any purpose,
without our written consent. We have been engaged by Fund I-II for the purpose
of rendering this Fairness Opinion, in connection with which we will receive a
fee payable in installments (i) upon engagement, (ii) the rendering of the
Fairness Opinion, and (iii) upon the consummation of, and contingent as to, the
Mergers.
Based upon and subject to the foregoing and based upon such other matters
as we consider relevant, it is our opinion that, as of the date hereof, the
Redemption Price offered is fair, from a financial point of view, to the BAC
Holders.
Very truly yours,
/s/ Oppenheimer & Co., Inc.
Oppenheimer & Co., Inc.
<PAGE>
APPENDIX B-3
OPINION OF OPPENHEIMER & CO., INC.
DELIVERED TO
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III
LIMITED PARTNERSHIP
<PAGE>
[LETTERHEAD OF OPPENHEIMER & CO., INC.]
March 14, 1996
Capital Realty Investors Tax Exempt
Fund III Limited Partnership
c/o The CRI Building
11200 Rockville Pike
Rockville, MD 20852
Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, of the redemption price to the holders (the "BAC Holders") of
Beneficial Assignee Certificates issued by Capital Realty Investors Tax Exempt
Fund III Limited Partnership ("Fund III") with regard to the acquisition of
Fund III by Capital Apartment Properties, Inc. ("CAPREIT") pursuant to the
mergers (the "Mergers") of an affiliate of CAPREIT with and into each of Fund
III and Capital Realty Investors Tax Exempt Fund Limited Partnership. Unless
otherwise defined in this Fairness Opinion, all capitalized terms used herein
which are not otherwise defined herein shall have the respective meanings
ascribed to them in the definitive proxy statement to be used in connection with
the Mergers (the "Proxy Statement").
Oppenheimer & Co., Inc. ("Oppenheimer"), as part of its investment banking
business, is regularly engaged in the valuation of businesses and securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for corporate, estate and other purposes. We have been
retained by Fund III for the purpose of, and will receive a fee for, rendering
this Fairness Opinion.
In connection with our Fairness Opinion, we have: reviewed the Fund III
Merger Agreement; reviewed documents relating to the issuance of Fund III's
mortgage revenue bonds ("Mortgage Revenue Bonds"); held discussions with CRITEF
III Associates Limited Partnership (the "General Partner") or its
representatives, including employees of C.R.I., Inc. ("CRI"); inspected each of
the properties owned by the Partnership which secure the Mortgage Revenue Bonds
and the multi-family rental housing market in the geographic areas where the
properties securing the Mortgage Revenue Bonds are located; reviewed independent
engineering reports and phase I environmental reports for each property prepared
for CAPREIT by Law Engineering and Environmental Services; reviewed independent
engineering reports for each property prepared for CAPREIT by ValCon
Construction Consultants, Inc.; reviewed construction and site inspection
reports for each property prepared by The Related Companies; reviewed audited
financial statements of Fund III for the calendar years 1992, 1993, and 1994,
and unaudited financial statements of Fund III for the nine months ended
September 30, 1995; reviewed audited financial statements for each of the
properties
<PAGE>
APPENDIX C-1
PROPOSED
AMENDMENTS
TO THE
AGREEMENT
OF
LIMITED PARTNERSHIP
OF
CAPITAL REALTY INVESTORS TAX EXEMPT FUND
LIMITED PARTNERSHIP
<PAGE>
AMENDMENT TO AGREEMENT
OF LIMITED PARTNERSHIP
OF CAPITAL REALTY INVESTORS
TAX EXEMPT FUND LIMITED PARTNERSHIP
This Amendment to Agreement of Limited Partnership of Capital Realty
Investors Tax Exempt Fund Limited Partnership (the "Partnership"), dated as of
-----------
__________ __, 199__ (this "Amendment"), is made and entered into by and between
---------
[Capital Apartment Properties, Inc. or its designee] (the "CAPREIT General
---------------
Partner"), CRITEF, Inc. (the "Assignor Limited Partner") and [Capital Apartment
- - - - ------- ------------------------
Properties, Inc. or its designee] (the "CAPREIT Limited Partner").
