CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LTD PARTNERSHIP, 10-K, 1996-03-28

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LTD PARTNERSHIP
10-K, 1996-03-28
ASSET-BACKED SECURITIES

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<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1995
-----------------
Commission file number 1-12034
-----------------

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
- --------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

Delaware 52-1551450
- ----------------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

11200 Rockville Pike, Rockville, Maryland 20852
- ----------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)

(Registrant's telephone number, including area code) (301) 468-9200
------------------
Securities registered pursuant to Section 12(b) of the Act:

Name of each exchange
Title of each class on which registered
- --------------------------------- -----------------------------
Beneficial Assignee Certificates American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

NONE
- --------------------------------------------------------------------------
(Title of class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No[ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

As of March 15, 1996, 5,258,268 Series A Beneficial Assignee Certificates
(BACs) were outstanding and the aggregate market value of such BACs held by non-
affiliates of the Registrant on such date was $72,259,935.

DOCUMENTS INCORPORATED BY REFERENCE

Form 10-K Parts Document
- ------------------ ---------------------------------------
I, II, III and IV 1995 Annual Report to BAC Holders
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

1995 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

PART I
------

Page
----

Item 1. Business . . . . . . . . . . . . . . . . . . . . . I-1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . I-1
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . I-1
Item 4. Submission of Matters to a Vote
of Security Holders . . . . . . . . . . . . . . . I-1

PART II
-------

Item 5. Market for the Registrant's Partnership
Interests and Related Partnership Matters . . . . II-1
Item 6. Selected Financial Data . . . . . . . . . . . . . . II-1
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . . II-1
Item 8. Financial Statements and Supplementary Data . . . . II-2
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . II-2

PART III
--------

Item 10. Directors and Executive Officers
of the Registrant . . . . . . . . . . . . . . . . III-1
Item 11. Executive Compensation . . . . . . . . . . . . . . III-2
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . III-3
Item 13. Certain Relationships and Related Transactions . . III-4

PART IV
-------

Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K . . . . . . . . . . . . . . . IV-1

Signatures . . . . . . . . . . . . . . . . . . . . . . . . IV-3

Cross Reference Sheet . . . . . . . . . . . . . . . . . . . . IV-4

Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . IV-5
<PAGE>

PART I
------

ITEM 1. BUSINESS
--------

Development and Description of Business
---------------------------------------

Information concerning the business of Capital Realty Investors Tax
Exempt Fund III Limited Partnership (the Partnership) is contained in the
1995 Annual Report to BAC Holders which contains Management's Discussion
and Analysis of Financial Condition and Results of Operations and Notes 1,
5 and 7 of the notes to consolidated financial statements. The Annual
Report is contained in Part IV (filed in response to Item 8 hereof), which
is incorporated herein by reference.

Employees
---------

The Partnership has no employees. Services are performed for the
Partnership by affiliates of the General Partner and agents retained by
them.

ITEM 2. PROPERTIES
----------

Information concerning the properties of the Partnership is contained
in the 1995 Annual Report to BAC Holders which contains Management's
Discussion and Analysis of Financial Condition and Results of Operations
and Notes 1 and 5 of the notes to consolidated financial statements. The
Annual Report is contained in Part IV (filed in response to Item 8 hereof),
which is incorporated herein by reference.

ITEM 3. LEGAL PROCEEDINGS
-----------------

Reference is made to Note 8 of the notes to consolidated financial
statements on page 55 of the 1995 Annual Report to BAC Holders, which is
incorporated herein by reference.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------

No matters were submitted to a vote of security holders during the
fourth quarter of 1995.

I-1
<PAGE>
PART II
--------

ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP INTERESTS AND
-----------------------------------------------------
RELATED PARTNERSHIP MATTERS
---------------------------

(a) Market information.

Reference is made to the Selected Financial Data on pages 1 through 3
of the 1995 Annual Report to BAC Holders which is incorporated herein by
reference.

(b) Number of Security Holders.

As of March 15, 1996, there were approximately 6,200 registered
holders of BACs in the Partnership.

Reference is made to the Selected Financial Data on pages 1 through 3
of the 1995 Annual Report to BAC Holders which is incorporated herein by
reference.

See Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in the 1995 Annual Report to BAC Holders,
which is incorporated herein by reference, for information regarding the
sources of funds used for cash distributions and for a discussion of
factors which may affect the Partnership's ability to maintain cash
distributions at current levels.

ITEM 6. SELECTED FINANCIAL DATA
-----------------------

Reference is made to Selected Financial Data on pages 1 through 3 of
the 1995 Annual Report to BAC Holders, which is incorporated herein by
reference.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------

Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations on pages 4 through 24 of the 1995
Annual Report to BAC Holders, which is incorporated herein by reference.

II-1
<PAGE>
PART II
-------

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------

Reference is made to pages 25 through 29 of the 1995 Annual Report to
BAC Holders for the financial statements of the registrant, which are
incorporated herein by reference. See also Item 14 of this report for
information concerning financial statements and financial statement
schedules.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------

None.

II-2
<PAGE>
PART III
--------

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------

(a), (b) and
(c) The Partnership has no directors, executive officers or
significant employees of its own.
(a), (b), (c)
and (e) The names, ages and business experience of the directors and
executive officers of C.R.I., Inc. (CRI), the Managing General
Partner of the Partnership, are as follows:

William B. Dockser, 59, has been the Chairman of the Board of CRI and a Director
since 1974. Prior to forming CRI, he served as President of Kaufman and Broad
Asset Management, Inc., an affiliate of Kaufman and Broad, Inc., which managed a
number of publicly held limited partnerships created to invest in low and
moderate income multifamily apartment complexes. For a period of 2-1/2 years
prior to joining Kaufman and Broad, he served in various positions at HUD,
culminating in the post of Deputy FHA Commissioner and Deputy Assistant
Secretary for Housing Production and Mortgage Credit, where he was responsible
for all federally insured housing production programs. Before coming to
Washington, Mr. Dockser was a practicing attorney in Boston and also was a
special Assistant Attorney General for the Commonwealth of Massachusetts. He
holds a Bachelor of Laws degree from Yale University Law School and a Bachelor
of Arts degree, cum laude, from Harvard University. He is also Chairman of the
Board of CRIIMI MAE Inc., CRIIMI, Inc. and CRI Liquidating REIT, Inc.

H. William Willoughby, 49, President, Secretary and a Director of CRI since
January 1990 and Senior Executive Vice President, Secretary and a Director of
CRI from 1974 to 1989. He is principally responsible for the financial
management of CRI and its associated partnerships. Prior to joining CRI in
1974, he was Vice President of Shelter Corporation of America and a number of
its subsidiaries dealing principally with real estate development and equity
financing. Before joining Shelter Corporation, he was a senior tax accountant
with Arthur Andersen & Company. He holds a Juris Doctorate degree, a Master of
Business Administration degree and a Bachelor of Science degree in Business
Administration from the University of South Dakota. He is also a Director and
executive officer of CRIIMI MAE Inc., CRIIMI, Inc. and CRI Liquidating REIT,
Inc.

Richard J. Palmer, 44, Senior Vice President-Chief Financial Officer. Prior to
joining CRI in 1983 as Director of Tax Policy, he was a Tax Manager at Grant
Thornton (formerly Alexander Grant & Company). He also served in the Tax and
Audit Departments of Peat, Marwick, Main and Company (formerly Peat, Marwick,
Mitchell and Company) prior to his seven years at Grant Thornton. He holds a
Bachelor of Business Administration degree from the Florida Atlantic University
and is also a Certified Public Accountant.

III-1
<PAGE>
PART III
--------

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - Continued
--------------------------------------------------

Ronald W. Thompson, 49, Group Executive Vice President-Hotel Asset Management.
Prior to joining CRI in 1985, he was employed at the Hyatt Organization where he
most recently served as the General Manager of the Hyatt Regency in Flint,
Michigan. During his nine year tenure with Hyatt, he held senior management
positions with the Hyatt Regency in Dearborn, Michigan, the Hyatt in Richmond,
Virginia, the Hyatt in Winston-Salem, North Carolina and the Hyatt Regency in
Atlanta, Georgia. Before joining Hyatt, Mr. Thompson worked in London, England
for the English Tourist Board as well as holding management positions in Europe,
Australia, and New Zealand in the hotel industry. Mr. Thompson received his
education in England where he received a business degree in Hotel Administration
from Winston College.

Susan R. Campbell, 37, Senior Vice President-CRI Realty Services. Prior to
joining CRI in March 1985, she was a budget analyst for the B. F. Saul Advisory
Company. She holds a Bachelor of Science degree in General Business from the
University of Maryland.

Melissa Cecil Lackey, 40, Senior Vice President and General Counsel. Prior to
joining CRI in 1990, she was associated with the firms of Zuckerman, Spaeder,
Goldstein, Taylor & Kolker in Washington, D.C. and Hirsch & Westheimer in
Houston, Texas. She holds a Juris Doctorate from the University of Virginia
School of Law and a Bachelor of Arts degree from the College of William & Mary.

(d) There is no family relationship between any of the foregoing directors
and executive officers.

(f) Involvement in certain legal proceedings.

None.

(g) Promoters and control persons.

Not applicable.

ITEM 11. EXECUTIVE COMPENSATION
---------------------

(a), (b), (c) and (d)

The Partnership has no officers or directors. However, in accordance
with the Partnership Agreement and as disclosed in the Partnership's
Registration Statement on Form S-11, as amended, various kinds of
compensation and fees are payable or were paid to the General Partner
and/or its affiliates. Additional information required in these sections
is included in Notes 3 and 4 to the financial statements contained in Part
IV (filed in response to Item 8 hereof), which are incorporated herein by
reference.

(e) Termination of employment and change in control arrangement.

None.

III-2
<PAGE>
PART III
--------

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
--------------------------------------------------
MANAGEMENT
----------

(a) Security ownership of certain beneficial owners

No person or "group", as that term is used in Section 13(d)(3) of the
Securities Exchange Act of 1934, is known by the Partnership to be the
beneficial owner of more than 5% of the issued and outstanding BACs as of
December 31, 1995.

