<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
[X] Filed by the Registrant
[ ] Filed by a Party other than the Registrant
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
[ ] Confidential, for use of the Commission only (as permitted by Rule 14a-
6(e)(2)
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
("CRITEF")
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
("CRITEF III")
- --------------------------------------------------------------------------------
(Names of Registrants As Specified in Their Charters)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2), or
Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-
6(i)(3).
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
Beneficial Assignee Certificates ("BACs"), CRITEF, Series I & II
Beneficial Assignee Certificates ("BACs"), CRITEF III
<PAGE>
2) Aggregate number of securities to which transaction applies:
2,280,000 BACs in CRITEF, Series I
3,238,760 BACs in CRITEF, Series II
5,258,268 BACs in CRITEF III
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11: $15.00 per BAC in CRITEF, Series I
$14.68 per BAC in CRITEF, Series II
$15.32 per BAC in CRITEF III
4) Proposed maximum aggregate value of transaction: $162,301,663
5) Total fee paid: $32,461
[ ] Fee paid previously with preliminary materials.
[X] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
1) Amount previously paid: $31,759
2) Form, Schedule or Registration Statement No.: Schedule 14A
3) Filing parties: CRITEF and CRITEF III
4) Date filed: March 18, 1996
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP, SERIES I
c/o The CRI Building
11200 Rockville Pike
Rockville, Maryland 20852
________ __, 1996
Dear BAC Holder:
You are cordially invited to attend the special meeting of the holders ("BAC
Holders") of Beneficial Assignee Certificates ("BACs") in Series I issued by
Capital Realty Investors Tax Exempt Fund Limited Partnership ("Fund I- II") to
be held at [meeting place] on [meeting date], 1996 at 9:00 a.m., local time. At
the Special Meeting, BAC Holders will vote upon a series of proposals relating
to the merger (the "Merger") of an affiliate of Capital Apartment Properties,
Inc. ("CAPREIT") into Fund I-II and certain related transactions.
As a result of the Merger, all of the Series I BACs (other than BACs held by
CAPREIT or its affiliates or Fund I-II, if any) will be redeemed for $14.82 per
BAC net to the holder in cash, without interest, subject to increase based upon
Available Cash (as defined) at closing.
In addition to and in connection with the vote on the proposed Merger, BAC
Holders also are being asked to vote on a proposal (together with the Merger
proposal, the "Transaction Proposals"), to approve (a) the sale of the 1.01%
general partner interest in Fund I-II held by the General Partner to a newly-
formed, wholly-owned subsidiary of CAPREIT ("CAPREIT GP") for $500,000, and the
substitution of CAPREIT GP as general partner in its stead, and (b) the issuance
of a limited partner interest in Fund I-II to CAPREIT or its designee in
exchange for a contribution of real property or other assets, in each case to
occur concurrently with the consummation of the Merger.
THE GENERAL PARTNER BELIEVES THAT THE PROPOSED TRANSACTIONS ARE FAIR TO AND
IN THE BEST INTERESTS OF BAC HOLDERS AND THAT THE CONSIDERATION PAYABLE TO THE
BAC HOLDERS IN THE MERGER IS FAIR TO SUCH BAC HOLDERS AND RECOMMENDS THAT BAC
HOLDERS VOTE "FOR" APPROVAL OF EACH OF THE TRANSACTION PROPOSALS.
The Transaction Proposals are described in more detail in the accompanying
Joint Proxy Statement for the special meeting of BAC Holders of Fund I-II and a
special meeting of BAC holders of Capital Realty Investors Tax Exempt Fund III
Limited Partnership ("Fund III") to be held for the purpose of a vote by the BAC
holders of such Fund on similar transaction proposals.
BAC Holders are urged to review carefully the accompanying Joint Proxy
Statement. The affirmative vote of the holders of a majority of the outstanding
BACs in Fund I-II voting as a single class will be necessary for the approval of
each of the Transaction Proposals. The approval of each Transaction Proposal is
a condition to the approval of the other Transaction Proposal. At the option of
CAPREIT, the consummation of the Transaction Proposals also is conditioned upon
the consummation of similar transactions by Fund III. It is important to
understand that if you abstain from voting, your BACs will, in effect, be
counted as being voted against the Transaction Proposals.
<PAGE>
In considering the Transaction Proposals, BAC Holders should be aware that as
a result of certain benefits to be realized by the General Partner and certain
of its affiliates in connection with the Merger, the General Partner may have
interests in conflict with those of the BAC Holders. See "SPECIAL FACTORS--
Interests of Certain Persons in the Transactions" and "SPECIAL FACTORS--Certain
Relationships and Related Transactions" in the accompanying Joint Proxy
Statement.
All BAC Holders are cordially invited to attend the Special Meeting. Whether
or not you plan to attend the Special Meeting in person and regardless of the
number of BACs you own, PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED GOLD PROXY
AND MAIL IT AS SOON AS POSSIBLE IN THE ENCLOSED STAMPED, ADDRESSED RETURN
ENVELOPE TO ENSURE THAT YOUR BACS ARE VOTED AT THE SPECIAL MEETING. You may
vote in person if you wish to do so even though you have previously sent in your
Proxy.
THE VOTE OF EVERY BAC HOLDER IS IMPORTANT.
Very truly yours,
CRITEF ASSOCIATES LIMITED
PARTNERSHIP, General Partner
by C.R.I., Inc., its general partner
___________________________
William B. Dockser
Chairman of the Board of C.R.I., Inc.
and
___________________________
H. William Willoughby
President of C.R.I., Inc.
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP, SERIES II
c/o The CRI Building
11200 Rockville Pike
Rockville, Maryland 20852
________ __, 1996
Dear BAC Holder:
You are cordially invited to attend the special meeting of the holders ("BAC
Holders") of Beneficial Assignee Certificates ("BACs") in Series II issued by
Capital Realty Investors Tax Exempt Fund Limited Partnership ("Fund I- II") to
be held at [meeting place] on [meeting date], 1996 at 9:00 a.m., local time. At
the Special Meeting, BAC Holders will vote upon a series of proposals relating
to the merger (the "Merger") of an affiliate of Capital Apartment Properties,
Inc. ("CAPREIT") into Fund I-II and certain related transactions.
As a result of the Merger, all of the Series II BACs (other than BACs held by
CAPREIT or its affiliates or Fund I-II, if any) will be redeemed for $14.50 per
BAC net to the holder in cash, without interest, subject to increase based upon
Available Cash (as defined) at closing.
In addition to and in connection with the vote on the proposed Merger, the
BAC Holders also are being asked to vote on a proposal (together with the Merger
proposal, the "Transaction Proposals") to approve (a) the sale of the 1.01%
general partner interest in Fund I-II held by the General Partner to a newly-
formed, wholly-owned subsidiary of CAPREIT ("CAPREIT GP") for $500,000, and the
substitution of CAPREIT GP as general partner in its stead, and (b) the issuance
of a limited partner interest in Fund I-II to CAPREIT or its designee in
exchange for the contribution to Fund I-II of real property or other assets, in
each case to occur concurrently with the consummation of the Merger.
THE GENERAL PARTNER BELIEVES THAT THE PROPOSED TRANSACTIONS ARE FAIR TO AND
IN THE BEST INTERESTS OF BAC HOLDERS AND THAT THE CONSIDERATION PAYABLE TO THE
BAC HOLDERS IN THE MERGER IS FAIR TO SUCH BAC HOLDERS AND RECOMMENDS THAT BAC
HOLDERS VOTE "FOR" APPROVAL OF EACH OF THE TRANSACTION PROPOSALS.
The Transaction Proposals are described in more detail in the accompanying
Joint Proxy Statement for the special meeting of BAC Holders of Fund I-II and a
special meeting of BAC holders of Capital Realty Investors Tax Exempt Fund III
Limited Partnership ("Fund III") to be held for the purpose of a vote by the BAC
holders of such Fund on similar transaction proposals.
BAC Holders are urged to review carefully the accompanying Joint Proxy
Statement. The affirmative vote of the holders of a majority of the outstanding
BACs in Fund I-II voting as a single class will be necessary for the approval of
each of the Transaction Proposals. The approval of each Transaction Proposal is
a condition to the approval of the other Transaction Proposal. At the option of
CAPREIT, the consummation of the Transaction Proposals also is conditioned upon
the consummation of similar transactions by Fund III. It is important to
understand that if you abstain from voting, your BACs will, in effect, be
counted as being voted against the Transaction Proposals.
In considering the Transaction Proposals, BAC Holders should be aware that as
a result of certain benefits to be realized by the General Partner and certain
of its affiliates in connection with the
<PAGE>
Merger, the General Partner may have interests in conflict with those of the BAC
Holders. See "SPECIAL FACTORS--Interests of Certain Persons in the Transactions"
and "SPECIAL FACTORS--Certain Relationships and Related Transactions" in the
accompanying Joint Proxy Statement.
All BAC Holders are cordially invited to attend the Special Meeting. Whether
or not you plan to attend the Special Meeting in person and regardless of the
number of BACs you own, PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED GOLD PROXY
AND MAIL IT AS SOON AS POSSIBLE IN THE ENCLOSED STAMPED, ADDRESSED RETURN
ENVELOPE TO ENSURE THAT YOUR BACS ARE VOTED AT THE SPECIAL MEETING. You may
vote in person if you wish to do so even though you have previously sent in your
Proxy.
THE VOTE OF EVERY BAC HOLDER IS IMPORTANT.
Very truly yours,
CRITEF ASSOCIATES LIMITED
PARTNERSHIP, General Partner
by C.R.I., Inc., its general partner
___________________________
William B. Dockser
Chairman of the Board of C.R.I., Inc.
and
___________________________
H. William Willoughby
President of C.R.I., Inc.
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
c/o The CRI Building
11200 Rockville Pike
Rockville, Maryland 20852
________ __, 1996
Dear BAC Holder:
You are cordially invited to attend the special meeting of the holders ("BAC
Holders") of Beneficial Assignee Certificates ("BACs") issued by Capital Realty
Investors Tax Exempt Fund III Limited Partnership ("Fund III") to be held at
[meeting place] on [meeting date], 1996 at 10:00 a.m., local time. At the
Special Meeting, BAC Holders will vote upon a series of proposals relating to
merger (the "Merger") of an affiliate of Capital Apartment Properties, Inc.
("CAPREIT") into Fund III and certain related transactions.
As a result of the Merger, all of the BACs (other than BACs held by CAPREIT
or its affiliates or Fund III, if any) will be redeemed for $15.13 per BAC, net
to the holder in cash, without interest, subject to increase based upon
Available Cash (as defined) at closing.
In addition to and in connection with the vote on the proposed Merger, BAC
Holders also are being asked to vote on a proposal (together with the Merger
proposal, the "Transaction Proposals"), to approve (a) the sale of the 1.01%
general partner interest in Fund III held by the General Partner to a newly-
formed, wholly-owned subsidiary of CAPREIT ("CAPREIT GP") for $500,000, and the
substitution of CAPREIT GP as general partner in its stead, and (b) the issuance
of a limited partner interest in Fund III to CAPREIT or its designee in exchange
for the contribution to Fund III of real property or other assets, in each case
to occur concurrently with the consummation of the Merger.
THE GENERAL PARTNER BELIEVES THAT THE PROPOSED TRANSACTIONS ARE FAIR TO AND
IN THE BEST INTERESTS OF BAC HOLDERS AND THAT THE CONSIDERATION PAYABLE TO THE
BAC HOLDERS IN THE MERGER IS FAIR TO SUCH BAC HOLDERS AND RECOMMENDS THAT BAC
HOLDERS VOTE "FOR" APPROVAL OF EACH OF THE TRANSACTION PROPOSALS.
The Transaction Proposals are described in more detail in the accompanying
Joint Proxy Statement for the special meeting of BAC Holders of Fund III and a
special meeting of BAC holders of Capital Realty Investors Tax Exempt Fund
Limited Partnership ("Fund I-II") to be held for the purpose of a vote by the
BAC holders of such Fund on similar transaction proposals.
BAC Holders are urged to review carefully the accompanying Joint Proxy
Statement. The affirmative vote of the holders of a majority of the outstanding
BACs in Fund III will be necessary for the approval of each of the Transaction
Proposals. The approval of each Transaction Proposal is a condition to the
approval of the other Transaction Proposal. At the option of CAPREIT, the
consummation of the Transaction Proposals also is conditioned upon the
consummation of similar transactions by Fund I-II. It is important to
understand that if you abstain from voting, your BACs will, in effect, be
counted as being voted against the Transaction Proposals.
In considering the Transaction Proposals, BAC Holders should be aware that as
a result of certain benefits to be realized by the General Partner and certain
of its affiliates in connection with the
<PAGE>
Merger, the General Partner may have interests in conflict with those of the BAC
Holders. See "SPECIAL FACTORS--Interests of Certain Persons in the Transactions"
and "SPECIAL FACTORS--Certain Relationships and Related Transactions" in the
accompanying Joint Proxy Statement.
All BAC Holders are cordially invited to attend the Special Meeting. Whether
or not you plan to attend the Special Meeting in person and regardless of the
number of BACs you own, PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED GOLD PROXY
AND MAIL IT AS SOON AS POSSIBLE IN THE ENCLOSED STAMPED, ADDRESSED RETURN
ENVELOPE TO ENSURE THAT YOUR BACS ARE VOTED AT THE SPECIAL MEETING. You may
vote in person if you wish to do so even though you have previously sent in your
Proxy.
THE VOTE OF EVERY BAC HOLDER IS IMPORTANT.
Very truly yours,
CRITEF III ASSOCIATES LIMITED
PARTNERSHIP, General Partner
by C.R.I., Inc., its general partner
___________________________
William B. Dockser
Chairman of the Board of C.R.I., Inc.
and
___________________________
H. William Willoughby
President of C.R.I., Inc.
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
____________________
NOTICE OF SPECIAL MEETINGS
To Be Held on [meeting date], 1996
NOTICE IS HEREBY GIVEN that special meetings of the holders (the "BAC
Holders") of Beneficial Assignee Certificates ("BACs") in Series I and II issued
by Capital Realty Investors Tax Exempt Fund Limited Partnership, a Delaware
limited partnership ("Fund I- II"), and BACs issued by Capital Realty Investors
Tax Exempt Fund III Limited Partnership, a Delaware limited partnership ("Fund
III," and together with Fund I-II, the "Funds"), will be held on [meeting date],
1996 at [location of meeting] at 9:00 a.m. and 10:00 a.m., local time
respectively.
The purpose of the special meetings is to consider and vote upon:
1. A proposal (the "Merger Proposal") to approve and adopt (a)
with respect to Fund I-II, the Fourth Amended and Restated Agreement and
Plan of Merger, dated as of August 21, 1996 (the "Fund I-II Merger
Agreement"), among Fund I-II, CRITEF Associates Limited Partnership, a
Delaware limited partnership which is the general partner of Fund I-II
("Fund I-II GP"), Watermark Partners, L.P. ("Merger Partnership"), a
Delaware limited partnership affiliated with Capital Apartment Properties,
Inc., a Maryland corporation ("CAPREIT"), and others, which provides for
the Merger (the "Fund I-II Merger") of Merger Partnership into Fund I-II
pursuant to which, among other things, each BAC (other than BACs held by
CAPREIT or its affiliates or the Funds, if any) will be redeemed for cash
in the amount of $14.82 per BAC net to the holder in cash, without
interest, in the case of Series I and $14.50 per BAC net to the holder in
cash, without interest, in the case of Series II, in each case subject to
increase as described below, and (b) with respect to Fund III, the Fourth
Amended and Restated Agreement and Plan of Merger, dated as of August 21,
1996 (the "Fund III Merger Agreement" and, together with the Fund I-II
Merger Agreement, the "Merger Agreements"), among Fund III, CRITEF III
Associates Limited Partnership, a Delaware limited partnership which is the
general partner of Fund III ("Fund III GP" and, together with Fund I-II GP,
the "General Partners"), Watermark III Partners, L.P., ("Merger Partnership
III," and together with Merger Partnership, the "Merger Partnerships") a
Delaware limited partnership, affiliated with CAPREIT, and others, which
provides for the Merger (the "Fund III Merger," and together with the Fund
I-II Merger, the "Mergers," and individually, a "Merger") pursuant to
which, among other things, each BAC (other than BACs held by CAPREIT or its
affiliates or the Funds, if any) will be redeemed for cash in the amount of
$15.13 per BAC net to the holder in cash, without interest, subject to
increase as described below, and in each case, related amendments to the
respective Agreement of Limited Partnership of each Fund to authorize
expressly the Mergers and the Merger Agreements and the transactions
contemplated thereby. In each case, the redemption price per BAC is
subject to increase
<PAGE>
based upon the amount of Available Cash (as defined in the Merger
Agreements) at closing as described in more detail in the accompanying
Joint Proxy Statement;
2. A proposal (the "New Partners Proposal", and together with
the Merger Proposal, the "Transaction Proposals") with respect to each
Fund, to approve in connection with a Merger (a) the sale of the 1.01%
general partner interest held by such Fund's General Partner to CAPREIT GP,
Inc., a newly-formed, wholly-owned subsidiary of CAPREIT ("CAPREIT GP") for
$500,000, and the substitution of CAPREIT GP as general partner of such
Fund in its stead, and (b) the issuance of a limited partner interest in
such Fund to CAPREIT or its designee in exchange for the contribution to
such Fund of real property or other assets, in each case to occur
concurrently with the consummation of a Merger, and related amendments to
the respective Agreement of Limited Partnership of each Fund to authorize
expressly the foregoing;
3. Any adjournments of the Special Meetings to allow for the
additional solicitation of BAC Holder votes in order to obtain more votes
in favor of the Transaction Proposals; and
4. Such other business as may properly come before the Special
Meetings or any adjournments or postponements thereof.
THE APPROVAL AND ADOPTION BY THE BAC HOLDERS OF EACH FUND OF EACH
TRANSACTION PROPOSAL TO BE VOTED UPON BY THEM IS CONTINGENT UPON THE APPROVAL
AND ADOPTION BY THE BAC HOLDERS OF SUCH FUND OF THE OTHER TRANSACTION PROPOSAL
TO BE VOTED UPON BY THEM. THE CONSUMMATION OF THE TRANSACTION PROPOSALS BY ONE
FUND IS A CONDITION TO THE CONSUMMATION OF THE TRANSACTION PROPOSALS BY THE
OTHER FUND, WHICH CONDITION MAY BE WAIVED BY CAPREIT IN ITS SOLE AND ABSOLUTE
DISCRETION.
The Transaction Proposals and certain related matters, including, without
limitation, certain benefits to be realized by the General Partners and certain
of their affiliates in connection therewith, are more fully described in the
Joint Proxy Statement accompanying this notice.
Only BAC Holders of record as of the close of business on [record date],
1996 are entitled to notice of and to vote at the Special Meeting of BAC Holders
in the Fund in which they own BACs. Approval of each of the Transaction
Proposals by each Fund will require the affirmative vote of a majority of such
Fund's BAC Holders voting together as a single class.
<PAGE>
Whether or not you plan to attend the Special Meeting in person and
regardless of the number of BACs you own, please complete, sign and date the
enclosed Proxy and mail it as soon as possible in the enclosed stamped,
addressed return envelope to ensure that your BACs are voted at the Special
Meeting. You may vote in person if you wish to do so even though you have
previously sent in your Proxy.
By Order of the General Partners:
CRITEF ASSOCIATES LIMITED
PARTNERSHIP
CRITEF III ASSOCIATES LIMITED
PARTNERSHIP
Rockville, Maryland
________ __, 1996
If you have any questions or need assistance in voting your BACs, please
contact MacKenzie Partners, Inc. at the toll-free number listed below.
MACKENZIE PARTNERS
156 Fifth Avenue
New York, NY 10010
(212) 929-5500 (call collect)
or
CALL TOLL FREE (800) 322-2885
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTIONS OR UPON THE ACCURACY OF ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND
LIMITED PARTNERSHIP
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III
LIMITED PARTNERSHIP
c/o The CRI Building
11200 Rockville Pike
Rockville, Maryland 20852
______________________
JOINT PROXY STATEMENT
FOR
SPECIAL MEETINGS OF BAC HOLDERS
TO BE HELD
[meeting date], 1996
______________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
SUMMARY........................................................ 1
GENERAL INFORMATION............................................ 15
Purpose of the Special Meetings............................... 15
Adjournment of the Special Meetings and other Matters.......... 18
Record Date; Required Vote.................................... 18
Voting Procedures and Proxies................................. 19
Solicitation of Proxies....................................... 20
SPECIAL FACTORS................................................ 20
Purpose and Effect of the Transactions........................ 20
Background of the Mergers..................................... 21
Recommendations of the General Partners....................... 34
Fairness of the Transactions.................................. 35
Alternatives to the Mergers................................... 42
Potential Adverse Consequences of the Mergers................. 47
Fairness Opinions of Oppenheimer & Co., Inc................... 47
Interests of Certain Persons in the Transactions.............. 54
Certain Relationships and Related Transactions................ 57
SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT......... 59
Principal BAC Holders......................................... 59
Management.................................................... 59
BACKGROUND OF THE FUNDS........................................ 60
THE TRANSACTION PROPOSALS...................................... 61
The Merger Proposal........................................... 61
The Mergers................................................. 62
The Merger Agreements....................................... 62
Conditions to Consummation of the Mergers................. 62
Redemption Procedures..................................... 63
Conduct of Business Pending the Mergers................... 64
Other Pre-Closing Covenants............................... 65
Post-Closing Covenants.................................... 65
No Solicitation........................................... 65
Indemnification........................................... 66
Termination............................................... 66
Deposit................................................... 67
Fees and Expenses......................................... 68
Tax Treatment............................................. 70
Amendments to the Partnership Agreements.................. 70
No Dissenter's Rights....................................... 70
New Partners Proposal....................................... 70
The Financing................................................. 71
Credit Enhancement.......................................... 72
Collateral.................................................. 73
Events of Default and Termination of Financing.............. 74
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Proposed Amendments to Mortgage Revenue Bonds................. 75
Miscellaneous............................................. 76
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGERS AND RELATED
TRANSACTIONS.................................................. 76
Introduction.................................................. 76
General Principles Of Partnership Taxation.................... 76
Certain Federal Income Tax Consequences of the Mergers........ 77
Certain Federal Income Tax Consequences of the Financing...... 77
Overall Federal Income Tax Consequences to BAC Holders........ 78
CERTAIN TAX MATTERS RELATING TO TAX-EXEMPT BONDS............... 79
MARKET PRICE DATA FOR FUND I-II................................ 79
MARKET PRICE DATA FOR FUND III................................. 82
SELECTED FINANCIAL DATA OF FUND I-II........................... 84
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF FUND I - II........................... 90
Business...................................................... 90
Financial Condition and Liquidity............................. 96
Results of Operations......................................... 103
SELECTED FINANCIAL DATA OF FUND III............................ 108
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF FUND III............................ 110
Business...................................................... 110
Financial Condition and Liquidity............................. 115
Results of Operations......................................... 120
LITIGATION..................................................... 124
MANAGEMENT OF THE FUNDS........................................ 129
THE MERGER PARTNERSHIPS AND CAPREIT GP......................... 131
MANAGEMENT OF THE MERGER PARTNERSHIPS AND CAPREIT GP........... 131
CERTAIN LEGAL MATTERS.......................................... 134
ACCOUNTANTS.................................................... 134
AVAILABLE INFORMATION.......................................... 134
INDEX TO FINANCIAL STATEMENTS.................................. F-1
</TABLE>
<PAGE>
Appendix A-1 Fourth Amended and Restated Agreement and Plan of Merger among
Capital Realty Investors Tax Exempt Fund Limited Partnership,
CRITEF Associates Limited Partnership, and Watermark Partners,
L.P.
Appendix A-2 Fourth Amended and Restated Agreement and Plan of Merger among
Capital Realty Investors Tax Exempt Fund III Limited Partnership,
CRITEF III Associates Limited Partnership, and Watermark III
Partners, L.P.
Appendix B-1 Fairness Opinion of Oppenheimer & Co., Inc. Delivered to Capital
Realty Investors Tax Exempt Fund Limited Partnership Relating to
the Holders of Beneficial Assignee Certificates of Series I
Appendix B-2 Fairness Opinion of Oppenheimer & Co., Inc. Delivered to Capital
Realty Investors Tax Exempt Fund Limited Partnership Relating to
the Holders of Beneficial Assignee Certificates of Series II
Appendix B-3 Fairness Opinion of Oppenheimer & Co., Inc. Delivered to Capital
Realty Investors Tax Exempt Fund III Limited Partnership Relating
to the Holders of its Beneficial Assignee Certificates
Appendix C-1 Proposed Amendments to the Agreement of Limited Partnership of
Capital Realty Investors Tax Exempt Fund Limited Partnership
Appendix C-2 Proposed Amendments to the Agreement of Limited Partnership of
Capital Realty Investors Tax Exempt Fund III Limited Partnership
<PAGE>
SUMMARY
The following is a brief summary of information contained elsewhere in this
Joint Proxy Statement. This summary is not intended to be complete and is
qualified in all respects by reference to the detailed information contained
elsewhere in this Joint Proxy Statement and the Appendices attached to this
Joint Proxy Statement. BAC Holders are urged to review carefully the entire
Joint Proxy Statement including the Appendices hereto.
These proxy materials are being furnished to the holders (the "BAC
Holders") of Beneficial Assignee Certificates ("BACs") in Series I and II issued
by Capital Realty Investors Tax Exempt Fund Limited Partnership, a Delaware
limited partnership ("Fund I- II"), and BACs issued by Capital Realty Investors
Tax Exempt Fund III Limited Partnership, a Delaware limited partnership ("Fund
III," and together with Fund I-II, the "Funds") , in connection with the
solicitation of proxies for use at the Special Meetings of BAC Holders in Fund
I-II and Fund III to be held at 9:00 a.m. and 10:00 a.m. local time,
respectively, on [meeting date], 1996 at [location of meeting] and at any
adjournments or postponements thereof (the "Special Meetings"). Each BAC Holder
is entitled to one vote for each BAC held of record by such BAC Holder at the
close of business on _________ [__], 1996 (the "Record Date"), with respect to
each of the proposals described in this Proxy Statement to be voted upon by such
BAC Holder.
This Proxy Statement is first being mailed to BAC Holders on or about
[mailing date], 1996.
PURPOSE OF THE SPECIAL MEETINGS
The purpose of the Special Meetings is to consider and vote upon the
proposed mergers of affiliates of Capital Apartment Properties, Inc., a Maryland
corporation ("CAPREIT"), with and into each of the Funds and certain related
transactions, as a result of which all of the BACs (other than BACs held by
CAPREIT and its affiliates or the Funds, if any) will be redeemed for cash at
the redemption prices set forth below and CAPREIT and its affiliates will own
all of the partnership interests in the Funds.
At each Special Meeting, the BAC Holders of a Fund will, with respect to
such Fund, consider and vote upon:
(i) A proposal (the "Merger Proposal") to approve and adopt (a) with
respect to Fund I-II, the Fourth Amended and Restated Agreement and Plan of
Merger, dated as of August 21, 1996 (the "Fund I-II Merger Agreement"), among
Fund I-II, CRITEF Associates Limited Partnership, a Delaware limited partnership
which is the general partner of Fund I-II ("Fund I-II GP"), Watermark Partners,
L.P., a Delaware limited partnership ("Merger Partnership"), and others, which
provides for the merger (the "Fund I-II Merger") of Merger Partnership into Fund
I-II, and (b) with respect to Fund III, the Fourth Amended and Restated
Agreement and Plan of Merger, dated as of August 21, 1996 (the "Fund III Merger
Agreement," and together with the Fund I-II Merger Agreement, the "Merger
Agreements"), among Fund III, CRITEF III Associates Limited Partnership, a
Delaware limited partnership
-1-
<PAGE>
which is the general partner of Fund III ("Fund III GP," and together with Fund
I-II GP, the "General Partners"), and Watermark III Partners, L.P., a Delaware
limited partnership ("Merger Partnership III," and together with Merger
Partnership, the "Merger Partnerships"), and others, which provides for the
merger (the "Fund III Merger," and together with the Fund I-II Merger, the
"Mergers," and individually, a "Merger") of Merger Partnership III into Fund
III, and certain amendments to the respective Agreement of Limited Partnership
(the "Partnership Agreement") of each of the Funds to authorize expressly the
foregoing.
Upon consummation of each Merger and by virtue thereof, (a) all of the BACs
in the merged Fund (except as provided below) will be redeemed for cash at a
redemption price (the "Redemption Price") of (i) with respect to Fund I-II,
$14.82 per BAC, net to the holder in cash, without interest, in the case of
Series I and $14.50 per BAC, net to the holder in cash, without interest, in the
case of Series II and (ii) with respect to Fund III, $15.13 per BAC, net to the
holder in cash, without interest, in each case, subject to increase as described
below, and the interests represented by such BACs will be canceled, (b)
interests in each of the Funds held by the Assignor Limited Partner (the
"Assignor Limited Partner") of each of the Funds will be canceled and
extinguished, (c) partnership interests in each of the Funds held by CAPREIT or
its affiliates will remain outstanding, and (d) in each case, BACs held by
CAPREIT and its affiliates, if any, will be converted into limited partner
interests in the respective Funds and BACs held by the Funds, if any, will be
canceled and no consideration will be paid therefor.