-----------------------
WITNESSETH
----------
WHEREAS, as of August 1, 1986, CRITEF Associates Limited Partnership
("CRITEF Associates"), as general partner of the Partnership, executed a
-----------------
Certificate of Limited Partnership of the Partnership (the "Certificate")
-----------
forming the Partnership under the Delaware Revised Uniform Limited Partnership
Act (6 Del. C. (S) 17-101, et seq.) (as amended from time to time, the
------- -- ---
"Partnership Act"), which Certificate was filed with the Delaware Secretary of
- - - - ----------------
State on August 19, 1986;
WHEREAS, the partners of the Partnership entered into an Agreement of
Limited Partnership of the Partnership, dated as of August 1, 1986 (as it may
have been amended from time to time, the "Original Agreement");
------------------
WHEREAS, it is contemplated that the Partnership will merge with
Watermark Partners, L.P., a Delaware limited partnership (the "Merger
------
Partnership"), with the Partnership being the surviving entity (the "Merger"),
- - - - ----------- ------
pursuant to an Amended and Restated Agreement and Plan of Merger, dated as of
March 13, 1996 (as amended from time to time in accordance with its terms, the
"Merger Agreement"), among, inter alia, the Merger Partnership, the Partnership
- - - - -----------------
and CRITEF Associates;
WHEREAS, in contemplation of the Merger and related matters, the
partners of the Partnership desire to set forth additional terms and conditions
with respect to the Partnership; and
NOW, THEREFORE, in consideration of the mutual promises made herein,
the parties, intending to be legally bound, agree as follows:
<PAGE>
AMENDMENTS
----------
1. Removal and Admission. CRITEF Associates is hereby removed as
---------------------
general partner of the Partnership and the CAPREIT General Partner is hereby
simultaneously admitted to the Partnership as a replacement general partner of
the Partnership. Execution by the CAPREIT General Partner of this Amendment
shall constitute execution of a counterpart signature page to the Original
Agreement and the CAPREIT General Partner's acceptance and agreement to be bound
by the terms and provisions of the Original Agreement. Under the Original
Agreement, the CAPREIT General Partner shall be the sole "General Partner" and
the sole "Managing General Partner." The CAPREIT General Partner is hereby
authorized to and shall continue the business of the Partnership as a remaining
General Partner without dissolution. The CAPREIT General Partner shall file an
amendment to the Certificate that reflects the fact that the CAPREIT General
Partner is the sole general partner of the Partnership.
2. Assignment of General Partner Interest. Notwithstanding any
--------------------------------------
provision in the Original Agreement to the contrary, in accordance with Sections
6.05(b) and 10.02(b) of the Original Agreement, for value received, the receipt
and sufficiency of which is hereby acknowledged, upon execution of this
Amendment by the parties hereto, CRITEF Associates assigns, transfers and
conveys all of its general partner interest in the Partnership (i.e., its 1.01%
Interest) to the CAPREIT General Partner.
3. Issuance of Limited Partner Interest. Notwithstanding anything to
------------------------------------
the contrary in the Original Agreement, including, without limitation, Section
5.04(o) of the Original Agreement, a limited partner interest in the Partnership
is hereby issued by the Partnership to the CAPREIT Limited Partner in exchange
for real property and/or other assets. Without the need for any consent, action
or approval by any Person, the CAPREIT Limited Partner is hereby admitted to the
Partnership as a limited partner of the Partnership. Execution by the CAPREIT
Limited Partner of this Amendment shall constitute execution of a counterpart
signature page to the Original Agreement and the CAPREIT Limited Partner's
acceptance and agreement to be bound by the terms and provisions of the Original
Agreement. The parties hereto hereby agree that upon such admission, the
CAPREIT General Partner's Interest shall be reduced to 1.00% of the Interests
and the CAPREIT Limited Partner's Interest shall be 0.01% of the Interests. For
purposes of the Original Agreement, any reference in the Original Agreement to
1.01% as it relates to the Interest of the General Partner shall be deemed to be
a reference to the 1.00% Interest of the CAPREIT General Partner and the 0.01%
Interest of the CAPREIT Limited Partner. The term "Assignees" as used in the
Original Agreement does not include the CAPREIT Limited Partner as a limited
partner of the Partnership.
4. Merger or Consolidation.
-----------------------
(a) Merger or Consolidation. Notwithstanding anything in the Original
-----------------------
Agreement to the contrary, upon the affirmative vote (either in person, by proxy
or by written Consent) of the holders of a majority of the outstanding BACs
(voting through the
<PAGE>
Assignor Limited Partner in accordance with the Original Agreement), which vote
may or may not be the same vote taken with respect to the adoption of this
Amendment, the Partnership shall be authorized to consummate the transactions
contemplated by the Merger and the Merger Agreement.