(b) Security ownership of management

The following table sets forth certain information concerning all BACs
beneficially owned, as of March 15, 1996, by each director and by all
directors and officers as a group of the managing general partner of the
Partnership's General Partner. The voting and investment powers for the
BACs listed are held solely by the named beneficial owner. The General
Partner, which controls the day-to-day operations of the Partnership, is a
limited partnership whose managing general partner is CRI. Mr. Dockser and
Mr. Willoughby control CRI.

Name of Amount and Nature % of total
Beneficial Owner of Beneficial Ownership BACs issued
- ---------------- ----------------------- -----------
<S> <C> <C>
William B. Dockser 500 BACs 0.01%
H. William Willoughby None 0.00%
All Directors and Officers
as a Group (6 persons) 2,500 BACs 0.05%

</TABLE>

There exists no arrangement known to the Partnership, the operation of
which may at a subsequent date result in a change in control of the
Partnership, with the exception of the merger agreement with an affiliate
of Capital Apartment Properties, Inc., as discussed in Management's
Discussion and Analysis of Financial Condition and Results of Operations
and Note 7 of the notes to consolidated financial statements, which are
incorporated herein by reference. There is a provision in the Limited
Partnership Agreement which allows, under certain circumstances, the
ability to change control.

III-3
<PAGE>
PART III
--------

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------

(a) Transactions with management and others.

The Partnership has no directors or officers. In addition, the
Partnership has had no transactions with individual officers or directors
of the managing general partner of the General Partner of the Partnership
other than any indirect interest such officers and directors may have (i)
in the amounts paid to the General Partner or its affiliates by virtue of
their stock ownership in CRI, as disclosed in Part IV, Item 14, in Note 3
of the notes to consolidated financial statements, which is incorporated
herein by reference; (ii) as shareholders in corporations that are partners
in partnerships that hold title to properties, subject to the existing
indebtedness, as a consequence of deeds in lieu of foreclosure from, or
transfers of partnership interests in, former borrowers; and/or (iii) in
the amounts paid to individual officers and directors of the General
Partner with respect to distributions in connection with BACs held by such
individuals.

Nominee limited partnerships have been formed to take title to certain
properties on which the original borrowers defaulted, subject to the
existing indebtedness, rather than the Partnership taking title, in an
effort to maintain the tax-exempt nature of the interest on the mortgage
revenue bonds and to hold the properties until their ultimate disposition.
In the case of Geary Courtyard, nominee corporations of the Partnership
assumed the partnership interests in the original borrower. The nominee
entities and the managing general partner of the General Partner of the
Partnership have common ownership (except for Ethan's Glen IIA prior to
March 14, 1996) and are under common control. No compensation or fees were
paid by the Partnership to the nominee entities or their principals in
connection with the transfers of ownership. Item 11 of this report, which
contains a discussion of the fees and other compensation paid or accrued by
the Partnership to the General Partner or its affiliates, is incorporated
herein by reference.

PROPERTY NOMINEE ENTITY
----------------- ----------------------------------------------

Ethan's Glen IIA CRICO of Ethan's II Limited Partnership
---------------------------------------
General Partner: CRICO of Ethan's II, Inc.
Limited Partners: CRICO of Iona, Inc. and three
unrelated parties (the interest of which un-
related parties were terminated effective
March 14, 1996)

Geary Courtyard Geary Courtyard Associates
--------------------------
General Partner: CRICO of Geary Courtyard, Inc.
Limited Partner: CRICO Holdings, Inc.

Regency Woods CRICO of Regency Woods Limited Partnership
------------------------------------------
General Partner: CRICO of Regency Woods, Inc.
Limited Partner: CRICO Holdings, Inc.

III-4
<PAGE>
PART III
--------

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Continued
----------------------------------------------

Ocean Walk CRICO of Ocean Walk Limited Partnership
---------------------------------------
General Partner: CRICO of Ocean Walk, Inc.
Limited Partner: CRICO Holdings, Inc.

Valley Creek II CRICO of Valley Creek II Limited Partnership
--------------------------------------------
General Partner: CRICO of Valley Creek II, Inc.
Limited Partner: CRICO Minnesota Holdings, Inc.

Woodlane Place CRICO of Woodlane Place Limited Partnership
-------------------------------------------
General Partner: CRICO of Woodlane Place, Inc.
Limited Partner: CRICO Minnesota Holdings, Inc.

(b) Certain business relationships.

The Partnership's response to Item 13(a) is incorporated herein by
reference. In addition, the Partnership has no business relationship with
entities of which the general partners of the General Partner of the
Partnership are officers, directors or equity owners other than as set
forth in the Partnership's response to Item 13(a).

None.

(d) Transactions with promoters.

Not applicable.

III-5
<PAGE>
PART IV
-------

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
---------------------------------------------------
ON FORM 8-K
-----------

(a) List of documents filed as part of this report:

(1) Financial Statements Page(s)
-------------------- -------

Reports of Independent Public Accountants 25

Reports of Independent Public Accountants on
which Arthur Andersen & Co. placed
reliance in 1995, 1994 and 1993 IV-6

Consolidated Balance Sheets as of
December 31, 1995 and 1994 26

Consolidated Statements of Income for
the years ended December 31, 1995, 1994
and 1993 27

Consolidated Statements of Changes in
Partners' Capital (Deficit) for the
years ended December 31, 1995, 1994 and
1993 28

Consolidated Statements of Cash Flows for
the years ended December 31, 1995, 1994
and 1993 29

Notes to Consolidated Financial Statements
which include the information required to
be included in Schedule III - Real Estate
and Accumulated Depreciation of
Properties (Note 5) 30-59

(2) Financial Statement Schedules
-----------------------------

All financial statement schedules are omitted since they are
not required, are inapplicable, or the required information is
included in the financial statements or notes thereto.

(3) Exhibits (listed according to the number assigned in the table in
Item 601 of Regulation S-K).

Exhibit No. 3 - Articles of incorporation and bylaws

a. Certificate of Limited Partnership of Capital Realty
Investors Tax Exempt Fund III Limited Partnership.
(Incorporated by reference from Exhibit 3 to the Regis-
trant's Post-Effective Amendment No. 3, dated January 30,
1989, to the Registration Statement on Form S-11.)

Exhibit No. 4 - Instruments defining the rights of security
holders, including indentures

IV-1
<PAGE>
PART IV
-------

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
---------------------------------------------------
ON FORM 8-K - Continued
-----------

a. Agreement of Limited Partnership of Capital Realty Investors
Tax Exempt Fund III Limited Partnership. (Incorporated by
reference from Exhibit 4 to the Registrant's Post-Effective
Amendment No. 3, dated January 30, 1989, to the Registration
Statement on Form S-11.)

Exhibit No. 10 - Material contracts

a. Beneficial Assignee Certificate. (Incorporated by reference
from Exhibit 10A to the Registrant's Post-Effective
Amendment No. 1, dated February 1, 1988, to the Registration
Statement on Form S-11.)

b. Amended and Restated Agreement and Plan of Merger, dated as
of March 14, 1996. (Incorporated by reference from Appendix
A-1 to the Registrant's Preliminary Proxy Statement Pursuant
to Section 14(a) of the Securities and Exchange Act of 1934
filed March 18, 1996.)

Exhibit No. 13 - Annual Report to security holders, Form 10-Q or
quarterly report to security holders

a. 1995 Annual Report to BAC Holders.

Exhibit No. 27 - Financial Data Schedule

(b) Report on Form 8-K
------------------

No Reports on Form 8-K were filed with the Commission during the
quarter ended December 31, 1995.

This list of Exhibits required by Item 601 of Regulation S-K is
included in Item (a)(3) above.

(d) Financial Statement Schedules
-----------------------------

See (a)(1) and (2) above.

IV-2
<PAGE>

SIGNATURES
----------

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

Capital Realty Investors Tax Exempt
Fund III Limited Partnership

By: CRITEF III Associates Limited
Partnership, General Partner

By: C.R.I., Inc., General Partner

March 27, 1996 /s/ William B. Dockser
- ------------------- ------------------------------------
DATE William B. Dockser, Director
Chairman of the Board,
Treasurer and Principal
Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:

March 27, 1996 /s/ H. William Willoughby
- ------------------- ------------------------------------
DATE H. William Willoughby
Director, President and Secretary

March 27, 1996 /s/ Richard J. Palmer
- ------------------- ------------------------------------
DATE Richard J. Palmer
Senior Vice President,
Chief Financial Officer,
Principal Financial and
Principal Accounting Officer

IV-3
<PAGE>

CROSS REFERENCE SHEET

The item numbers and captions in Parts I, II, III and IV hereof and the
page and/or pages in the referenced materials where the corresponding
information appears are as follows:

Item Reference Materials Pages
- ---- ------------------- -------------

3. Legal Proceedings 1995 Annual Report 55 through 59

5. Market for the Registrant's 1995 Annual Report 1 through 3
Partnership Interests and
Related Partnership Matters

6. Selected Financial Data 1995 Annual Report 1 through 3

7. Management's Discussion and 1995 Annual Report 4 through 24
Analysis of Financial
Condition and Results of
Operations

8. Financial Statements and 1995 Annual Report 25 through 29
Supplementary Data

14. Exhibits, Financial Statement 1995 Annual Report 25 through 59
Schedules, and Reports on
Form 8-K

IV-4
<PAGE>

EXHIBIT INDEX

Exhibit Page
- ------- ----------------------------

(13) Annual Report to BAC Holders 1 through 59

(27) Financial Data Schedule Filed herewith electronically

IV-5
<PAGE>

Independent Auditor's Report
----------------------------

To the Partners
Investment VII, Ltd.,
d/b/a Washington Ridge Apartments
Birmingham, Alabama

We have audited the accompanying balance sheet of Investment VII, Ltd.,
d/b/a Washington Ridge Apartments, as of December 31, 1995, and the related
statements of profit and loss, changes in partners' equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
project's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Investment VII, Ltd., d/b/a
Washington Ridge Apartments as of December 31, 1995, and the results of its
operations and the changes in partners' equity and cash flows for the year then
ended in conformity with generally accepted accounting principles.

BROWDER & ASSOCIATES, P.C.