The cash consideration to be paid to BAC Holders in the Mergers, in each
case, may be increased by the amount (the "Adjustment Amount") by which
Available Cash (as defined below) is greater than, with respect to Fund I-II,
$2,606,482 in the case of Series I, and $3,869,290 in the case of Series II,
and, with respect to Fund III, $5,924,228. The maximum Adjustment Amount is,
with respect to Fund I-II, $476,520 (or $0.2090 per BAC) in the case of Series
I, and $676,901 (or $0.2090 per BAC) in the case of Series II, and, with respect
to Fund III, $1,098,978 (or $0.2090 per BAC). For purposes of calculating the
Adjustment Amount, Available Cash means the amount of cash and cash equivalents
held by or at the direction of a Fund after deducting any amounts then owed,
accrued or reserved by such Fund for goods, services or liabilities of any
nature or description (which liabilities shall not include any liabilities of
the properties securing the Mortgage Revenue Bonds (as defined), including
accrued real estate taxes and insurance); provided that all amounts held in tax
and insurance escrows for all such properties and all amounts held in
replacement reserves for the benefit of the Owner Partnerships (as defined)
shall be deemed to be part of the Available Cash and, provided further, that
Available Cash includes any addition to tax and insurance escrows for all of the
properties securing the Mortgage Revenue Bonds and the replacement reserves for
the benefit of the Owner Partnerships, less any withdrawals from such escrows
and reserves, in each case, in the ordinary course of business and consistent
with past practice. See "THE TRANSACTION PROPOSALS--The Merger Proposals."
Under the Merger Agreements, CAPREIT has offered BAC Holders, in the
aggregate, $162.3 million, or $15.00 per BAC, in the case of Series I of Fund I-
II, $14.68 per BAC, in the case of Series II of Fund I-II, and $15.32 per BAC,
in the case of Fund III, in each case
-2-
<PAGE>
plus the Adjustment Amount, if any. In arriving at the Redemption Prices, the
consideration to be paid to the BAC Holders in the Mergers under the Merger
Agreements, in each case, has been reduced by the fees and expenses awarded by
the court to counsel for the plaintiffs in certain class action litigation
relating to the Mergers (see "SPECIAL FACTORS--Background of the Mergers" and
"LITIGATION") of, assuming both Funds consummate the Mergers, $2 million in the
aggregate. As a result of the foregoing, the consideration offered by CAPREIT in
the Merger Agreements (assuming no Adjustment Amount) was reduced $0.18 per BAC,
in the case of Series I of Fund I-II, $0.18 per BAC, in the case of Series II of
Fund I-II, and $0.19 per BAC in the case of Fund III in arriving at the
respective Redemption Prices;
Presented below is a table depicting, on a per BAC basis, the gross amount
of Merger consideration payable by CAPREIT, the amounts payable to counsel for
the plaintiffs in certain litigation relating to the Mergers and the net amount
of Merger consideration payable to BAC Holders, assuming no upward Adjustment
Amount.
<TABLE>
<CAPTION>
Fund I-II, Fund I-II,
Series I Series II Fund III
---------- --------- --------
<S> <C> <C> <C>
Gross Merger consideration $15.00 $14.68 $15.32
Amounts payable to plaintiffs' counsel $ 0.18 $ 0.18 $ 0.19
Net Redemption Price $14.82 $14.50 $15.13
</TABLE>
(ii) A proposal (the "New Partners Proposal", and together with the Merger
Proposal, the "Transaction Proposals") to approve, with respect to each
Fund, (a) the sale of the 1.01% general partner interest by such Fund's
General Partner to CAPREIT GP, Inc., a newly-formed, wholly-owned
subsidiary of CAPREIT ("CAPREIT GP"), in exchange for $500,000, and the
substitution of CAPREIT GP as a general partner of such Fund in its stead,
and (b) the issuance of a limited partner interest in such Fund to CAPREIT
or its designee in exchange for the contribution to such Fund of real
property or other assets, in each case, to occur concurrently with the
Mergers, and certain amendments to the respective Partnership Agreement of
each of the Funds to authorize expressly the foregoing. See "SPECIAL
FACTORS--Interests of Certain Persons in the Transactions" and "THE
TRANSACTION PROPOSALS-- New Partners Proposal";
(iii) Any adjournments of the Special Meetings to allow for the
additional solicitation of BAC Holder votes in order to obtain more votes in
favor of the Transaction Proposals; and
(iv) Such other business as may properly come before the Special Meetings
or any adjournment or postponement thereof.
-3-
<PAGE>
VOTE REQUIREMENTS AT THE SPECIAL MEETINGS
Pursuant to the Delaware Revised Uniform Limited Partnership Act (the
"Partnership Act") and the respective Partnership Agreement of each of the
Funds, the approval and adoption of each of the proposals by a Fund will require
the affirmative vote of a majority of such Fund's BAC Holders entitled to vote
at the Special Meeting. In that regard, holders of Series I BACs and Series II
BACs in Fund I-II will vote together as a single class and the approval of each
of the Transaction Proposals will require the affirmative vote of a majority of
the combined BAC Holders of Series I and Series II.
The approval and adoption, by the BAC Holders of each Fund, of each
Transaction Proposal to be voted upon by them is conditioned upon the approval
and adoption by such BAC Holders of the other Transaction Proposal to be voted
upon by them.
In the event that the BAC Holders in one Fund approve each of the
Transaction Proposals to be voted upon by them, but the BAC Holders in the other
Fund do not approve each of the Transaction Proposals to be voted upon by them,
the Merger Partnerships may elect, in their sole and absolute discretion,
whether or not to consummate the Merger and the related transactions with the
Fund whose BAC Holders have approved the Transaction Proposals and not with the
other Fund.
THE FUNDS AND THE MERGER PARTNERSHIPS AND CAPREIT GP
THE FUNDS. Each of the Funds was originally formed to acquire a portfolio
of tax-exempt mortgage revenue bonds (the "Mortgage Revenue Bonds") issued by
various state or local governments or their agencies or instrumentalities, which
were collateralized by non-recourse participating first mortgage loans on
multifamily residential developments. The Funds are Delaware limited
partnerships with executive offices c/o C.R.I., Inc., The CRI Building, 11200
Rockville Pike, Rockville, Maryland 20852.
The General Partner of Fund I-II is CRITEF Associates Limited Partnership
("Fund I-II GP"), the managing general partner of which is C.R.I., Inc. ("CRI"),
and the other general partners of which are William B. Dockser and H. William
Willoughby . The General Partner of Fund III is CRITEF III Associates Limited
Partnership ("Fund III GP"), the general partner of which is CRI. Mr. Martin C.
Schwartzberg, formerly a general partner of Fund I-II GP, formally withdrew as a
general partner effective June 12, 1996. See "LITIGATION."
THE MERGER PARTNERSHIPS AND CAPREIT GP. The Merger Partnerships are
Delaware limited partnerships formed during August 1995 solely for the purpose
of effecting the Mergers and have engaged in no other business or operations.
CAPREIT GP is a Delaware corporation formed during August 1996 solely for the
purpose of acquiring the general partner interests in the Funds and has engaged
in no other business or operations. CAPREIT, the general partner of each of the
Merger Partnerships and the owner of all of the outstanding capital stock of
CAPREIT GP, is a self-managed, self-administered private real estate investment
trust. CAPREIT currently owns 30 multi-family complexes located in 10 states.
In addition to
-4-
<PAGE>
managing the 7,512 apartments that CAPREIT owns, CAPREIT Residential
Corporation, an indirect subsidiary of CAPREIT ("CAPREIT Residential"), manages
another 8,942 apartments (including 14 of the properties securing the Mortgage
Revenue Bonds and 16 other properties owned by CRI-related entities) for third-
party owners. CAPREIT has a total capitalization in excess of $331 million.
Approximately 99% of the outstanding capital stock of CAPREIT is held by AP
CAPREIT Partners, L.P. ("AP CAPREIT"), a Delaware limited partnership which is
wholly-owned by Apollo Real Estate Advisors, L.P. ("Apollo") and certain of its
affiliates. CAPREIT Limited Partnership, a Maryland limited partnership, is the
initial limited partner of the Merger Partnerships. Except for CAPREIT
Residential's management of 14 of the properties securing the Mortgage Revenue
Bonds and 16 properties held by other CRI-related entities and CAPREIT's
sublease of certain office space from CRI, neither CAPREIT nor any of its
affiliates have any affiliation or other relationship with CRI or any of its
partners or affiliates. See "SPECIAL FACTORS--Background of the Mergers" and
"SPECIAL FACTORS--Certain Relationships And Related Transactions." The Merger
Partnerships and CAPREIT GP each has executive offices c/o CAPREIT, 11200
Rockville Pike, Rockville, Maryland 20852.
THE MERGERS
The Mergers will be effected pursuant to the terms of the Merger
Agreements. Upon the consummation of the Mergers and by virtue thereof, each of
the Merger Partnerships will be merged with and into the respective Funds. The
Merger Partnerships will cease to exist and CAPREIT and its affiliates will own
all of the interests in each of the Funds. In addition, (a) each BAC (other
than any BACs held by CAPREIT or its affiliates or the Funds) will be canceled
and extinguished and converted into the right to receive the Redemption Price in
cash, without interest, (b) interests held by the Assignor Limited Partner of
each of the Funds will be canceled and extinguished, (c) partnership interests
in each of the Funds held by CAPREIT or its designees will remain outstanding,
and (d) in each case, BACs held by CAPREIT and its affiliates, if any, will be
converted into limited partner interests in the respective Funds and BACs held
by the Funds, if any, will be canceled and no consideration will be paid
therefor.
EFFECTIVE TIME OF THE MERGERS
Pursuant to the Merger Agreements, a Merger will become effective on the
date (the "Effective Date") and at the time (the "Effective Time") that the
applicable Certificate of Merger is filed pursuant to Delaware law. It is
currently anticipated that the Effective Date and Effective Time will occur as
soon as practicable following the Special Meeting. At the Effective Time and as
a result of a Merger, a Fund, as the surviving entity of the Merger, will
continue in existence under Delaware law, but will be wholly owned by CAPREIT
and its affiliates, and each BAC will be converted into the right to receive the
Redemption Price and will cease to be outstanding. Upon consummation of a
Merger, the BACs will be delisted and will no longer trade on the American Stock
Exchange, Inc. (the "AMEX"), and the Fund will cease to be a reporting company
under the Securities Exchange Act of 1934, as amended.
-5-
<PAGE>
The BAC transfer books of the Funds will be closed as of the close of
business on the Effective Date and no transfer of record of BACs will be made
thereafter other than the registration of transfers reflecting transfers
occurring before the close of business on the Effective Date.
A Merger Agreement may be terminated by a Fund or a Merger Partnership
party thereto if the Effective Time does not occur by December 31, 1996 (so long
as the terminating party has complied with all its covenants and agreements
contained in such Merger Agreement). See "THE TRANSACTION PROPOSALS--The Merger
Agreements--Termination".
REDEMPTION OF BACS
At the Effective Time, CAPREIT will cause to be deposited the aggregate
Redemption Price with a redemption agent to be selected jointly by the Funds and
the Merger Partnerships (the "Redemption Agent"). As soon as practicable after
the Effective Time, the Redemption Agent will mail to each record holder of a
certificate that immediately prior to the Effective Time represented outstanding
BACs (the "Certificates") a form of letter of transmittal and instructions for
use in effecting the surrender of certificates for payment. BAC HOLDERS SHOULD
NOT SURRENDER THEIR CERTIFICATES WITH THEIR PROXY CARDS FOR THE SPECIAL
MEETINGS. Upon surrender to the Redemption Agent of a Certificate, together
with such letter of transmittal, duly executed, and any other requested
documents, and upon acceptance thereof by the Redemption Agent, the holder of
such Certificate will be entitled to receive in exchange therefor cash in an
amount equal to the product of the number of BACs represented by such
Certificate multiplied by the Redemption Price, less any withholding taxes, and
such Certificate will then be canceled. No interest will be paid or accrue on
the cash payable upon the surrender of the Certificate. See "THE TRANSACTION
PROPOSALS -- The Merger Proposals -- The Merger Agreements--Redemption
Procedures."
RECOMMENDATIONS OF THE GENERAL PARTNERS; FAIRNESS OF THE MERGERS
Each of the General Partners has determined, with respect to its Fund,
that, in light of the totality of the factors described in detail under "SPECIAL
FACTORS --Recommendations of the General Partners" and "SPECIAL FACTORS--
Fairness of the Transactions", the Transactions are fair to and in the best
interests of the BAC Holders of its Fund and that the Redemption Prices payable
to the BAC Holders of its Fund are fair to such BAC Holders.
EACH OF THE GENERAL PARTNERS BELIEVES THAT THE PROPOSED TRANSACTIONS ARE
FAIR TO AND IN THE BEST INTERESTS OF THE BAC HOLDERS OF ITS RESPECTIVE FUND AND
THAT THE REDEMPTION PRICES PAYABLE TO THE BAC HOLDERS OF ITS RESPECTIVE FUND ARE
FAIR TO SUCH BAC HOLDERS AND RECOMMENDS THAT BAC HOLDERS VOTE "FOR" APPROVAL OF
EACH OF THE TRANSACTION PROPOSALS.
-6-
<PAGE>
CONDITIONS TO CONSUMMATION OF A MERGER
The obligation of a Fund and a Merger Partnership to consummate a Merger
and related transactions is subject to satisfaction or waiver (where
permissible), on or before the Effective Date (or such earlier time as specified
in the condition), of certain conditions, including, but not limited to, (i) the
performance, in all material respects, of the obligations of the other party or
parties contained in a Merger Agreement, (ii) the receipt of all approvals and
authorizations of any governmental authority and the making of all filings and
notices required for the consummation of such Merger and related transactions,
(iii) the approval of such Merger and related transactions by the BAC Holders of
such Fund, (iv) the absence of any governmental action which would have the
effect of preventing the consummation of such Merger and related transactions
and (v) the receipt of a final and non-appealable order of a court of competent
jurisdiction approving the settlement of the cases captioned Zakin v. Dockser et
-------------------
al. and Wingard v. Dockser et al. filed in connection with the Mergers, as such
- --- ------- -----------------
settlement is set forth in the Stipulation of Settlement, dated May 17, 1996, as
amended. See "LITIGATION."
The obligation of a Fund to consummate a Merger and related transactions is
subject to certain additional conditions, which conditions must be satisfied or
waived (where permissible), including, but not limited to, the accuracy of the
representations and warranties made by the applicable Merger Partnership.
The obligation of a Merger Partnership to consummate a Merger and related
transactions is subject to certain additional conditions, which conditions must
be satisfied or waived (where permissible), including, but not limited to, (i)
the amount of Available Cash shall not be less than (a) prior to September 30,
1996, $2,448,830, with respect to Fund I-II, Series I, $3,634,800, with respect
to Fund I-II, Series II, and $5,566,370, with respect to Fund III; (b) from
October 1, 1996 through October 31, 1996, $2,375,260 with respect to Fund I-II,
Series I, $3,525,600 with respect to Fund I-II, Series II and $5,399,140, with
respect to Fund III, (c) from November 1, 1996, through November 30, 1996,
$2,354,240 with respect to Fund I-II, Series I, $3,494,400 with respect to Fund
I-II, Series II, and $5,351,360 with respect to Fund III, and (d) from December
1, 1996 through December 31, 1996, $2,333,220, with respect to Fund I-II, Series
I, $3,463,200 with respect to Fund I-II, Series II, and $5,303,580, with respect
to Fund III, (ii) the absence of any action, suit or proceeding seeking to
materially restrain or delay the consummation of such Merger and related
transactions or seeking material damages in connection therewith, (iii) the
Financing (as defined) having been consummated in accordance with the terms of
the Commitment (as defined), (iv) the absence of a material adverse change in
the condition of such Fund or an applicable Owner Partnership, and (v) both
Mergers being closed concurrently. See "THE TRANSACTION PROPOSALS--The Merger
Proposals--The Merger Agreements-- Conditions to Consummation of the Mergers."
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS
The Merger Agreements also provide that on the Effective Date CAPREIT or
its designee will purchase certain accounts receivable consisting of the accrued
mortgage servicing
-7-
<PAGE>
and administration fees (the "Accrued Fees") which are payable to CRI and CRIIMI
MAE Services Limited Partnership ("CRIIMI"), affiliates of the General Partners,
by certain partnerships affiliated with the General Partners. The properties
securing 15 of the mortgage revenue bonds held by the Funds (the "Mortgage
Revenue Bonds") had been assigned or transferred by deed in lieu of foreclosure
or otherwise upon default by the original unaffiliated borrowers to such
affiliated partnerships (the "Owner Partnerships"), which assumed the existing
indebtedness. Except with respect to Observatory II and Royal Oaks in Fund I-II,
Series I (with respect to which the mortgages and the Mortgage Revenue Bonds
were modified, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATION
OF FUND I-II"), the related Mortgage Revenue Bonds were not amended in
connection with the transfers of the properties, although each Owner Partnership
advised the Funds that it would apply all available cash flow toward payment of
base interest and accrued base interest on the mortgages and acknowledged that
the acceptance of such cash flow payments by the Funds did not waive the Funds'
right to declare an event of default at any time on account of the failure to
pay full base interest.
The Accrued Fees to be paid to CRI represent the Accrued Fees through June
30, 1995, and the Accrued Fees to be paid to CRIIMI, the general partner of
which is a subsidiary of CRIIMI MAE Inc., a public company affiliated with the
General Partners, represent the Accrued Fees from July 1, 1995 through the
Effective Date. The consideration payable to CRI for its Accrued Fees is, with
respect to Fund I-II, $511,680 in the case of Series I, and $770,835, in the
case of Series II, and, with respect to Fund III, $667,485, which amounts
represent, in the aggregate, approximately 42% of the Accrued Fees payable to
CRI. The consideration payable to CRIIMI for its Accrued Fees is, with respect
to Fund I-II, $310,296, in the case of Series I, and $456,512 in the case of
Series II, and with respect to Fund III, $661,122, representing 100% of the
Accrued Fees payable to CRIIMI through August 31, 1996. The amounts payable to
CRIIMI will continue to increase by the amount of the estimated Accrued Fees for
each month after August 31, 1996 through the Effective Date.
The payment of the Accrued Fees is subordinated on a current basis, loan by
loan, to the payment of full base interest, plus any unpaid base interest and
interest thereon, on the mortgage loans. In the absence of the Mergers, the
Accrued Fees would not be payable until the earlier of (i) repayment of any
unpaid base interest and interest thereon from increased cash flow of a property
or (ii) prepayment or maturity of the respective loan or the sale, refinancing
or other disposition of the respective property that secures the Mortgage
Revenue Bond after debt repayment in full of principal and accrued base
interest. As a result, it is possible that in the absence of the Mergers, CRI
and CRIIMI would not get substantial payment from the properties on account of
the Accrued Fees. Accordingly, the payment by CAPREIT to CRI and CRIIMI for the
Accrued Fees, albeit on a substantially discounted basis to CRI, is a benefit of
the proposed Merger to CRI and CRIIMI.
William B. Dockser and H. William Willoughby are the sole shareholders,
directors and Chairman of the Board and President, respectively, of CRI, and are
5.1% and 4.7% shareholders,
-8-
<PAGE>
respectively, directors and Chairman of the Board and President, respectively,
of CRIIMI MAE Inc., the public company that owns CRIIMI.
In connection with the Mergers, CAPREIT has agreed to pay the General
Partner of each Fund $500,000 for its general partner interest. Messrs. Dockser,
Willoughby and Schwartzberg will each receive approximately 25% and CRI will
receive approximately .01% of the $500,000 to be paid to the Fund I-II GP and
Messrs. Dockser, Willoughby and Schwartzberg will each receive approximately 25%
and CRI will receive approximately 1% of the $500,000 to be paid to the Fund III
GP in accordance with their respective partnership interests in those entities.
The remaining interests in the General Partners are held by general partnerships
comprised of certain current and former employees of CRI. The $500,000 payment
to each of the General Partners in consideration for its general partner
interest in its Fund represents substantially more than the General Partners
would receive on account of their general partner interests in the event of the
liquidation of its Fund. If the Funds were liquidated as of June 30, 1996, Fund
I-II GP would have received only a nominal amount and Fund-III GP would have
received nothing.
Messrs. Dockser and Willoughby also own, through various corporations, all
of the interests in the Owner Partnerships. The owners of the interests in each
of the Owner Partnerships have agreed to either (a) sell, assign or transfer the
partnership interest in, or the real property and other assets of, such Owner
Partnerships to CAPREIT or its designee for no additional consideration or (b)
admit CAPREIT or its designee as the managing general partner of such Owner
Partnership, whereupon the general partner interests of the current general
partners will be converted into limited partner interests, and CAPREIT will have
the option to acquire all of the limited partner interests at any time within
five years of the Effective Date at the then fair market value thereof (based on
the fair market value of the partnership property as encumbered by the mortgage
loans) . Although such interests currently have nominal value and, based on
current market conditions, none of the General Partners or CAPREIT believes that
such interests are likely to increase in value prior to the time CAPREIT
exercises its options, if the fair market value of the partnership properties
were to substantially increase prior to the time CAPREIT exercises its options,
any such increase in the fair market value in excess of the indebtedness and
accrued interest owing in respect thereof would benefit the current owners of
the Owner Partnerships.
The Owner Partnerships do not supply any services to the Funds or to any of
the properties collateralizing the Mortgage Revenue Bonds. The Owner
Partnerships currently do not receive, nor have they ever received, fees in any
form for serving as holders of the properties. If the Mergers are consummated,
the future fair market value of the Owner Partnership interests could be
affected by CAPREIT's proposed financing. CAPREIT intends to attempt to amend
relevant documents relating to the Mortgage Revenue Bonds to eliminate any
remarketing features and establish new interest rates, among other changes.
These amendments, which would require the consent of the issuers of the Mortgage
Revenue Bonds which has not yet been obtained, would have the effect of reducing
the debt obligations of the Owner Partnerships, which could increase the fair
market value of the interests in such Owner Partnerships. Any change in the
fair market value in the future would not benefit BAC Holders, but could
-9-
<PAGE>
potentially benefit the owners of any interests in the Owner Partnerships, which
could include the current owners or CAPREIT or its designees.
CAPREIT Residential is currently the property manager for 14 of the
properties securing the Mortgage Revenue Bonds, all 14 of which are owned by the
Owner Partnerships. See "SPECIAL FACTORS -- Interests of Certain Persons in the
Transactions" and "SPECIAL FACTORS -- Certain Relationships and Related
Transactions."
FAIRNESS OPINIONS OF OPPENHEIMER & CO., INC.
Oppenheimer has rendered its fairness opinions, dated the date of this
Proxy Statement (the "Fairness Opinions"), to the effect that, as of such date
and subject to the assumptions and limitations therein, the Redemption Prices
offered to the BAC Holders of each of Series I of Fund I-II, Series II of Fund
I-II and Fund III in the Mergers are fair to such BAC Holders from a financial
point of view.
The discussion herein of the Fairness Opinions is qualified in its entirety
by reference to the text of such Fairness Opinions, copies of which are attached
hereto as Appendices B-1, B-2 and B-3, respectively, and which are incorporated
herein by reference. See "SPECIAL CONSIDERATIONS--Fairness Opinions of
Oppenheimer & Co., Inc."
CERTAIN EFFECTS OF THE MERGERS
As a result of the Mergers, BAC Holders of Series I, Fund I-II will receive
$14.82 per BAC, net to the holder in cash, without interest, BAC Holders of
Series II, Fund I-II will receive $14.50 per BAC, net to the holder in cash,
without interest, and BAC Holders of Fund III will receive $15.13 per BAC, net
to the holder in cash, without interest, subject, in each case, to increase by
the Adjustment Amount, if any, in exchange for their BACs and the Funds will
become wholly owned by CAPREIT and its affiliates. Accordingly, as a result of
the Mergers, BAC Holders will not have an opportunity to continue their interest
in the Funds as an ongoing concern, and will no longer receive tax-exempt
distributions from the Funds or share in any future appreciation (or
depreciation) in the values of the Mortgage Revenue Bonds or the underlying
properties. Under the Partnership Act and under the principles stated in a
number of Delaware court cases, the approval of a Merger by BAC Holders may
extinguish certain fiduciary duty claims, if any, that such BAC Holders might
otherwise have been able to assert against the General Partners regarding their
conduct in connection with the Transactions. See "SPECIAL FACTORS--Fairness of
the Transactions" and "SPECIAL FACTORS--Potential Adverse Consequences of the
Mergers."
TERMINATION OF A MERGER AGREEMENT
A Merger Agreement may be terminated and the Merger and related
transactions may be abandoned, at any time prior to the Effective Time, whether
before or after the BAC Holders have approved and adopted such Merger and
related transactions, by the mutual written consent of a Merger Partnership and
a Fund, or by either such Merger Partnership or such Fund if: (i) a
-10-
<PAGE>
court or governmental, regulatory or administrative authority has issued a final
and non-appealable order, decree, or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting such Merger and
related transactions, (ii) the Effective Time shall not have occurred by
December 31, 1996 (the "Termination Date") (so long as the terminating party has
complied with all of its covenants and agreements contained in such Merger
Agreement), or (iii) the BAC Holders of such Fund do not approve and adopt such
Merger and related transactions.
A Merger Agreement may also be terminated at any time prior to the
Effective Time, whether before or after the BAC Holders have approved and
adopted a Merger and the related transactions, by a Fund, if, among other
things, a Merger Partnership fails to perform in all material respects its
obligations under the Merger Agreement.
A Merger Agreement may also be terminated at any time prior to the
Effective Time, whether before or after the BAC Holders have approved and
adopted a Merger and related transactions, by a Merger Partnership if: (i) a
Fund or its General Partner shall have (a) withdrawn, amended or modified its
recommendation of such Merger and related transactions, or (b) taken any public
position inconsistent with such recommendations, (ii) if such Fund or any
applicable Owner Partnership fails to perform in all material respects its
obligations under such Merger Agreement, (iii) there shall have occurred a
material adverse change in the business, assets, properties, results of
operations or financial or other condition or prospects of such Fund or such
Owner Partnerships as defined, (iv) if such Fund shall have settled or
compromised any lawsuits or other legal proceedings challenging such Merger
Agreement ("Designated Actions") without the prior written consent of such
Merger Partnership, unless such settlement or compromise requires the payment of
money in an amount which, when aggregated with the other amounts expended to
settle or compromise Designated Actions, does not exceed an agreed upon amount
and (v) the representations and warranties of such Fund and such Owner
Partnerships are not true and correct in all material respects at any time as if
made at and as of such time, except to the extent that any such representation
or warranty is made as of a specific date, in which case such representation or
warranty shall have been true and correct as of such date. See "THE TRANSACTION
PROPOSALS--The Merger Proposals--The Merger Agreement--Termination."
A Merger Agreement may be amended by the written agreement of each of the
parties thereto before or after the BAC Holders have approved of a Merger and
related transactions, provided that, after approval by such BAC Holders, no such
amendment may adversely affect the interests of such BAC Holders unless such
amendment is also approved by such BAC Holders.
DEPOSIT
On the business day immediately prior to the date this Proxy Statement was
first mailed to the BAC Holders, CAPREIT paid into escrow a deposit (each a
"Deposit" and together, the "Deposits") of $1,000,000 under each Merger
Agreement ($2,000,000 in the aggregate), which Deposits are being held in escrow
by Chicago Title Insurance Company (the "Escrow Agent"),
-11-
<PAGE>
an independent third party, pursuant to the terms of escrow agreements. A
Deposit will be paid to a Fund under certain circumstances in the event that a
Merger Partnership fails to perform certain of its obligations under the
applicable Merger Agreement.
FEES AND EXPENSES
In the event a Merger Agreement is terminated or abandoned under the
specified circumstances described in this Proxy Statement, a Fund may be liable
for the payment of a fee equal to $2,250,000 with respect to such terminated or
abandoned Merger Agreement if there is a Fiduciary Out Termination (as defined
in a Merger Agreement), a Triggering Event (as defined in a Merger Agreement) or
a Fund consummates an alternative transaction within 270 days from the date of
termination or abandonment of such Merger Agreement.
If a Merger Agreement is terminated or abandoned due to (i) a Fiduciary Out
Termination, (ii) a willful and material breach by a Fund or any applicable
Owner Partnership (other than a breach of the representations and warranties),
(iii) the failure by such Fund or any of such Owner Partnerships to perform in
all material respects its obligations and duties thereunder, or (iv) a
termination of such Merger Agreement by such Merger Partnership because such
Fund shall have settled Designated Actions for an amount in excess of an agreed
upon amount or such settlement or compromise contains terms to which such Merger
Partnership reasonably objects, then such Fund shall bear all of its own
expenses and reimburse such Merger Partnership and its affiliates for reasonable
out-of-pocket expenses (including, without limitation, all fees and expenses of
counsel, and its financing sources and consultants to the Merger Partnership and
its affiliates) in connection with such Merger and related transactions and this
Proxy Statement. If a closing shall occur under one, but not the other Merger
Agreement, the Merger Partnership which is a party to the terminated Merger
Agreement will be reimbursed for all such expenses directly allocable to such
terminated Merger Agreement and for one-half of all expenses which cannot be
allocated specifically to either of the Merger Agreements but were incurred in
connection with the Merger and the related transactions. In no event, however,
shall the amount paid to reimburse expenses under a Merger Agreement exceed
$2,600,000.
Unless a Merger Agreement is terminated or abandoned for the reasons
specified in the preceding paragraph or a Merger Partnership elects to terminate
such Merger Agreement because the representations and warranties of a Fund and
the applicable Owner Partnerships are not true and correct in all material
respects, then such Merger Partnership shall bear all of its own costs and
expenses and it shall reimburse such Fund for all its costs and expenses
incurred in connection with a Merger, the related transactions and this Proxy
Statement, other than the costs and expenses of (i) the fairness opinion and the
related legal and accounting fees, (ii) the legal and accounting fees incurred
in negotiating such Merger Agreement and (iii) reimbursement for certain
overhead costs of such Fund's General Partner and such General Partner's
affiliates.