(b) New Partnership Agreement. In accordance with Section 17-211(g)
-------------------------
of the Partnership Act, notwithstanding anything to the contrary contained in
the Original Agreement, an agreement of merger or consolidation approved in
accordance with Section 17-211(b) of the Partnership Act and the Original
Agreement as amended by this Amendment or as otherwise amended from time to time
(as so amended, the "Partnership Agreement") may (A) effect any amendment to the
Partnership Agreement, or (B) effect the adoption of a new partnership agreement
for the Partnership if it is the surviving or resulting limited partnership in
the merger or consolidation. Any amendment to the Partnership Agreement or the
adoption of a new partnership agreement made pursuant to the foregoing sentence
shall be effective at the effective time or date of the merger or consolidation.
(c) General Partner Authorization. In connection with the Merger,
-----------------------------
notwithstanding anything to the contrary in the Original Agreement, the CAPREIT
General Partner shall be authorized, at such time in its sole discretion as it
deems appropriate, to execute, acknowledge, verify, deliver, file and record,
for and in the name of the Partnership and, to the extent necessary, the CAPREIT
General Partner, any former general partner of the Partnership, the limited
partners of the Partnership and the BAC Holders, any and all documents and
instruments, including, without limitation, a certificate of merger and a
partnership agreement for the surviving or resulting entity in the Merger, and
shall do and perform any and all acts required by applicable law or which the
CAPREIT General Partner, in its sole discretion, deems necessary, convenient or
advisable, in order to effectuate the Merger.
MISCELLANEOUS
-------------
1. Capitalized Terms. Initially capitalized terms used herein and
-----------------
not otherwise defined are used as defined in the Original Agreement.
2. Successors and Assigns. This Amendment shall be binding upon, and
----------------------
shall inure to the benefit of, the parties hereto and their respective
successors and assigns.
3. Full Force and Effect. Except to the extent modified hereby, the
---------------------
Original Agreement shall remain in full force and effect.
4. Counterparts. This Amendment may be executed in counterparts, all
------------
of which together shall constitute one agreement binding on all parties hereto,
notwithstanding that all such parties are not signatories to the original or
same counterpart, provided, however, that no such counterpart shall be binding
unless signed by the CAPREIT General Partner as Managing General Partner.
<PAGE>
5. Governing Law. This Amendment shall be interpreted in accordance
-------------
with the laws of the State of Delaware (without regard to conflict of laws
principles), all rights and remedies being governed by such laws.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the date first set forth above.
CAPREIT GENERAL PARTNER:
[NAME]
By:_______________________________
Name:
Title:
CAPREIT LIMITED PARTNER:
------------------------
[NAME]
By:_______________________________
Name:
Title:
ASSIGNOR LIMITED PARTNER:
CRITEF, INC.
By:_______________________________
Name:
Title:
CRITEF ASSOCIATES LIMITED
PARTNERSHIP, merely to reflect its
agreement be bound by Section 2 of this
Amendment
By: C.R.I., Inc., its general partner
By:________________________________
Name:
Title:
<PAGE>
APPENDIX C-2
PROPOSED
AMENDMENTS
TO THE
AGREEMENT
OF
LIMITED PARTNERSHIP
OF
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III
LIMITED PARTNERSHIP
<PAGE>
AMENDMENT TO AGREEMENT
OF LIMITED PARTNERSHIP
OF CAPITAL REALTY INVESTORS
TAX EXEMPT FUND III LIMITED PARTNERSHIP
This Amendment to Agreement of Limited Partnership of Capital Realty
Investors Tax Exempt Fund III Limited Partnership (the "Partnership"), dated as
of _____________, 199_ (this "Amendment"), is made and entered into by and
between [Capital Apartment Properties, Inc. or its designee] (the "CAPREIT
General Partner"), CRITEF, Inc. (the "Assignor Limited Partner") and [Capital
Apartment Properties, Inc. or its designee] (the "CAPREIT Limited Partner").