January 30, 1996

IV-6
<PAGE>

Independent Auditor's Report
----------------------------

To the Partners
Investment VII, Ltd.,
d/b/a Washington Ridge Apartments
Birmingham, Alabama

We have audited the accompanying balance sheet of Investment VII, Ltd.,
d/b/a Washington Ridge Apartments, as of December 31, 1994, and the related
statements of income and expense, changes in partners' equity, and cash flows
for the year then ended. These financial statements are the responsibility of
the project's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Investment VII, Ltd., d/b/a
Washington Ridge Apartments as of December 31, 1994, and the results of its
operations and the changes in partners' equity and cash flows for the year then
ended in conformity with generally accepted accounting principles.

BROWDER & ASSOCIATES, P.C.

January 10, 1995

IV-7
<PAGE>

Independent Auditor's Report
----------------------------

To the Partners
Investment VII, Ltd.,
d/b/a Washington Ridge Apartments
Birmingham, Alabama

We have audited the accompanying balance sheet of Investment VII, Ltd.,
d/b/a Washington Ridge Apartments, as of December 31, 1993, and the related
statements of income and expense, changes in partners' equity, and cash flows
for the year then ended. These financial statements are the responsibility of
the project's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Investment VII, Ltd., d/b/a
Washington Ridge Apartments as of December 31, 1993, and the results of its
operations and the changes in partners' equity and cash flows for the year then
ended in conformity with generally accepted accounting principles.

BROWDER & ASSOCIATES, P.C.

February 7, 1994

IV-8
<PAGE>

Independent Auditors' Report
----------------------------

To Partners
Regency Woods Limited Partnership
Wichita, Kansas

We have audited the accompanying balance sheets of Regency Woods Limited
Partnership as of December 31, 1994 and 1993, and the related statements of loss
and partners' deficit and cash flows for the years then ended. These financial
statements are the responsibility of the Partnerships' management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Regency Woods Limited
Partnership as of December 31, 1994 and 1993, and the results of its operations
and its cash flows for the years then ended, in conformity with generally
accepted accounting principles.

Our audit was conducted for the purpose of forming an opinion on the
financial statements taken as a whole. The supporting information included in
the report (shown on pages 10 through 13) are presented for the purpose of
additional analysis and are not a required part of the basic financial
statements of Regency Woods Limited Partnership. Such information has been
subjected to the auditing procedures applied in the audit of the basis financial
statements and, in our opinion, is fairly presented in all material respects in
relation to the financial statements taken as a whole.

The accompanying financial statements have been prepared assuming that the
partnership will continue as a going concern. As discussed in Note 7 to the
financial statements, the Partnership defaulted on it's mortgage debt raising
doubts about its ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

Peterson, Peterson & Goss, L.C.

January 13, 1995

IV-9
<PAGE>

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

1995 ANNUAL REPORT TO BAC HOLDERS
<PAGE>

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

SELECTED FINANCIAL DATA
- -----------------------

Financial Highlights
- --------------------

For the years ended December 31,
1995 1994 (3) 1993 1992 1991
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net rental income (1) $ 3,393,314 $ 3,429,900 $ 2,822,609 $ 2,198,325 $ 1,067,970
Interest income from:
Mortgage revenue bonds and working
capital loans (2) 876,359 -- -- -- 769,025
Income from investment in mortgage
revenue bonds and working capital
loan -- -- -- -- 989,152
Other income (expenses) (541,312) (173,586) (230,847) 50,411 (19,760)
Valuation adjustment on investment in
real estate (1) -- -- -- -- (373,637)
------------ ------------ ------------ ------------ ------------
Net income $ 3,728,361 $ 3,256,314 $ 2,591,762 $ 2,248,736 $ 2,432,750
============ ============ ============ ============ ============

Net income allocated to
BAC Holders (98.99%) $ 3,690,705 $ 3,223,425 $ 2,565,585 $ 2,226,024 $ 2,408,179
============ ============ ============ ============ ============

Net income per BAC outstanding $ 0.70 $ 0.61 $ 0.49 $ 0.42 $ 0.46
============ ============ ============ ============ ============
Total cash distribution per
BAC outstanding $ 1.20 $ 1.63 $ 1.63 $ 1.63 $ 1.87
============ ============ ============ ============ ============

Number of BACs outstanding 5,258,268 5,258,268 5,258,268 5,258,268 5,258,268
============ ============ ============ ============ ============

Investment in real estate, before
accumulated depreciation(1) $ 82,190,763 $ 82,123,975 $ 91,576,714 $ 91,576,714 $ 91,576,714
============ ============ ============ ============ ============
Investment in real estate, before
accumulated depreciation, per
BAC outstanding $ 15.47 $ 15.46 $ 17.24 $ 17.24 $ 17.24
============ ============ ============ ============ ============
Investment in mortgage revenue bonds
and working capital loans(1) $ 8,254,707 $ 8,254,707 $ -- $ -- $ --
============ ============ ============ ============ ============

Total assets $ 84,708,344 $ 87,296,032 $ 92,296,205 $ 97,929,180 $102,798,278
============ ============ ============ ============ ============

Total assets per BAC outstanding $ 15.95 $ 16.50 $ 17.38 $ 18.44 $ 19.35
============ ============ ============ ============ ============

</TABLE>

-1-
<PAGE>

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

SELECTED FINANCIAL DATA - Continued
- -----------------------

Financial Highlights - Continued
- --------------------

For the years ended December 31,
1995 1994 (3) 1993 1992 1991
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>

Net assets $ 78,830,457 $ 81,476,398 $ 86,878,511 $ 92,918,617 $ 99,301,738
============ ============ ============ ============ ============

Net assets per BAC outstanding $ 14.84 $ 15.34 $ 16.36 $ 17.49 $ 18.69
============ ============ ============ ============ ============

</TABLE>

(1) Certain properties collateralizing the mortgage revenue bonds have been
transferred by deed in lieu of foreclosure to nominees of the Partnership,
subject to existing indebtedness, or considered in-substance foreclosed
(ISF), generally as a result of defaults of the borrowers. As a result,
the Partnership has accounted for these investments as investments in real
estate for financial statement purposes. The Partnership 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 Note 6 to consolidated financial
statements.

(2) Effective December 31, 1994, the Partnership 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.

(3) Certain amounts have been reclassified to conform to 1995 presentation.

Market Data
- -----------

On July 1, 1993, the General Partner listed the BACs on the American Stock
Exchange 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:

-2-
<PAGE>

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

SELECTED FINANCIAL DATA - Continued
- -----------------------

<TABLE>
<CAPTION>
1995
------------------------------------------
Sales Price
--------------------- Distributions
Quarter Ended High Low per BAC
- ------------------ ------- ------- -------------
<S> <C> <C> <C>
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
=========
</TABLE>

<TABLE>
<CAPTION>
1994
------------------------------------------
Sales Price
--------------------- Distributions
Quarter Ended High Low per BAC
- ------------------ ------- ------- -------------
<S> <C> <C> <C>
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
=========
</TABLE>

<TABLE>
<CAPTION>
1993
------------------------------------------
Sales Price
--------------------- Distributions
Quarter Ended High Low per BAC
- ------------------ ------- ------- -------------
<S> <C> <C> <C>
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
=========
</TABLE>

-3-
<PAGE>

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------

Business
--------

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 Agreement of Limited
Partnership. 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 non-recourse 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 commenced a public offering of Series A Beneficial Assignee
Certificates (BACs) representing assignment of limited partnership interests in
February 1988. As provided in the original offering, the Partnership could
issue BACs in additional series at the discretion of the General Partner. As of
December 31, 1995, 5,258,268 Series A BACs had been sold, representing total
capital contributions of $131,456,700.

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 to 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. In 1995, 1994 and 1993, the Partnership met these exceptions and
was not taxed as a corporation.

The Partnership'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 the Partnership's capital.
As of December 31, 1995, six of the eight properties securing the loans have
been taken control of by nominees of the Partnership through deed in lieu of
foreclosure or through transfer of partnership interests of the borrower (in the
case of Geary Courtyard), subject to existing indebtedness, which resulted in
significant valuation adjustments to the carrying values of these properties
during 1991 and 1990. Although the Partnership 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, with BAC Holder consent, to hold certain of
the properties beyond the maturity dates of the mortgage loans (1999 through

-4-
<PAGE>

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------

2000). Due to proposed Internal Revenue Service (IRS) regulations, the General
Partner 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, 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.

A description of the portfolio securing the mortgage revenue bonds and
working capital loans held by the Partnership is as follows:

-5-
<PAGE>

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------

Investment Information Mortgage Information
- ----------------------------------------------------------------- -------------------------------------------
Permanent
Date of Loan Loan
No. of Acquisition or Origination Maturity
Name and Location Rental Units Construction Date Face 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>

-6-
<PAGE>

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------

<TABLE>
<CAPTION>
Real Estate Information
------------------------------------------------------------------------------------------------
Commencement Buildings Carrying
of and Amount of
Real Estate Personal Investments
Name of Location Accounting Land Property at 12/31/95
- -------------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ETHAN'S GLEN IIA
KANSAS CITY, MO (1) 4/15/90 $ 887,222 $ 8,943,985 $ 9,831,207
GEARY COURTYARD
SAN FRANCISCO, CA (1,2) 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 (1,2) 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 11,623,157 12,345,216
----------- ----------- -----------
$10,228,056 $71,962,707 82,190,763
=========== ===========

Less: Accumulated depreciation as of December 31, 1995 (14,171,745)
-----------
$68,019,018
===========
</TABLE>

(1) As discussed herein and in Notes 2 and 5 of the notes to consolidated
financial statements, as of December 31, 1995, these properties are
accounted for as real estate due to deeds in lieu of foreclosure or other
transfers.

(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 of
the notes to consolidated financial statements.

(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 in the aggregate amount of $8,254,707.

As illustrated in the table below, as of December 31, 1995, the Partnership
accounts for all of its investments in mortgage revenue bonds and working
capital loans, except Paces River 2, as real estate for financial statement
purposes due to the receipt by nominees of the Partnership of deeds in lieu of

-7-
<PAGE>

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------

foreclosure or transfer of partnership interests or in accordance with the AICPA
Notice of Practitioners-ADC Arrangements.