In all other cases, in the event of a termination of a Merger Agreement
each of the parties shall bear its own expenses.
-12-
<PAGE>
See "THE TRANSACTION PROPOSALS-- The Merger Proposal--The Mergers" for a
detailed discussion of the terms and conditions of the Merger Agreements.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
On an overall basis, taking into account the federal income tax
consequences of the Mergers and the financing therefor, BAC Holders will, for
federal income tax purposes, generally realize a net capital gain or loss as a
result of the Mergers equal to the difference between their tax basis in the
BACs and the Redemption Price they receive as a result of the Mergers. For
federal income tax purposes, the transfer of the Mortgage Revenue Bonds in
connection with the financing for the Mergers will result in the Funds
recognizing significant long term capital losses which will be allocated to BAC
Holders. In addition, the payment of the Redemption Price to the BAC Holders
will constitute, for federal income tax purposes, a redemption of the BAC
Holders' interests in the Funds pursuant to Section 731(a) of the Internal
Revenue Code of 1986, as amended (the "Code") and BAC Holders will recognize
gain or loss on this redemption measured by the difference between the
Redemption Price and their tax basis in the BACs (adjusted to reflect operations
up to the Effective Date and the loss allocated to such BACs as a result of the
financing for the Mergers)..
The income tax treatment of the Mergers as a redemption and the concurrent
consummation of the financing therefor, which will result in a tax loss being
allocated to the BAC Holders, generally will result in a BAC Holder recognizing
the same net gain or net loss for federal income tax purposes that such Holder
would have recognized if such Holder sold his or her BACs for an amount of cash
equal to the Redemption Price. A BAC Holder who acquired his or her BACs within
12 months of a Merger and has net long-term capital gains in the year of the
Merger from other unrelated transactions and a taxable gain on the redemption of
his or her BACs in the Merger, however, may have a larger overall tax liability.
See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGERS AND RELATED
TRANSACTIONS".
NO DISSENTER'S RIGHTS
If the Transaction Proposals are approved by a Fund's BAC Holders, such
approval will bind all BAC Holders in such Fund including those who voted
against such Proposals or who abstained or failed to return a completed proxy.
BAC Holders will not have any dissenter's rights of appraisal in connection with
the Transaction Proposals under the Funds' Partnership Agreements or applicable
law.
THE FINANCING
The funds required to pay for the redemption of the BACs in the Mergers and
to pay related fees and expenses of the Mergers and certain related transactions
in connection with the financing thereof will be provided primarily by the
proceeds of financing to be arranged by CAPREIT. Additional funds will be
provided by an equity contribution by CAPREIT and cash held by the Funds. In
connection with the financing, CAPREIT will cause to be sold certain
-13-
<PAGE>
beneficial ownership interests in one or more trusts (the "Trusts") to be formed
at the Effective Time to which the Funds, following consummation of the Mergers,
will cause the Mortgage Revenue Bonds to be contributed and to which CAPREIT
will contribute an additional mortgage revenue bond issue. The interests in the
Trusts will have the benefit of credit and liquidity support from third party
financial institutions which is to be arranged and guaranteed in part by CAPREIT
and certain of its affiliates. The obligations of CAPREIT and its affiliates
with respect to such credit support will be secured by subordinate mortgages on
the properties securing the Mortgage Revenue Bonds and on the additional bond
property securing the additional mortgage revenue bond issue to be contributed
to the Trusts by CAPREIT, as well as by mortgages on seven other properties
owned by affiliates of CAPREIT and pledges by CAPREIT and its affiliates of the
equity ownership interests in the properties securing the Mortgage Revenue Bonds
and the residual interest in each Trust to be held by CAPREIT and its
affiliates. See "THE TRANSACTION PROPOSALS -- The Financing."
MARKET PRICE DATA
The BACs are listed on the AMEX under the symbols CRA for Fund I-II, Series
I, CRB for Fund I-II, Series II, and CRL for Fund III. On September 8, 1995,
the last full trading day prior to the public announcement of the execution of
each of the Merger Agreements, the closing prices per BAC as reported on the
AMEX Composite Tape were $11.75, $10.875 and $12.00, respectively. On January
31, 1996, the last trading day prior to the public announcement of the increase
in the Redemption Price, the closing prices per BAC as reported on the AMEX
Composite Tape were $12.875, $12.625 and $13.375, respectively. On May 22,
1996, the last trading day prior to the public announcement of the revised terms
of the Merger Agreements providing for the elimination of any downward
adjustment and an increase in the upward adjustment in arriving at the
Redemption Price, the closing prices per BAC as reported on the AMEX Composite
Tape were $13.375, $13.25 and $13.875, respectively. On August __, 1996, the
last trading day prior to the public announcement of the additional increase in
the Redemption Price, the closing prices per BAC as reported on the AMEX
Composite Tape were $_____, $_____ and $_____, respectively. As of _________
___, 1996, the day prior to the date of this Proxy Statement, the closing prices
per BAC as reported on the AMEX Composite Tape were $___________,
$______________ and $_____________, respectively. See "MARKET PRICE DATA."
-14-
<PAGE>
GENERAL INFORMATION
These proxy materials are being furnished to the holders (the "BAC
Holders") of Beneficial Assignee Certificates ("BACs") in Series I and II issued
by Capital Realty Investors Tax Exempt Fund Limited Partnership, a Delaware
limited partnership ("Fund I- II"), and BACs issued by Capital Realty Investors
Tax Exempt Fund III Limited Partnership, a Delaware limited partnership ("Fund
III," and together with Fund I-II, the "Funds"), in connection with the
solicitation of proxies for use at the Special Meetings of BAC Holders of each
Fund to be held at 9:00 a.m. and 10:00 a.m., respectively, on [meeting date],
1996 at [location of meeting] and at any adjournments or postponement thereof
(the "Special Meetings").
This Proxy Statement is first being mailed to BAC Holders on or about
[mailing date], 1996.
PURPOSE OF THE SPECIAL MEETINGS
The purpose of the Special Meetings is to consider and vote upon the
proposed mergers of affiliates of Capital Apartment Properties, Inc., a Maryland
corporation ("CAPREIT"), with and into each of the Funds and certain related
transactions, as a result of which all of the BACs (other than BACs held by
CAPREIT and its affiliates or the Funds, if any) will be redeemed for cash at
the redemption prices set forth below, the current General Partners of each Fund
will cease to have any partner interest in the Funds, and CAPREIT and its
affiliates will own all of the partnership interests in the Funds.
At each Special Meeting, the BAC Holders of a Fund will consider and vote
upon:
(i) A proposal (the "Merger Proposal") to approve and adopt (a) with
respect to Fund I-II, the Fourth Amended and Restated Agreement and Plan of
Merger, dated as of August 21, 1996 (the "Fund I-II Merger Agreement"), among
Fund I-II, CRITEF Associates Limited Partnership, a Delaware limited partnership
which is the general partner of Fund I-II ("Fund I-II GP"), and Watermark
Partners, L.P., a Delaware limited partnership ("Merger Partnership"), et al.,
which provides for the merger (the "Fund I-II Merger") of Merger Partnership
into Fund I-II, and (b) with respect to Fund III, the Fourth Amended and
Restated Agreement and Plan of Merger, dated as of August 21, 1996 (the "Fund
III Merger Agreement," and together with the Fund I-II Merger Agreement, the
"Merger Agreements"), among Fund III, CRITEF III Associates Limited Partnership,
a Delaware limited partnership which is the general partner of Fund III ("Fund
III GP," and together with Fund I-II GP, the "General Partners"), and Watermark
III Partners, L.P., a Delaware limited partnership ("Merger Partnership III,"
and together with Merger Partnership, the "Merger Partnerships"), et al., which
provides for the merger (the "Fund III Merger" and together with the Fund I-II
Merger, the "Mergers" and individually, a "Merger") of Merger Partnership III
into Fund III and, in each case, certain amendments to the respective Agreement
of Limited Partnership (the "Partnership Agreement") of each of the Funds to
authorize expressly the foregoing.
-15-
<PAGE>
Upon consummation of each Merger and by virtue thereof, (a) all of the BACs
in the merged Fund (except as provided below) will be redeemed for cash at a
redemption price (the "Redemption Price") of (i) with respect to Fund I-II,
$14.82 per BAC in the case of Series I and $14.50 per BAC in the case of Series
II and (ii) with respect to Fund III, $15.13 per BAC, in each case subject to
increase as described below, (b) interests in each of the Funds held by the
Assignor Limited Partner (the "Assignor Limited Partner") of each of the Funds
will be canceled and extinguished, (c) interests in each of the Funds held by
CAPREIT or its designees will remain outstanding, and (d) in each case, BACs
held by CAPREIT and its affiliates, if any, will be converted into limited
partner interests in the respective Funds and BACs held by the Funds, if any,
will be canceled and no consideration will be paid therefor.
The cash consideration to be paid to the BAC Holders in the Mergers, in
each case, may be increased by the amount (the "Adjustment Amount") by which
Available Cash is greater than, with respect to Fund I-II, $2,606,482 in the
case of Series I, and $3,869,290 in the case of Series II, and, with respect to
Fund III, $5,924,228. The maximum Adjustment Amount is, with respect to Fund I-
II, $476,520 (or $0.2090 per BAC) in the case of Series I and $676,901 (or
$0.2090 per BAC) in the case of Series II, and, with respect to Fund III,
$1,098,978 (or $0.2090 per BAC). For purposes of calculating the Adjustment
Amount, Available Cash means the amount of cash and cash equivalents held by or
at the direction of a Fund after deducting any amounts then owed, accrued or
reserved by such Fund for goods, services or liabilities of any nature or
description (which liabilities shall not include any liabilities of the
properties securing the mortgage revenue bonds held by the Funds (the "Mortgage
Revenue Bonds"), including accrued real estate taxes and insurance); provided,
that all amounts held in tax and insurance escrows for all such properties and
all amounts held in replacement reserves for the benefit of the Owner
Partnerships (as defined) shall be deemed to be part of the Available Cash.
Available Cash shall include any additions to tax and insurance escrows for all
of the mortgaged properties and the replacement reserves for the benefit of the
Owner Partnerships, less any withdrawals from such escrows and reserves, in each
case, in the ordinary course of business consistent with past practice.
Under the Merger Agreements, CAPREIT has offered the BAC Holders, in the
aggregate $162.3 million, or $15.00 per BAC, in the case of Series I of Fund I-
II, $14.68 per BAC, in the case of Series II of Fund I-II, and $15.32 per BAC,
in the case of Fund III, plus, in each case, the Adjustment Amount, if any. In
arriving at the Redemption Prices, the consideration to be paid to the BAC
Holders in the Mergers, in each case, has been reduced by the amount of fees and
expenses awarded by the court to counsel for the plaintiffs in certain
litigation relating to the Mergers of, assuming both Funds consummate the
Mergers, $2 million in the aggregate. As a result of the foregoing, the
consideration offered by CAPREIT in the Merger Agreements (assuming no
Adjustment Amount) was reduced $0.18 per BAC, in the case of Series I of Fund I-
II, $0.18 per BAC, in the case of Series II of Fund I-II, and $0.19 per BAC in
the case of Fund III in arriving at the respective Redemption Prices.
For state law purposes, each Merger Partnership will merge with and into
the Fund into which it is merging, and all assets and obligations of such Merger
Partnership will be transferred by operation of law to the respective Fund as
the surviving entity. In connection with and as
-16-
<PAGE>
consideration for the Mergers, each BAC Holder will have its BACs converted into
the right to receive cash equal to the applicable Redemption Price;
Presented below is a table depicting, on a per BAC basis, the gross amount
of Merger consideration payable by CAPREIT, the amounts payable to counsel for
the plaintiffs in certain litigation relating to the Mergers and the net amount
of Merger consideration payable to BAC Holders.
<TABLE>
<CAPTION>
Fund I-II, Fund I-II,
Series I Series II Fund III
------------------------------------
<S> <C> <C> <C>
Gross Merger consideration $15.00 $14.68 $15.32
Amounts payable to plaintiffs' counsel $ 0.18 $ 0.18 $ 0.19
Net Merger consideration $14.82 $14.50 $15.13
</TABLE>
(ii) A proposal (the "New Partners Proposal", and together with the Merger
Proposal, the "Transaction Proposals") to approve, with respect to each Fund,
(a) the sale of the 1.01% general partner interest held by such Fund's General
Partner to a newly-formed, wholly-owned subsidiary of CAPREIT ("CAPREIT GP"), in
exchange for $500,000 each, and the substitution of CAPREIT GP as general
partner of such Fund in its stead, and (b) the issuance of a limited partner
interest in such Fund to CAPREIT or its designee in exchange for the
contribution to such Fund of real property or other assets, which sale of the
general partner interests and issuance of limited partner interests
(collectively with the Mergers, the "Transactions") shall occur concurrently
with the Mergers, and certain amendments to the respective Partnership
Agreements of each of the Funds to authorize expressly the foregoing. As a
result of the sale of the general partner interest in each Fund by the
respective General Partner and the substitution of CAPREIT GP as general partner
in each of the Funds, the General Partners will cease to have any partnership
interest in the Funds. See "SPECIAL FACTORS--Interests of Certain Persons in the
Transactions;"
(iii) Any adjournments of the Special Meetings to allow for the additional
solicitation of BAC Holder votes in order to obtain more votes in favor of the
Transaction Proposals; and
(iv) Such other business as may properly come before the Special Meetings
or any adjournments or postponements thereof.
THE APPROVAL AND ADOPTION BY THE BAC HOLDERS OF EACH FUND OF EACH
TRANSACTION PROPOSAL TO BE VOTED UPON BY THEM IS CONDITIONED UPON THE APPROVAL
AND ADOPTION BY SUCH BAC HOLDERS OF THE OTHER TRANSACTION PROPOSAL TO BE VOTED
UPON BY THEM. THUS, IF THE BAC HOLDERS OF A FUND WERE TO APPROVE THE MERGER
PROPOSAL , BUT VOTE AGAINST THE NEW PARTNERS PROPOSAL, OR WERE TO APPROVE THE
NEW PARTNERS PROPOSAL BUT VOTE AGAINST THE MERGER PROPOSAL, NEITHER OF THE
TRANSACTION PROPOSALS WOULD BE APPROVED AND ADOPTED
-17-
<PAGE>
AT THE SPECIAL MEETING. ACCORDINGLY, THE GENERAL PARTNERS RECOMMEND THAT THE BAC
HOLDERS VOTE "FOR" EACH OF THE TRANSACTION PROPOSALS.
IN THE EVENT THAT THE BAC HOLDERS IN ONE FUND APPROVE EACH OF THE
TRANSACTION PROPOSALS TO BE VOTED UPON BY THEM, BUT THE BAC HOLDERS IN THE OTHER
FUND DO NOT APPROVE EACH OF THE TRANSACTION PROPOSALS TO BE VOTED UPON BY THEM,
THE APPLICABLE MERGER PARTNERSHIP MAY ELECT, IN ITS SOLE AND ABSOLUTE
DISCRETION, WHETHER OR NOT TO CONSUMMATE THE MERGER AND THE RELATED TRANSACTIONS
WITH THE FUND WHOSE BAC HOLDERS HAVE APPROVED THE TRANSACTION PROPOSALS.
EACH OF THE GENERAL PARTNERS HAS APPROVED THE TRANSACTION PROPOSALS WITH
RESPECT TO ITS FUND AND HAS DETERMINED THAT THE TRANSACTIONS CONTEMPLATED
THEREBY ARE FAIR TO AND IN THE BEST INTERESTS OF THE BAC HOLDERS OF ITS FUND AND
THAT THE REDEMPTION PRICES PAYABLE TO THE BAC HOLDERS OF ITS FUNDS ARE FAIR TO
SUCH BAC HOLDERS. ACCORDINGLY, EACH OF THE GENERAL PARTNERS RECOMMEND THAT BAC
HOLDERS VOTE "FOR" EACH OF THE TRANSACTION PROPOSALS.
ADJOURNMENT OF THE SPECIAL MEETINGS AND OTHER MATTERS
A vote in person or by proxy by a BAC Holder in favor of a proposal to
adjourn a Special Meeting to solicit additional votes would allow an additional
solicitation of BAC Holder votes in order to obtain more votes in favor of the
Transaction Proposals. In the event of a motion to adjourn the Special Meetings
to solicit additional votes, the persons named in the enclosed form of proxy
will vote as indicated on the last proposal on a properly signed proxy, or if no
such vote is indicated, "FOR" such proposal. It is not likely to be in the
interest of a BAC Holder who intends to vote against the Transaction Proposals
to vote "for" a proposal to adjourn a Special Meeting to solicit additional
votes.
THE GENERAL PARTNERS RECOMMEND THAT BAC HOLDERS VOTE "FOR" THE PROPOSAL TO
ADJOURN A SPECIAL MEETING TO SOLICIT ADDITIONAL VOTES IN FAVOR OF THE
TRANSACTION PROPOSALS.
It is not expected that any matter other than the approval and adoption of
the Transaction Proposals will be brought before the Special Meetings. If,
however, any other matters are properly presented at a Special Meeting
including, among other things, consideration of a motion to adjourn the Special
Meeting to another time or place for a purpose other than soliciting additional
votes, the persons named in the enclosed form of proxy and acting thereunder
will have discretion to vote on such matters in accordance with their best
judgment.
RECORD DATE; REQUIRED VOTE
Only BAC Holders of record as of the close of business on [record date],
1996 (the "Record Date") are entitled to notice of and to vote at the Special
Meetings. Each BAC Holder is entitled to one vote for each BAC owned of record
by him or her. As of the Record Date, there were 2,280,000 Fund I-II, Series I
BACs outstanding held by ______ BAC Holders
-18-
<PAGE>
of record, 3,238,760 Fund I-II, Series II BACs outstanding held by ______ BAC
Holders of record, and 5,258,268 Fund III BACs outstanding held by _____ BAC
Holders of record.
Pursuant to the Delaware Revised Uniform Limited Partnership Act (the
"Partnership Act") and the respective Partnership Agreement of each of the
Funds, the approval and adoption of each proposal to be voted on by the BAC
Holders of a Fund will require the affirmative vote of a majority of such Fund's
limited partners. The Assignor Limited Partner of each Fund is the sole limited
partner of such Fund. The BAC Holders of each Fund are entitled to direct the
vote of the Assignor Limited Partner of such Fund and, accordingly, the approval
and adoption of each proposal to be voted on by the BAC Holders of a Fund will
require the affirmative vote of a majority of such Fund's BAC Holders entitled
to vote at the Special Meetings. In the case of Fund I-II, approval of each
proposal will require the affirmative vote of a majority of the combined BAC
Holders of Series I and Series II voting together as a single class (i.e., at
least 2,759,381 BACs in Fund I-II must be voted in favor of each proposal).
Accordingly, if a majority of the BAC Holders approve a proposal, such proposal
will be deemed approved and adopted by Fund I-II irrespective of whether a
majority of the BAC Holders in either Series I or Series II failed to vote for
such proposal. Although not expressly structured as such, effectively, the
approval of each of the proposals to be voted upon will require the approval of
a majority of the unaffiliated BAC Holders, since CAPREIT does not own any BACs
and the General Partners and their affiliates own a de minimis number of BACs.
See "SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT--Management".
VOTING PROCEDURES AND PROXIES
Each BAC Holder of record on the Record Date is entitled to cast one vote
per BAC in person or by proxy at the Special Meeting or any adjournment thereof.
The persons named in the Proxy will vote as instructed by the BAC Holder with
respect to each proposal to be voted on by such BAC Holder, and will have
authority, as a result of holding such Proxy, to vote in their discretion as to
any other matters that are properly presented at the Special Meetings .
Each BAC Holder, whether voting in person or by proxy, must vote, with
respect to all of such BAC Holder's BACs in a Fund, either "FOR," "AGAINST" or
"ABSTAIN" as to each proposal to be voted upon. If a BAC Holder has BACs in
more than one Fund or Series, however, such BAC Holder can vote the BACs held in
one Fund or Series differently from how such BAC Holder votes the BACs held in
the other Fund or Series. A signed Proxy which is returned without a vote will
be voted "FOR" each of the proposals. The failure to return a signed Proxy or
returning it with an "ABSTAIN" vote has the effect of, and is equivalent to, a
vote against each proposal. In addition, broker non-votes (i.e., BACs not voted
on a specific proposal by record holders due to the absence of specific voting
instructions from the beneficial owner of the BACs) have the effect of, and are
equivalent to, votes against the proposals.
Any Proxy may be withdrawn or changed at any time prior to the date of the
Special Meetings by completing, executing and returning a Proxy indicating the
changed vote. Any such withdrawal will be effective when the appropriate Fund
receives a signed Proxy bearing a later date. A BAC Holder may also revoke a
previously delivered Proxy by voting in person at the
-19-
<PAGE>
Special Meeting (although attendance at the Special Meeting will not in and of
itself constitute revocation of a Proxy) or by giving notice of revocation of
his or her Proxy at the Special Meeting. Unless revoked in the manner set forth
above, Proxies in the form enclosed will be voted at the Special Meeting in
accordance with the BAC Holder's instructions.
Each BAC Holder is requested to complete and execute the Proxy in
accordance with the instructions contained therein. For a Proxy to be
effective, a BAC Holder must deliver his or her Proxy at any time prior to the
Special Meeting of the Fund, or any adjournment thereof, addressed to Capital
Realty Investors Tax Exempt Fund Limited Partnership or Capital Realty Investors
Tax Exempt Fund III Limited Partnership, as applicable:
c/o Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016.
A self-addressed, stamped envelope for return of the Proxy has been
included with this Proxy Statement.
THE GENERAL PARTNERS URGE EACH BAC HOLDER TO VOTE--YOUR VOTE IS IMPORTANT.
SOLICITATION OF PROXIES
The expense of preparing, printing and mailing these proxy materials and
the costs of the solicitation will be paid by CAPREIT. Proxies are being
solicited principally by mail, but proxies may also be solicited personally, by
telephone, telegraph and similar means by the General Partners and their
affiliates. In addition, CAPREIT, on behalf of the Funds, has retained
MacKenzie Partners, Inc. to assist in the solicitation of the proxies for an
estimated fee of $30,000 plus out-of-pocket expenses. CAPREIT will also
reimburse brokerage firms and others for their expenses in forwarding proxy
solicitation materials to the beneficial owners of the BACs.
SPECIAL FACTORS
PURPOSE AND EFFECT OF THE TRANSACTIONS
The principal purpose and effect of the Transactions is to cause CAPREIT
and its affiliates to acquire the entire equity interest in each of the Funds
and the Owner Partnerships. As a result of the Mergers, BAC Holders will
receive the Redemption Price in cash in exchange for their interest in the Funds
and will cease to have any continuing equity interest in the Funds or receive
distributions therefrom and will not participate in any future losses or gains
of the Funds. See "--Recommendations of the General Partners" and "--Fairness
of the Transactions" below. As a result of the Transactions, the General
Partners and their respective affiliates also will cease to have any continuing
interest in the Funds.
-20-
<PAGE>
As a result of the Mergers, CAPREIT and its affiliates will own the entire
equity interest in the Funds. Immediately following the Mergers, CAPREIT will
cause the Funds to merge and the surviving entity of such merger will contribute
the Mortgage Revenue Bonds together with certain other assets contributed by
CAPREIT to one or more trusts to be formed by CAPREIT in connection with the
financing for the Transactions (the "Financing"). In connection with the
Financing, CAPREIT will cause beneficial ownership interests in the trusts to be
sold to investors. The residual equity interest in the trusts will be retained
by CAPREIT and its affiliates. See, "THE TRANSACTION PROPOSALS -- The Mergers -
- - The Financing".
As a self-managed real estate investment trust, CAPREIT is in the business
of owning and managing properties similar to the mortgaged properties underlying
the Mortgage Revenue Bonds. By effecting the Mergers and the Financing and
acquiring ownership of certain of the underlying properties which secure the
Mortgage Revenue Bonds, which include 14 properties currently managed by an
affiliate of CAPREIT under management contracts with the Owner Partnerships,
CAPREIT is seeking to guarantee its continued management of the properties,
strengthen its competitive position by integrating these properties with its
current leasing portfolio which is located, for the most part, in the same
geographic area as these properties, and replace existing indebtedness on
certain properties owned by it with lower cost financing.
Other than as set forth in this Proxy Statement, the General Partners have
no reason for proposing and recommending the Transactions now (as opposed to any
other time) and are unaware of any material development affecting the future
value of the BACs which is not discussed in this Proxy Statement.
BACKGROUND OF THE MERGERS
On January 12, 1995, Mr. Richard L. Kadish, President of CAPREIT, met with
Mr. William B. Dockser, Chairman of the Board of C.R.I., Inc. ("CRI"), the
managing general partner of Fund I-II GP and the sole general partner of Fund
III GP, in Phoenix, Arizona, where each was attending a convention of the
National Multi Housing Council. At the meeting, Mr. Kadish raised the
possibility that CAPREIT acquire the Funds. Mr. Dockser indicated that he
believed that the General Partners would be receptive to a proposal to acquire
the Funds, because Mr. Dockser believed that, absent a significant increase in
the cash flows generated by, or the market values of, the properties securing
the Mortgage Revenue Bonds, each of the General Partners anticipated that most
of the Mortgage Revenue Bonds owned by their respective Funds would not be paid
off at par when the associated mortgage loans matured at various times in 1998
through 2000. Nine of the 10 mortgage loans relating to the Mortgage Revenue
Bonds owned by Fund I-II and 6 of the 8 mortgage loans relating to the Mortgage
Revenue Bonds owned by Fund III had not been paying the full amount of base
interest for some period of time and instead, the Funds had been receiving
interest based on the cash flow of those 15 properties. In addition, interest
had been accruing on the unpaid base interest at the base interest rate and
there could be no assurance that the Funds would receive payments that would pay
down materially the accrued interest. For the 15 non-performing loans to be
paid in full at maturity and thereby avoid a default under the related Mortgage
Revenue Bonds, the cash flows and values of the underlying properties would have
to appreciate significantly in the next two to
-21-
<PAGE>
four years. Accordingly, Mr. Dockser believed that the General Partners would be
interested in considering a proposal for the sale of their respective Funds.
CAPREIT was initially formed in late 1993 by CRI for the purpose of
acquiring, owning and managing a portfolio of multi-family real estate
properties, and was acquired by A.P. CAPREIT Partners, L.P. ("AP CAPREIT"), an
affiliate of Apollo Real Estate Advisors, L.P. ("Apollo") on January 31, 1994.
In January 1995, when Mr. Kadish first approached Mr. Dockser regarding the
possible acquisition of the Funds by CAPREIT, CAPREIT Residential Corp.
("CAPREIT Residential"), an indirect, wholly-owned subsidiary of CAPREIT,
managed 13 of the properties underlying the Mortgage Revenue Bonds (and in
February 1995 took over management of another property), CRI and certain of
CRI's affiliates held up to a 22% residual profits limited partner interest
(contingent on the occurrence of certain events and meeting certain hurdle
rates) in A.P. CAPREIT, and Messrs. Dockser and Willoughby were two of the seven
directors of CAPREIT. In addition, CRI and certain of its affiliates had
retained the right to re-acquire the property management business it had
contributed to CAPREIT Residential in 1994 at any time prior to June 30, 1995 at
no cost. See "--Certain Relationships and Related Transactions" below.
In late January, 1995. Mr. Kadish again approached Mr. Dockser and Mr. H.
William Willoughby, President of CRI, about CAPREIT's proposed acquisition of
the Funds. Mr. Kadish indicated that CAPREIT was studying the potential
acquisition of the Funds through a tender offer for the BACs, although no tender
prices were discussed at such time. As a result of such discussions, the Funds
agreed to provide CAPREIT with additional information and to continue
discussions with CAPREIT following the execution of appropriate confidentiality
agreements. Messrs. Dockser and Willoughby did not consider establishing an
independent committee to conduct negotiations with CAPREIT.
On or about February 10, 1995, the Funds submitted draft Confidentiality
and Non-Circumvention Agreements to CAPREIT, which following certain
modifications , were signed by CAPREIT on March 1, 1995 (the "Confidentiality
Agreements"). Following execution of the Confidentiality Agreements,
representatives of CAPREIT received and reviewed certain documents and other
data concerning the Funds and studied potential acquisition structures.
On March 22, 1995, Messrs. Dockser and Willoughby and their
representatives, and Mr. Kadish and his representatives, including Mr. Ronald
Kravit, then a director of CAPREIT and an associate of Apollo, met to discuss
the structure of the proposed acquisition. At that time CAPREIT advised the
General Partners that CAPREIT had determined that a merger of the Funds with
affiliates of CAPREIT would be more beneficial to it for business planning and
tax purposes than a tender offer and that since a merger transaction structure
was more beneficial to CAPREIT than a tender offer or other acquisition
structure, CAPREIT would be willing to offer a higher price per BAC in a merger
than it would under a different acquisition structure. At the meeting, the
General Partners expressed their initial resistance to a merger structure based
upon their view that such a structure would not only require potential higher
costs for the Funds than a tender offer, but also would require the Funds to
make extensive representations and warranties. Subsequently, during the
meeting, CAPREIT agreed to bear the bulk of the Funds' transaction
-22-
<PAGE>
costs (other than the cost of negotiating the Merger Agreements and the cost of
obtaining any fairness opinions in connection therewith), including, but not
limited to, the costs of preparing and mailing this Proxy Statement and
conducting the proxy solicitation. The General Partners concluded the meeting by
agreeing to continue to negotiate the acquisition of the Funds by CAPREIT in a
merger transaction structure.