WITNESSETH
----------
WHEREAS, as of September 1, 1987, CRITEF III Associates Limited
Partnership ("CRITEF Associates"), as general partner of the Partnership,
executed a Certificate of Limited Partnership of the Partnership (the
"Certificate") forming the Partnership under the Delaware Revised Uniform
Limited Partnership Act (6 Del. C. (S) 17-101, et seq.) (as amended from time to
------- -- ---
time, the "Partnership Act"), which Certificate was filed with the Delaware
Secretary of State on September 18, 1987;
WHEREAS, the partners of the Partnership entered into an Agreement of
Limited Partnership of the Partnership, dated as of September 1, 1987 (as it
may have been amended from time to time, the "Original Agreement");
WHEREAS, it is contemplated that the Partnership will merge with
Watermark III Partners, L.P., a Delaware limited partnership (the "Merger
Partnership"), with the Partnership being the surviving entity (the "Merger"),
pursuant to an Amended and Restated Agreement and Plan of Merger, dated as of
March 13, 1996 (as amended from time to time in accordance with its terms, the
"Merger Agreement"), among, inter alia, the Merger Partnership, the Partnership
and CRITEF Associates;
WHEREAS, in contemplation of the Merger and related matters, the
partners of the Partnership desire to set forth additional terms and conditions
with respect to the Partnership; and
NOW, THEREFORE, in consideration of the mutual promises made herein,
the parties, intending to be legally bound, agree as follows:
AMENDMENTS
----------
1. Removal and Admission. CRITEF Associates is hereby removed as
---------------------
general partner of the Partnership and the CAPREIT General Partner is hereby
simultaneously admitted to the Partnership as a replacement general partner of
the Partnership. Execution by the
<PAGE>
CAPREIT General Partner of this Amendment shall constitute execution of a
counterpart signature page to the Original Agreement and the CAPREIT General
Partner's acceptance and agreement to be bound by the terms and provisions of
the Original Agreement. Under the Original Agreement, the CAPREIT General
Partner shall be the sole "General Partner" and the sole "Managing General
Partner." The CAPREIT General Partner is hereby authorized to and shall continue
the business of the Partnership as a remaining General Partner without
dissolution. The CAPREIT General Partner shall file an amendment to the
Certificate that reflects the fact that the CAPREIT General Partner is the sole
general partner of the Partnership.
2. Assignment of General Partner Interest. Notwithstanding any
--------------------------------------
provision in the Original Agreement to the contrary, in accordance with Sections
6.05(b) and 10.02(b) of the Original Agreement, for value received, the receipt
and sufficiency of which is hereby acknowledged, upon execution of this
Amendment by the parties hereto, CRITEF Associates assigns, transfers and
conveys all of its general partner interest in the Partnership (i.e., its 1.01%
Interest), to the CAPREIT General Partner.
3. Issuance of Limited Partner Interest. Notwithstanding anything
------------------------------------
to the contrary in the Original Agreement, including, without limitation,
Section 5.04(o) of the Original Agreement, a limited partner interest in the
Partnership is hereby issued by the Partnership to the CAPREIT Limited Partner
in exchange for real property and/or other assets. Without the need for any
consent, action or approval by any Person, the CAPREIT Limited Partner is hereby
admitted to the Partnership as a limited partner of the Partnership. Execution
by the CAPREIT Limited Partner of this Amendment shall constitute execution of a
counterpart signature page to the Original Agreement and the CAPREIT Limited
Partner's acceptance and agreement to be bound by the terms and provisions of
the Original Agreement. The parties hereto hereby agree that upon such
admission, the CAPREIT General Partner's Interest shall be reduced to 1.00% of
the Interests and the CAPREIT Limited Partner's Interest shall be 0.01% of the
Interests. For purposes of the Original Agreement, any reference in the Original
Agreement to 1.01% as it relates to the Interest of the General Partner shall be
deemed to be a reference to the 1.00% Interest of the CAPREIT General Partner
and the 0.01% Interest of the CAPREIT Limited Partner. The term "Assignees" as
used in the Original Agreement does not include the CAPREIT Limited Partner as a
limited partner of the Partnership.
4. Merger or Consolidation.
-----------------------
(a) Merger or Consolidation. Notwithstanding anything in the Original
-----------------------
Agreement to the contrary, upon the affirmative vote (either in person, by proxy
or by written Consent) of the holders of a majority of the outstanding BACs
(voting through the Assignor Limited Partner in accordance with the Original
Agreement), which vote may or may not be the same vote taken with respect to the
adoption of this Amendment, the Partnership shall be authorized to consummate
the transactions contemplated by the Merger and the Merger Agreement.