-8-
<PAGE>

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------

<TABLE>
<CAPTION>
Change in
Management
Depletion of Commencement Company to
Borrower and of Date of Affiliate of the
Name of Investment Debt Service Real Estate Deed in Lieu Partnerships
Rental Property Reserves (1) Accounting or Transfer through 1/31/94(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(7) N/A (6) 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 the Partnership are solely in the form of cash flow from
property operations.

(2) CRICO Management Corporation (CRICO) or CRICO Management of Minnesota, Inc.
(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 Residential Corporation (Residential).
Residential was formed by C.R.I., Inc. (CRI), the managing general partner
of the General Partner, 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) During 1990, the nominee limited partnership holding Ethan's Glen IIA 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 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. The unaffiliated
investor limited partners are presently in default with respect to the pay-
in schedule and their interests were terminated effective March 14, 1996.

(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.

-9-
<PAGE>

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------

(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 required 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 adjusted annually). Upon the occurrence of a monetary
default during the term of the Workout, the Partnership could direct the
release of the deed currently held in escrow to be recorded in lieu of
foreclosure. The borrower has complied with the terms of the Workout,
which matured in March 1996.

(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 below.

(8) 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.

(9) 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. Upon review of
documentation from the borrower's independent accounting firm, the General
Partner released the operating deficit guarantee on March 30, 1995.
Contingent interest is being paid on a quarterly basis. This investment is
accounted for as real estate due to ADC determination.

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 of December
31, 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 nominees of the Partnership,
subject to existing indebtedness. 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 (AICPA) Notice to Practitioners-ADC Arrangements.
Accordingly, the consolidated balance sheets reflect these investments in the
amounts of $68,019,018 and $70,780,645 as of December 31, 1995 and 1994,
respectively, net of accumulated depreciation. Additionally, the Partnership
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 December 31, 1995 and 1994, as discussed
below.

In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 115 "Accounting for Certain

-10-
<PAGE>

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------

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 originally accounted for the Paces River 2 mortgage revenue
bond and working capital loan as loans. From December 31, 1991 to December 31,
1994, the Partnership accounted for the investments in Paces River 2 as real
estate as they had been considered ISF. In 1993, the Partnership finalized a
three-year workout agreement with Paces River 2 and in 1994, after a period of
sustained performance under the workout agreement, reclassified its investments
in Paces River 2 from real estate to a security and a loan.

As of December 31, 1995 and 1994, the investment in Paces River 2 on the
Partnership'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. The Partnership 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 in 1995 and 1994, as the recorded
investment of the mortgage revenue bond approximated market value. The mortgage
revenue bond and working capital loan original principal balances are $8,750,000
and $850,000, respectively.

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 in-substance foreclosure (ISF), and were 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 cost 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 American Institute of
Certified Public Accounts (AICPA) Statement of Position 92-3 "Accounting for
Foreclosed Assets" (SOP 92-3). 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 is considered permanent. In March 1995, 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 of
long-lived assets. This statement is required to be implemented by the
Partnership in 1996 and effectively supersedes the impairment guidance under SOP

-11-
<PAGE>

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------

92-3 for properties intended to be held long term. The adoption of SFAS 121 is
not expected to have a material effect on the Partnership's consolidated
financial statements. If the proposed merger, as discussed below, 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.

No valuation adjustments were necessary on the properties in 1995, 1994 or
1993.

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 Section 103 of the Internal Revenue Code of 1986,
as amended (the Code) (which would cause the bonds to lose their tax-exempt
status). The Partnership also obtained opinions from certain bond counsel that
certain transfers of the properties to Partnership nominees would not cause the
Partnership 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.

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 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.

In March 1995, the Partnership was notified by the Paces River 2 borrower
that the property may not have been in compliance with the low to moderate
income requirements under the tax-exempt bonds. The borrower had applied tenant
certification criteria consistent with that used by state authorities. Further,
state authorities had reviewed and approved the compliance on an annual basis.
However, the borrower believed that certain technical aspects of the tenant
certification criteria may not have been appropriately applied. The borrower
met with the state authorities and determined the appropriate criteria. As of
December 31, 1995, the borrower was in compliance with the requirements for tax-
exempt status.

The General Partner's ongoing strategy has been for the nominees to
continue holding the properties acquired upon the defaults of the original

-12-
<PAGE>

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------

borrowers until the loan maturity dates. If the merger proposal, as discussed
below, 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
General Partner 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 bonds as
needed.

Following are updates of significant events affecting the Partnership's
properties during 1995, 1994 and 1993:

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 1994 consolidated statement of income.
Repairs to the property relating to the fire damage were completed during
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 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 $67,000 and $29,000 were completed
in 1995 and 1994, respectively, and are included in buildings and personal
property in the consolidated balance sheets. The remaining repairs are
expected to be completed in 1996 and 1997. As the remaining costs to
correct the drainage problem are capitalizable, 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

-13-
<PAGE>

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------

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
judgment, 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.

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.
On January 31, 1996, the agreement for the proposed merger was modified for the
first time to improve the terms of the original proposal. Under the original
proposal, the redemption amount per BAC was to be $14.360. Under the first
modified agreement, the redemption amount per BAC was to be $15.1735, subject to
adjustment but not less than $15.0372 or greater than $15.3098. On March 14,
1996, the merger agreement was modified for the second time to round the
expected redemption amount per BAC from $15.1735 to $15.18, subject to
adjustment for available cash as defined in the amended merger agreement, but
not less than $15.04 or greater than $15.32. In addition, the redemption
amounts will be reduced by the amount of court approved legal fees and expenses
awarded to counsel of the plaintiffs in the putative class action suits
described below. Such legal fees and expenses are not expected to exceed $0.16
per BAC.

The BAC Holders will also vote upon the removal of the Partnership's
General Partner immediately prior to consummation of the proposed merger and the
election in its stead of a newly-formed wholly-owned subsidiary of CAPREIT.
CAPREIT has agreed to pay the General Partner $500,000 in consideration for its
1.01% general partner interest in the Partnership. CAPREIT and/or its designee
will also acquire an account receivable held by CRI and CRIIMI MAE Services
Limited Partnership (CRIIMI), for the accrued mortgage servicing and
administration fees on certain property mortgage loans of the Partnership. The
general partner of CRIIMI is a subsidiary of CRIIMI MAE Inc., a publicly-traded
company affiliated with the General Partners. Under the second modified
agreement, CAPREIT will pay the discounted amount of $667,485 to CRI for its
accrued fees, which represents approximately 42% of the total accrued fees owed
to CRI by the Partnership. Also, CAPREIT will pay $566,676 to CRIIMI for its
accrued fees, which represents all of the accrued fees which are expected to be
owed to CRIIMI by the Partnership as of June 30, 1996. If the closing of the
proposed merger does not occur by June 30, 1996, the amounts to be paid by
CAPREIT to CRIIMI will increase, to reflect additional amounts currently being
accrued for mortgage servicing and administration fees, at a rate of $47,223 per

-14-
<PAGE>

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------

month.

Each of the nominee entities has agreed to either (a) sell, assign and
transfer the partnership interests in, or the real property and other assets of,
such nominee entities 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 of the merger 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 nominee entities.

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 amount to BAC Holders from a
financial point of view. A favorable opinion from an independent investment
banking firm was issued on March 14, 1996. A proxy statement is expected to be
issued to BAC Holders after it is filed with and clearance is received from the
Securities and Exchange Commission (SEC). A preliminary proxy statement was
filed with the SEC on March 18, 1996. This proxy statement includes a full
description of the proposed merger and the independent fairness opinion.

Litigation
- ----------

On September 22, 1995, Irving Zakin commenced a putative class action (the
Zakin Action) against the Partnership, its General Partner (CRITEF III
Associates Limited Partnership), its Assignor Limited Partner (CRITEF III,
Inc.), CRI, 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 the Court of
Chancery of the State of Delaware in New Castle County (the Chancery Court)
(C.A. No. 14558). The complaint alleges, among other things, that the amount
offered to the BAC Holders in the proposed merger 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 proposed merger. The suit seeks to
enjoin the proposed merger, to obtain damages in an unspecified amount for the
BAC Holders, and to compel the Defendants to maximize the amount paid to the BAC
Holders and consider unspecified alternatives to the proposed merger.

On October 5, 1995, David and Johanna Wingard (the Wingard Action)
commenced a second putative class action against the Defendants in the Chancery
Court (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 Chancery 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 putative class actions which is

-15-
<PAGE>

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------

memorialized in a Memorandum of Understanding (the Memorandum), dated as of such
date. The proposed settlement must be approved by the Chancery 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 proposed merger. 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 Chancery 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 proposed merger, which
the General Partner believes to be in the best interest of the BAC Holders.

In accordance with the Memorandum, the agreements for the proposed merger
were amended to provide for the revised merger terms, as discussed above.
Pursuant to the Memorandum, the plaintiffs' counsel will be entitled to apply to
the Chancery Court for an award of reasonable attorneys' fees and expenses.
Such expenses are not expected to exceed $0.16 per BAC. These fees will reduce
the redemption amounts to BAC Holders in connection with the proposed merger, as
discussed. In the event that the proposed merger is not consummated, these fees
will not be borne by the Partnership. As such, the Partnership's financial
statements do not include any adjustment for these fees.

Counsel for the plaintiffs have reviewed certain documents relating to the
proposed mergers, and will have the opportunity to review and take depositions
of representatives of the General Partner 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 Chancery 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
Chancery 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.

-16-
<PAGE>

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------

the Partnership makes its financial statements and financial statements of the
properties available. Such financial statements of the properties are included
in the Form 8-K filed with the Securities and Exchange Commission on March 25,
1996.

On January 18, 1996, Mr. Schwartzberg and CMS filed a complaint in the
Circuit Court of Montgomery County, Maryland (the Circuit Court), 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 proposed 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 the Partnership nor the General
Partner 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 strike the
allegations concerning the Partnership and CRIIMI MAE Inc. and dismiss the
related counts for failure to state a claim upon which relief can be granted.
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 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 Chancery Court
against the General Partner and CRITEF III Associates Limited Partnership (No.
14837). He alleges that he has made demands upon the General Partner and CRITEF
III Associates Limited Partnership, in his capacity as a general and limited
partner of the General Partner and as a limited partner of CRITEF III Associates
Limited Partnership, 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 Partner and CRITEF III Associates Limited
Partnership 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.