During March 1995, Messrs. Dockser and Willoughby also had been discussing
with representatives of AP CAPREIT the possible redemption of CRI's minority
interest in AP CAPREIT which would result in the termination of the right of CRI
and certain of its affiliates to reacquire, at no cost to them, the property
management businesses they had contributed to CAPREIT Residential upon its
formation, which right was to expire on June 30, 1995. See "--Certain
Relationships and Related Transactions" below. The proposed redemption was
discussed at the meeting of March 22, 1995, although Messrs. Dockser and
Willoughby insisted that the negotiations of the proposed redemption stay
independent of and not be conditioned upon CAPREIT's proposed acquisition of the
Funds.
On April 5, 1995, Messrs. Dockser and Willoughby again met with Messrs.
Kadish and Kravit to discuss the general terms of CAPREIT's acquisition proposal
and the structure of an acquisition transaction. Messrs. Dockser and Willoughby
reiterated that they were prepared to proceed in concept with the merger
transaction structure, but only if the Funds would not incur greater costs or be
subject to greater liability than under a tender offer structure.
Representatives of CAPREIT highlighted a number of items to be discussed,
including the scope of the representations and warranties to be made by the
Funds and the Owner Partnerships to CAPREIT, the allocation of fees and expenses
of the parties, a termination fee and the conditions precedent to each party's
obligation to consummate the transaction. Both sides discussed these items
generally, and the representatives of the General Partner stated that the Funds
were not prepared to make any representations and warranties (and in particular
any representations or warranties as to the tax-exempt status of the Mortgage
Revenue Bonds) that would subject the Funds to any undue potential liability.
Representatives of CAPREIT insisted that the Funds make certain representations
and warranties regarding the Mortgage Revenue Bonds and the underlying
properties. In addition, the representatives of CAPREIT and the General
Partners at that meeting discussed the terms (but not the amount) of a
termination fee that would be payable to CAPREIT in the event the Merger
Agreements were terminated and the Funds were to engage in a merger or other
sale transaction with a party other than CAPREIT that yielded greater proceeds
to the BAC Holders within 270 days after such termination. See "THE TRANSACTION
PROPOSALS--The Merger Proposal--The Merger Agreements--Fees and Expenses".
After several hours of discussion, no agreements were reached on these points.
At that time, the General Partners also advised CAPREIT that they needed to be
satisfied that CAPREIT had the ability to secure financing for the transaction
before they would continue discussions regarding the Mergers.
Also at the April 15, 1995, meeting, Messrs. Dockser and Willoughby
expressed their concern to CAPREIT that they wished to avoid even the appearance
of a conflict of interest since CRI and its affiliates controlled the General
Partners of the Funds and representatives of CRI and AP CAPREIT were in
negotiations regarding the possible redemption of CRI's interests in AP
-23-
<PAGE>
CAPREIT and advised CAPREIT that they would suspend negotiations regarding the
mergers of the Funds until CRI and its affiliates divested themselves of their
limited partner interests in AP CAPREIT.
Over the course of the next three months, while AP CAPREIT and CRI were
negotiating the redemption of CRI's limited partner interests in AP CAPREIT,
CAPREIT continued its due diligence with respect to the Funds and held
discussions with potential financing sources. During this period, all
negotiations between CRI and CAPREIT regarding the Funds and CAPREIT's potential
acquisition thereof were suspended.
On June 30, 1995, AP CAPREIT redeemed all of the interests of CRI and
certain of its affiliates for an aggregate consideration of $4,750,000, subject
to partial refunds ("Termination Refunds") of up to $3,900,000 if certain
property management contracts are terminated under certain circumstances. At
that time, CAPREIT and CRI also agreed, however, that the portion of the
Termination Refunds relating to properties that secure certain Mortgage Revenue
Bonds held by the Funds in the original aggregate amount of $1,313,864 (which
amount decreased after June 30, 1996 to $1,149,631 and will continue to decrease
after June 30 of each succeeding year) would not be due if the Mergers were
consummated. See "-- Interests of Certain Persons in the Transactions" and "--
Certain Relationships and Related Transactions" below. Also on June 30, 1995,
representatives of CAPREIT delivered initial drafts of Merger Agreements to the
Funds.
Messrs. Kadish and Kravit and other representatives of CAPREIT met with
Messrs. Dockser and Willoughby and other representatives of the Funds on July
17, 1995 to discuss the terms of the draft Merger Agreements which CAPREIT had
previously delivered to the Funds. At that meeting, Messrs. Dockser and
Willoughby insisted that the Funds would only agree to make limited
representations and warranties, would not agree to make any representations
regarding the tax-exempt status of the Mortgage Revenue Bonds or the underlying
properties and would not agree to be liable for any breaches of representations
and warranties by the Funds. Representatives of CAPREIT, on the other hand,
insisted on receiving certain representations and warranties about the Mortgage
Revenue Bonds and the underlying properties. The General Partners also stated
that their approval of the Mergers would be conditioned on the receipt of a
favorable fairness opinion of an investment bank and insisted on preserving
their ability to talk with other potential bidders whenever they believed they
had a fiduciary duty to conduct such discussions. CAPREIT agreed to this point.
The General Partners also demanded that CAPREIT post a non-refundable deposit
against payment of the aggregate Redemption Price prior to the mailing of the
Proxy Statement. Representatives of CAPREIT raised issues concerning the amount
of cash which the Funds would have on hand at closing and insisted that the
Funds seek CAPREIT's consent prior to settling certain litigation.
During the course of the discussions, representatives of CAPREIT also
insisted that CAPREIT's ability to obtain the requisite financing for the
transactions be a condition to its obligation to consummate the Mergers. At
that point, the General Partners declared that they did not wish to proceed with
negotiations until CAPREIT could provide more details about the terms of the
proposed financing.
-24-
<PAGE>
The following week CAPREIT delivered to the General Partners a draft
financing term sheet prepared by a financial institution (which financial
institution a few months later declined to proceed with the financing). After
reviewing the term sheet, the General Partners believed that CAPREIT would
likely be able to secure financing for its proposals and negotiations with
CAPREIT concerning the terms of the Merger Agreements resumed in earnest.
On August 18, 1995 representatives of the General Partners and
representatives of CAPREIT conducted a telephone conference call to discuss a
revised draft of the Merger Agreements. During that call, CAPREIT advised the
General Partners that it would agree to their request to pay a deposit if the
deposit would be returned to CAPREIT in the event of a breach of the Merger
Agreement by a Fund or a breach of the commitment letter by the financial
institution. Shortly following that call, Messrs. Dockser and Willoughby
advised representatives of CAPREIT that the Funds would not make any
representations and warranties regarding the properties underlying the Mortgage
Revenue Bonds but that the Owner Partnerships would agree to make certain
representations and warranties about the two properties owned by them that were
at that time not managed by affiliates of CAPREIT, and CAPREIT concurred.
Certain matters relating to the payment of expenses, the termination fee to be
payable to CAPREIT in certain circumstances, and the amount of cash held by the
Funds at closing, however, remained unresolved.
On August 22, 1995, representatives of CAPREIT advised the General Partners
that CAPREIT was willing to offer an aggregate of $145.0 million for all of the
BACs. The General Partners rejected the offer as too low. Following further
negotiations with the General Partners, CAPREIT and the General Partners agreed
later that day upon an aggregate offering price of $150.0 million for all of the
BACs (subject to the receipt of favorable fairness opinions and approval by the
BAC Holders). Over the next two weeks the parties finalized the provisions of
the Merger Agreements and reviewed revised proposals for CAPREIT's financing.
On September 11, 1995, CAPREIT delivered an executed term sheet relating to
its financing for the Mergers and the parties signed the initial Merger
Agreements among them providing for the Mergers and related transactions
discussed herein. On September 11, 1995, the Funds issued a press release
announcing the signing of the Merger Agreements and the salient terms thereof.
Also on September 11, 1995, the General Partners engaged Oppenheimer & Co.,
Inc. ("Oppenheimer") to render its fairness opinions in connection with the
Mergers. During September and October 1995, Oppenheimer inspected each of the
properties which secure the Mortgage Revenue Bonds and reviewed, among other
things, audited financial statements of each Fund for the calendar years 1994,
1993 and 1992, and unaudited financial statements of each Fund for the six
months ended June 30, 1995, 1994 and 1993; audited financial statements for each
of the properties which secure the Mortgage Revenue Bonds (except for
Observatory II whose unaudited financial statement for calendar years 1993 and
1994 were reviewed); and unaudited financial operating statements which included
actual information for the eight months ended August 31, 1995 combined with the
remaining four months based on the 1995 operating budgets for each property.
-25-
<PAGE>
In late October, representatives of Oppenheimer informally told the General
Partners that, based on the information Oppenheimer had reviewed at that time,
they believed that the aggregate Merger consideration of $150.0 million then
being offered would not be likely to support a fairness opinion. In reaching
this determination, Oppenheimer performed a preliminary analysis of Fund I-II,
Series I and Series II, and Fund III utilizing valuation methodologies that are
similar to the ones described below under "-- Fairness Opinions of Oppenheimer &
Co., Inc." Oppenheimer's initial observations did not constitute its fairness
opinion nor did it provide any reports or documents in connection with these
communications.
On September 22, 1995, eleven days after the public announcement of the
proposed Mergers, Irving Zakin commenced a putative class action on behalf of
the BAC Holders against Messrs. Dockser and Willoughby, CRI, Fund I-II GP, Fund
III GP, the Assignor Limited Partner of each of the Funds, and CAPREIT and each
of the Funds in the Court of Chancery of the State of Delaware in New Castle
County (C.A. No. 14558; the "Zakin Action"). The complaint alleged, among other
-----
things, that the price being offered to the BAC Holders as announced by the
Funds was inadequate and that the defendants breached their fiduciary duty to
the BAC Holders, or aided and abetted such a breach, and engaged in self-dealing
and misled BAC Holders, in connection with the Mergers. The suit sought to
enjoin the Transactions, to obtain damages and to compel the defendants to
maximize the price paid to the BAC Holders and consider alternatives to the
Transaction Proposals.
On October 5, 1995, David and Johanna Wingard commenced a second putative
class action against the same defendants named in the Zakin Action in the Court
-----
of Chancery of the State of Delaware in New Castle County (C.A. No. 14604; the
"Wingard Action"). The allegations of the complaint in the Wingard Action were
- -------- -------
virtually identical to the allegations of the complaint filed in the Zakin
-----
Action described above and the complaint sought virtually identical relief.
The defendants voluntarily provided documents to counsel for the plaintiffs
in both actions during October 1995 and shortly thereafter initiated settlement
discussions with such counsel. The plaintiffs' initial document review and the
settlement discussions between the parties continued throughout November and
December 1995.
In January 1996, following plaintiffs' counsel's initial document review
and other diligence efforts, the defendants and plaintiffs' counsel reached a
tentative settlement of the Zakin and Wingard Actions. In connection therewith,
----- -------
representatives of CAPREIT and the General Partners held a conference call on
January 28, 1996 to discuss the settlement offer and agreed that, consistent
with the proposed terms of the settlement, (a) the aggregate cash consideration
to be paid to the BAC Holders would be increased by $8.5 million from $150.0
million to $158.5 million (less the amount of fees and expenses payable to
counsel for the plaintiffs as described below), subject to an upward adjustment
in the event that Available Cash at closing exceeded $12.4 million and a
downward adjustment in the event that Available Cash was less than $12.4
million, in each case, with the aggregate maximum adjustment amount being capped
at $1.5 million, and (b) the aggregate amount payable in consideration for the
Accrued
-26-
<PAGE>
Fees payable to CRI would be reduced to no more than $1.95 million as compared
to the $4.023 million contemplated by the original Merger Agreements. It was
further agreed that plaintiffs' counsel could apply to the court for payment of
their fees and expenses in an amount not to exceed 20% of the improvements
negotiated by them over the initial Merger consideration which would be paid
from the distributions to BAC Holders. See "LITIGATION".
CAPREIT had continued discussions for several months through the fall of
1995 with the financial institution that prepared the July term sheet, but
negotiations with such financial institution over the terms and structure of the
financing reached an impasse over business and tax issues in December 1995.
Thereafter, CAPREIT commenced negotiations with another financial institution
that had expressed an interest in providing the financing for the Mergers .
On January 31, 1996, the parties entered into amendments to the Merger
Agreements providing for the improved merger terms negotiated by plaintiffs'
counsel in the Zakin and Wingard Actions as described above. At the same time,
----- -------
the defendants and the plaintiffs and their respective attorneys entered into a
Memorandum of Understanding setting forth the proposed settlement of the Zakin
-----
and Wingard Actions, including the complete discharge, settlement and release by
-------
the plaintiff class of all claims that have been, could have been, or in the
future might be asserted in any action or any other proceeding in connection
with the Mergers and agreeing to use their best efforts to execute an
appropriate Stipulation of Settlement and such other documents as might be
required in order to obtain approval by the court of the settlement.
During February 1996, the General Partners asked Oppenheimer to review the
fairness of the transactions based on the improved Merger terms agreed to with
plaintiffs' counsel in connection with the settlement of the Zakin and Wingard
----- -------
Actions as outlined above. At such time, Oppenheimer also reviewed the 1995
annual unaudited financial operating statements and certain other updated
information.
During the first two weeks of March 1996, following further review of the
Redemption Prices being offered to the BAC Holders and certain information with
respect to the properties underlying the Mortgage Revenue Bonds, the Funds and
CAPREIT determined that as a result of their re-evaluation of certain deferred
maintenance costs and contingent liabilities with respect to certain of the
properties, it appeared that the portion of the aggregate Redemption Price that
had theretofore been allocated to Fund I-II, Series II, was disproportionately
low. As a result, representatives of Fund I-II GP held further discussions with
CAPREIT which on March 13, 1996 resulted in a further increase in the aggregate
consideration to be offered to the Series II BAC Holders in Fund I-II of
approximately $260,000.
On March 14, 1996, the General Partners entered into the First Amended and
Restated Merger Agreements which restated in their entirety the Merger
Agreements and the amendments entered into on January 31, 1996 and provided for
an increase of approximately $260,000 in the aggregate consideration to be
payable to the Series II BAC Holders and also provided for an increase of
approximately $35,000 in the aggregate Merger consideration payable to all BAC
Holders as a result of rounding the Redemption Prices up to two decimal places
from four decimal places
-27-
<PAGE>
On March 14, 1996, Oppenheimer delivered its initial fairness opinions to
the Funds to the effect that, as of such date and subject to the assumptions and
limitations therein, the redemption prices then being offered to the BAC Holders
of each of Series I of Fund I-II, Series II of Fund I-II and Fund III in the
Mergers of $14.28 per BAC, net to the holders in cash, $14.07 per BAC, net to
the holders in cash and $15.02 per BAC, net to the holders in cash,
respectively, were fair to such BAC Holders from a financial point of view. See
"-- March 14, 1996 Fairness Opinions of Oppenheimer & Co., Inc."
During the period of February and March, 1996, CAPREIT continued its
discussions with potential financing sources regarding the structure and terms
of its proposed financing for the Transactions. Thereafter, on March 29, 1996,
CAPREIT received a financing commitment letter (the "Commitment Letter") from
CentRe Mortgage Capital, L.L.C. providing for certain credit and liquidity
support for its proposed financing structure for the Mergers. See "THE
TRANSACTION PROPOSALS--The Financing". On April 26, 1996, in satisfaction of a
condition under the Merger Agreements, CAPREIT delivered a copy of the executed
Commitment Letter to the Funds.
In January 1996, Mr. Martin C. Schwartzberg, a former general partner of
Fund I-II GP and other CRI related entities, made certain negative public
statements about CRI and the General Partners and their affiliates, as well as
the proposed Mergers. On February 16, 1996, the Funds, together with the
General Partners, CRI and CAPREIT filled suit against Mr. Schwartzberg in the
United States District Court for the Southern District of New York, No. 96 Civ.
1186 (LAK) (the "New York Action") alleging that Mr. Schwartzberg engaged in an
unlawful solicitation of proxies of the BAC Holders through two press releases
he issued. On March 18, 1996, the Court enjoined 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 (the
"Exchange Act"), and (2) committing any violation of Rule 14A-9 promulgated
under the Exchange Act (regarding false or misleading statements) in connection
with any solicitation relating to the Funds.
On March 18, 1996, Mr. Schwartzberg filed counterclaims in that action
against the General Partners alleging that three press releases issued by the
General Partners and the Funds were false and misleading and constituted
solicitations in violation of the Exchange Act and on March 31, 1996 moved to
enjoin the Funds from allegedly soliciting proxies in violation of the Exchange
Act. The counter-defendants denied the allegations. On April 23, 1996, the
Court denied Mr. Schwartzberg's motion for an injunction on the grounds that
such an injunction would be unwarranted given the scope and extent of Mr.
Schwartzberg's prospects for succeeding on the merits, and the fact he could
show neither a sufficient threat of irreparable injury nor a balance in his
favor of the hardships associated with granting or denying an injunction.
Following extensive discovery by counsel for the plaintiffs and experts
retained by them, including a review of voluminous quantities of documents
(including drafts of this Proxy Statement) and depositions of representatives of
the General Partners, CAPREIT and Oppenheimer, counsel for the plaintiffs in the
Zakin and Wingard Actions satisfied themselves as to the terms of the Mergers
and related Transactions and this Proxy Statement and executed a
-28-
<PAGE>
Stipulation of Settlement with the defendants, which was filed with the Court on
May 16, 1996 (the "Stipulation of Settlement"). A class action notice was first
mailed to members of the putative class on or about May 20, 1996 for a fairness
hearing on the proposed Settlement which was initially scheduled to be held on
June 19, 1996. See "LITIGATION."
As stated in the Stipulation of Settlement, in arriving at their decision
to settle the Zakin and Wingard Actions, plaintiffs' counsel considered, among
----- -------
other things: their review and analysis of the relevant documents produced by
the defendants and third parties and also publicly available documents; analyses
and evaluations performed by an expert retained by the plaintiffs' counsel;
their own discussions with the Dominium Group (as defined below) which had
expressed an interest in acquiring the Funds; an informal review of the market
undertaken by them in an effort to identify higher and better offers for the
interests of the BAC Holders and the fact that no other bidder had emerged from
the process or the publicity surrounding the proposed Merger with a higher and
better offer; the deposition of certain of the defendants; the interview and
deposition of Oppenheimer as to the basis for its Fairness Opinions; discussions
with counsel for Mr. Schwartzberg; the substantial economic benefits which
members of the putative class will receive from the improved Merger
consideration; the risks and expenses associated with complex litigation,
including delays in the process itself and appeals from the rulings of the trial
level courts; and the "fiduciary out" provision allowing plaintiff's counsel to
terminate the Settlement in the event that a bona fide purchaser comes forward
with a superior proposal before entry of a final judgment in the Zakin and
-----
Wingard Actions.
- -------
On May 18, 1996, representatives of the General Partners and CAPREIT
conferred regarding the status of the Transactions. Such representatives
discussed, among other things, the undue complexity in the terms of the Merger
created by the adjustments in the cash consideration payable to the BAC Holders.
The parties determined to amend the terms of the Merger Agreements to, among
other things, eliminate the possible downward adjustment of the Redemption Price
based on the amount of Available Cash and increase the maximum aggregate upward
adjustment for Available Cash from $1.5 million to $2.25 million. The parties
also agreed to extend the termination date thereof to November 30, 1996 from
June 30, 1996 and, in connection therewith, increase the expense reimbursement
payable to the Merger Partnerships in certain circumstances from $2 million to
$2.5 million per Fund.
On June 12, 1996, Mr. Schwartzberg entered into an agreement with Mr.
Dockser, Mr. Willoughby and CRI resolving various disputes which they had
involving their business relationships, including those relating to numerous
businesses other than the Funds. As part of the June 12, 1996 agreement,
Messrs. Schwartzberg, Dockser and Willoughby will continue their pre-dispute
sharing of net disposition fees generated by certain properties which are not
owned by or related to the Funds, but Mr. Schwartzberg will receive an advance
against such fees in the amount of $125,000 semi-annually from 1997 to 2002.
CAPREIT will be responsible for guaranteeing such advances from January 1, 2001,
through June 30, 2002. If cumulative disposition fees exceed cumulative
advances, the payor may retain from future fees an amount sufficient to recoup
the advances. Further, Mr. Schwartzberg and CRI have agreed not to take any
actions which might interfere with each other's business. Mr. Schwartzberg also
has retracted any derogatory statements that he previously made about CRI and
its principals and the
-29-
<PAGE>
Mergers and has promised not to make any similar statements in the future.
Pursuant to such agreement, all pending litigation between Mr. Schwartzberg and
CRI, Mr. Dockser and Mr. Willoughby was to be dismissed with prejudice. See
"LITIGATION".
Also as of June 12, 1996, Mr. Schwartzberg and CAPREIT and certain of their
respective affiliates entered into an agreement pursuant to which the parties
and the Funds agreed to dismiss the New York Action with prejudice and Mr.
Schwartzberg agreed not to take certain actions or make any public statements in
opposition to the Mergers. The agreement provides for the payment into escrow
for the benefit of Mr. Schwartzberg's counsel and consultants an aggregate of
$867,000 over a three year period, of which CAPREIT is responsible for payment
of a maximum of $333,500. The remaining amount is to be paid by others to
CAPREIT for deposit into the escrow account as follows: $400,000 by CRI,
$100,000 by plaintiffs' counsel in the Zakin and Wingard Actions, and $33,500 by
----- -------
Mr. Schwartzberg. Unless both of the Mergers have been consummated, only
$300,000 of the maximum aggregate amount shall be payable into escrow ($116,500
by CAPREIT, $33,500 by Mr. Schwartzberg and $150,000 by CRI). See
"LITIGATION" and "SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT".
On July 15, 1996, CAPREIT and the General Partners executed the Third
Amended and Restated Merger Agreements with each of the Funds, which amended the
Second Amended and Restated Merger Agreements to reflect the agreement between
the parties arrived at following further negotiations subsequent to the
execution thereof in connection with the elimination of the previously proposed
downward adjustment of the Redemption Prices under certain circumstances, to
modify the minimum Available Cash condition to the Merger Partnerships'
obligations in the event the Mergers are consummated prior to October 1, 1996,
to provide that there be at least $11,650,000 (rather than $11,400,000 as
previously provided) of Available Cash in the aggregate. The amended Merger
Agreements also made certain technical changes to the agreement among the
parties with respect to the sale of the General Partners' interest in the Funds
to CAPREIT GP and the substitution of CAPREIT GP as general partner.
During February 1996, the General Partners had received an inquiry
concerning the possible acquisition of the Funds from a group of investors led
by Mr. Terry McNellis and Mr. Gary Petrucci, of Piper Jaffrey Inc., and Mr.
David Brierton and Mr. Jack Safar, of Dominium Management Services Inc.
(collectively, the "Dominium Group"). The General Partners advised the Dominium
Group that they would provide them with requested information concerning the
Funds upon such individuals' execution of appropriate confidentiality agreements
and sent to them Confidentiality and Non-Circumvention Agreements substantially
in the form signed by CAPREIT. Thereafter representatives of the Dominium Group
and the Funds proceeded to negotiate such confidentiality agreements with
respect to which the Dominium Group had requested substantial revisions. On
March 20, 1996, following receipt of signed confidentiality agreements from
certain of the principals of the Dominium Group, the Funds commenced providing
the Dominium Group with the due diligence material that they had requested. By
the beginning of April, 1996, the Funds had provided the Dominium Group with all
of the due diligence materials they had requested. The Funds did not receive an
executed confidentiality agreement from the remaining member of the Dominium
Group until April 15, 1996. Thereafter,
-30-
<PAGE>
the General Partners did not hear from any representative of the Dominium Group
until June 28, 1996, just days prior to the date scheduled for the fairness
hearing to be held on the Stipulation of Settlement in the Zakin and Wingard
----- -------
Actions.
On June 28, 1996, counsel to the plaintiffs in the Zakin and Wingard
----- -------
Actions and the Funds received a letter from Dominium Tax Exempt Fund L.L.P.
("Dominium"), which was signed by Mr. Safar of the Dominium Group, indicating an
interest in entering into merger agreements with the Funds having similar terms
as the Merger Agreements and purportedly offering the BAC Holders an aggregate
merger consideration of approximately $168,230,000.
After reviewing the Dominium letter, the General Partners determined that
Dominium had not demonstrated any firm financing ability and that Dominium may
have failed to account appropriately for certain deal costs and expenses and the
posting of reserves for the properties. Notwithstanding such determination, the
General Partners, in a letter dated July 3, 1996, notified Dominium that they
would make documents available to Dominium for its due diligence, although they
also cautioned Dominium that they would not jeopardize the Merger Agreements
with CAPREIT by an unwarranted delay while Dominium and its potential lenders
continued to study the Funds and the Mortgage Revenue Bonds and completed their
due diligence. See "-- Alternatives to the Mergers."
During the weeks of July 8, July 22 and July 29, representatives of
Dominium visited the principal offices of the Funds to continue their due
diligence review. During that period, the General Partners also responded to
numerous requests for copies of specific documents and coordinated site visits
by Dominium, its two proposed potential lenders, and its engineering and
environmental consultants to the 18 properties. On July 12, 1996, the Funds
received copies of correspondence from Dominium to counsel for the plaintiffs in
the Zakin and Wingard Actions, indicating that Dominium had received purported
----- -------
financing commitments, subject to its potential lenders' satisfactory completion
of their due diligence during the succeeding 21 days and the payment by Dominium
of an expense deposit of $75,000, a processing fee of $100,000 on July 23, 1999,
and a commitment fee of in excess of $3,000,000 of which $500,000 was due at the
end of the 21-day due diligence period. According to Dominium's letter, the net
amount payable to BAC Holders under its adjusted proposal would be at least
$165,305,000. By letter dated July 18, 1996, the General Partners requested
that Dominium supply them with evidence that it had the financial capability to
cover the costs of the transaction it proposed and to provide the equity that
its potential lenders would require. The General Partners never received any
evidence that the $500,000 portion of the loan commitment fee, the $100,000
processing fee or the $75,000 expense deposit was paid. The July 18 letters
also requested that Dominium's counsel submit their suggested revisions to the
existing Merger Agreements with CAPREIT to reflect the terms desired by
Dominium. That request was reiterated by letter dated July 24, 1996. Copies of
the existing Merger Agreements marked to reflect Dominium's proposed changes
thereto were received on July 29, 1996. By letter dated July 31, 1996, the
General Partners requested clarification of seven issues relating to Dominium's
mark-up, but never received a response.
-31-
<PAGE>
On August 2, 1996, representatives of CAPREIT met with representatives of
Dominium in New York City in an attempt to assess the credibility of Dominium's
proposal and to discern its motivations with respect to the Fund, in view of
CAPREIT's belief that Dominium's proposal, as described in its letters to the
Funds, was not financeable and could not be accomplished as proposed. At that
meeting and in a few subsequent phone conversations between a representative of
CAPREIT and a representative of Dominium, certain aspects of CAPREIT's and
Dominium's respective proposals were discussed. No agreements or understandings
were reached between CAPREIT and Dominium as a result of the meeting or in any
subsequent communications.
Dominium had previously indicated to counsel for the plaintiffs' in the
Zakin and Wingard Actions that they would complete their due diligence and
- ----- -------
submit firm financing commitments for its proposal in order to satisfy such
counsel's concerns about Dominium's ability to secure financing for a
transaction with the Funds by August 5, 1996. No such commitment was submitted
on August 5, 1996 or at any time thereafter. The General Partners did not
receive any responses from Dominium to their subsequent inquiries as to whether
Dominium did in fact receive a loan commitment from its lenders until August 13,
1996, when Dominium advised the Funds, by letter, that it was not in a position
to provide evidence of its ability to finance or to finalize its proposals.
During the period of time while the Funds and counsel to the plaintiffs in
the Zakin and Wingard Actions continued to pursue a possible transaction with
----- -------
Dominium, the fairness hearing in the Zakin and Wingard Actions, initially
----- -------
scheduled to be held on June 19, 1996 and postponed by the parties until July 2,
1996, was further postponed on three occasions in order to accommodate
Dominium's request for additional time to finalize its proposal. The hearing
was ultimately scheduled to be held on August 14, 1996.
On August 7, 1996, after not having received any word from Dominium by
August 5, 1996, the date Dominium itself had selected as the deadline for the
delivery of its definitive proposal and firm commitments for the financing
thereof, counsel for the plaintiffs in the Zakin and Wingard Actions wrote to
-------
Dominium establishing a deadline of 12:00 noon, August 12, 1996 for their
receipt from Dominium of a documented "firm offer economically superior to" the
CAPREIT Mergers. No offer was received from Dominium by the August 12, 1996
deadline. CAPREIT, in order to bring finality to the process and to induce
plaintiffs' counsel to proceed with the August 14, 1996 hearing date on the
Stipulation of Settlement as scheduled rather than postponing it for the fifth
time, agreed with plaintiffs' counsel to increase the consideration being
offered by it to the BAC Holders by $2 million in the aggregate. Plaintiffs'
counsel advised Dominium's counsel, by letter of August 12, 1996, that in light
of Dominium's repeated failure to respond to their inquiries and to provide a
firm offer for the acquisition of the Funds with financing commitments therefor,
and in light of the agreement of CAPREIT to increase the aggregate consideration
being offered by it in the Mergers by $2 million, such counsel intended to
support the Stipulation of Settlement at the hearing to be held on August 14,
1996.