(b) New Partnership Agreement. In accordance with Section 17-211(g)
-------------------------
of the Partnership Act, notwithstanding anything to the contrary contained in
the Original
-2-
<PAGE>
Agreement, an agreement of merger or consolidation approved in accordance with
Section 17-211(b) of the Partnership Act and the Original Agreement as amended
by this Amendment or as otherwise amended from time to time (as so amended, the
"Partnership Agreement") may (A) effect any amendment to the Partnership
Agreement, or (B) effect the adoption of a new partnership agreement for the
Partnership if it is the surviving or resulting limited partnership in the
merger or consolidation. Any amendment to the Partnership Agreement or the
adoption of a new partnership agreement made pursuant to the foregoing sentence
shall be effective at the effective time or date of the merger or consolidation.
(c) General Partner Authorization. In connection with the Merger,
-----------------------------
notwithstanding anything to the contrary in the Original Agreement, the CAPREIT
General Partner shall be authorized, at such time in its sole discretion as it
deemed appropriate, to execute, acknowledge, verify, deliver, file and record,
for and in the name of the Partnership and, to the extent necessary, the CAPREIT
General Partner, any former general partner of the Partnership, the limited
partners of the Partnership and the BAC Holders, any and all documents and
instruments, including, without limitation, a certificate of merger and a
partnership agreement for the surviving or resulting entity in the Merger, and
shall do and perform any and all acts required by applicable law or which the
CAPREIT General Partner, in its sole discretion, deems necessary, convenient or
advisable, in order to effectuate the Merger.
MISCELLANEOUS
-------------
1. Capitalized Terms. Initially capitalized terms used herein and
-----------------
not otherwise defined are used as defined in the Original Agreement.
2. Successors and Assigns. This Amendment shall be binding upon,
----------------------
and shall inure to the benefit of, the parties hereto and their respective
successors and assigns.
3. Full Force and Effect. Except to the extent modified hereby,
---------------------
the Original Agreement shall remain in full force and effect.
4. Counterparts. This Amendment may be executed in counterparts,
------------
all of which together shall constitute one agreement binding on all parties
hereto, notwithstanding that all such parties are not signatories to the
original or same counterpart, provided, however, that no such counterpart shall
be binding unless signed by the CAPREIT General Partner as Managing General
Partner.
5. Governing Law. This Amendment shall be interpreted in accordance
-------------
with the laws of the State of Delaware (without regard to conflict of laws
principles), all rights and remedies being governed by such laws.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as
of the date first set forth above.
-3-
<PAGE>
CAPREIT GENERAL PARTNER:
[NAME]
By:______________________________
Name:
Title:
CAPREIT LIMITED PARTNER:
[NAME]
By:______________________________
Name:
Title:
ASSIGNOR LIMITED PARTNER:
CRITEF III, INC.
By:______________________________
Name:
Title:
CRITEF III ASSOCIATES LIMITED
PARTNERSHIP, merely to reflect its
agreement be bound by Section 2 of this
Amendment
By: C.R.I., Inc., its general partner
By:______________________________
Name:
Title:
-4-
<PAGE>
[GOLD] CAPITAL REALTY INVESTORS TAX EXEMPT FUND
LIMITED PARTNERSHIP, SERIES I
PROXY
The undersigned hereby appoints William B. Dockser and H.
William Willoughby, each with the power to act alone and with full
power of substitution and revocation, to represent and vote, as
specified on the other side of this Proxy, all Beneficial Assignee
Certificates ("BACs") of Capital Realty Investors Tax Exempt Fund
Limited Partnership, Series I, which the undersigned is entitled to
vote at the Special Meeting of BAC Holders to be held at 10:00A.M.,
local time, on ________ __, 1996, at [location] and all adjournments
and postponements thereof. The undersigned revokes any previous
proxies with respect to the matters covered by this Proxy.
THE BACS REPRESENTED BY THIS PROXY WILL BE VOTED AS
SPECIFIED ON THE OTHER SIDE. IF NO CHOICE IS SPECIFIED, THIS PROXY
WILL BE VOTED FOR PROPOSALS 1, 2 AND 3. THE PROXIES ARE AUTHORIZED, IN
THEIR DISCRETION, TO VOTE SUCH BACS UPON ANY OTHER BUSINESS THAT MAY
PROPERLY COME BEFORE THE SPECIAL MEETING.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE JOINT
PROXY STATEMENT OF CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED
PARTNERSHIP, SERIES I AND II AND CAPITAL REALTY INVESTORS TAX EXEMPT
FUND III LIMITED PARTNERSHIP.