-17-
<PAGE>

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------

the BAC Holders. The complaint also alleges that Mr. Schwartzberg has made
false and misleading statements in the solicitations concerning the terms of the
proposed merger and the availability of certain financial information, and has
falsely imputed base motives to the principals of the General Partner. On
February 23, 1996, the District Court, without making a finding 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 District Court held
a hearing on March 5, 1996, on the motion of preliminary injunction, and,
pending a decision, continued the temporary restraining order.

On March 18, 1996, the District Court issued its Opinion enjoining Mr.
Schwartzberg from (1) making any further solicitation of BAC Holders without
complying with the provisions of Regulation 14A under the Securities Exchange
Act of 1934, and (2) committing any violation of Rule 14a-9 (regarding false or
misleading statements) in connection with any solicitation relating to the
Partnerships. The injunction was based on the District Court's findings of fact
and conclusions of law, in which it stated that the Plaintiffs (including the
Partnership) have established a strong likelihood of success on their claim that
the press releases constitute a proxy solicitation in violation of securities
laws and that the Plaintiffs are likely to establish that Mr. Schwartzberg acted
with the requisite culpability with respect to at least some of the false
statements made in his press releases. Also on March 18, 1996, Mr. Schwartzberg
filed his answer to the complaint in the New York action, coupled with
counterclaims against at least some of the Plaintiffs (the Partnership cannot
determine from the pleadings exactly which parties are counter-defendants)
alleging that three press releases issued by the General Partner of the
Partnership constituted solicitations in violation of the same provisions of the
Securities Exchange Act and that they were false and misleading. The counter-
defendants deny the allegations.

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 New York Action, but the General Partners
do not anticipate that the litigation will have an adverse affect on the
Partnership.

Financial Condition and Liquidity
---------------------------------

The primary sources of the Partnership'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, the Partnership'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. The General Partner expects that the properties transferred
to nominees of the Partnership, subject to existing indebtedness, 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 the
Partnership. Other than the estimated $200,000 in remaining drainage correction
costs relating to Woodlane Place, as discussed above, and approximately $180,000

-18-
<PAGE>

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------

in painting costs contracted at Ocean Walk in February 1996, the Partnership has
no material commitments for capital expenditures.

The Partnership expects to continue to make distributions to BAC Holders on
a quarterly basis. The amended merger agreement stipulates that 1996
distributions cannot exceed ten cents per BAC per month. There are no other
legal restrictions on the Partnership's present or future ability to make cash
distributions other than as set forth in the amended 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 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, it is expected that 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 from one
property, 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 1996 distribution to approximate
$1.20 per BAC.

The following distributions were paid or accrued to BAC Holders of record
during 1995, 1994 and 1993:

-19-
<PAGE>

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------

<TABLE>
<CAPTION>
1995 1994 1993
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 $ 1,577,480 0.30 $ 2,103,307 $ 0.40 $ 2,106,988 $ 0.40
June 30 1,577,480 0.30 2,155,890 0.41 2,135,908 0.41
September 30 1,577,480 0.30 2,155,890 0.41 2,141,693 0.41
December 31 1,577,482 0.30 2,155,890 0.41 2,160,097 0.41
----------- ------- ----------- ------- ----------- -------
Total $ 6,309,922 $ 1.20 $ 8,570,977 $ 1.63 $ 8,544,686 $ 1.63
=========== ======= =========== ======= =========== =======

</TABLE>

Distributions to BAC Holders for the years ended December 31, 1995,
1994 and 1993 were funded as follows:

<TABLE>
<CAPTION>
For the years ended
December 31,
------------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flow (1) $ 6,647,350 $ 6,740,474 $ 7,132,542

Net (deposits to) withdrawals from working
capital/interest reserves (273,048) 1,917,953 1,499,326 (2)
------------ ------------ ------------
Total cash available for distribution $ 6,374,302 $ 8,658,427 $ 8,631,868
============ ============ ============
Distributions to:

General Partner (1.01%) $ 64,380 $ 87,450 $ 87,182
============ ============ ============
BAC Holders (98.99%) $ 6,309,922 $ 8,570,977 $ 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.

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, 1996, payable to

-20-
<PAGE>

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------

BAC Holders of record as of the last day of each month.

As of December 31, 1995, the Partnership had cash and cash equivalents of
$187,747, unrestricted marketable securities of $1,213,572 and restricted cash
and cash equivalents of $1,561,442. Marketable securities consist of tax-exempt
municipal bonds which generally contain a seven-day put option with established
banks or brokerage houses. The Partnership classified its investments in
marketable securities into the Available for Sale category under SFAS 115.
Realized gains or 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 1995 and 1994 as the cost for the tax-
exempt municipal bonds approximated market value throughout 1995 and 1994.

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, 1995 and 1994, the working capital reserves were $4,235,144 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 $517,000 as of December 31, 1995 may be used to supplement
distributions to BAC Holders. Of the total distributions made during 1995, 1994
and 1993, $0, $1,917,953 and $1,499,326, respectively, were funded from the
surplus working capital 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 their approximate 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 $298,750 and $414,326 as of
December 31, 1995 and 1994. There were no interest reserves established during
1995, 1994 or 1993. During 1995, 1994 and 1993, amounts of $115,576, $0 and
$15,000, 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.

As of December 31, 1995, the Partnership had aggregate investments in
marketable securities (including those held in working capital and interest
reserves) with the following maturities:

-21-
<PAGE>

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------

Amount Maturity
----------- --------

$ 900,632 Within one year
1,030,711 Between one and five years
690,000 Between five and ten years
3,126,123 After ten years
-----------
$5,747,466
===========

In December 1991, the FASB issued Statement of Financial Accounting
Standards No. 107 "Disclosure about Fair Value of Financial Instruments" (SFAS
107). This statement requires the disclosure of fair value information about
financial instruments for which it is practicable to estimate that value. As
required, the Partnership implemented SFAS 107 in 1995. The Partnership has
determined that the carrying amount of cash and cash equivalents and restricted
cash and cash equivalents approximate fair value. The estimated fair value of
marketable securities and working capital/interest reserves invested in
marketable securities are based on the quoted market prices of these instruments
at December 31, 1995. The estimated fair value of the Paces River 2 mortgage
revenue bond and working capital loan is estimated by discounting cash flows
expected to be received by the Partnership from this investment using current
rates adjusted for credit risk.

The following table presents information on the Partnership's financial
instruments:

<TABLE>
<CAPTION>
Carrying Estimated Fair
Value at Value at
December 31, 1995 December 31, 1995
----------------- -----------------
<S> <C> <C>
Cash and cash equivalents $ 187,747 $ 187,747
Restricted cash and cash
equivalents 1,561,442 1,561,442
Marketable securities 1,213,572 1,211,462
Working capital reserves
invested in marketable
securities 4,235,144 4,227,782
Interest reserves invested in
marketable securities 298,750 298,231
Mortgage revenue bond and
working capital loan 8,254,707 8,254,707

</TABLE>

The Partnership 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. The Partnership's net cash provided by
operating activities for 1995 and 1994, which consisted primarily of receipt of
base interest on mortgage loans, was adequate to support operating requirements

-22-
<PAGE>

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------

and the payment of declared distributions to BAC Holders and the General
Partner. The Partnership 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 and the General
Partner. Distributions to BAC Holders may be supplemented by withdrawals from
working capital and interest reserves, as discussed above.

Results of Operations
---------------------

The Partnership's net income for 1995 increased from 1994 primarily due to
the reclassification of the investment in Paces River 2 from real estate to
security and working capital loan, as discussed above. The 1994 income from the
Paces River 2 mortgage revenue bond and working capital loan was limited to the
property's net rental income due to its classification as real estate in 1994.
Contributing to the increase in net income was an increase in rental revenue as
a result of increased occupancy and rental rates at certain properties, as well
as a decrease in depreciation expense resulting from the use of an accelerated
method for personal property. Partially offsetting the increase in net income
were fees incurred by the Partnership for an independent fairness opinion in
connection with the consideration to be received by BAC Holders in the proposed
merger, as previously discussed.

The Partnership'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.

-23-
<PAGE>

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------

Presented below is a summary of the rental operations for the years
ended December 31, 1995, 1994 and 1993 of each of the properties in which
the Partnership has invested.

<TABLE>
<CAPTION>
Average Physical Occupancy Base Interest Paid From Properties' Operations(1,4)
-------------------------- ---------------------------------------------------
Name of Investment
Rental Property 1995 1994 1993 1995(4) 1994 1993
- ------------------ ---- ---- ---- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Ethan's Glen IIA 94% 92% 94% $ 754,900 $ 776,803 $ 811,075

Geary Courtyard 92% 89% 88% 762,000 601,329 687,267

Ocean Walk 95% 94% 97% 1,648,840 1,571,022 1,560,048

Paces River 2 97% 97% 97% 795,522 743,314 706,634

Regency Woods 95% 95% 93% 463,362 544,268 538,836

Valley Creek II 97% 96% 95% 722,363 614,332 554,970

Washington Ridge(5) 95% 95% 94% 875,000 875,000 875,000

Woodlane Place 99% 97% 98% 954,478 979,747 880,463
---- ---- ---- ----------- ----------- -----------
95% 95% 90% $ 6,976,465 $ 6,705,815 $ 6,614,293
==== ==== ==== =========== =========== ===========

</TABLE>

-24-
<PAGE>

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------
AND RESULTS OF OPERATIONS - Continued
-------------------------

<TABLE>
<CAPTION>
Net Rental Operating Income (2)
----------------------------------------------
Name of Investment
Rental Property 1995 1994 1993
- ------------------ ----------- ----------- -----------
<S> <C> <C> <C>
Ethan's Glen IIA $ 873,716 $ 790,845 $ 774,122

Geary Courtyard 864,522 783,771 580,464

Ocean Walk 1,671,428 1,824,749 1,606,833

Paces River 2 (3) -- 687,471 742,487

Regency Woods 463,254 625,189 565,256

Valley Creek II 756,189 673,774 614,947

Washington Ridge 1,001,816 1,024,343 1,006,807

Woodlane Place 1,138,935 964,846 1,026,677
----------- ----------- -----------
$ 6,769,860 $ 7,374,988 $ 6,917,593
=========== =========== ===========
</TABLE>

(1) Exclusive of amounts paid to the Partnership from the properties' reserves
and/or general partners of the borrowers. Such amounts were $17,834,
$250,682 and $622,060, respectively, for the years ended December 31, 1995,
1994 and 1993. 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, and reclassified the cash
flow from these 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.