Dominium responded in letters to the Funds and plaintiffs' counsel received
on August 13, 1996 alleging that with more time and "disinterested general
partners" it would be able to make a proposal superior to CAPREIT's. In light
of the fact that Dominium had not been able to
-32-
<PAGE>
put together a firm offer in nearly six months since their initial expression of
interest in February, 1996, the General Partners did not believe it to be in the
best interests of the BAC Holders to delay any further proceeding with the
Mergers with CAPREIT.
On August 13, 1996, the parties in the Zakin and Wingard Actions entered
----- -------
into an Amendment to the Stipulation of Settlement which reflected CAPREIT's
agreement to increase the consideration to be paid by it in the Mergers and
plaintiffs' counsel agreement to support the Stipulation of Settlement, as
improved, notwithstanding any actions Dominium had taken or would take in the
future. The proposed Settlement, as amended, was presented to the Court for
final hearing and approval on August 14, 1996.
On August 14, 1996, at the fairness hearing on the Stipulation of
Settlement, as amended, in the Zakin and Wingard Actions, the Delaware Court of
----- -------
Chancery certified the class of BAC Holders, found that the proposed settlement
was fair, reasonable, adequate and in the best interests of the BAC Holders,
approved the Stipulation of Settlement, awarded to plaintiffs' counsel fees in
the amount of $2 million, and entered a final judgment dismissing the actions.
Based upon the properties performance during the period since the second
Amended and Restated Merger Agreement was signed, the General Partners
negotiated with CAPREIT to obtain a further increase in the aggregate Merger
consideration in addition to the $2 million increase agreed to in connection
with the fairness hearing. In light of the delays in pursuing the Mergers and
the fairness hearing occasioned by the efforts of the General Partner and
plaintiffs' counsel to obtain an offer from Dominium, CAPREIT sought to extend
the Termination Date and increase the amount of expenses for which a Merger
Partnership may be reimbursed pursuant to the Merger Agreements. On August 21,
1996, CAPREIT agreed to increase the aggregate amount of Merger consideration by
a further $1.5 million, approximately, in consideration for the extension of the
Termination Date from November 30, 1996 to December 31, 1996 and an increase
from $2,500,000 to $2,600,000 per Merger Agreement of the maximum amount of
expenses for which a Merger Partnership may be reimbursed under certain
circumstances if a Merger Agreement is terminated.
On that day, the Funds entered into the Merger Agreements with the Merger
Partnerships and CAPREIT, to provide, among other things, for the increase in
the consideration being offered by CAPREIT to the BAC Holders in the Mergers by
$3.5 million to an aggregate of $162.3 million, the extension of the Termination
Date from November 30, 1996 to December 31, 1996 and the $100,000 increase per
Merger Agreement in the maximum amount of expense for which a Merger Partnership
may seek reimbursement if a Merger Agreement is terminated under specified
circumstances.
On __________________, 1996, Oppenheimer delivered its Fairness Opinions to
the Funds to the effect that, as of such date and subject to the assumptions and
limitations therein, the Redemption Prices of $14.82 per BAC with respect to
Series I of Fund I-II, $14.50 per BAC with respect to Series II of Fund I-II and
$15.13 per BAC with respect to Fund III, net to the holders in cash,
respectively, are fair to such BAC Holders from a financial point of view.
"See--Fairness Opinions of Oppenheimer & Co., Inc."
-33-
<PAGE>
RECOMMENDATIONS OF THE GENERAL PARTNERS
EACH OF THE GENERAL PARTNERS RECOMMENDS THAT BAC HOLDERS OF ITS FUND VOTE "FOR"
EACH OF THE TRANSACTION PROPOSALS TO BE VOTED ON BY SUCH BAC HOLDERS.
Fund I-II GP, by the unanimous vote of its general partners, has approved
the Fund I-II Merger Agreement, determined that the Transactions are fair to and
in the best interests of the BAC Holders of each of Series I and Series II of
Fund I-II and that the Redemption Prices payable to such BAC Holders are fair,
and recommends that such BAC Holders vote "FOR" each of the Transaction
Proposals.
Fund III GP, by the vote of its sole general partner, has approved the Fund
III Merger Agreement, determined that the Transactions are fair to and in the
best interests of the BAC Holders of Fund III and that the Redemption Prices
payable to such BAC Holders are fair, and recommends that all such BAC Holders
vote "FOR" each of the Transaction Proposals.
Before deciding whether to vote "FOR" the Transaction Proposals, BAC
Holders are urged to consider carefully the basis for the General Partners'
recommendation described below, as well as the factors described under "--
Interests of Certain Persons in the Transactions" and "-- Certain Relationships
and Related Transactions".
The General Partners believe that there are sound reasons for
consummating the Mergers and the related transactions. Foremost, BAC Holders
will receive significantly more value in the Mergers than they would be able to
obtain by selling their BACs in the public marketplace at the prices that
prevailed immediately prior to the initial announcement of the Mergers.
In addition, absent a significant increase in the cash flows generated
by, or other market values of, the properties securing the Mortgage Revenue
Bonds, the General Partners anticipate that most of the Mortgage Revenue Bonds
will not be paid off at par when the associated mortgage loans mature at various
times in 1998 through 2000. The General Partners believe that none of the
alternatives they considered are superior to the Mergers for the reasons
described under the heading "--Alternatives to the Mergers" below. In light of
the foregoing, the receipt of the Fairness Opinions from Oppenheimer, the
indicia of procedural fairness underlying the negotiation of the Transactions
discussed under "--Fairness of the Transactions" below and their belief that the
Transactions and the Redemption Prices are fair to the BAC Holders, the General
Partners believe that approving the proposed Transactions provide the Funds the
opportunity to achieve a result that is in the best interests of the BAC
Holders.
In recommending the Transaction Proposals, the General Partners note
(i) that CAPREIT agreed to bear the bulk of the transaction costs, which costs
are estimated to aggregate approximately $21.5 million (as estimated by
CAPREIT); (ii) CAPREIT will deposit into escrow on the date of this Proxy
Statement a Deposit of $1 million for each Fund and such Deposits will not be
returned to CAPREIT in the event the Mergers are not consummated except in
certain limited circumstances (see "THE TRANSACTION PROPOSALS--The Merger
Proposal--The
-34-
<PAGE>
Merger Agreements--Deposit"); (iii) consummation by CAPREIT of the Transactions
contemplated by the Merger Agreements was subject to a limited due diligence
condition, which may no longer be relied upon by CAPREIT; (iv) CAPREIT's
considerable experience and expertise in the real estate industry, its knowledge
of and familiarity with the Mortgage Revenue Bonds and the properties that
secure them and its financial wherewithal and sophistication; and (v) CAPREIT's
payment of non-refundable financing commitment fees of $1,282,500. All these
factors indicate to the General Partners that the risks of the Mergers not being
consummated, a risk inherent in all business combinations, is minimized under
the Merger Agreements.
FAIRNESS OF THE TRANSACTIONS
In determining that the applicable Transaction Proposals are fair to and in
the best interests of the BAC Holders of its Fund and that the applicable
Redemption Price payable to such BAC Holders is fair to such BAC Holders, and
recommending that BAC Holders of its Fund vote for each of the Transaction
Proposals to be voted upon by them, each of the General Partners gave
considerable weight to the fact that the Redemption Prices payable to the BAC
Holders in the Mergers represent a substantial premium of approximately 26.1%,
in the case of Fund I-II, Series I, 33.3%, in the case of Fund I-II, Series II,
and 26.1%, in the case of Fund III, over the market prices of the BACs as of
September 8, 1995, the last trading day prior to the public announcement of the
Mergers, and the fact that the Redemption Prices, in each case, are higher than
the highest trading prices of the BACs since the BACs were listed on the
American Stock Exchange in 1993.
Each of the General Partners, in arriving at its fairness determination,
also gave considerable weight to and relied to a significant extent on the
estimates of the range of values of the BACs developed by Oppenheimer in
connection with its Fairness Opinions.
The Redemption Prices represent the net amount payable to BAC Holders after
payment of plaintiffs' counsels' fees in the Zakin and Wingard Actions.
----- -------
Notwithstanding that each of the Redemption Prices falls within the range of
values developed by Oppenheimer and adopted by the General Partners, the General
Partners felt it also was important in making their fairness
-35-
<PAGE>
determinations to consider the gross amount payable to BAC Holders (before
payment of plaintiffs' counsels' fees). The General Partners were of the view
that this interpretation is justified because the plaintiffs' counsel represent
the BAC Holders and, pursuant to the Stipulation of Settlement, the plaintiffs'
counsel are to be paid out of the consideration otherwise payable to the BAC
Holders.
Based on the quantitative and qualitative analyses prepared by Oppenheimer,
it determined a range of values for the Funds. In each case, the Redemption
Price payable to BAC Holders was within each such range of values. See "--
Fairness Opinions of Oppenheimer & Co., Inc." below. Accordingly, Oppenheimer
determined that, subject to the assumptions and limitations set forth therein,
the Redemption Prices payable to the BAC Holders in the Mergers are fair to such
BAC Holders from a financial point of view, and each of the General Partners has
expressly adopted the conclusions and analyses of Oppenheimer as its own. As
indicated below under "--Fairness Opinions of Oppenheimer & Co., Inc.", in
connection with the Fairness Opinions, Oppenheimer developed estimates of the
values of the BACs of each Fund using quantitative and qualitative analyses
including the performance of the following: (a) capitalization rate valuation
analysis (a liquidation analysis); (b) discounted cash flow analysis; (c)
valuation of the Funds on a continuing basis; (d) valuation of the Mortgage
Revenue Bonds; and (e) valuation of the non-performing Mortgage Revenue Bonds as
if reissued.
As indicated in the discussion of Oppenheimer's Fairness Opinions below,
the Redemption Prices payable to the BAC Holders in the Mergers are within the
range of values developed by Oppenheimer under each of the assumed valuation
methodologies. The General Partners reviewed each one of the methodologies
employed by Oppenheimer, and based on the over 20 years experience of the
principals of the General Partners, believed each one of them to be reasonable
and appropriate and considered such valuation estimates as supporting their
fairness determinations. In addition, given Oppenheimer's reputation and
expertise in valuing real estate backed securities, each of the General Partners
believed it was appropriate to rely on and adopt as its own Oppenheimer's
conclusions and analyses.
The General Partners also noted that the Redemption Prices, in each case,
are higher than the net asset value per BAC for the year ended December 31, 1995
and for the three months ended March 31, 1996.
During the negotiations over the terms and conditions of the Merger
Agreements, the General Partners and CAPREIT discussed the aggregate amount
payable to the BAC Holders of both Funds. Once the parties agreed as to the
aggregate Merger consideration, the parties then agreed to an allocation between
the Funds and between the series of Fund I-II. Such allocation was based on the
cash flows generated by the properties underlying the Mortgage Revenue Bonds
held by each Fund and series. The market prices for the BACs in each Fund and
series were also taken into account. The General Partners believed that the
allocation of the aggregate Redemption Price on the basis of cash flows of the
properties was fair because most of the Mortgage Revenue Bonds have been paying
interest solely out of the cash flows of the properties. As noted above, on
March 14, 1996, the parties amended the Merger Agreements to, among other
things, increase the aggregate consideration payable to the Series II BAC
Holders.
-36-
<PAGE>
Such increase was necessitated because, following a further review,
the parties realized that they had failed to take into account certain deferred
maintenance charges with respect to certain of the properties and determined to
revalue a contingent liability relating to James Street Crossing which had
resulted in a lower allocation to Series II BAC Holders than otherwise would
have been the case.
In arriving at their fairness determinations, the General Partners noted
that despite the fact that the Mergers were publicly announced nearly one year
ago, no potential bidder has come forward with a superior proposal. As
discussed under the heading "--Background of the Mergers" Dominium ultimately
failed to put together a superior proposal.
In arriving at their fairness determinations, each of the General Partners
also considered certain factors which militate against the Mergers being
considered substantively fair. The General Partners considered that the cash
flows generated by the properties securing the Mortgage Revenue Bonds have
increased somewhat over the past year and if such cash flows were to continue to
increase and were to increase significantly, in the absence of the Mergers, the
BAC Holders might be able to realize a greater return on their investment. The
General Partners, however, believe that it is reasonable to assume, as
Oppenheimer did in arriving at its Fairness Opinions, that the income and
expenses will increase by 3% to 4% per year through the maturity dates of the
associated mortgage loans. See "--Fairness Opinions of Oppenheimer & Co., Inc."
The General Partner also noted that as a result of the Mergers the BAC Holders
will no longer have an interest in the Funds and will not participate in the
appreciation, if any, in the value of the Mortgage Revenue Bonds and the
underlying properties.
The General Partners also weighed the possibility that the BAC Holders
might not be able to reinvest the cash received by them at a yield similar to
the yield they might be able to achieve if they continued to receive tax-exempt
distributions for the originally contemplated terms of the Funds.
The General Partners deemed the premium over market prices and the entire
quantitative and qualitative analyses performed by Oppenheimer, which analyses
were expressly adopted by each of the General Partners, to be of most importance
and assigned the greatest weight to such factors in reaching their substantive
fairness determinations.
In view of the wide variety of other factors considered in connection with
their evaluation of the Merger Agreements and the Mergers, the General Partners
did not find it practicable to, and did not, quantify or otherwise assign
relative weights to the other factors considered in reaching their
determinations. In addition, the General Partners did not undertake to
determine the degree to which the other factors were favorable or unfavorable.
The General Partners concluded, however, that the positive factors set forth
above substantially outweighed the negative factors and, accordingly, determined
that the Transactions are fair to and in the best interests of the BAC Holders.
The General Partners believe that, in view of the similarities between the
two Funds in terms of their investment objectives and policies, as well as their
Mortgage Revenue Bond
-37-
<PAGE>
portfolios, there are no material differences in the factors to be considered in
their fairness determinations for each Fund.
In arriving at their fairness determinations, the General Partners took
into account the fact that they and certain of their affiliates are receiving
various benefits in connection with the Mergers and related proposals and that
such benefits may create a conflict of interest between the General Partners and
the BAC Holders. Specifically, (i) each of the General Partners will receive
$500,000 on account of its general partner interests (whereas Fund I-II GP would
receive only a nominal amount and Fund III GP would receive nothing if the Funds
were liquidated at this point in time), (ii) CRI and CRIIMI Mae Services Limited
Partnership ("CRIIMI"), affiliates of the General Partners, will receive an
aggregate amount of approximately $3.4 million as of August 31, 1996 increasing
by approximately $102,000, in the aggregate, per month thereafter, on account of
certain accrued fees (which in the absence of the Mergers would likely not have
been recoverable by them in full and not at all until some years in the future),
and (iii) if the Mergers are consummated, CRI and its affiliates will be
relieved of certain contingent obligations which would currently be payable to
CAPREIT Residential if the Owner Partnerships were to terminate it as manager of
the properties, in the amount of $1,149,631 (which amount reduces each year that
there is no termination). See " -- Interests of Certain Persons in the
Transactions" and "--Certain Relationships and Related Transactions" below.
The General Partners also took into account that in connection with the
redemption by AP CAPREIT on June 30, 1995 of certain limited partner interests
held by CRI and certain of CRI's affiliates, CRI and its affiliates received an
aggregate of $4,750,000, subject to the Termination Refund obligations in the
aggregate amount of $3,900,000 (which includes the amount cited under clause
(iii) in the preceding paragraph).
In arriving at their fairness determination, the General Partners did not
give any weight to any possible conflicts of interest that could arise from the
fact that the General Partners are co-defendants in the Zakin and Wingard
----- -------
Actions, and therefore may have been potentially responsible for a portion of
any damages or other amounts which may have been payable in such actions,
including the legal fees in connection with the settlements thereof, which under
the terms of the Stipulation of Settlement will be paid to plaintiffs' counsel
out of the aggregate Merger consideration payable by CAPREIT.
In order to address any conflict of interest, and to act in a matter
consistent with the fiduciary duties the General Partners owe to the BAC
Holders, the General Partners conditioned the Merger Agreements and their
agreement to recommend the Transaction Proposals upon the receipt of favorable
fairness opinions from a well-regarded investment bank.
The General Partners noted that, under Delaware law, general partners must
account to their partnerships for any profits derived by them without the
consent of the other partners from any transaction connected with the formation,
conduct, or liquidation of the partnerships, or from any use by them of the
property of such partnerships. To the extent that some or all of the benefits
realized by the General Partners as a result of the Transactions described above
would constitute such profits, the approval by the BAC Holders of the
Transaction Proposals should
-38-
<PAGE>
be deemed to provide the requisite consent, negating any potential liability.
The General Partners further noted that a number of Delaware court cases
indicate that the approval by fully informed BAC Holders of the Transaction
Proposals may operate as a complete defense to any claims against the General
Partners arising out of their conduct in connection with the Transactions.
The General Partners did not give any consideration to the apparent
conflicts of interest that may exist by reason of the fact that affiliates of
the General Partners control the partnerships to which the properties securing
15 of the Mortgage Revenue Bonds were transferred (the "Owner Partnerships") by
deed in lieu of foreclosure, or otherwise, when the original borrowers failed to
pay full base interest on their respective mortgage loans. One of the main
purposes for establishing the Owner Partnerships was to prevent the loss of tax-
exempt interest on the Mortgage Revenue Bonds that would have resulted had the
Funds acquired legal title to the properties following foreclosure on the
properties that secure the Mortgage Revenue Bonds when the original,
unaffiliated owners of the properties defaulted on their obligations. The Owner
Partnerships, and their respective owners, have never received any material
benefits, directly or indirectly, in connection with owning the properties that
secure the Mortgage Revenue Bonds. See "-- Interests of Certain Persons in the
Transactions" below.
In connection with the Mergers, each of the Owner Partnerships has agreed
to either (a) sell, assign or transfer the partnership interests in, or the real
property and other assets of, such Owner Partnership 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 Effective Date at the then fair market value (based
on the fair market value of the partnership property as encumbered by the
mortgage loans) thereof. Although such interests currently have nominal value
and, based upon current market conditions, none of the General Partners or
CAPREIT believes that it is likely that such interests will increase in value
prior to the time CAPREIT exercises its options, if the fair market value of the
partnership properties were to substantially increase prior to the time CAPREIT
exercises its options, any such increase in value in excess of the indebtedness
and accrued interest owing in respect of such properties may benefit the owners
of the Owner Partnerships.
As discussed above under "--Background of the Mergers", the General
Partners postponed key negotiations over the price terms and material conditions
of the Merger Agreements until after AP CAPREIT had redeemed the interests of
CRI and its affiliates in AP CAPREIT. The terms of the Merger Agreements were
reached through protracted arm's-length negotiations over several months between
representatives of CAPREIT, on the one hand, and representatives of the Funds,
on the other, and, as a result of such negotiations, among other things, (i) the
consideration offered by CAPREIT to the BAC Holders was increased on three
occasions; (ii) the Funds were not required to make substantial representations
and warranties, including any representations regarding the tax-exempt status of
the Mortgage Revenue Bonds; and (iii) the Merger Agreements were made contingent
upon the receipt of favorable fairness opinions from an investment bank. In
addition, the General Partners had retained the ability to
-39-
<PAGE>
negotiate with third parties who might express an interest in making a competing
offer and, if appropriate, to terminate the Merger Agreements with CAPREIT in
light of such competing offers upon payment to CAPREIT of certain fees and
expenses described below. See "THE TRANSACTION PROPOSALS--The Merger Proposal--
The Merger Agreements--No Solicitation".
The General Partners did not retain an unaffiliated representative to act
solely on behalf of the BAC Holders for the purpose of negotiating the Merger
Agreements with CAPREIT. To enhance the procedural fairness underlying the
determination of the terms of the Merger Agreement, the General Partners did,
however, require that the Mergers be conditioned upon the receipt of favorable
fairness opinions from an investment bank. As an additional assurance of
procedural fairness, the General Partners note that counsel for the plaintiffs
in the Zakin and Wingard Actions, unaffiliated third parties, reviewed the
----- -------
Merger Agreements and twice negotiated for the benefit of the BAC Holders an
increase in the cash consideration payable to the BAC Holders.
Although the General Partners recognize that adoption of the Merger
Agreements does not expressly require the affirmative vote of a majority of the
BACs held by BAC Holders of each Fund who are not affiliated with the General
Partners or CAPREIT, the General Partners note that management and affiliates of
the General Partners own only an inconsequential number of BACs (see "SECURITY
OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT--Management") and that CAPREIT
does not own any BACs. The General Partners believe that since all parties who
could be deemed to be interested in the Transactions own such a de minimis
amount of BACs their vote will have virtually no effect on the vote of the BAC
Holders. Accordingly, for all practical purposes a majority of BACs held by
unaffiliated BAC Holders of each Fund will have to be voted in favor of the
Mergers. In the view of the General Partners, this was a substantial and
meaningful requirement which, taken together with the other factors considered
by the General Partners as set forth herein, supported their conclusion that the
Mergers are fair even in the absence of an express provision requiring that the
Merger Agreements be approved by an affirmative vote of a majority of BACs held
by unaffiliated BAC Holders.
The principal original objectives of the Funds were to preserve and protect
capital and to provide periodic distributions of tax-exempt interest income.
The Funds originally expected to hold the Mortgage Revenue Bond with respect to
each property for approximately 10 years from the completion of construction or
13 years from the date of issuance of the Mortgage Revenue Bond. The General
Partners realized that the Mergers would modify the original purposes of the
Funds by accelerating the liquidity of the BAC Holders' interests and
terminating any future distributions. However, in light of the determination by
the General Partners that the Mergers are a fair alternative to holding the BACs
and the requirement that BAC Holders vote on the Transactions, the General
Partners believed that any modification to the original objectives of the Funds
was not significant.
The General Partners also noted that the BAC Holders are not entitled to
appraisal rights in connection with the Mergers. Accordingly, BAC Holders of
each of the Funds do not have the alternative of dissenting from the Merger and
seeking a judicial determination of the fair value of
-40-
<PAGE>
their BACs in lieu of accepting the Redemption Price. While the lack of
appraisal rights might be deemed to militate against procedural fairness, the
General Partners believe this concern is mitigated somewhat by the fact that
counsel for the plaintiffs in the Zakin and Wingard Actions reviewed the
----- -------
Merger Agreements and twice negotiated for the benefit of the BAC Holders an
increase in the Redemption Price and that the General Partners negotiated a
further increase in the Redemption Price prior to the execution of the Fourth
Amended and Restated Merger Agreement.
Pursuant to the Merger Agreements, CAPREIT is entitled to receive a fee in
the amount of $2.25 million per Fund and reimbursement for its expenses of up to
$2.6 million per Fund under specified circumstances if a Merger Agreement is
terminated and a Fund pursues a transaction with another party which would yield
higher proceeds to the BAC holders. See "THE TRANSACTION PROPOSALS--The Merger
Proposal--The Merger Agreements--Fees and Expenses". The General Partners
determined that the agreement to pay such fee and expense reimbursement was
reasonable and necessary in light of the circumstances in order to induce
CAPREIT to make an offer for the Funds; that the amount of such fee was
reasonable in light of the aggregate Redemption Price; that such amount was not
so great as to deter other serious bidders; and that the potential benefits
obtained from entering into a Merger Agreement with CAPREIT outweighed any
possible chilling effect the agreement to make such payments could have on
potential bidders.
The General Partners have considered the fact that, as a result of recently
issued IRS regulations, effective September 24, 1996, it appears that the
Financing may constitute a reissuance for federal income tax purposes, and as a
result CAPREIT would need to secure the cooperation of the issuers of the
Mortgage Revenue Bonds in, among other things, making certain filings with the
Internal Revenue Service and effecting certain necessary amendments to the
Mortgage Revenue Bonds in order to maintain the tax-exempt status of the
Mortgage Revenue Bonds after the Financing or, if CAPREIT is unable to effect
such amendments, to arrange for alternative financing. CAPREIT has commenced
approaching the issuers of the Mortgage Revenue Bonds to obtain their consent
under guidelines established by, and under the supervision of, the General
Partners. See "THE TRANSACTION PROPOSALS--The Financing". The General Partners
believe that since any such amendments to the Mortgage Revenue Bonds would be
effective only upon the consummation of the Mergers, they do not create any risk
for the BAC Holders.
The General Partners noted that, as a consequence of the Mergers and the
consummation of the Financing, BAC Holders will be allocated a significant tax
loss which will reduce each BAC Holder's basis in his or her BACs. The General
Partners did not give any consideration to this tax effect because such
allocation of loss will be realized at the same time as, and will be offset by,
the higher gain than such holder would otherwise receive (or added to the
smaller loss such holder would otherwise have), generally resulting in such BAC
Holder's recognizing the same net gain or net loss for federal income tax
purposes as he or she would have recognized if such BAC Holder had sold his or
her BACs for an amount of cash equal to the Redemption Price, except in certain
limited circumstances described below under
-41-
<PAGE>
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGERS AND RELATED TRANSACTIONS
Certain Federal Income Tax Consequences of the Financing".
Although the consummation of the Mergers is contingent upon the
consummation of the Financing, the General Partners reviewed the executed
Commitment Letter CAPREIT received from CentRe Mortgage Capital, L.L.C. and gave
little weight to the risk that the Financing would not be consummated.
The General Partners also are recommending that BAC Holders vote "FOR" the
New Partners Proposal and the Adjournment Proposal to be voted upon by them
because such proposals are reasonable and necessary in order to effectuate the
consummation of the Mergers. Accordingly, for the same reasons set forth above,
the General Partners recommend that BAC Holders vote for each Proposal to be
voted upon by them. The General Partners further note that the approval and
adoption of the Merger Proposal is contingent upon the approval and adoption of
the New Partners Proposal.
CAPREIT and the Merger Partnerships. CAPREIT and the Merger Partnerships
have reviewed the factors considered by the General Partners in reaching their
determination as to the fairness of the Mergers and believe that these factors
provide a reasonable basis for CAPREIT and the Merger Partnerships to conclude,
as they do, that the Transactions are fair to the BAC Holders and that the
applicable Redemption Prices payable to such BAC Holders are fair to such BAC
Holders. This belief should not, however, be considered as a recommendation by
CAPREIT or the Merger Partnerships to the BAC Holders to vote to approve and
adopt the Transaction Proposals. Neither CAPREIT nor the Merger Partnerships
have quantified or assigned specific relative weights to any of these factors.
CAPREIT and the Merger Partnerships have relied principally on, and have adopted
as their own, the conclusions of the General Partners that the Transactions are
fair to the BAC Holders and that the applicable Redemption Prices payable to
such BAC Holders are fair to such BAC Holders for the reasons set forth above.
ALTERNATIVES TO THE MERGERS
In late 1994 and in January 1995, the General Partners received indications
of interest concerning possible acquisitions of the Funds from Oxford Tax Exempt
Fund and from Tiger Real Estate Partners. After engaging in preliminary
discussions, the Funds did not receive any formal offers, oral or written, from,
and have not had further discussions with, either of such parties.
Consequently, the General Partners have concluded that no transaction is likely
with either such party.
On February 19, 1996, the General Partners received an inquiry regarding
possible acquisitions of the Funds from the Dominium Group. The Dominium Group
had executed confidentiality agreements and the Funds provided it with the
information regarding the Funds which it had requested in March and early April,
1996.
Thereafter, the Funds did not receive any further communications from the
Dominium Group until June 28, 1996, when the Funds received a letter from
Dominium Tax Exempt Fund
-42-
<PAGE>
L.L.P. indicating an interest in entering into merger agreements with the Funds
having generally the same terms as the Merger Agreements and purportedly
offering the BAC Holders an aggregate Merger consideration in the amount of
approximately $168,230,000 subject to, among other things, financing in such
amount. After reviewing this letter, the General Partners noted that Dominium
did not have a financing commitment and that its purported offer and any
financing therefor was conditioned upon Dominium and its potential financing
sources having satisfactorily completed a due diligence review and having
significant additional time in which to complete such due diligence review. The
General Partners also noted that Dominium might not have appropriately taken
into account various fees and expenses payable in connection with the Mergers or
amounts required to fund reserves for the underlying properties. Although for
the reasons indicated above, the General Partners did not view the Dominium
letter as a basis for terminating the Merger Agreements pursuant to their
"fiduciary out" provisions, the General Partners, in a letter dated July 3,
1996, notified Dominium that the Funds would continue to make documents
available to Dominium for its due diligence review. Representatives of Dominion
came to the General Partners' offices on July 11, 12, 26, 29 and 30, 1996 to
conduct such review. During that period, the General Partners also responded to
numerous requests for copies of specific documents and coordinated site visits
for Dominium, its two potential lenders, and its engineering and environmental
consultants to the properties.
Dominium had previously indicated to counsel for the plaintiffs in the
Zakin and Wingard Actions that they would complete their due diligence and
- ----- -------
submit firm financing commitments for its proposal in order to satisfy such
counsel's concerns about Dominium's ability to secure financings for a
transaction with the Funds by August 5, 1996. No such commitment was submitted
on August 5, 1996 or any time thereafter. The General Partners did not receive
any responses from Dominium to their subsequent inquiries as to whether Dominium
did in fact receive a loan commitment from its lenders until August 13, 1996,
when Dominium advised the Funds, by letter, that it was not in a position to
provide evidence of its ability to finance or finalize its proposals. See "--
Background of the Mergers".
In light of the fact that Dominium had not been able to put together a firm
offer in nearly six months since their initial expression of interest in
February, 1996, the General Partners did not view Dominium's purported interest
as an alternative to the Mergers.