(Continued and to be signed on the other side.)
<PAGE>
THE GENERAL PARTNERS RECOMMEND A [X] PLEASE MARK YOUR
VOTE FOR PROPOSALS 1, 2 & 3 VOTE AS THIS
PROPOSAL 1. APPROVAL OF THE MERGER PROPOSAL. Approve and adopt the Amended and
Restated Agreement and Plan of Merger, dated March 14, 1996 (the "Merger
Agreement"), among Capital Realty Investors Tax Exempt Fund Limited Partnership
("Fund I-II"), CRITEF Associates Limited Partnership, Watermark Partners, L.P.
and others.
FOR AGAINST ABSTAIN
[_] [_] [_]
PROPOSAL 2. APPROVAL OF THE NEW PARTNERS PROPOSAL. Approve the removal of the
current general partner of Fund I-II and the election in its stead of a newly
formed, wholly owned subsidiary of Capital Apartment Properties, Inc.
("CAPREIT").
FOR AGAINST ABSTAIN
[_] [_] [_]
PROPOSAL 3. APPROVAL OF THE AMENDMENT PROPOSAL. Amend the Agreement of Limited
Partnership of Fund I-II to authorize expressly (i) the Merger, the Merger
Agreement and the transactions contemplated thereby and (ii) the admission of a
designee of CAPREIT as a limited partner.
FOR AGAINST ABSTAIN
[_] [_] [_]
THE GENERAL PARTNERS RECOMMEND THAT YOU SIGN, DATE AND MAIL THIS PROXY TODAY.
[_] Change of address?
Check this box and insert new
address below:
_____________________________________
_____________________________________
Signature(s):_______________________________________ Dated:____________________
Note: Please sign as name appears herein. Joint owners should each sign. When
signing as attorney, executor, administrator, trustee or guardians, please give
full title as such. If a corporation, please sign in full corporate name by
authorized officer. If a partnership, please sign in partnership name by
authorized person.
<PAGE>
[GOLD] CAPITAL REALTY INVESTORS TAX EXEMPT FUND
LIMITED PARTNERSHIP, SERIES II
PROXY
The undersigned hereby appoints William B. Dockser and H.
William Willoughby, each with the power to act alone and with full
power of substitution and revocation, to represent and vote, as
specified on the other side of this Proxy, all Beneficial Assignee
Certificates ("BACs") of Capital Realty Investors Tax Exempt Fund
Limited Partnership, Series II, which the undersigned is entitled to
vote at the Special Meeting of BAC Holders to be held at 10:00A.M.,
local time, on ________ __, 1996, at [location] and all adjournments
and postponements thereof. The undersigned revokes any previous
proxies with respect to the matters covered by this Proxy.
THE BACS REPRESENTED BY THIS PROXY WILL BE VOTED AS SPECIFIED
ON THE OTHER SIDE. IF NO CHOICE IS SPECIFIED, THIS PROXY WILL BE VOTED
FOR PROPOSALS 1, 2 AND 3. THE PROXIES ARE AUTHORIZED, IN THEIR
DISCRETION, TO VOTE SUCH BACS UPON ANY OTHER BUSINESS THAT MAY
PROPERLY COME BEFORE THE SPECIAL MEETING.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE JOINT PROXY
STATEMENT OF CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED
PARTNERSHIP, SERIES I AND II AND CAPITAL REALTY INVESTORS TAX EXEMPT
FUND III LIMITED PARTNERSHIP.
(Continued and to be signed on the other side.)
<PAGE>
THE GENERAL PARTNERS RECOMMEND A [X] PLEASE MARK YOUR
VOTE FOR PROPOSALS 1, 2 & 3 VOTE AS THIS
PROPOSAL 1. APPROVAL OF THE MERGER PROPOSAL. Approve and adopt the Amended and
Restated Agreement and Plan of Merger, dated March 14, 1996 (the "Merger
Agreement"), among Capital Realty Investors Tax Exempt Fund Limited Partnership
("Fund I-II"), CRITEF Associates Limited Partnership, Watermark Partners, L.P.
and others.
FOR AGAINST ABSTAIN
[_] [_] [_]
PROPOSAL 2. APPROVAL OF THE NEW PARTNERS PROPOSAL. Approve the removal of the
current general partner of Fund I-II and the election in its stead of a newly
formed, wholly owned subsidiary of Capital Apartment Properties, Inc.