(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 information is not provided for the Paces River 2
investment for 1995 because it is accounted for as an investment in
mortgage revenue bond and working capital loan as of December 31, 1994.

(4) Excludes amounts received by the Partnership in January 1996 from the
release of excess tax and insurance reserves relating to 1995. Such
amounts received from Ethan's Glen IIA, Paces River 2 and Woodlane Place
totalled $70,000, $12,000 and $23,000, respectively.

(5) Base interest paid from operations excludes amounts received by the
Partnership for contingent interest. Such amounts were $70,549, $0 and $0
for the years ending December 31, 1995, 1994 and 1993, respectively.

-25-
<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, 1995 and 1994, and the related
consolidated statements of income, changes in partners' capital (deficit) and
cash flows for the years ended December 31, 1995, 1994 and 1993. These
financial statements are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the financial statements of certain borrowers
(Washington Ridge in 1995 and Washington Ridge and Regency Woods in 1994 and
1993) which received the proceeds of the Partnership's investments in mortgage
revenue bonds, which combined statements reflect total assets of 8 percent and
15 percent, respectively of 1995 and 1994 consolidated totals, and total
revenues of 13 percent, 19 percent and 21 percent, respectively, of 1995, 1994
and 1993 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, 1995 and 1994, and the results
of its operations and its cash flows for the years ended December 31, 1995, 1994
and 1993, in conformity with generally accepted accounting principles.

Arthur Andersen LLP

Washington, D.C.
March 18, 1996

-26-
<PAGE>

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

CONSOLIDATED BALANCE SHEETS

ASSETS
<TABLE>
<CAPTION>

As of December 31,
-------------------------------
1995 1994
------------ ------------
<S> <C> <C>
Investments in Real estate:
Land $ 10,228,056 $ 10,228,056
Buildings and personal property 71,962,707 71,895,919
------------ ------------
82,190,763 82,123,975
Less: accumulated depreciation (14,171,745) (11,343,330)
------------ ------------
68,019,018 70,780,645
Mortgage revenue bond and working capital loan 8,254,707 8,254,707
------------ ------------
76,273,725 79,035,352

Cash and cash equivalents 187,747 100,513
Restricted cash and cash equivalents 1,561,442 1,345,940
Marketable securities 1,213,572 1,707,572
Working capital reserves invested in marketable securities 4,235,144 3,846,520
Interest reserves invested in marketable securities 298,750 414,326
Receivables and other assets 937,964 845,809
------------ ------------
Total assets $ 84,708,344 $ 87,296,032
============ ============

LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)

Distributions payable $ 1,593,577 $ 2,177,886
Deferred revenue 1,526,429 1,507,697
Accrued mortgage administration and servicing fees due to
related parties 1,667,032 1,172,173
Other liabilities related to real estate operations 697,504 815,924
Accounts payable and accrued expenses 393,345 145,954
------------ ------------
Total liabilities 5,877,887 5,819,634
------------ ------------

Partners' capital (deficit):
General Partner (409,340) (382,616)
Beneficial Assignee Certificates (BACs) - 5,258,268 BACs
issued and outstanding 79,239,797 81,859,014
------------ ------------
Total partners' capital 78,830,457 81,476,398
------------ ------------

Total liabilities and partners' capital $ 84,708,344 $ 87,296,032
============ ============
</TABLE>

The accompanying notes are an integral
part of these consolidated financial statements.

-27-
<PAGE>

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF INCOME

For the years ended December 31,
1995 1994 1993
----------- ----------- ------------
<S> <C> <C> <C>
Income from investment in real estate:
Rental revenue $13,065,907 $14,367,365 $13,433,679
Rental expense (6,844,178) (7,634,048) (7,144,288)
Depreciation (2,828,415) (3,303,417) (3,466,782)
----------- ----------- -----------
Net rental income 3,393,314 3,429,900 2,822,609

Mortgage revenue bond and working capital loan 876,359 -- --
----------- ----------- -----------
4,269,673 3,429,900 2,822,609
----------- ----------- -----------
Other income (expenses):
Other interest income 175,506 214,004 345,366
Merger-related expenses (338,559) -- --
General and administrative (297,001) (314,850) (446,474)
Professional fees (81,258) (72,740) (111,222)
AMEX Listing -- -- (18,517)
----------- ----------- -----------
(541,312) (173,586) (230,847)
----------- ----------- -----------
Net income $ 3,728,361 $ 3,256,314 $ 2,591,762
=========== =========== ===========

Net income allocated to General Partner (1.01%) $ 37,656 $ 32,889 $ 26,177
=========== =========== ===========

Net income allocated to BAC Holders (98.99%) $ 3,690,705 $ 3,223,425 $ 2,565,585
=========== =========== ===========

Net income per BAC $ 0.70 $ 0.61 $ 0.49
=========== =========== ===========

BACs outstanding 5,258,268 5,258,268 5,258,268
=========== =========== ===========

</TABLE>

The accompanying notes are an integral
part of these consolidated financial statements.

-28-
<PAGE>

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)

For the years ended December 31, 1995, 1994 and 1993

Beneficial
Assignee
Certificate General
Holders Partner Total
------------ ---------- ------------
<S> <C> <C> <C>
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

Distributions of $1.20 per BAC (including return
of capital of $0.50 per BAC) (6,309,922) (64,380) (6,374,302)

Net income 3,690,705 37,656 3,728,361
------------ ---------- ------------
Balance, December 31, 1995 $ 79,239,797 $ (409,340) $ 78,830,457
============ ========== ============

</TABLE>

The accompanying notes are an integral
part of these consolidated financial statements.

-29-
<PAGE>

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,728,361 $ 3,256,314 $ 2,591,762
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 2,828,415 3,303,417 3,466,782
Changes in assets and liabilities:
(Increase) decrease in restricted cash
and cash equivalents (215,502) (135,456) 577,009
(Increase) decrease in receivables and other
assets (92,155) (153,080) 61,100
Increase in deferred revenue 18,732 185,541 252,996
Increase in accrued mortgage administration
and servicing fees due to related parties 494,859 497,498 416,811
(Decrease) increase in other liabilities
related to real estate operations (118,420) 92,627 (277,563)
Increase (decrease) in accounts payable and
accrued expenses 247,391 (231) 3,203
------------ ------------ ------------
Net cash provided by operating activities 6,891,681 7,046,630 7,092,100
------------ ------------ ------------
Cash flows from investing activities:
Purchase of personal property (66,788) (297,261) --
Sale of marketable securities 12,938,223 10,618,490 14,418,516
Purchase of marketable securities (12,444,223) (10,589,456) (14,398,858)
Deposits to working capital reserves invested
in marketable securities (539,995) -- (98,939)
Withdrawals from working capital reserves invested
in marketable securities 151,371 1,917,953 1,652,326
Withdrawals from interest reserves invested
in marketable securities 115,576 -- 15,000
------------ ------------ ------------
Net cash provided by investing activities 154,164 1,649,726 1,588,045
------------ ------------ ------------
Cash flows from financing activities:
Distributions to BAC Holders and General Partner (6,958,611) (8,662,676) (8,620,184)
------------ ------------ ------------
Net increase in cash and cash equivalents 87,234 33,680 59,961

Cash and cash equivalents, beginning of year 100,513 66,833 6,872
------------ ------------ ------------
Cash and cash equivalents, end of year $ 187,747 $ 100,513 $ 66,833
============ ============ ============
</TABLE>

The accompanying notes are an integral
part of these consolidated financial statements.

-30-
<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 Agreement of Limited
Partnership. 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 general partnership comprised of certain
current and former 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 Limited Partnership Agreement, that the BACs
could be issued in 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.

-31-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of significant accounting policies

a. 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 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 due to receipt of deeds in lieu of
foreclosure or transfer of partnership interests (for Geary Courtyard),
subject to the existing indebtedness by nominees of the Partnership, or
upon acquisition, development or construction (ADC) determination. One
property, Paces River 2, is not included in this consolidation, as
discussed below.

b. Use of estimates
----------------

In preparing consolidated financial statements in conformity with
generally accepted accounting principles, the Partnership is required to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at
the date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from those estimates.

c. 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 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. The Ocean
Walk, Regency Woods, Valley Creek II, and Washington Ridge investments
originally qualified as ADC arrangements. However, nominees of the
Partnership received deeds in lieu of foreclosure, subject to existing
indebtedness, on all of these investments, except Washington Ridge, from
1993 through 1995. The Partnership continues to account for the Washington
Ridge investment as real estate due to ADC determination.

In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of 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.

-32-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of significant accounting policies - Continued

The Partnership originally accounted for the Paces River 2 mortgage
revenue bond and working capital loan as loans. From December 31, 1991 to
December 31, 1994, the Partnership accounted for its investments in Paces
River 2 as real estate as they had been considered ISF. In 1993, the
Partnership finalized a three-year workout agreement with Paces River 2 and
in 1994, after a period of sustained performance under the workout
agreement, reclassified its investments in Paces River 2 from real estate
to a security and a loan.

As of December 31, 1995 and 1994, the investment in Paces River 2 on
the Partnership'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. The Partnership 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 in 1995 and 1994, as the
recorded investment of the mortgage revenue bond approximated market value.
The mortgage revenue bond and working capital loan original principal
balances are $8,750,000 and $850,000, respectively.

d. Investment in real estate
-------------------------

As further described in Note 5, as of December 31, 1995, the
Partnership accounts for all of its investments in mortgage revenue bonds,
except Paces River 2, 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 of 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.