In the absence of the Mergers or other disposition of the assets of the
Funds, the Mortgage Revenue Bonds would have to be remarketed when the
underlying mortgage loans mature in 1998 through 2000 if the loans could not be
extended at or before the time of the remarketing. A remarketing of a Mortgage
Revenue Bond involves the sale of a Mortgage Revenue Bond pursuant to the terms
of and at the time specified in the bond documentation for such Mortgage Revenue
Bond, the proceeds of which sale are payable to the former bondholder. Absent a
significant increase in the cash flows generated by, or the values of, the
underlying properties, the General Partners do not expect that most of the
Mortgage Revenue Bonds could be remarketed when required by the Mortgage Revenue
Bond documents without restructuring the underlying mortgage loans. See "--
Recommendations of the General Partners " and "--Fairness of the Transactions".
-43-
<PAGE>
In view of the foregoing, the General Partners considered several
alternatives in anticipation of the upcoming mandatory remarketing dates
including the following: (i) holding the Mortgage Revenue Bonds until the
mortgage loans mature, and then liquidating the properties securing the mortgage
loans pursuant to foreclosures under the Mortgage Revenue Bond documents; (ii)
seeking to extend the loan maturities and continuing to hold the Mortgage
Revenue Bonds for extended periods; and (iii) liquidating the properties
securing the mortgage loans pursuant to foreclosures under the Mortgage Revenue
Bond documents prior to the mortgage loan maturities.
The General Partners considered holding the Mortgage Revenue Bonds until
the mortgage loans mature and then liquidating the underlying properties,
thereby allowing the BAC Holders to continue to receive tax-exempt distributions
over the next two to four years. If the cash flows generated by the properties
improve significantly or there is a substantial improvement in the real estate
market, the Funds and the BAC Holders would benefit from such improvements. The
net proceeds from foreclosure sales liquidating the underlying properties would
be distributed to the BAC Holders pursuant to the terms of each Fund's
Partnership Agreement, which provides for liquidation proceeds to be distributed
in the following order: (i) to the payment of the Fund's debt; (ii) to the
General Partner and the BAC Holders in an amount equal to the positive balance
in their capital accounts; (iii) to the BAC Holders in the amount of their
adjusted capital contributions; (iv) to the General Partner in the amount of its
adjusted capital contribution, (v) of the remainder, 98.99% to the BAC Holders
and 1.01% to the General Partner until the BAC Holders have received a preferred
cash flow return as provided in the Partnership Agreement; (vi) to an affiliate
of the General Partner for a disposition fee, if any; and (vii) of the
remainder, 90% to the BAC Holders and 10% to the General Partner. Although
Oppenheimer did not render an opinion to this effect, in connection with its
preparation of the Fairness Opinions, Oppenheimer did perform an evaluation of
the Funds. See "--Fairness Opinions of Oppenheimer & Co., Inc.--Valuation of
the Funds on a Continuing Basis." Based on the results of this analysis, the
General Partners believe that the Redemption Prices payable to the BAC Holders
in the Mergers would be within the range of net present values that the BAC
Holders would receive if the Funds were to obtain ownership of those properties
presently owned by the Owner Partnerships upon the date the individual loan was
scheduled to mature and commenced an orderly liquidation of such properties
immediately thereafter, plus the value of the three performing Mortgage Revenue
Bonds and the other assets of the Funds.
In addition, the sale of the underlying properties would most likely
involve high transaction costs, including brokers' commissions and real estate
transfer taxes, and ongoing overhead costs to the Funds, which overhead costs
are likely to be disproportionately high for a diminishing portfolio if
individual property sales are pursued. Also, this alternative involves risks
inherent in any real estate disposition program, including the impossibility of
determining the future prices at which properties could be sold or the amount of
time necessary to complete those sales. Holding the Mortgage Revenue Bonds
until maturity also entails the possibility that general or local economic
conditions could worsen prior to the time the properties would be liquidated
pursuant to foreclosures. Given that this alternative would not necessarily
provide the BAC Holders with greater returns than the Redemption Prices payable
in the Mergers and that such current payment of the Redemption Prices eliminates
the uncertainties associated
-44-
<PAGE>
with holding the Mortgage Revenue Bonds for several more years, the General
Partners rejected this alternative.
Extending the maturity dates of the mortgage loans and making corresponding
amendments to the Mortgage Revenue Bonds would allow the Funds to receive tax-
exempt interest with respect to the underlying properties beyond the current
loan maturity dates. If, during the extended period, the values of the
underlying properties were to increase, BAC Holders might share in any such
increase. The extension of the mortgage loan terms, however, requires BAC
Holder consent because it would lengthen the investment horizon beyond the
originally anticipated holding period as stated in the Funds' prospectuses. The
extension also requires the consent of the issuers of the Mortgage Revenue
Bonds. Such issuers may cooperate and consent to the modifications; however,
there can be no assurance that such issuers would do so or would not impose
additional requirements that could have an adverse impact on the properties.
Recently issued IRS regulations indicate that extending the mortgage loans,
together with other modifications that might be appropriate in connection with
such an extension, would, if such modifications were made without the consent of
the issuers, jeopardize the tax-exempt status of the Mortgage Revenue Bonds.
The General Partners have not sought the consent of any such issuer with respect
to extending the mortgage loan terms. See "CERTAIN TAX MATTERS RELATING TO TAX-
EXEMPT BONDS." Moreover, even with issuer consent, if the modifications were
deemed to constitute a reissuance of the Mortgage Revenue Bonds, such
modifications would result in a write-off of all of the accrued and unpaid
interest. In addition, the final regulations indicate that the terms could be
extended only for a maximum of five years without causing a reissuance. The
estimated transaction costs involved in obtaining BAC Holder consent to amend
the terms of the loans and in obtaining issuer consents to make related
amendments to the 18 Mortgage Revenue Bonds exceed the costs the Funds bear in
connection with the proposed Mergers. Accordingly, the costs, the uncertainties
and the limitations of this alternative led the General Partners to reject it in
favor of giving the BAC Holders the opportunity to redeem their investments
now.
The General Partners could seek to liquidate the 15 properties securing the
non-performing Mortgage Revenue Bonds now, prior to the mortgage loan
maturities, which would permit BAC Holders to continue to receive tax-exempt
distributions for a limited time, although only until the properties are
foreclosed upon and liquidated. This alternative would most likely involve the
same high transaction costs and risks as described above if the General Partners
were to seek to liquidate the properties after the mortgage loans mature. Also,
the General Partners could not force the liquidation of the three properties
that secure the performing Mortgage Revenue Bonds. Thus, the Funds would have
to try to sell the debt on those properties or continue to hold those few assets
until their loan maturities. Although Oppenheimer did not render an opinion to
this effect, in connection with its preparation of the Fairness Opinions,
Oppenheimer did perform an evaluation of the Funds under a capitalization rate
valuation analysis and a discounted cash flow analysis, both of which assume an
orderly liquidation of the Funds. See "--Fairness Opinions of Oppenheimer &
Co., Inc.--Capitalization Rate Valuation Analysis" and "--Fairness Opinions of
Oppenheimer & Co., Inc.--Discounted Cash Flow Analysis." Based on the results
of these analyses, the General Partners believe that the amounts
-45-
<PAGE>
the BAC Holders would receive upon an orderly liquidation of the Funds on a
present value basis would be within the range of values established under these
analyses performed by Oppenheimer, which have been adopted by the General
Partners, given the uncertainties associated with liquidation, particularly as
to the amount of time involved, the General Partners do not believe that this
alternative would provide the BAC Holders with greater net present value
proceeds than they would receive in the Mergers. Accordingly, the General
Partners rejected the alternative.
The General Partners have also considered, as alternatives to the Mergers,
(a) seeking to refund the Mortgage Revenue Bonds, or (b) borrowing funds for
distributions to the BAC Holders based on a securitization of the Mortgage
Revenue Bonds.
The General Partners could seek BAC Holder consent to refund the Mortgage
Revenue Bonds when the loans mature. A refunding is a refinancing through the
issuance of new mortgage revenue bonds, the proceeds of which are used to retire
the old Mortgage Revenue Bonds. The General Partners could also seek consent to
amend the Mortgage Revenue Bonds to obtain the same result as a refunding. As a
result of such refunding or amendment, the maturity dates of the underlying
mortgage loans and the remarketing dates of the Mortgage Revenue Bonds could be
extended beyond the present dates. If the mortgaged properties appreciate in
value during the extended period, the BAC Holders might be able to realize a
greater return on their investment. The issuers of the Mortgage Revenue Bonds
would have to consent to such refundings or amendment and they could possibly
impose additional income restrictions or requirements on the properties. A
refunding or similar amendment would result in a write-off of all accrued and
unpaid interest on the existing mortgage loans. In addition, bond refundings or
similar amendments generally have significant transaction costs. In the Mergers,
however, CAPREIT bears the bulk of the transaction costs and the risks
associated with the refunding process. There can be no assurance that BAC
Holder approval or issuer consent for any such refunding or amendment would be
obtained. Even if the consent of the issuers was obtained, the Funds still run
the risk of a write-down of accrued interest on the Mortgage Revenue Bonds.
While the Funds could seek to refinance the Mortgage Revenue Bonds, the
General Partners believe that such refinancing would yield substantially lower
total proceeds than the BAC Holders will receive as a result of the Mergers. A
principal reason for the higher amount of the proceeds to be realized in the
Financing is the additional collateral and security being supplied by CAPREIT.
Investors should be willing to pay more for securities representing interests in
the Mortgage Revenue Bonds because of the credit enhancement and liquidity
support being furnished in connection with the Financing, which is in turn
supported by the additional collateral furnished by CAPREIT. See "THE
TRANSACTION PROPOSALS--The Merger Proposal--The Financing". Since the Funds do
not have significant assets other than the Mortgage Revenue Bonds, the Funds are
not able to provide the type or extent of credit enhancement necessary to
produce as great an amount of proceeds in a financing as the net consideration
to be received by the BAC Holders in the Mergers.
In light of the above, if the Merger transactions are not approved by the
BAC Holders, the General Partners currently intend to continue the Funds'
operations in their present form.
In evaluating the possible alternatives to the Mergers, the General
Partners of each of the Funds were faced with substantially similar issues and
did not find it necessary to engage in
-46-
<PAGE>
different analyses. In addition, for the reasons set forth under "--Fairness of
the Transactions", the General Partners did not give any consideration to the
apparent conflicts of interest that may exist by reason of the fact that
affiliates of the General Partners own the Owner Partnerships.
POTENTIAL ADVERSE CONSEQUENCES OF THE MERGERS
As a result of the Mergers, the BACs will be redeemed upon payment of the
Redemption Price to the BAC Holders. There can be no assurance that BAC Holders
will be able to reinvest the cash received by them at a similar yield to the
yield they might be able to achieve if they had continued to receive tax-exempt
distributions on the BACs. In addition, as a result of the redemption of their
BACs in the Mergers, BAC Holders will not realize any possible future
appreciation (or depreciation) in the values of the Mortgage Revenue Bonds or of
any of the properties securing the Mortgage Revenue Bonds. Additionally,
depending upon the purchase price paid by a BAC Holder for such holder's BACs,
such BAC Holder may be required to pay a capital gains tax of, generally, the
positive difference between the cash received by such BAC Holder in the Mergers
and such BAC Holder's adjusted basis in his or her BACs. In addition, under the
Partnership Act and under the principles stated in a number of Delaware court
cases, the approval of a Merger by BAC Holders may extinguish certain fiduciary
duty claims, if any, that such BAC Holders might otherwise have been able to
assert against the General Partners regarding their conduct in connection with
the Transactions. See "-- Fairness of the Transactions."
FAIRNESS OPINIONS OF OPPENHEIMER & CO., INC.
Fund I-II and Fund III retained Oppenheimer to render its opinions as to
the fairness, from a financial point of view, of the Redemption Prices being
offered to the BAC Holders of Series I and Series II of Fund I-II and to the BAC
Holders of Fund III. The General Partners did not place any limitation on the
scope of Oppenheimer's investigation or review. In connection with its
engagement, Oppenheimer was not requested to serve as financial advisor to the
General Partners, Fund I-II or Fund III or to assist the General Partners in the
merger negotiations or in the negotiations of the related transactions involving
the General Partners and their affiliates and CAPREIT. Oppenheimer was not
requested to and does not make any recommendation to the BAC Holders of any of
the Funds regarding the Mergers. Further, Oppenheimer was not requested to and
did not make any evaluation regarding any other expressions of interest to the
General Partners by third parties with regard to any alternative transactions
(see "SPECIAL FACTORS--Alternatives to the Mergers"), and Oppenheimer expresses
no opinion on any such alternative transaction, including whether such
alternative transaction may be superior for the BAC Holders to the transactions
contemplated herein. Also, Oppenheimer was not requested to and did not analyze
or give any effect to the impact of any federal, state or local income taxes to
the BAC Holders arising out of the transactions contemplated herein. In
determining the fairness of the Redemption Price, the General Partners did not
request that Oppenheimer take into account the consideration to be paid to or
other benefits to be received by the General Partners and their affiliates,
including CRI or CRIIMI, in connection with the transactions contemplated herein
and Oppenheimer expresses no opinion thereon.
-47-
<PAGE>
Oppenheimer, as part of its investment banking business, is regularly
engaged in the valuation of businesses and securities in connection with mergers
and acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate, estate and other purposes. The General Partners
issued requests for proposals concerning the fairness opinions to four
investment banks. The selection of Oppenheimer was based on several factors,
including price, experience and the presentation of its intended analyses.
In rendering the Fairness Opinions which are dated the date of this Proxy
Statement, and as the basis therefor, Oppenheimer, among other things, reviewed:
the Merger Agreements, as amended; a draft of this proxy statement dated
____________; phase I environmental reports prepared for each property by both
Law Engineering and Environmental Services, Inc.; engineering reports prepared
for each property by both Law Engineering and Environmental Services, Inc. and
Valcon Construction Consultants, Inc.; construction and site inspection reports
for each property prepared by The Related Companies; audited financial
statements of each Fund for calendar years 1992, 1993, 1994 and 1995; audited
financial statements for each of the properties which secure the Mortgage
Revenue Bonds for calendar years 1992, 1993, 1994 and 1995 and unaudited
statements for the twelve month period ended June 30, 1996 (except Observatory
II whose unaudited financial statements for calendar years 1993, 1994 and 1995
were reviewed); documents relating to the Mortgage Revenue Bonds; 1995 reports
on Form 10-K for each of the Funds, reports on Form 10-Q for the three month
periods ended March 31, 1996 and June 30, 1996 for each of the Funds and certain
financial and other information relating to Fund I-II and Fund III that was
publicly available or furnished to Oppenheimer by the General Partners,
including 1995 property operating budgets, 1995 annual audited financial
operating statements, certain internal financial analyses, six-year financial
forecasts of net operating income of properties underlying the non-performing
Mortgage Revenue Bonds held by each of Fund I-II, Series I and Series II, and
Fund III, and other information prepared by or with the approval of the General
Partners or their representatives, or by CAPREIT Residential, which manages 14
of the 18 properties.
The financial forecasts used by Oppenheimer were developed based on the
actual financial results of the Funds for the twelve month period ended June 30,
1996 (the "Base Year"). The actual financial results of the Base Year were then
adjusted as follows: (i) capital expenditures were assumed to be $275 per
apartment unit per year; (ii) all extraordinary items were eliminated; (iii)
occupancy of each property was adjusted to the lesser of the actual occupancy or
95% occupancy; and (iv) management fees charged to each property were increased
from a historic 3.75% to 4% to more accurately reflect market rates. Utility
expenses for the twelve month period ended June 30, 1996 were adjusted by adding
5% to the average utility expenses of the years 1992 through 1995 because
utility expenses were unusually low in 1995. The forecasts were then derived by
assuming that the income and expense items from the adjusted Base Year were
increased by 4% per year for the twelve month period ending June 30, 1997 and
1998 and 3% per twelve month period thereafter.
The following table sets forth the estimated aggregate revenues, expenses
and net operating income of the properties underlying the non-performing
Mortgage Revenue Bonds
-48-
<PAGE>
held by each of Fund I-II, Series I and Series II, and Fund III, for each twelve
month period ending June 30, 1996 through June 30, 2001 that were included in
the financial forecasts used by Oppenheimer in connection with the preparation
of the Fairness Opinions. Such amounts do not reflect any contribution from
Mortgage Revenue Bonds that were considered performing as of the date of the
Fairness Opinions.
<TABLE>
<CAPTION>
//
Series I of Fund I-II
----------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
1996 1997 1998 1999 2000 2001
------ ------ ------ ------ ------ ------
Total Revenues 6,122 6,367 6,622 6,820 7,025 7,236
Total Expenses (3,093) (3,209) (3,329) (3,422) (3,519) (3,618)
------ ------ ------ ------ ------ ------
Net Operating Income 3,029 3,158 3,293 3,398 3,506 3,617
------ ------ ------ ------ ------ ------
<CAPTION>
Series II of Fund I-II
----------------------------------------------------
(in thousands)
1996 1997 1998 1999 2000 2001
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Total Revenues 8,640 8,990 9,346 9,627 9,916 10,213
Total Expenses (4,199) (4,354) (4,516) (4,641) (4,771) (4,905)
------ ------ ------ ------ ------ ------
Net Operating Income 4,441 4,636 4,831 4,985 5,145 5,308
------ ------ ------ ------ ------ ------
<CAPTION>
Fund III
----------------------------------------------------
(in thousands)
1996 1997 1998 1999 2000 2001
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Total Revenues 11,353 11,812 12,279 12,647 13,027 13,418
Total Expenses (5,609) (5,819) (6,037) (6,208) (6,383) (6,564)
------ ------ ------ ------ ------ ------
Net Operating Income 5,744 5,993 6,242 6,439 6,643 6,853
------ ------ ------ ------ ------ ------
//
</TABLE>
In rendering the Fairness Opinions, Oppenheimer relied, without assuming
responsibility for independent verification, on the accuracy and completeness of
all financial and operating data, financial analyses, reports and other
information that were publicly available, compiled or approved by or otherwise
furnished or communicated to Oppenheimer by or on behalf of the General
Partners. With respect to the financial forecasts utilized by Oppenheimer, the
General Partners represented to Oppenheimer that the assumptions underlying the
forecasts are reasonable and that consequently there is a reasonable probability
that the projections would prove to be substantially correct. However, BAC
Holders should be aware that actual revenues, expenses and net operating income
of the properties underlying the non-performing Mortgage Revenue Bonds of the
Funds will depend to a large extent on a number of factors that cannot be
predicted with certainty or which may be outside of the control of the General
Partners, including general business, market and economic conditions, supply and
demand for rental properties in the areas in which the properties are located,
future operating expense and capital expenditure requirements for the
properties, future occupancy rates, the ability of the General Partners and
property managers for the properties to maintain the attractiveness of the
properties
-49-
<PAGE>
to tenants, real estate tax rates, changes in tax laws and interest rate levels
and other factors. As a result, actual results could differ significantly from
the forecasted results.
Oppenheimer has also reviewed a written analysis prepared by counsel to the
Funds relating to those portions of the limited partnership agreements for Fund
I-II and Fund III which govern the distribution of proceeds of the respective
Funds upon the liquidation or sale of all or substantially all of their assets.
In addition, Oppenheimer also held discussions with the General Partners and
their representatives, including employees of CRI, inspected each of the
properties which secure the Mortgage Revenue Bonds and the multi-family rental
housing market in the geographic areas where the properties securing the
Mortgage Revenue Bonds are located, conducted such other investigations,
financial analyses and studies, and reviewed such other information and factors
as it deemed appropriate for the purposes of the Fairness Opinions. Oppenheimer
did not make an independent evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of Fund I-II or Fund III, nor was Oppenheimer
furnished with any such evaluation or appraisal.
In addition, Oppenheimer assumed, in accordance with estimates provided by
the General Partners, that the Redemption Prices will reflect a reduction for
fees and expenses awarded to plaintiffs' counsel in the Zakin and Wingard
----- -------
Actions of $0.18, $0.18 and $0.19 in the case of the Series I BAC Holders in
Fund I-II, the Series II BAC Holders in Fund I-II and the Fund III BAC Holders,
respectively, which was based on the assumption that the fees and expenses
awarded to plaintiffs' counsel would not exceed $2,000,000 and that such fees
and expenses would be allocated among the BAC Holders in Fund I-II, Series I and
Series II and Fund III in the ratios that the above reduction amounts bear to
each other. The resulting estimated Redemption Prices, which were used by
Oppenheimer in its analysis, were $14.82, $14.50 and $15.13, respectively.
The following paragraphs summarize the significant quantitative and
qualitative analyses performed by Oppenheimer in arriving at the Fairness
Opinions. Oppenheimer considered all such quantitative and qualitative analyses
in connection with its valuation analysis, and no one method of analysis was
given particular emphasis.
Capitalization Rate Valuation Analysis. Oppenheimer assumed that each Fund
obtained direct ownership of those properties presently owned by the Owner
Partnerships which secure its Mortgage Revenue Bonds effective June 30, 1996
and commenced an orderly liquidation of the properties immediately thereafter.
Oppenheimer applied capitalization rates ranging from 9.0% to 10.25% to the net
operating income after capital expenditures ("Cash Flow") estimated for each
such property for the twelve month period ended June 30, 1996 to determine a
range of its capitalized values. Oppenheimer believes that a capitalization rate
analysis provides a basis for estimating what a real estate investor would be
willing to pay for a particular property. To the range of capitalized property
values, Oppenheimer added the estimated value (as determined utilizing the
methodology described below at "4. Valuation of the Performing Mortgage Revenue
Bonds") of the Funds' remaining performing Mortgage Revenue Bonds, if any, and
the estimated value, projected as of October 31, 1996, of the Funds' other
assets consisting of cash balances, marketable securities and minimum required
reserve balances less estimated accrued expenses and other liabilities,
-50-
<PAGE>
estimated distributions payable to BAC Holders and the estimated value, as of
October 31, 1996, of the Owner Partnerships' other assets (together, the "Other
Assets"), less a factor for cost of sale, to determine the total value of the
Funds. Under this methodology, the implied equity values of Fund I-II, Series I,
including the estimated value of its remaining Mortgage Revenue Bond and the
estimated value of its Other Assets, was $ 14.323 to $ 15.677 per BAC as
compared to the estimated Redemption Price for Fund I-II, Series I of $14.82,
the implied equity value of Fund I-II, Series II, including the estimated value
of its Other Assets, was $ 14.051 to $ 15.449 per BAC as compared to the
estimated Redemption Price for Fund I-II, Series II of $14.50, and the implied
equity value of Fund III, including the estimated value of its remaining
performing Mortgage Revenue Bonds and the estimated value of its Other Assets,
was $ 14.890 to $ 16.110 per BAC as compared to the estimated Redemption Price
for Fund III of $15.13. Oppenheimer believes the capitalization rate analysis
supports its fairness determination because the estimated Redemption Price for
each Series or Fund, as the case may be, in the Mergers was within the range of
values indicated by such analysis.
Discounted Cash Flow Analysis. Oppenheimer performed a discounted cash
flow analysis of (i) the present value of the forecasted Cash Flows from those
properties owned by the Owner Partnerships from future operations, and (ii) the
present value of the proceeds of sale of the property at the conclusion of the
forecast period. In completing its analysis, Oppenheimer utilized financial and
operating forecasts of each property's estimated Cash Flow for the twelve month
periods ending June 30, 1996 to 2000 and applied discount rates of 11% to 12% to
forecasted Cash Flow and to forecasted residual value which was based upon
capitalizing forecasted Cash Flow for the year 2002 at 10% to 11.25%. Since its
Discounted Cash Flow Analysis assumes the immediate sale of the properties to
third parties who are not affected by the tax-exempt nature of the cash flows to
the BAC Holders, Oppenheimer did not take into account the tax-exempt nature of
the Cash Flow in its analysis. To the resulting range of values, Oppenheimer
added the estimated value of the Funds' three remaining performing Mortgage
Revenue Bonds, and the estimated value, projected as of October 31, 1996, of the
Funds' Other Assets. Oppenheimer's analysis indicated a range of values for Fund
I-II, Series I, of $ 14.491 to $ 15.712 per BAC as compared to the estimated
Redemption Price for Fund I-II, Series I of $14.82, a range of values for Fund
I-II, Series II, of $ 14.216 to $15.474 per BAC as compared to the estimated
Redemption Price for Fund I-II, Series II of $14.50, and a range of values for
Fund III, of $ 14.975 to $ 16.077 per BAC as compared to the estimated
Redemption Price for Fund III of $15.13. Oppenheimer believes the discounted
cash flow analysis supports its fairness determination because the estimated
Redemption Price for each Series or Fund, as the case may be, was within the
range of values indicated by such analysis.
Valuation of the Funds on a Continuing Basis. Oppenheimer performed a
discounted cash flow analysis of the Funds assuming each Fund obtained ownership
of those properties presently owned by the Owner Partnerships upon the date the
individual loan was scheduled to mature and commenced an orderly liquidation of
such properties immediately thereafter. Using the methodology described above
(see "2. Discounted Cash Flow Analysis"), Oppenheimer estimated the future value
of such properties, which it discounted to present value utilizing discount
rates of 11% to 12%. To the resulting range of values, Oppenheimer added the
estimated present value of the Fund's remaining performing Mortgage Revenue
Bonds, if
-51-
<PAGE>
applicable, assuming the Mortgage Revenue Bonds were repaid in full by the
borrower upon the scheduled maturity of the loan, and the present value of each
Fund's Other Assets. Oppenheimer's analysis, which gave effect to the tax free
nature of the interest payments to be made under the Mortgage Revenue Bonds
through their maturity, indicated a range of implied present equity values for
Fund I-II, Series I of $13.759 to $14.903 per BAC as compared to the estimated
Redemption Price for Fund I-II, Series I of $14.82, a range of implied present
equity values for Fund I-II, Series II of $13.484 to $14.664 per BAC as compared
to the estimated Redemption Price for Fund I-II, Series II of $14.50, and a
range of implied present equity values for Fund III of $14.618 to $ 15.676 per
BAC as compared to the estimated Redemption Price of Fund III of $15.13.
Oppenheimer believes this analysis supports its fairness determination because
the estimated Redemption Price for each Series or Fund, as the case may be, was
within the range of values indicated by such analysis.
Valuation of the Performing Mortgage Revenue Bonds. Oppenheimer valued the
Funds' three performing Mortgage Revenue Bonds by projecting the current
interest and contingent interest to be received by the Funds from July 1,
1996 through the scheduled maturity of the loans securing such Mortgage Revenue
Bonds. The current annual base interest and contingent interest on the
Observatory II Mortgage Revenue Bond is projected to be $128,000 and $0,
respectively. The current annual base interest and contingent interest on the
Paces River 2 Mortgage Revenue Bond is $769,025 and $708,771, respectively. The
current annual base interest and contingent interest on the Washington Ridge
Mortgage Revenue Bond is $875,000 and $725,000, respectively. Oppenheimer then
discounted the projected payments to present value utilizing discount rates of
6.5% to 9.5%, which Oppenheimer estimated to be the current yield for comparable
mortgage revenue bonds having similar maturities and investment characteristics,
including debt service coverage ratios. In addition, Oppenheimer discounted the
estimated principal to be received by the Funds at the scheduled maturity of the
Mortgage Revenue Bonds to present value at the above stated discount rates.
This methodology was used to determine the values of the three performing
Mortgage Revenue Bonds as applied in the analysis described above under "1.
Capitalization Rate Analysis," "2. Discounted Cash Flow Analysis" and "5.
Valuation of the Bonds as if Reissued."
Valuation of the Non-Performing Bonds as if Reissued. Oppenheimer analyzed
the potential economic benefits to be received by each Fund through the
reissuance of its non-performing Mortgage Revenue Bonds. Based upon an analysis
of the documentation underlying each Mortgage Revenue Bond, the Funds may seek
to reissue the Mortgage Revenue Bonds by remarketing them, without restrictions
as to purchasers, by having the Mortgage Revenue Bonds rated by a recognized
rating agency and obtaining a AA or comparable rating and by providing each
purchaser with an Official Statement. Alternatively, the Funds could seek to
reissue the Mortgage Revenue Bonds without obtaining such rating by remarketing
the Mortgage Revenue Bonds solely to institutional investors. Oppenheimer
estimated the value of the Mortgage Revenue Bonds as if reissued by utilizing,
to the extent possible, the rating and valuation methodology that would be
employed by a rating agency in evaluating a similar mortgage revenue bond for
the purpose of assigning a AA rating. Alternatively, Oppenheimer estimated the
value of the Mortgage Revenue Bonds as if reissued by utilizing, to the extent
possible, the valuation methodology that would be employed by an institutional
investor in evaluating the
-52-
<PAGE>
purchase of a mortgage revenue bond having similar characteristics to the
Mortgage Revenue Bonds. To the resulting value, Oppenheimer added the estimated
value of each Fund's remaining Mortgage Revenue Bonds, if applicable, the
present value of the remaining cash flow after debt service on the reissued
bonds calculated using discount rates of 12% to 14% and the value of each Fund's
Other Assets. Oppenheimer analysis indicated a range of implied equity values
for Fund I-II, Series I of $13.802 to $14.562 per BAC as compared to the
estimated Redemption Price for Fund I-II, Series I of $14.82, a range of implied
equity values for Fund I-II, Series II of $13.669 to $14.439 per BAC as compared
to the estimated Redemption Price for Fund I-II, Series II of $14.50, and a
range of implied equity values for Fund III of $14.504 to $15.124 per BAC as
compared to the estimated Redemption Price for Fund III of $15.13. Oppenheimer
believes application of this methodology supports its fairness determination
because the Redemption Price for each Series or Fund, as the case may be, was
greater than the range of values indicated by such analysis.