("CAPREIT").
FOR AGAINST ABSTAIN
[_] [_] [_]
PROPOSAL 3. APPROVAL OF THE AMENDMENT PROPOSAL. Amend the Agreement of Limited
Partnership of Fund I-II to authorize expressly (i) the Merger, the Merger
Agreement and the transactions contemplated thereby and (ii) the admission of a
designee of CAPREIT as a limited partner.
FOR AGAINST ABSTAIN
[_] [_] [_]
THE GENERAL PARTNERS RECOMMEND THAT YOU SIGN, DATE AND MAIL THIS PROXY TODAY.
[_] Change of address?
Check this box and insert new
address below:
_________________________________
_________________________________
Signature(s):_________________________________________ Dated:___________________
Note: Please sign as name appears herein. Joint owners should each sign. When
signing as attorney, executor, administrator, trustee or guardians, please give
full title as such. If a corporation, please sign in full corporate name by
authorized officer. If a partnership, please sign in partnership name by
authorized person.
<PAGE>
[GOLD] CAPITAL REALTY INVESTORS TAX EXEMPT FUND III
LIMITED PARTNERSHIP
PROXY
The undersigned hereby appoints William B. Dockser and H.
William Willoughby, each with the power to act alone and with full
power of substitution and revocation, to represent and vote, as
specified on the other side of this Proxy, all Beneficial Assignee
Certificates ("BACs") of Capital Realty Investors Tax Exempt Fund III
Limited Partnership, which the undersigned is entitled to vote at the
Special Meeting of BAC Holders to be held at 11:00A.M., local time, on
________ __, 1996, at [location] and all adjournments and
postponements thereof. The undersigned revokes any previous proxies
with respect to the matters covered by this Proxy.
THE BACS REPRESENTED BY THIS PROXY WILL BE VOTED AS
SPECIFIED ON THE OTHER SIDE. IF NO CHOICE IS SPECIFIED, THIS PROXY
WILL BE VOTED FOR PROPOSALS 1, 2 AND 3. THE PROXIES ARE AUTHORIZED, IN
THEIR DISCRETION, TO VOTE SUCH BACS UPON ANY OTHER BUSINESS THAT MAY
PROPERLY COME BEFORE THE SPECIAL MEETING.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE JOINT
PROXY STATEMENT OF CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED
PARTNERSHIP, SERIES I AND II AND CAPITAL REALTY INVESTORS TAX EXEMPT
FUND III LIMITED PARTNERSHIP.
(Continued and to be signed on the other side.)
<PAGE>
THE GENERAL PARTNERS RECOMMEND A [X] PLEASE MARK YOUR
VOTE FOR PROPOSALS 1, 2 & 3 VOTE AS THIS
PROPOSAL 1. APPROVAL OF THE MERGER PROPOSAL. Approve and adopt the Amended and
Restated Agreement and Plan of Merger, dated March 14, 1996 (the "Merger
Agreement"), among Capital Realty Investors Tax Exempt Fund III Limited
Partnership ("Fund III"), CRITEF III Associates Limited Partnership, Watermark
III Partners, L.P. and others.
FOR AGAINST ABSTAIN
[_] [_] [_]
PROPOSAL 2. APPROVAL OF THE NEW PARTNERS PROPOSAL. Approve the removal of the
current general partner of Fund III and the election in its stead of a newly
formed, wholly owned subsidiary of Capital Apartment Properties, Inc.
("CAPREIT").
FOR AGAINST ABSTAIN
[_] [_] [_]
PROPOSAL 3. APPROVAL OF THE AMENDMENT PROPOSAL. Amend the Agreement of Limited
Partnership of Fund III to authorize expressly (i) the Merger, the Merger
Agreement and the transactions contemplated thereby and (ii) the admission of a
designee of CAPREIT as a limited partner.
FOR AGAINST ABSTAIN
[_] [_] [_]
THE GENERAL PARTNERS RECOMMEND THAT YOU SIGN, DATE AND MAIL THIS PROXY TODAY.
[_] Change of address?
Check this box and insert new
address below:
_________________________________
_________________________________
Signature(s):_________________________________________ Dated:___________________
Note: Please sign as name appears herein. Joint owners should each sign. When
signing as attorney, executor, administrator, trustee or guardians, please give
full title as such. If a corporation, please sign in full corporate name by
authorized officer. If a partnership, please sign in partnership name by
authorized person.