-33-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of significant accounting policies - Continued

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 American Institute of Certified Public Accountants (AICPA)
Statement of Position 92-3 "Accounting for Foreclosed Assets" (SOP 92-3).
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 deter-
mines that its estimated net realizable value is less than the recorded
investment in the property, an additional valuation adjustment is recorded
if the decline is considered permanent. In March 1995, 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 of long-lived assets. This statement is required to be
implemented by the Partnership 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 the Partnership's consolidated financial statements. If the proposed
merger, as discussed in Note 7, 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 will be sought.

e. 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.

f. Cash and cash equivalents
-------------------------

Cash and cash equivalents consist of tax-exempt money market funds
with original maturities of three months or less.

g. 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 transfer of the properties to nominees of the
Partnership, subject to existing indebtedness: escrow deposits restricted
for tax and insurance payments and for replacement of fixed assets. 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.

h. Marketable securities
---------------------

Marketable securities, consisting of tax-exempt municipal bonds with
carrying amounts of $1,213,572 and $1,707,572 as of December 31, 1995 and
1994, respectively, are stated at their approximate market value. The
Partnership has the option to resell certain bonds to the seller on seven

-34-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of significant accounting policies - Continued

days' notice at the bonds' par value. Proceeds from the sale of marketable
securities totalled $13,205,170, $12,536,443 and $16,085,842 for the years
ended December 31, 1995, 1994 and 1993, 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.

The Partnership has classified its investments in marketable
securities into the Available for Sale category under SFAS 115. There were
no net unrealized holding gains or losses recognized during 1995 and 1994
as the cost for the tax-exempt municipal bonds approximated market value
throughout 1995 and 1994.

As of December 31, 1995, 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
----------- --------

$ 900,632 Within one year
1,030,711 Between one and five years
690,000 Between five and ten years
3,126,123 After ten years
-----------
$5,747,466
===========

i. 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, 1995 and 1994, the working capital reserves
were $4,235,144 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 $517,000 as of
December 31, 1995 may be used to supplement distributions to BAC Holders.
Of the total distributions made during 1995, 1994 and 1993, $0, $1,917,953
and $1,499,326, respectively, were funded from the surplus working capital
reserves.

j. Interest reserves
-----------------

-35-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of significant accounting policies - Continued

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 $298,750 and $414,326 as of December 31, 1995 and
1994. There were no interest reserves established during 1995, 1994 or
1993. During 1995, 1994 and 1993, amounts of $115,576 and $0 and $15,000,
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.

k. Fair value of financial instruments
-----------------------------------

In December 1991, the FASB issued Statement of Financial Accounting
Standards No. 107 "Disclosure about Fair Value of Financial Instruments"
(SFAS 107). This statement requires the disclosure of fair value
information about financial instruments for which it is practicable to
estimate that value. As required, the Partnership implemented SFAS 107 in
1995. The Partnership has determined that the carrying value of cash and
cash equivalents and restricted cash and cash equivalents approximate fair
value. The estimated fair value of marketable securities and working
capital/interest reserves invested in marketable securities are based on
the quoted market prices of these instruments at December 31, 1995. The
estimated fair value of the Paces River 2 mortgage revenue bond and working
capital loan is estimated by discounting cash flows expected to be received
by the Partnership from this investment using current rates adjusted for
credit risk.

The following table presents information on the Partnership's
financial instruments:

</TABLE>

l. 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

-36-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of significant accounting policies - Continued

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, subject to existing indebtedness, represent non-cash
investing activities for financial statement purposes.

m. 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,
1995 and 1994, 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.

n. 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.

o. Reclassifications
-----------------

Certain amounts in the consolidated financial statements for the years
ended December 31, 1994 and 1993 have been reclassified to conform with the
1995 presentation.

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 1995, 1994 and 1993, $188,546, $191,411 and $163,540,
respectively, were reimbursed for such costs and are included in general and
administrative expense and merger- related expense 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 full base interest on the mortgage loans. On June 30, 1995,
CRICO Mortgage merged with and into CRIIMI MAE Services Limited Partnership
(CRIIMI), an affiliate of CRIIMI MAE Inc., a publicly traded real estate
investment trust (the REIT). The REIT was originally sponsored by CRI, the
general partner of the General Partner, but is not controlled by CRI, although
the CRI stockholders are directors, 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

-37-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Related-party transactions - Continued

merger was distributed by CRICO Mortgage to its shareholders and contributed by
them to CRI. After June 30, 1995, the mortgage administration and servicing are
being performed by CRIIMI and mortgage administration and servicing fees are
payable to that entity. The merger did not result in any increase in fees or
changes in the amount of fees which are currently payable.

The following unpaid fees, including those relating to Paces River 2, were
due to CRI/CRICO Mortgage and CRIIMI as of December 31, 1995 and 1994:

<TABLE>
<CAPTION>
As of December 31,
1995 1994
----------- -----------
<S> <C> <C>
CRI/CRICO Mortgage $ 1,578,694 $ 1,307,173
CRIIMI 283,338 --
----------- -----------
Total $ 1,862,032 $ 1,307,173
=========== ===========
</TABLE>

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.

In connection with the amended merger agreement entered into by the
Partnership, as discussed in Note 7, the unpaid fees will be purchased from CRI
for the discounted amount of $667,485, which represents approximately 42% of the
total accrued fees owed to CRI. In addition, unpaid fees will be purchased by
CAPREIT from CRIIMI for $556,674, which represents all of the accrued fees which
are expected to be owed to CRIIMI by the Partnership as of June 30, 1996. The
proposed purchase price for CRIIMI's portion remains in effect until June 30,
1996. If the proposed merger is not consummated by such date, the purchase
price of CRIIMI's portion will be adjusted upward at a rate of $47,223 per
month.

Fees paid by the borrowers to CRI/CRICO Mortgage and CRIIMI for the years
ended December 31, 1995, 1994 and 1993 were as follows:

<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
CRI/CRICO Mortgage $ 49,312 $ 144,175 $ 212,359
CRIIMI 37,500 - -
----------- ----------- -----------
Total $ 86,812 $ 144,175 $ 212,359
=========== =========== ===========
</TABLE>

-38-
<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 were paid or accrued during 1993. 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
(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. This change did not result in any increase in
property management fees.

Nominee entities formed to take title to properties, subject to existing
indebtedness, 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 prior to March 14, 1996) 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.

In connection with the amended merger agreement, each of the nominee
entities has agreed to either (a) sell, assign and transfer the partnership
interests in, or the real property and other assets of, such nominee entities 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 of the
merger 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 nominee entities.

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

-39-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. Profits, losses and cash distributions to Partners - Continued

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
(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 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.

-40-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. Profits, losses and cash distributions to Partners - Continued

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.

-41-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. Profits, losses and cash distributions to Partners - Continued

The following distributions were paid or accrued to BAC Holders of
record during 1995, 1994 and 1993:

<TABLE>
<CAPTION>
1995 1994 1993
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 $ 1,577,480 $ 0.30 $ 2,103,307 $ 0.40 $ 2,106,988 $ 0.40
June 30 1,577,480 0.30 2,155,890 0.41 2,135,908 0.41
September 30 1,577,480 0.30 2,155,890 0.41 2,141,693 0.41
December 31 1,577,482 0.30 2,155,890 0.41 2,160,097 0.41
----------- ------- ----------- ------- ----------- -------
Total $ 6,309,922 $ 1.20 $ 8,570,977 $ 1.63 $ 8,544,686 $ 1.63
=========== ======= =========== ======= =========== =======
</TABLE>

Distributions to BAC Holders for the years ended December 31, 1995,
1994 and 1993 were funded as follows:

<TABLE>
<CAPTION>
For the years ended
December 31,
-------------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flow (1) $ 6,647,350 $ 6,740,474 $ 7,132,542

Net (deposits to) withdrawals from working
capital/interest reserves (273,048) 1,917,953 1,499,326(2)
------------ ------------ ------------
Total cash available for distribution $ 6,374,302 $ 8,658,427 $ 8,631,868
============ ============ ============
Distributions to:

General Partner (1.01%) $ 64,380 $ 87,450 $ 87,182
============ ============ ============

BAC Holders (98.99%) $ 6,309,922 $ 8,570,977 $ 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.

-42-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

A description of the portfolio securing the mortgage revenue bonds and
working capital loans held by the Partnership is as follows:

-43-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. Investments - Continued

<TABLE>
<CAPTION>
Investment Information Mortgage Information
- ----------------------------------------------------------------- ---------------------------------------------
Permanent
Date of Loan Loan
No. of Acquisition or Origination Maturity
Name and Location Rental Units Construction Date Face 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

-44-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. Investments - Continued

<TABLE>
<CAPTION>
Real Estate Information
-------------------------------------------------------------------
Commencement Buildings Carrying
of and Amount of
Real Estate Personal Investments
Name of Location Accounting Land Property at 12/31/95
- -------------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ETHAN'S GLEN IIA
KANSAS CITY, MO (1) 4/15/90 $ 887,222 $ 8,943,985 $ 9,831,207
GEARY COURTYARD
SAN FRANCISCO, CA (1,2) 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 (1,2) 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 11,623,157 12,345,216
----------- ----------- -----------
$10,228,056 $71,962,707 82,190,763
=========== ===========
Less: Accumulated depreciation as of December 31, 1995 (14,171,745)
-----------
$68,019,018
===========
</TABLE>

(1) As discussed in Notes 2 and herein, as of December 31, 1995, these
properties are accounted for as real estate due to deed in lieu of
foreclosure or other transfers.

(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.

-45-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. Investments - Continued

Public Accountants (AICPA) Notice to Practitioners-ADC Arrangements.
Accordingly, the consolidated balance sheets reflect these investments in the
amounts of $68,019,018 and $70,780,645 as of December 31, 1995 and 1994,
respectively, net of accumulated depreciation. Additionally, the Partnership
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 December 31, 1995 and 1994, as discussed
in Note 2.

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.

Following are updates of significant events affecting the Partnership's
properties during 1995, 1994 and 1993:

Ocean Walk
----------

Woodlane Place
--------------

-46-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. Investments - Continued

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.

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. Addition-
ally, 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 six of the
properties as of December 31, 1995. These properties, along with the collateral
for the Washington Ridge mortgage, are classified as investments in real estate
in the accompanying balance sheets as of December 31, 1995 and 1994.

-47-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. Investments - Continued

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.