Oppenheimer considered but did not conduct a comparative merger analysis as
Oppenheimer did not believe this analytical methodology was appropriate.
Oppenheimer's review of publicly available information on recent mergers and
acquisitions indicated that there had been no similar acquisitions or mergers of
entities having comparable investment objectives and business strategies
announced or completed.
Oppenheimer has analyzed, but did not give significant weight to, the
trading history of each of the Funds' stock on the American Stock Exchange from
January 1, 1995 through December 31, 1995 and noted that the Redemption Price to
the BAC Holders of Series I and Series II of Fund I-II and to the BAC Holders of
Fund III upon consummation of the Mergers represents a substantial premium over
the market price of the BACs as of September 8, 1995, the last trading day prior
to the public announcement of the Mergers.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant quantitative and qualitative methods of
financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
partial analyses or summary description. Accordingly, Oppenheimer believes its
analyses must be considered as a whole and that considering any portion of such
analyses and of the factors considered, without considering all analyses and
factors, could create a misleading or incomplete view of the process underlying
the Fairness Opinions. Any estimates contained in these analyses are not
necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less than as set forth herein. Also,
analyses relating to the values of the properties or the Mortgage Revenue Bonds
do not purport to be appraisals or to reflect the prices at which the properties
or the Mortgage Revenue Bonds may actually be sold.
In connection with the preparation of the Fairness Opinions, Oppenheimer
also assumed, as set forth in the financial forecasts referred to above, that
the actual Adjustment Amount for Series I and Series II of Fund I-II and for
Fund III does not exceed the maximum Adjustment Amount for such Series or Fund,
as the case may be. Oppenheimer also assumed that prior to the consummation of
the Mergers, the Zakin and Wingard Actions shall be subject to final and non-
----- -------
-53-
<PAGE>
appealable settlements. See "SPECIAL FACTORS--Background of the Transactions"
and "LITIGATION."
Oppenheimer's Fairness Opinions were based solely upon the information
available to it and the economic market and other circumstances that existed as
of the date of this Proxy Statement. Events occurring after such date could
materially affect the assumptions and conclusions contained in the Fairness
Opinions. Oppenheimer has not undertaken to reaffirm or revise the Fairness
Opinions or otherwise comment upon any events occurring after the date hereof.
As compensation for its Fairness Opinions with respect to the Mergers,
Oppenheimer will receive an aggregate fee of $633,333 ($316,667 per Fund),
consisting of an $83,333 retainer paid at the time of its engagement, $250,000
paid upon delivery of its fairness opinions, dated March 14, 1996, $150,000 paid
upon delivery of the Fairness Opinions, dated the date of this Proxy Statement,
and $150,000 payable upon consummation of the Mergers. The Funds have also
agreed to reimburse Oppenheimer for its reasonable out-of-pocket expenses,
including attorneys' fees, and to indemnify Oppenheimer against certain
liabilities incurred in connection with its services, including certain
liabilities under the federal securities laws.
During late 1993, Oppenheimer and its affiliate, Oppenheimer International,
Ltd., served as co-managers and co-underwriters of an unsuccessful public
offering of CAPREIT, which at that time was an affiliate of the General
Partners. Since such date, Oppenheimer has rendered no investment banking
services to CAPREIT. The engagement terminated in January, 1994 prior to
acquisition of CAPREIT by AP CAPREIT, the owner of 99.83% of the outstanding
capital stock of CAPREIT. There is no active relationship between Oppenheimer
and the Funds other than the engagement to render fairness opinions with respect
to the Mergers.
MARCH 14, 1996 FAIRNESS OPINIONS OF OPPENHEIMER & CO., INC.
On March 14, 1996, Oppenheimer delivered is initial fairness opinions to
the Funds to the effect that, as of such date and subject to the assumptions and
limitations therein, the redemption prices then being offered to the BAC Holders
of each of Series I of Fund I-II, Series II of Fund I-II and Fund III were fair
to such BAC Holders from a financial point of view. The methodologies and
assumptions underlying the initial fairness opinions were substantially the same
methodologies and assumptions underlying the Fairness Opinions except that the
Fairness Opinions reflect the enhanced performance of the properties securing
the Mortgage Revenue Bonds owned by the Funds subsequent to Oppenheimer's
initial fairness opinions dated March 14, 1996.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS
The Merger Agreements provide that on the Effective Date, CAPREIT or its
designee will acquire the accrued mortgage servicing and administrative fees
(the "Accrued Fees") payable by the Owner Partnerships to CRI, for fees accrued
through June 30, 1995, and to CRIIMI Mae Services Limited Partnership
("CRIIMI"), whose general partner is a subsidiary of CRIIMI Mae Inc., a public
company affiliated with the General Partners, for fees accrued from July 1, 1995
through the Effective Date. The consideration payable to CRI for such Accrued
Fees is
-54-
<PAGE>
$511,680 in the case of Fund I-II, Series I and $770,835 in the case of
Fund I-II, Series II, and $667,485 in the case of Fund III which represents, in
the aggregate, approximately 42% of the total Accrued Fees payable to CRI. The
consideration payable to CRIIMI for the Accrued Fees is, with respect to Fund I-
II, $310,296 in the case of Series I, and $456,512 in the case of Series II,
and, with respect to Fund III, $661,122, representing the full amount of such
fees payable to CRIIMI through August 31, 1996, and in each case, will be
increased to reflect the fees accrued for the account of CRIIMI after August 31,
1996, through the Closing Date, at the rate of, with respect to Fund I-II,
$22,164 per month in the case of Series I, and $32,608 per month in the case of
Series II, and with respect to Fund III, $47,223 per month, estimated to be the
full amount of the fees which will accrue after August 31, 1996.
The payment of the Accrued Fees is subordinated on a current basis, loan by
loan, to the payment of full base interest, plus any unpaid base interest and
interest thereon, on the mortgage loans. In the absence of the Mergers, the
Accrued Fees would not be payable until the earlier of (i) repayment of any
unpaid base interest and interest thereon from increased cash flow of a property
or (ii) prepayment or maturity of the respective loan or the sale, refinancing
or other disposition of the respective property that secures the Mortgage
Revenue Bond after debt repayment in full of principal and accrued base
interest. As a result, CRI or CRIIMI might not get a substantial payment from
the properties on account of the Accrued Fees. Accordingly, the payments by
CAPREIT to CRI, albeit on a substantially discounted basis, and CRIIMI for the
Accrued Fees are a benefit of the proposed Merger to CRI and CRIIMI.
William B. Dockser and H. William Willoughby are the sole shareholders and
directors and Chairman of the Board and President, respectively, of CRI, and
beneficially own 5.1% and 4.7%, respectively, and are directors and Chairman of
the Board and President, respectively, of CRIIMI Mae Inc., a public company that
owns CRIIMI.
In connection with the Mergers, CAPREIT has agreed to pay the General
Partners $500,000 for their general partner interests. Messrs. Dockser,
Willoughby and Schwartzberg will each receive approximately 25%, and CRI will
receive .01%, of the $500,000 to be paid to Fund I-II GP and Messrs. Dockser,
Willoughby and Schwartzberg will each receive approximately 25% and CRI will
receive approximately 1% of the $500,000 to be paid to Fund III GP in accordance
with their respective partnership interests in those entities. The remaining
interests in the General Partners are held by general partnerships comprised of
current and former employees of CRI, including Richard L. Kadish, Chief
Executive Officer, President and Director of CAPREIT, who holds a 23.23% general
partner interest in a limited partner of Fund I-II GP and a 26.66% general
partner interest in a limited partner of Fund III GP. Prior to joining CAPREIT
in 1994, Mr. Kadish served as the Group Executive Vice President--Multifamily
Acquisition of CRI.
The $500,000 payment to each of the General Partners represents
substantially more than the General Partners would receive on account of their
general partner interests in the event of the liquidation of the Funds. If the
Funds were liquidated as of June 30, 1996, the Fund I-II GP would have received
only a nominal amount and the Fund III GP would have received nothing.
-55-
<PAGE>
Messrs. Dockser and Willoughby also own, through various corporations, all
of the interests in the Owner Partnerships. Each of the Owner Partnerships has
agreed to either (a) sell, assign and transfer the partnership interests in, or
the real property and other assets of, such Owner Partnerships to CAPREIT or its
designee for no additional consideration or (b) admit CAPREIT or its designee as
the managing general partner, whereupon the general partner interests of the
current general partners will be converted into limited partner interests, and
CAPREIT will have the option to acquire all of the limited partner interests at
any time within five years from the Effective Date at the then fair market value
(based on the fair market value of the property as encumbered by the mortgage
loans) thereof. Although such interests currently have nominal value, and based
on current market conditions, none of the General Partners or CAPREIT believes
that such interests are likely to increase in value prior to the time CAPREIT
exercises its options, if the fair market value of the partnership properties
were to substantially increase prior to the time CAPREIT exercises its option,
any such increase in value in excess of the indebtedness and accrued interest
owed with respect to such properties, may benefit the owners of the Owner
Partnerships.
One of the main purposes for establishing the Owner Partnerships was to
prevent the loss of tax-exempt interest on the Mortgage Revenue Bonds that would
have resulted had the Funds acquired legal title to the properties securing the
Mortgage Revenue Bonds following foreclosure on such properties when the
original, unaffiliated owners of the properties defaulted on their obligations.
The Owner Partnerships do not supply any services to the Funds or to any of the
properties collateralizing the mortgage loans. The Owner Partnerships, and the
respective owners thereof, have never received fees in any form for serving as
holders of the properties and do not receive, and have never received any
material benefits, directly or indirectly, in connection with owning the
properties. It is possible, however, that the owners of the Owner Partnerships
could potentially receive a tax benefit from the eventual sale or transfer of
the properties securing the Mortgage Revenue Bonds (whether in connection with
the Transactions or from a future sale or transfer) to the extent that such
owners have taxable ordinary income in the year of the sale or transfer and that
ordinary income and capital gains are taxed at different rates, as a result of
the tax rate differential between the previously suspended tax losses generated
by the Owner Partnerships that would become deductible at ordinary tax rates
upon such a sale or transfer and the gain from the sale or transfer that would
be taxed at capital gains rates.
If the Mergers are consummated, the future fair market value of the Owner
Partnerships' interests could be affected by CAPREIT's proposed financing.
CAPREIT intends to attempt to amend relevant documents relating to the Mortgage
Revenue Bonds following consummation of the Mergers to eliminate any remarketing
features and establish new interest rates, among other changes. These
amendments would have the effect of reducing the debt obligations of the Owner
Partnerships, which could increase the future fair market value of the interests
in such Owner Partnerships. Any change in the fair market value in the future
would not inure to the benefit of the BAC Holders, but would benefit the owners
of any interests in the Owner Partnerships, which could include the current
owners or CAPREIT or its designee.
-56-
<PAGE>
CAPREIT Residential is currently the property manager for 14 of the 18
properties securing the Mortgage Revenue Bonds, all of which 14 properties are
owned by Owner Partnerships.
As described in detail under "--Certain Relationships and Related
Transactions" below, in June 1995, CRI and certain of its affiliates agreed to
pay CAPREIT Residential up to a maximum aggregate amount of $3.9 million in
Termination Refunds if certain of CAPREIT Residential's property management
contracts, including the property management contracts for 14 of the properties
securing the Mortgage Revenue Bonds, are terminated under specified conditions
at any time prior to June 30, 2005. If the Mergers are consummated, the parties
have agreed that neither CRI nor any of its affiliates will owe any Termination
Refunds to CAPREIT Residential with respect to the 14 properties it manages that
secure Mortgage Revenues Bonds held by the Funds. The maximum amount of the
Termination Refunds currently allocable to management contracts for the 14
properties is $1,149,631.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CAPREIT was initially formed during 1993 by CRI, an affiliate of the
General Partners, for the purpose of acquiring, owning and managing a portfolio
of multi-family real estate properties. In order to obtain some of the funds
necessary to acquire such properties, on January 31, 1994, CAPREIT issued all of
its outstanding shares to AP CAPREIT Partners, L.P. (AP CAPREIT"), an affiliate
of Apollo Real Estate Investment Fund, L.P. In connection with such share
issuance and CAPREIT's acquisition of 20 properties, CRI and certain other
affiliates of the General Partners (the "CRI Affiliates") contributed property
and asset management contracts relating to approximately 50 multi-family rental
properties and other assets relating to its property management business
(including the property management contracts for a majority of the properties
securing the Mortgage Revenue Bonds) to CAPREIT Residential in 1994 for
$6,053,000 in installment notes. CRI and the CRI Affiliates contributed the
installment notes to AP CAPREIT in exchange for contingent limited partner
residual profits interests of up to 22% in AP CAPREIT, assuming certain events
occurred and hurdle rates were met. In connection with the contribution of the
property management business to CAPREIT Residential, the CRI Affiliates had the
right and the obligation under certain circumstances to reacquire the property
management business at any time prior to June 30, 1995, at no cost to them. As
of June 30, 1995, neither CRI nor the CRI Affiliates had received any
distributions on account of their interests in AP CAPREIT.
On June 30, 1995, in connection with the cancellation of the right to
reacquire the property management business, AP CAPREIT redeemed the limited
partner interests of CRI and the CRI Affiliates in AP CAPREIT for an aggregate
of $4,750,000. Because the respective owner of each property covered by the
property management contracts retains the right to terminate the contract and
change the property management agent at any time, CRI and the CRI Affiliates
agreed to pay CAPREIT Residential Termination Refunds in a maximum aggregate
amount of up to $3,900,000 if certain property management contracts relating to
the multi-family rental properties, including property management contracts for
a majority of the properties which secure the Mortgage Revenue Bonds, are
terminated under specified conditions at any time prior to June 30, 2005. Even
in the absence of the Mergers such Termination Refunds would not be
-57-
<PAGE>
payable unless CAPREIT Residential's future performance warranted termination.
CAPREIT Residential currently manages 30 properties affiliated in some way with
CRI. Fourteen of these 30 properties secure Mortgage Revenue Bonds held by the
Funds, all of which 14 are owned by Owner Partnerships.
If the Mergers are consummated, the parties have agreed that no Termination
Refunds will be due with respect to the 14 properties securing Mortgage Revenue
Bonds. The maximum amount of Termination Refunds allocable to the management
contracts for these properties was $1,313,864 through June 30, 1996, which
amount decreased to $1,149,631 from July 1, 1996 through June 30, 1997 (and
which will continue to decrease annually thereafter effective July 1 of each
year). The CRI Affiliates that own 14 of the 16 properties not related to the
Funds but currently managed by CAPREIT Residential will continue to be liable to
CAPREIT Residential for the contingent Termination Refunds with respect to those
properties. The maximum amount of Termination Refunds allocable to those 14
properties was approximately $2.2 million through June 30, 1996, which amount
decreased to approximately $1.9 million as of June 30, 1996 (and will continue
to decrease annually on June 30 of each year). There are no Termination Refund
obligations with respect to the remaining two properties affiliated with CRI and
managed by CAPREIT Residential.
During 1990 through 1995, 16 of the 18 original borrowers (none of which
were affiliated with the General Partners or their affiliates) under the
mortgage loans on the properties securing the Mortgage Revenue Bonds defaulted
when the owners failed to pay full base interest on their respective mortgage
loans. The properties securing the mortgage loans were assigned or transferred
to the Owner Partnerships by deed in lieu of foreclosure or otherwise and the
Owner Partnerships assumed the indebtedness.
The aggregate amount of fees paid by Owner Partnerships to CAPREIT
Residential in 1995 for the 14 properties it managed was $819,214. All such
fees were paid pursuant to written property management agreements, which have a
one year term and are automatically renewable unless earlier terminated on 30
days prior notice, and which provide for a monthly payment calculated as a
percentage of gross revenues collected (generally 3.75%), not including interest
income. The contracts also generally provide for an annual incentive management
fee calculated as a percentage of annual gross revenues collected (generally
0.50%) if the property produced audited net operating income in an amount more
than 5% greater than the prior year. The consummation or failure to consummate
the Mergers will have no effect on the 16 properties owned by CRI Affiliates not
affiliated with the Funds and managed by CAPREIT Residential pursuant to
individual written property management agreements. The aggregate amount of fees
paid by CRI Affiliates to CAPREIT Residential in 1995 for these 16 properties
was $1,234,055.
CAPREIT Residential has been owned since February 1, 1994 by Capital
Apartment Properties Limited Partnership, an indirect subsidiary of CAPREIT, and
neither of the General Partners of the Funds nor any entity currently affiliated
with either of them has any ownership interest in or other affiliation with
CAPREIT Residential. The consummation of the Mergers is not expected to change
the number of properties managed by CAPREIT Residential.
-58-
<PAGE>
CRI is the managing general partner and William B. Dockser and H. William
Willoughby are general partners of Fund I-II G.P. CRI is the sole general
partner of Fund III G.P.
Mr. Martin C. Schwartzberg formerly a general partner of Fund I-II GP,
formally withdrew as a general partner of Fund I-II GP as of June 12, 1996 and
converted his general partner interest in Fund I-II GP into a limited partner
interest. Mr. Schwartzberg had retired from active participation in CRI and all
its businesses, including the Funds, as of January 1, 1990, and had not
performed any duties as a general partner of Fund I-II GP since then. See
"LITIGATION".
SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL BAC HOLDERS
The Funds know of no person or "group" (as such term is used in Section
13(d) of the Exchange Act) who, as of June 30, 1996, beneficially owned more
than 5% of the BACs outstanding in Fund I-II or Fund III.
MANAGEMENT
The following table sets forth certain information concerning, to the
knowledge of the Funds, all BACs beneficially owned, as of July 30, 1996, by the
General Partners and each general partner of the General Partners, and by all
directors and officers as a group of the corporate general partner of the
General Partners. The voting and investment powers for the BACs listed are held
solely by the named beneficial owner.
The general partners of Fund I-II G.P. consist of C.R.I., Inc., a Delaware
corporation ("CRI"), the managing general partner, and William B. Dockser and H.
William Willoughby . CRI is the sole general partner of Fund III G.P. Messrs.
Dockser and Willoughby are the sole stockholders, directors and Chairman of the
Board and President, respectively, of CRI.
<TABLE>
<CAPTION>
Name of Amount and Nature % of Total
Beneficial Owner of Beneficial Ownership BACs outstanding
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
CRITEF Associates None
Limited Partnership
CRITEF III Associates None
Limited Partnership
William B. Dockser 500 BACs in Fund I-II, Series I 0.02%
2,500 BACs in Fund I-II, Series II 0.05%*
500 BACs in Fund III 0.01%
H. William Willoughby None
</TABLE>
-59-
<PAGE>
<TABLE>
<S> <C> <C>
All Directors and Officers 500 BACs in Fund I-II, Series I 0.02%
as a Group (6 persons) 2,500 BACs in Fund I-II, Series II 0.05%*
500 BACs in Fund III 0.01%
- ------------------------------------------------------------------------------------------------
</TABLE>
* Includes 1,000 BACs in Series II, representing 0.03% of total BACs issued in
Series II, owned by Saundra L. Dockser, Mr. Dockser's spouse.
The Funds have been advised by Mr. Dockser, the only partner, director or
officer of a General Partner who owns BACs, that he will vote his BACs in favor
of each of the proposals.
The Funds also have been advised that Mr. Martin C. Schwartzberg, formerly
a general partner of Fund I-II GP, has agreed to vote the BACs beneficially
owned by him (100 BACs in Series I and 200 BACs in Series II of Fund I-II and
200 BACs in Fund III, in each case, representing less than 0.01% of the total
number of BACs outstanding in each such Fund) in favor of each of the Proposals
to be voted upon by the BAC Holders of the Funds and has agreed to grant CAPREIT
his proxy to vote such BACs. Mr. Schwartzberg formally withdrew as a general
partner of Fund I-II GP as of June 12, 1996 and converted his general partner
interest in Fund I-II GP into a limited partner interest. Prior thereto, Mr.
Schwartzberg had retired from active participation in the business of the Funds
and had not performed any duties as a general partner of Fund I-II GP since
January 1, 1990. See "LITIGATION."
BACKGROUND OF THE FUNDS
Fund I-II and Fund III were formed in August, 1986 and September, 1987,
respectively, for the purpose of acquiring portfolios of tax exempt bonds issued
by various state or local governments or their agencies or instrumentalities,
which were collateralized by non-recourse participating first mortgage loans on
multifamily residential developments. Since the formation of the Funds,
2,280,000 Fund I-II, Series I BACs were sold, representing total capital
contributions of $157,000,000, 3,238,750 Fund I-II, Series II BACs were sold,
representing total capital contributions of $80,969,000 and 5,258,208 Fund III
BACs were sold, representing total capital contributions of $131,456,700.
The original objectives of the Funds were to: (1) provide (semi-annual, in
the case of Fund I-II, and quarterly, in the case of Fund III) cash
distributions that would be exempt from regular federal income tax on base
interest paid on the Mortgage Revenue Bonds; (2) provide additional cash
distributions that would be exempt from regular federal income tax from payments
of contingent interest on the Mortgage Revenue Bonds which would be determined
(a) on the basis of the cash flow of the mortgaged properties, or (b) to the
extent that cash flow was not sufficient to provide for the current payment of
the maximum amount of contingent interest, on the basis of either (i) the net
proceeds resulting from the sale of the mortgaged properties or repayment on the
redemption or remarketing (i.e. sale) of the applicable Mortgage Revenue Bond or
(ii) the appraised value of the mortgaged properties upon repayment of the
mortgage loans or remarketing of the Mortgage Revenue Bonds; and (3) preserve
and protect
-60-
<PAGE>
each Fund's capital. Fund III had the additional objective to provide additional
taxable cash distributions from payments of interest on its working capital
loans.
During 1990 through 1995, 15 of the 18 original borrowers (none of which
were affiliated with the General Partners or their affiliates) under the
mortgage loans on the properties securing the Mortgage Revenue Bonds defaulted
when the owners failed to pay full base interest on their respective mortgage
loans. The properties securing the mortgage loans were assigned or transferred
to the Owner Partnerships, subject to the existing indebtedness, by deed in lieu
of foreclosure or otherwise. In all but two cases, the related Mortgage Revenue
Bonds were not amended in connection with the transfer of the properties,
although each Owner Partnership agreed to pay the mortgage loan on a cash flow
basis and to accrue interest on the unpaid base interest at the base interest
rate. Although distributions from the Funds are lower than was originally
anticipated at the time of issuance of the BACs because most of the properties
are unable to pay full base interest, the Funds continue to treat the interest
payments from the net cash flow of the properties as tax-exempt interest income.
In connection with certain of the transfers the Funds obtained an opinion from
their former independent accounting firm that a modification of a Mortgage
Revenue Bond would not be deemed a reissuance of that Mortgage Revenue Bond. The
Funds also received opinions from bond counsel that the transfers discussed
above would not cause the Funds to be deemed "substantial users" and result in a
loss of the tax-exempt status of these Mortgage Revenue Bonds. The General
Partners do not believe that any of these transfers has resulted in the loss of
the tax-exempt status of the Mortgage Revenue Bonds.
In addition, a sixteenth mortgage loan, Observatory II in Fund I-II, Series
I, went into default in 1989 and the property securing the Observatory II loan
was transferred to an Owner Partnership in 1990. In 1992, the property was
subsequently sold to an unaffiliated borrower for $2,050,000 (including $450,000
in cash) and the corresponding Mortgage Revenue Bond was reduced from $4,039,000
to $1,600,000. This mortgage loan is scheduled to mature on February 11, 1998.
In connection with the foregoing, Fund I-II received an opinion from bond
counsel that the transaction would not adversely affect the exclusion of
interest on the Mortgage Revenue Bond from gross income for federal income tax
purposes, in addition to obtaining a separate opinion regarding substantial user
issues. A seventeenth mortgage loan, Paces River 2, failed to meet its
obligations and the borrower and Fund III entered into a workout agreement
pursuant to which the interest payments on the working capital loan were
extended. The borrower fully performed its obligations under the workout
agreement, which matured in March, 1996. No bond opinion was obtained with
respect to Paces River 2 because the tax-exempt loan was not in default. The
eighteenth mortgage loan, Washington Ridge, in Fund III, is currently paying
full debt service from operations and is making quarterly contingent interest
payments from available cash.
THE TRANSACTION PROPOSALS
THE MERGER PROPOSAL
-61-
<PAGE>
The following discussion sets forth the material terms of the Merger
Agreements. This discussion is intended to be a summary only and is qualified
in its entirety by reference to the full text of the Merger Agreements, copies
of which are attached hereto (without schedules and exhibits) as Appendices A-1
and A-2, and incorporated herein by reference. BAC Holders are urged to read
carefully the Merger Agreements.
THE MERGERS
The Mergers will be effected pursuant to the Merger Agreements, the
material terms of which are described below. Upon the consummation of each of
the Mergers and by virtue thereof, (a) all of the BACs in each of the Funds
(except as provided below) will be redeemed in cash at the Redemption Price and
the interests represented by such BACs will be canceled, (b) interests held by
the Assignor Limited Partners of each of the Funds will be canceled and
extinguished, (c) partnership interests in each of the Funds held by designees
of CAPREIT will remain outstanding and (d) in each case, BACs held by CAPREIT
and its affiliates, if any, will be converted into limited partner interests in
the respective Funds and BACs held by the Funds, if any, will be canceled and no
consideration will be paid therefor.
Pursuant to the Merger Agreements, each Merger will become effective on the
date (the "Effective Date") and at the time (the "Effective Time") that the
applicable Certificate of Merger is filed pursuant to Delaware law. It is
anticipated that the Effective Date and the Effective Time will occur as soon as
practicable following the later of the completion of the Special Meetings and
the receipt of a final non-appealable order of the court approving the
settlement of the Zakin and Wingard Actions. Following the Effective Time and as
----- -------
a result of the Mergers, each of the Funds will continue in existence under
Delaware law, but will be wholly owned by CAPREIT and its affiliates. Upon
consummation of the Mergers, the BACs will be delisted and will no longer trade
on the AMEX, and the Funds, as the surviving entities in the Merger, will cease
to be separate reporting companies under the Exchange Act.
The BAC transfer books of the Funds will be closed as of the close of
business on the Effective Date and no transfer of record of BACs will be made
thereafter other than the registration of transfers reflecting transfers
occurring before the close of business on the Effective Date.
THE MERGER AGREEMENTS
Below is a description of the material terms and provisions of the Merger
Agreements. The two Merger Agreements are similar in all material respects,
except for certain pricing related provisions. BAC Holders should note that the
consummation of the transactions contemplated in one Merger Agreement is
conditioned on the consummation of the transactions contemplated in the other
Merger Agreement. This condition may be waived by the Merger Partnerships in
their sole discretion.
-62-
<PAGE>
Conditions to Consummation of the Mergers
The respective obligations of a Fund and a Merger Partnership to consummate
a Merger and the related transactions are subject to satisfaction or (where
permissible, and other than clause (v) below) waiver, on or before the Effective
Date (or such earlier time as specified in the condition), of certain
conditions, including, but not limited to, (i) the performance, in all material
respects, of the obligations of the other party or parties contained in a Merger
Agreement, (ii) the receipt of all approvals and authorizations of any
governmental authority required for the consummation of such Merger and related
transactions, (iii) the approval of such Merger and related transactions by the
BAC Holders of such Fund and (iv) the absence of any governmental action which
would have the effect of preventing the consummation of such Merger and related
transactions and (v) the final and non-appealable approval by a court of
competent jurisdiction of the settlement of the Zakin and Wingard Actions on the
----- -------
terms set forth in the Stipulation of Settlement, dated May 17, 1996, as
amended.
The obligation of a Fund to consummate a Merger and the related
transactions is subject to certain additional conditions, which conditions must
be satisfied or waived (where permissible), including, but not limited to, the
accuracy of the representations and warranties made by the Merger Partnership.
The obligation of a Merger Partnership to consummate a Merger and the
related transactions is subject to certain conditions, which conditions must be
satisfied or waived (where permissible), including, but not limited to, (i) the
amount of Available Cash shall not be less than (a) prior to September 30, 1996,
$2,448,830, with respect to Fund I-II, Series I, $3,634,800, with respect to
Fund I-II, Series II, and $5,566,370, with respect to Fund III, (b) from October
1, 1996, $2,375,260 with respect to Fund I-II, Series I, $3,525,600 with respect
to Fund I-II, Series II, and $5,399,140 with respect to Fund III, (c) from
November 1, 1996 through November 30, 1996, $2,354,240 with respect to Fund I-
II, Series I, $3,494,400 with respect to Fund I-II, Series II and $5,351,360
with respect to Fund III, and (d) from December 1, 1996 through December 31,
1996, $2,330,320, with respect to Fund I-II, Series I, $3,463,200 with respect
to Fund I-II, Series II, and $5,303,580 with respect to Fund III; (ii) the
absence of any action, suit or proceeding seeking to materially restrain or
delay the consummation of such Merger and related transactions or seeking
material damages in connection therewith; (iii) the Financing (as defined) shall
have been consummated in accordance with the terms of the
Neither the Funds nor the Merger Partnerships currently intend to waive any
of the conditions to their respective obligations under the Merger Agreements,
except that the Merger Partnerships may waive the condition to their obligations
that both Mergers be consummated concurrently. The General Partners do not
believe that the waiver of such condition by the Merger Partnerships would have
a material adverse impact on the BAC Holders in either the Fund which
consummates a Merger or the Fund which does not, and the General Partners do not
intend to resolicit the vote of the BAC Holders on the Transaction Proposals if
such condition were to be waived. If the Funds were to waive a material
condition to their obligations which could have a material adverse effect on BAC
Holders, the General Partners currently intend to resolicit the vote of BAC
Holders on the Transaction Proposals as so modified.