The General Partner's ongoing strategy has been for the nominees to
continue holding the properties acquired upon the defaults of the original
borrowers until the loan maturity dates. If the merger proposal, as discussed
in Note 7, 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
General Partner 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 bonds as
needed.

No valuation adjustments were necessary on the properties in 1995, 1994 or
1993.

As illustrated in the table below, as of December 31, 1995, the Partnership
accounts for all of its investments, except Paces River 2, in mortgage revenue
bonds and working capital loans as real estate for financial statement purposes
due to the receipt of deeds in lieu of foreclosure or transfer of partnership
interests when or in accordance with the Notice.

-48-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. Investments - Continued

<TABLE>
<CAPTION>
Change in
Management
Depletion of Commencement Company to
Borrower and of Date of Affiliate of the
Name of Investment Debt Service Real Estate Deed in Lieu Partnerships
Rental Property Reserves (1) Accounting or Transfer through 1/31/94(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 (7) N/A (6) 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 the Partnership are solely in the form of cash flow from
property operations.

(2) CRICO Management Corporation (CRICO) or CRICO Management of Minnesota, Inc.
(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 Residential Corporation (Residential).
Residential was formed by CRI, the managing general partner of the General
Partner, but on February 1, 1994, Residential was sold to AP CAPREIT, which
is not currently owned or controlled by CRI and/or its affiliates.

(5) A deed in lieu of foreclosure was obtained in exchange for a release of the
General Partners' unsecured operating deficit guarantee.

-49-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. Investments - Continued

(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 below.

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 was 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,

-50-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. Investments - Continued

if any. Contingent interest is recognized as revenue when collected.
Contingent interest due as of December 31, 1995, 1994 and 1993 amounted to
$37,635,033, $30,841,439 and $23,977,293, respectively. No contingent interest
was received or accrued by the Partnership during 1994 or 1993. The Partnership
received contingent interest of $70,549 from Washington Ridge during 1995.

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 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 with exception to the contingent interest
received from Washington Ridge, as discussed above.

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 and the issuers
of the mortgage revenue bonds 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.
There can be no assurance that the investors or the issuers will consent to such
extensions.

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

-51-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. Investments - Continued

(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, 1995 the Partnership is aware of no
"event of taxability" which has occurred.

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, 1995, 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, except Paces River 2, are accounted for as real estate as of December 31,
1995.

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, 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 or nominee until such time as the uncertainty of
collection of unpaid base interest is eliminated. 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 is recognized to the extent
of cash received. Contingent interest from the investment is recognized as
revenue when collected. Contingent interest of $70,549, as discussed above, was
recognized for the year ended December 31, 1995. No contingent interest was
recognized for the years ended December 31, 1994 and 1993.

As discussed in Note 5, 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 as of December 31, 1995. However, for federal income
tax purposes, the investments in all of these mortgage revenue bonds are treated
as loans, interest on which is exempt from federal income tax. A reconciliation

-52-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. Income taxes - Continued

of the primary differences between the financial statement net income and
municipal income for tax purposes is as follows:

-53-
<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,
-----------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Financial statement net income $ 3,728,361 $ 3,256,314 $ 2,591,726

Municipal interest income not recognized (1) 6,783,017 7,101,650 6,830,474
Rental income, net (2) (3,393,314) (3,429,900) (2,822,609)
Investment expenses and losses not allowable
for tax purposes 29,166 25,344 720,849
Excess amortization for tax purposes (144,600) (144,600) (144,600)
Taxable income on working capital loans, net (127,505) -- (252,033)
------------ ------------ ------------
Municipal income, net for tax purposes $ 6,875,125 $ 6,808,808 $ 6,923,807
============ ============ ============

Municipal income per BAC $ 1.29 $ 1.28 $ 1.30
============ ============ ============

</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 seven of the eight mortgage loan
investments and two of the three working capital loans as real estate for
financial statement purposes, and reclassified the cash flow from these
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, 1995, 1994 and 1993 that
are due to the Partnership from the properties:

-54-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. Income taxes - Continued

For the year ended December 31, 1995
----------------------------------------------------------------------------------
Base Interest Base Interest Cumulative
Paid From Paid From Current Base Unpaid
Current Base Properties' Non-Operating Interest Base
Interest Due(1) Operations(3,4) Sources(2) Not Paid Interest
--------------- ------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Ethan's Glen IIA $ 920,937 $ 754,900 $ -- $ 166,037 $ 321,262
Geary Courtyard 1,740,600 762,000 -- 978,600 5,722,503
Ocean Walk 1,774,427 1,648,840 -- 125,587 1,466,416
Paces River 2 769,025 795,522 -- (26,497) 197,359
Regency Woods 693,458 463,362 17,834 212,262 270,050
Valley Creek II 919,100 722,363 -- 196,737 707,343
Washington Ridge 875,000 875,000 -- -- 72,917
Woodlane Place 1,407,000 954,478 -- 452,522 2,662,408
---------- ---------- ---------- ---------- -----------
$9,099,547 $6,976,465 $ 17,834 $2,105,248 $11,420,258
========== ========== ========== ========== ===========
</TABLE>

<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>

-55-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. Income taxes - Continued

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
========== ========== ========== ========== ===========

</TABLE>

(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, totaled $1,050,137, $803,279 and $518,381 for 1995,
1994 and 1993, respectively.
(2) Amounts were funded from reserves provided for from the mortgage loan
proceeds and/or funds from the general partners of the borrowers.
(3) Excludes amounts received by the Partnership in January 1996 from the
release of excess tax and insurance reserves relating to 1995. Such
amounts received from Ethan's Glen IIA, Paces River 2 and Woodlane Place
totalled $70,000, $12,000 and $23,000, respectively.
(4) Excludes contingent interest of $70,549 received by the Partnership from
Washington Ridge during 1995.

7. Merger Proposal

-56-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. Merger Proposal - Continued

amounts will be reduced by the amount of court approved legal fees and expenses
awarded to counsel of the plaintiffs in the putative class action suits
described below. Such legal fees and expenses are not expected to exceed $0.16
per BAC.

8. Litigation

-57-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. Litigation - Continued

Chancery of the State of Delaware in New Castle County (the Chancery Court)
(C.A. No. 14558). The complaint alleges, among other things, that the amount
offered to the BAC Holders in the proposed merger 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 proposed merger. The suit seeks to
enjoin the proposed merger, to obtain damages in an unspecified amount for the
BAC Holders, and to compel the Defendants to maximize the amount paid to the BAC
Holders and consider unspecified alternatives to the proposed merger.

On January 31, 1996, the Defendants and the plaintiffs and their respective
attorneys reached a tentative settlement of the putative 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 Chancery 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 proposed merger. 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 Chancery Court of the settlement.

-58-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. Litigation - Continued

of proposed settlement, the parties will use their best efforts to obtain final
Chancery Court approval of the settlement and the dismissal of the class actions
as to all of the claims.

Thereafter, Mr. Schwartzberg launched a hostile consent solicitation to be
designated as managing general partner of approximately 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 the General Partner. Mr.
Schwartzberg has publicly stated that he is opposing the proposed merger until
the Partnership makes its financial statements and financial statements of the
properties available. Such financial statements of the properties are included
in the Form 8-K filed with the Securities and Exchange Commission on March 25,
1996.

On February 12, 1996, the 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 Chancery Court
against the General Partner and CRITEF Associates Limited Partnership (No.
14837). He alleges that he has made demands upon the General Partner and CRITEF
III Associates Limited Partnership, in his capacity as a general and limited
partner of the General Partner and as a limited partner of CRITEF III Associates
Limited Partnership, 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 Partner and CRITEF III Associates Limited
Partnership 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

-59-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. Litigation - Continued

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 Partnership, together with the General Partner,
Capital Realty Investors Tax Exempt Fund Limited Partnership and its general
partner, CRI and CAPREIT (collectively, the Plaintiffs) filed suit against Mr.
Schwartzberg in the United States District Court for the Southern District of
New York (the District Court), No. 96 Civ. 1186 (LAK) (the New York Action).
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. The complaint also alleges that Mr. Schwartzberg has made
false and misleading statements in the solicitations concerning the terms of the
proposed merger and the availability of certain financial information, and has
falsely imputed base motives to the principals of the General Partner. On
February 23, 1996, the District Court, without making a finding 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 District Court held
a hearing on March 5, 1996, on the motion of preliminary injunction, and,
pending a decision, continued the temporary restraining order.

On March 18, 1996, the District Court issued its Opinion enjoining Mr.
Schwartzberg from (1) making any further solicitation of BAC Holders without
complying with the provisions of Regulation 14A under the Securities Exchange
Act of 1934, and (2) committing any violation of Rule 14a-9 (regarding false or
misleading statements) in connection with any solicitation relating to the
Partnerships. The injunction was based on the District Court's findings of fact
and conclusions of law, in which it stated that the Plaintiffs (including the
Partnership) have established a strong likelihood of success on their claim that
the press releases constitute a proxy solicitation in violation of securities
laws and that the Plaintiffs are likely to establish that Mr. Schwartzberg acted
with the requisite culpability with respect to at least some of the false
statements made in his press releases. Also on March 18, 1996, Mr. Schwartzberg
filed his answer to the complaint in the New York action, coupled with
counterclaims against at least some of the plaintiffs (the Partnership cannot
determine from the pleadings exactly which parties are counter-defendants)
alleging that three press releases issued by the General Partner of the
Partnership constituted solicitations in violation of the same provisions of the
Securities Exchange Act and that they were false and misleading. The counter-
defendants deny the allegations.

-60-

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,749,189
<SECURITIES> 5,747,466
<RECEIVABLES> 937,964
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 82,190,763
<DEPRECIATION> 14,171,745
<TOTAL-ASSETS> 84,708,344
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 78,830,457
<TOTAL-LIABILITY-AND-EQUITY> 84,708,344
<SALES> 0
<TOTAL-REVENUES> 14,117,772
<CGS> 0
<TOTAL-COSTS> 9,672,593
<OTHER-EXPENSES> 716,818
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,728,361
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,728,361
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,728,361
<EPS-PRIMARY> 0.70
<EPS-DILUTED> 0.70

</TABLE>