-63-
<PAGE>
Redemption Procedures
Prior to the Effective Time, the Merger Partnerships and the Funds will
designate a bank or trust company to act as redemption agent for the redemption
of the BACs (the "Redemption Agent"). At the Effective Time, CAPREIT will cause
to be deposited with the Redemption Agent proceeds from the Financing in an
aggregate amount in cash sufficient to pay the aggregate Redemption Price.
As soon as reasonably practicable after the Effective Time, the Redemption
Agent will mail to each record holder of a certificate which immediately prior
to the Effective Time represented BACs (a "Certificate") entitled to payment of
the Redemption Price, a form of letter of transmittal for use in effecting the
surrender of such Certificates for payment therefor. BAC HOLDERS SHOULD NOT
SURRENDER THEIR CERTIFICATES WITH THEIR PROXY CARDS FOR THE SPECIAL MEETING.
Upon surrender to the Redemption Agent of a Certificate, together with such
letter of transmittal, duly executed, and any other required documents, and upon
acceptance thereof by the Redemption Agent, the holder of such Certificate will
be entitled to receive in exchange therefor cash in an amount equal to the
product of the number of BACs represented by such Certificate multiplied
by the Redemption Price less any withholding taxes, and such Certificate will
then be canceled. No interest will be paid or accrued on the cash payable upon
the surrender of the Certificate. If payment is to be made to a person other
than the person in whose name the Certificate surrendered is registered, it will
be a condition of payment that the Certificate so surrendered be properly
endorsed, with the signature guaranteed, or otherwise in proper form for
transfer, and that the person requesting such payment will pay any transfer or
other taxes required by reason of the payment to a person other than the
registered holder of the Certificate surrendered, or establish to the
satisfaction of the Redemption Agent that such tax has been paid or is not
applicable. Until so surrendered, each Certificate will represent for all
purposes only the right to receive the Redemption Price in cash, without any
interest thereon, less any required withholding taxes. Any funds remaining with
the Redemption Agent six months following the Effective Time will be delivered
to the Funds or their successor, after which time former holders of BACs,
subject to applicable law, must look only to the Funds, as the surviving entity
in the Mergers or their successor, for payment of their claims for the
Redemption Price, without interest thereon, less any required withholding taxes,
and will have no greater rights against the Funds or their successor than may be
accorded to general creditors of the Funds under Delaware law.
Conduct of Business Pending the Mergers
During the period from September 11, 1995 through the Effective Date (the
"Pre-Closing Period"), each Fund and the applicable Owner Partnerships have
agreed to conduct their respective businesses only in the ordinary course of
business and consistent with past practices. In that regard, except as
otherwise contemplated by a Merger Agreement, such Fund and such Owner
Partnerships agreed not to sell, dispose of, pledge or encumber any of their
property, and if such property is material to such Fund or such Owner
Partnership, such Fund and such Owner Partnerships will not take such actions
even in the ordinary course of business; amend their respective organizational
documents (other than the proposed amendments of the Agreements of Limited
Partnership of each Fund as described in this Proxy Statement), tax returns,
Mortgage
-64-
<PAGE>
Revenue Bonds or any notes, agreements, indentures or other instruments
relating to the Mortgage Revenue Bonds; declare, set aside or make any
distributions with respect to any partnership interests, except that Fund I-II
may accrue, on a monthly basis, $.09417 per BAC for Series I, and $.09667 per
BAC for Series II, and Fund III may accrue, on a monthly basis, $.10 per BAC for
calendar 1996, and pay, on a quarterly or semi-annual basis, as applicable, such
accrued amount to the holders of BACs; or redeem any BACs.
In addition, each Fund and each applicable Owner Partnership has agreed not
to issue, sell or dispose of any BACs; acquire other entities; incur debt for
money borrowed other than short-term debt incurred in the ordinary course of
business; materially change any agreement with or arrangement relating to any
material license, lease, contract or other document other than in the ordinary
course of business; or authorize or effect any change in their capitalization.
With respect to tax matters, each Fund and each applicable Owner
Partnership has agreed that pending consummation of a Merger it will not make
any material tax elections, change any material tax accounting method or settle
or compromise any material income tax liability.
Other Pre-Closing Covenants
The parties to a Merger Agreement have agreed, among other things, during
the pre-closing period, to use all commercially reasonable efforts to take all
actions and to do all things necessary to ensure that a Merger and the related
transactions are consummated. In that regard, each Fund and any applicable Owner
Partnerships have agreed to provide to each Merger Partnership and its
representatives reasonable access to its offices, facilities, personnel,
properties, books, records and contracts and, as soon as reasonably practicable
after they become available, additional financial statements.
In addition, each Fund has agreed to take all necessary action to convene a
meeting of its limited partners as soon as practicable to consider and vote on
and obtain the approval of such Fund's BAC Holders for the Merger and related
transactions. With respect to such meeting, each Fund and the applicable Merger
Partnership have agreed to jointly prepare and such Fund has agreed to file a
proxy statement and form of proxy, the costs of which shall be advanced by such
Merger Partnership.
Post-Closing Covenants
Each Merger Partnership and CAPREIT have agreed not to cause the
partnership surviving a Merger to amend any portions of any tax return of a Fund
for years ending prior to the Effective Time to the extent that such portion
relates to the accrual of interest on the Mortgage Revenue Bonds and to cause
the surviving partnership to not otherwise amend any tax returns of such Fund
for years ending prior to the Effective Time without the consent of such Fund's
General Partner or its designee, which consent shall not be unreasonably
withheld. In addition, the surviving partnership, CAPREIT and the General
Partners have agreed to cooperate in filing tax returns for the tax year
including the period ending on the Effective Date.
-65-
<PAGE>
No Solicitation
Each Fund and its General Partner have agreed not to solicit, initiate or
invite the submission of offers from any person regarding a business combination
or enter into discussions regarding the foregoing, during the period a Merger
Agreement is in effect and have further agreed not to furnish information to, or
otherwise cooperate with, any person seeking to do any of the foregoing.
Notwithstanding the above, the General Partner of such Fund may, if it is
so required because of its fiduciary duty obligations to the BAC Holders,
respond to any unsolicited inquiry or proposal from a third party regarding a
business combination; provided, however, that such General Partner agrees to
notify the Merger Partnership of any such response or negotiations as well as
afford to such Merger Partnership an opportunity to respond.
Indemnification
Each Merger Partnership has agreed, for a period of three and one-half
years after the Effective Time, to cause the Fund, as the surviving entity in
the Merger, to continue in full force and effect for the benefit of the current
general partner of such Fund and the Assignor Limited Partner and their
respective Affiliates (as defined in such Fund's Agreement of Limited
Partnership) the provisions currently set forth in the Agreement of Limited
Partnership of the Fund relating to indemnification of such general partner and
such Assignor Limited Partner and their respective Affiliates as if such general
partner and such Assignor Limited Partner continued to serve such Fund in their
respective capacities. CAPREIT has agreed to guarantee the obligations of each
of the surviving partnerships as if it were the indemnifying party, except that
its obligations are not limited to the extent of the assets of a surviving
partnership.
Termination
A Merger Agreement may be terminated and a Merger and the related
transactions may be abandoned at any time prior to the Effective Time, whether
before or after the BAC Holders have approved and adopted such Merger and
related transactions, by the mutual written consent of a Merger Partnership and
a Fund, or by either such Merger Partnership or such Fund if: (i) a court or
governmental, regulatory or administrative authority has issued a final and non-
appealable order, decree, or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting such Merger and related
transactions, (ii) the Effective Time shall not have occurred by December 31,
1996 (the "Termination Date") (so long as a terminating party has complied with
all of its covenants and agreements contained in such Merger Agreement), or
(iii) the BAC Holders do not approve and adopt such Merger and related
transactions.
A Merger Agreement may also be terminated at any time prior to the
Effective Time, whether before or after the BAC Holders have approved and
adopted a Merger and the related Transactions, by a Fund, if a Merger
Partnership fails to perform in all material respects its obligations under the
Merger Agreement.
-66-
<PAGE>
A Merger Agreement may also be terminated at any time prior to the
Effective Time, whether before or after the BAC Holders have approved and
adopted a Merger and the related Transactions, by a Merger Partnership, if: (i)
a Fund or its general partner shall have (a) withdrawn, amended or modified its
recommendation of a Merger and the related Transactions or (b) taken any public
position inconsistent with such recommendations, (ii) if such Fund or any
applicable Owner Partnership fails to perform in all material respects its
obligations under such Merger Agreement, (iii) there shall have occurred a
material adverse change in the business, assets, properties, results of
operations or financial or other condition or prospects of such Fund or any such
Owner Partnership; (iv) such Fund shall have settled or compromised any lawsuits
or other legal proceedings challenging such Merger Agreement ("Designated
Actions") without the prior written consent of the such Merger Partnership,
unless such settlement or compromise requires the payment of money in an amount
which, when aggregated with the other amounts expended to settle or compromise
Designated Actions, does not exceed an agreed upon amount, and (v) the
representations and warranties of such Fund and such Owner Partnerships,
irrespective of the knowledge of such Fund or such Owner Partnerships at the
time of signing of such Merger Agreement regarding the truthfulness of the
documents it supplied to the Merger Partnership, are not true and correct in all
material respects at any time as if made as of such time, except to the extent
that any such representation or warranty is made as of a specific date, in which
case such representation or warranty shall have been true and correct as of such
time.
A Merger Agreement may be amended by the written agreement of each of the
parties either before or after the BAC Holders have approved of a Merger and the
related transactions, provided that, after approval by the BAC Holders, no such
amendment may materially adversely affect the interests of such BAC Holders
unless such amendment is also approved by the BAC Holders.
Deposit
Pursuant to the terms of the Merger Agreements, on the business day
immediately prior to the date this Proxy Statement was first mailed to the BAC
Holders, CAPREIT paid into escrow the Deposits of $1,000,000 under each Merger
Agreement ($2,000,000 in the aggregate), which amounts are being held in escrow
for the benefit of each Fund by Chicago Title Insurance Company (the "Escrow
Agent"), an independent third party, pursuant to the terms of the escrow
agreements, the form of which agreement is attached as an appendix to the Merger
Agreements.
There are separate escrow agreements, with identical terms and conditions, with
respect to each of the Merger Agreements.
Pursuant to the terms of the Escrow Agreements, the Escrow Agent will pay
the Deposits and any interest earned thereon (the "Escrow Funds") as follows:
(i) if a Closing under a Merger Agreement shall occur, then the Escrow Funds
held for the benefit of the applicable Fund shall be paid to CAPREIT or as
CAPREIT shall direct; (ii) if a Closing under a Merger Agreement shall not occur
on or prior to the Termination Date and the failure of such Closing to occur
shall be due to: (a) the failure of any of a Merger Partnership's conditions to
Closing (other than the condition that the Financing be consummated), (b) the
termination of such Merger Agreement
-67-
<PAGE>
(other than where such Merger Agreement is terminated because the Effective Time
has not occurred by the Termination Date or such Merger Partnership has not
performed its obligations), (c) a breach of the Financing Commitment (as defined
in the Merger Agreements) by the party issuing such Financing Commitment; or (d)
a change in any statute, law or regulation which affects the tax exempt status
of the Mortgage Revenue Bonds, then the Escrow Fund shall be paid to CAPREIT or
as CAPREIT shall direct; (iii) if a Closing under a Merger Agreement shall not
occur on or prior to the Termination Date and the failure of the Closing to
occur shall be due to the failure of the Financing to be consummated, which
failure occurred because of a failure of a condition to funding set forth in the
Financing Commitment, then one-half of the Escrow Funds shall be paid to the
Fund and one-half of the Escrow Funds shall be paid to CAPREIT or as CAPREIT
shall direct; and (iv) if the Escrow Funds shall not be paid pursuant to (i),
(ii) or (iii), then the Escrow Funds shall be paid to the Fund on the earlier of
the Termination Date or the date on which such Merger Agreement was terminated.
If the Escrow Funds are paid to a Fund, such payment shall be made to such
Fund as liquidated damages in full satisfaction of all of a Merger Partnership's
and CAPREIT's liabilities or obligations under a Merger Agreement, including,
without limitation, the obligation to pay such Fund's expenses.
The payment of Escrow Funds to one Fund does not necessarily mean that
Escrow Funds are payable to the other Fund.
Fees and Expenses
In the event a Merger Agreement is terminated or abandoned, and
(i) such termination or abandonment resulted from the breach by a Fund of
its covenant not to solicit or encourage third party offers regarding business
combinations, the acceptance by such Fund's general partner, pursuant to its
fiduciary duties, of such third party offer (a "Fiduciary Out Termination"); or
a willful and material breach by such Fund of any of its covenants and
obligations (except its representations and warranties); or
(ii) from the date of such Merger Agreement and prior to or concurrent with
such termination or abandonment, (a) such Fund or its general partner enters
into any letter of intent or agreement with any person (including such Fund and
its affiliates and excluding such Merger Partnership and its affiliates) or
group (as defined in Section 13(d) of the Exchange Act) (collectively, the
"Designated Persons") regarding a (1) tender offer or exchange offer for any
class of such Fund's BACs at a per BAC price in excess of the price to be paid
by such Merger Partnership or (2) a business combination with or involving such
Fund or its affiliates, or any transaction involving the transfer of beneficial
ownership of such Fund's BACs representing at least 10% of any class of
outstanding BACs, (b) such Fund or its general partner shall file with the
Commission a Schedule 14D-9 or similar document, or make any public announcement
or communication (1) recommending, supporting or endorsing a proposal or plan by
such Fund or a Designated Person to effect any of the foregoing transactions or
(2) failing to support a Merger and the related transactions or (c) any
Designated Person shall have acquired beneficial
-68-
<PAGE>
ownership of at least 33 1/3% of any class of such Fund's outstanding BACs (the
foregoing events being collectively referred to as "Triggering Events"); or
(iii) within 270 days from the date of termination or abandonment of such
Merger Agreement, a Triggering Event shall have resulted in the Fund or the
holders of any class of such Fund's BACs receiving consideration (determined on
a per BAC basis) in excess of the amount to be paid in such Merger;
then the Merger Partnership will be entitled to a payment of $2,250,000 plus its
reasonable expenses up to a maximum of $2,600,000 per Merger Agreement.
The payment of such fee and its reasonable expenses shall be the sole
remedy available to such Merger Partnership for breach of such Merger Agreement
by such Fund or such Owner Partnership and shall be made as liquidated damages
in full satisfaction of such Fund's or such Owner Partnerships' liabilities or
obligations under such Merger Agreement.
If a Merger Agreement is terminated or abandoned due to (i) a willful and
material breach by a Fund or any applicable Owner Partnership (other than a
breach of the representations and warranties), (ii) the failure by such Fund or
any of such Owner Partnerships to perform in all material respects its
obligations and duties thereunder, (iii) a Fiduciary Out Termination or (iv) a
termination of such Merger Agreement by a Merger Partnership because such Fund
shall have settled Designated Actions for an aggregate amount in excess of an
agreed upon amount or such settlement or compromise contains terms to which such
Merger Partnership reasonably objects, then such Fund shall bear all of its own
expenses and reimburse such Merger Partnership and its affiliates for reasonable
out-of-pocket expenses (including, without limitation, all fees and expenses of
counsel, outside accountants, investment banking firms, financing sources and
third party consultants to such Merger Partnership and its affiliates) in
connection with a Merger and the related transactions and this Proxy Statement.
If a closing shall occur under one, but not the other, Merger Agreement, the
Merger Partnership which is a party to the terminated Merger Agreement will be
reimbursed for all such expenses directly allocable to the Merger Agreement that
did not close and for one-half of all expenses which can not be allocated
specifically to either of the Merger Agreements but were incurred in connection
with the Merger and the related transactions. In no event shall the amount paid
to reimburse expenses exceed $2,500,000 per Merger Agreement.
Unless a Merger Agreement is terminated or abandoned for the reasons
specified in the preceding paragraph, or a Merger Partnership elects to
terminate such Merger Agreement because the representations and warranties of a
Fund and any applicable Owner Partnerships are not true and correct in all
material respects (and with respect to the representations and warranties
regarding the truthfulness of disclosures made to such Merger Partnership,
irrespective of the knowledge of such Fund or such Owner Partnership at the time
of the signing of such Merger Agreement), at and as of the Effective Time as if
made at and as of such time, except to the extent that any such representation
or warranty is made as of a specific date, in which case such representation or
warranty shall have been true and correct as of such time, then such Merger
Partnership shall bear all of its own costs and expenses and it shall reimburse
such
-69-
<PAGE>
Fund for all its costs and expenses incurred in connection with a Merger,
the related transactions and this Proxy Statement, other than the costs and
expenses of (i) the fairness opinion and the related legal and accounting fees,
(ii) the legal and accounting fees incurred in negotiating such Merger Agreement
and (iii) reimbursement for certain overhead costs of the general partner of
such Fund and its affiliates.
In all other cases, in the event of a termination of a Merger Agreement
each of the parties shall bear their own expenses.
TAX TREATMENT
It is the intention of the Funds and the Merger Partnerships that the
payment of the consideration to the BAC Holders will constitute, for income tax
purposes, a redemption or liquidation of the BAC Holders limited partner
interests in the Funds pursuant to Section 731(a) of the Internal Revenue Code
of 1986, as amended (the "Code"), and that the consummation of the transactions
contemplated by the Merger Agreements will not result in a termination of the
Funds pursuant to Section 708(b)(1)(B) of the Code.
AMENDMENTS TO THE PARTNERSHIP AGREEMENTS
As part of the Merger Proposal, BAC Holders are being asked to vote to
approve and adopt an amendment to the respective Partnership Agreement of each
Fund to authorize expressly the Mergers and the Merger Agreements. Such
amendments will only become effective if the Mergers are consummated and will
have no effect on the rights of BAC Holders, except to the extent that they
facilitate the redemption of the BACs in the Mergers as a result of which BAC
Holders will cease to have any continuing interest in the Funds. The full text
of the proposed amendments is set forth in Appendices C-1 and C-2 to this Proxy
Statement and is incorporated herein by reference.
NO DISSENTER'S RIGHTS
If a Merger is approved by a simple majority of each Fund's BAC Holders,
such approval will bind all BAC Holders in such Fund including those who voted
against such Merger, abstained or failed to return a completed Proxy. BAC
Holders will have no dissenter's rights of appraisal in connection with the
Transaction Proposals under the Partnership Act or the Funds' Partnership
Agreements. The Funds are Delaware limited partnerships and their respective
Partnership Agreements provide that they are to be construed in accordance with
and governed by the laws of the State of Delaware. The Funds are not aware of
any provisions of Delaware law expressly providing rights to holders of
interests in a Delaware limited partnership in lieu of appraisal rights. In
cases involving corporations, courts applying Delaware law have held that a
controlling stockholder of a corporation involved in a merger has a fiduciary
duty to other stockholders that requires that the merger be fair to such other
stockholders. In determining whether a merger is fair to minority stockholders
of a corporation, these courts have considered, among other things, the type and
amount of consideration to be received by stockholders and whether there was
fair dealing among the parties. These courts have held that a damages remedy
-70-
<PAGE>
may be available in a merger which is the result of procedural unfairness,
including fraud, misrepresentation or other misconduct.
NEW PARTNERS PROPOSAL
In connection with the Mergers, the BAC Holders of each Fund also are being
asked to consider and act upon a proposal to approve, with respect to each Fund,
(a) the sale of the 1.01% general partner interest held by such Fund's General
Partner to CAPREIT GP, a newly-formed, wholly-owned subsidiary of CAPREIT, for
$500,000 each, and the substitution of CAPREIT GP as general partner of such
Fund in its stead, and (b) the issuance of a limited partner interest in such
Fund to CAPREIT or its designee in exchange for the contribution to such Fund of
real property or other assets, which sale of the general partner interests and
issuance of limited partner interests shall occur concurrently with the Mergers,
and certain amendments to the respective Partnership Agreement of each of the
Funds to authorize expressly the foregoing. See "SPECIAL FACTORS--Interests of
Certain Persons in the Transactions".
In connection with the New Partners Proposal, the BAC Holders are also
being asked to vote to approve and adopt an amendment to Section 5.04(o)
thereof, which currently prohibits the admission of a new limited partner, to
permit the issuance by the Fund of a limited partner interest to CAPREIT or its
designee. BAC Holders also are being asked to vote to approve and adopt
amendments to the Partnership Agreements to authorize expressly the withdrawal
of the General Partners as general partners of the Fund and the simultaneous
admission of CAPREIT GP to a Fund as the substitute general partner of a Fund,
upon the sale by the General Partner, in accordance with Section 6.05(b) and
10.02(b), of its general partner interest in a Fund to CAPREIT GP. These
amendments only will become effective if the Mergers are consummated and will
have no effect on the rights of BAC Holders, except to the extent that they
facilitate the Mergers as a result of which BAC Holders will cease to have any
continuing interest in the Funds. The full text of the proposed amendments is
set forth in Appendices C-1 and C-2 to this Proxy Statement and is incorporated
herein by reference.
The approval and adoption, by the BAC Holders of each Fund, of the New
Partners Proposal to be voted upon by them is conditioned upon the approval and
adoption, by such BAC Holders, of the Merger Proposal to be voted upon by them
and the approval and adoption by the BAC Holders of each Fund of the Merger
Proposal to be voted on by them is conditioned upon the approval and adoption by
such BAC Holders of the New Partners Proposal to be voted on by them.
THE FINANCING
The funds required to pay the consideration payable to the BAC Holders in
the Mergers and to pay related fees and expenses of the Mergers and the
Financing (as defined below) are expected to be approximately $180.4 million.
The funds required for the Mergers and certain related transactions in
connection with the financing thereof will be provided by an equity contribution
of approximately $11.5 million by CAPREIT, cash held by the Funds (estimated to
be approximately $12.4 million) and the proceeds of the sale (the "Financing")
of certain beneficial ownership interests in one or more trusts (the "Trusts")
to be formed at the Effective
-71-
<PAGE>
Time to which the Funds will cause to be contributed, following consummation of
the Mergers, the Mortgage Revenue Bonds and to which CAPREIT will contribute an
additional mortgage revenue bond issue consisting of two series of bonds having
an aggregate outstanding principal amount of approximately $12.6 million and
maturing in 2019.
In accordance with a Master Trust Agreement to be entered into between the
successor entity to the Funds surviving a merger of the Funds immediately
following the Effective Time (the "Surviving Fund Entity"), as trustor, and
United States Trust Company of New York, as trustee (the "Master Trust
Agreement"), each Trust will issue three classes of certificates evidencing the
beneficial ownership interests in such Trust: (i) a class of floating rate
certificates in a face amount of up to 99% of the market value of the Mortgage
Revenue Bonds and additional bond issue held by such Trust (the "Floater
Certificates"), (ii) a subordinate certificate entitled to certain income of the
Trust based on the outstanding face amount of the Floater Certificates (the
"Subordinate Certificate"), and (iii) an inverse floating rate certificate equal
to the remaining market value of the Mortgage Revenue Bonds and additional bond
issue held by such Trust (the "Residual Certificate"). The Floater Certificates
are expected to be privately placed with investors by Bear, Stearns & Co. for an
anticipated aggregate cash consideration of approximately $228.0 million, which,
together with the funds provided by CAPREIT and the cash held by of the Funds,
will be used to redeem the BACs and to pay fees, expenses and other items in
connection with the Mergers and the related transactions and the Financing,
including approximately $67.0 million in the aggregate which will be required to
refinance existing debt on a portion of the collateral required to be pledged by
CAPREIT and its affiliates to obtain the Financing . See "--Collateral" below.
Bear, Stearns & Co. has provisionally indicated to CAPREIT that, assuming normal
market conditions, satisfactory completion of due diligence and appropriate
documentation (including clean opinions regarding tax exemption), it would
expect to be able to successfully place the Floater Certificates. The
Subordinate Certificate for each Trust will be acquired by an entity that has
arranged for the issuance of the Surety Bond (as defined below). See "--Credit
Enhancement". The Residual Certificate for each Trust will be acquired by the
Surviving Fund Entity.
The Floater Certificates for each Trust will receive a portion of the
interest distributed on the related Mortgage Revenue Bonds and any additional
bond issue held by such Trust based on distribution rates on the Floater
Certificates to be determined by Bear, Stearns & Co., as remarketing agent, to
be that rate that would enable such Certificates to be marketed at 100% of the
outstanding face amount thereof consistent with market conditions prevailing
from time to time. The Subordinate Certificate for each Trust will receive a
distribution, out of the remaining interest distributed on the Mortgage Revenue
Bonds and additional bond issue held by such Trust, in an amount equal to 2-3/4%
of the outstanding face amount of the Floater Certificates. The Residual
Certificate for each Trust will receive the balance of the interest distributed
on the Mortgage Revenue Bonds and any additional bond issue held by such Trust
after distributions on the Floater Certificates and Subordinate Certificate of
the Trust.
-72-
<PAGE>
CREDIT ENHANCEMENT
Pursuant to the Commitment Letter, dated March 29, 1996 between CentRe
Mortgage Capital, L.L.C. ("CentRe") and CAPREIT, CentRe has committed to arrange
for credit enhancement with respect to the Mortgage Revenue Bonds and the
additional bond issue to be held by the Trusts and a liquidity facility with
respect to the Floater Certificates of each Trust. The credit enhancement and
liquidity facility are to consist of one or more four year irrevocable letters
of credit, standby purchase agreements or similar instruments (the "Letter of
Credit") issued by one or more financial institutions (the "Letter of Credit
Banks") reasonably acceptable to CAPREIT and having long term debt ratings of
"AA" or better by Standard & Poor's and short term ratings of "A-1+" or better
by Standard & Poor's, respectively. The Letter of Credit will provide for
drawings in such amounts and at such times as are required to pay amounts due
from time to time with respect to the Mortgage Revenue Bonds and the additional
bond issue in the Trusts, and to pay the purchase price of Floater Certificates
in connection with certain tenders of the Floater Certificates. Pursuant to
certain agreements (the "Bank Reimbursement Agreement") by and between the
Letter of Credit Banks and either the Owner Partnerships or the Surviving Fund
Entity, among others, the Owner Partnerships or the Surviving Fund Entity will
agree to reimburse the Letter of Credit Banks for all drawings under the Letter
of Credit and to pay certain other fees and expenses of the Letter of Credit
Banks.
In addition, CentRe has committed in the Commitment Letter to arrange for
an insurance company (the "Surety") having a claims paying rating of at least
"AA" by Standard & Poor's to issue one or more insurance surety bonds (the
"Surety Bond") which will provide for the payment by the Surety to the Letter of
Credit Banks of any amounts which are owing as a result of drawings under the
Letter of Credit and which have not been paid under the Bank Reimbursement
Agreement or otherwise. The Surety Bond will be issued pursuant to a master
reimbursement and security agreement (the "Surety Reimbursement Agreement") by
and among the Surety, CentRe, the Surviving Fund Entity, and the Owner
Partnerships, pursuant to which the Surviving Fund Entity and the Owner
Partnerships will agree, on a non-recourse basis, jointly and severally, to
reimburse the Surety for any amounts paid on the Surety Bond. Such reimbursement
obligations are to be secured by liens on substantially all of the real property
and assets of the Owner Partnerships and certain other affiliates of
CAPREIT.
In connection with the Financing, the Owner Partnerships and the Surviving
Fund Entity, as the trustor of each Trust, are obligated to pay certain fees and
expenses of the Letter of Credit Banks, the Surety, the Trustee and others. The
Owner Partnerships and the Surviving Fund Entity will not receive any
compensation in connection with the foregoing.
COLLATERAL
As collateral security for their reimbursement and other obligations under
the Bank Reimbursement Agreement and the Surety Reimbursement Agreement and
certain other agreements relating thereto, the Owner Partnerships will grant or
cause to be granted in favor of one or more Letter of Credit Banks, the Surety
and CentRe liens on and security interests in (i) the properties securing the
Mortgage Revenue Bonds (the "Bond Properties"), the additional
-73-
<PAGE>
property securing the bond issue contributed by CAPREIT (the "CAPREIT Bond
Property") and the seven additional multi-family properties having a fair market
value of approximately $90.0 million, owned by affiliates of CAPREIT (the
"CAPREIT Properties"); (ii) a pledge of the partnership interest of each partner
of each entity which is a party to the Surety Reimbursement Agreement
(individually a "Company" or collectively, the "Companies"); (iii) a pledge of
the interest of the holder of each Subordinate Certificate in the Subordinate
Certificates and a pledge of the Surviving Fund Entity's interest in each
Residual Certificate; (iv) a collateral assignment of the management contract
for each of the Bond Property, the CAPREIT Bond Properties and the CAPREIT
Properties; and (v) certain accounts to be created under the Surety
Reimbursement Agreement. In addition to the foregoing, the Surety Reimbursement
Agreement shall provide for (i) a lockbox arrangement for the collection of
tenant rentals and a daily sweep arrangement under which all tenant rental
collections during a portion of each month will be deposited into a central
collection account from which all monthly payment obligations under the Surety
Reimbursement Agreement and the Bank Reimbursement Agreement will be directed to
the appropriate payees prior to any release of funds from the central collection
account to the Owner Partnerships, (ii) indemnities by Apollo and CAPREIT with
respect to losses, costs, and other liabilities arising from the Zakin and
-----
Wingard Actions, and (iii) a limited guaranty by Apollo, capped at $15.0
- -------
million, of the indebtedness that becomes due and payable under the Surety
Reimbursement Agreement upon the occurrence and during the continuance of an
event of default thereunder which guarantee will remain in effect only to the
extent and for so long as the proposed amendments referred to in the last
paragraph under "Proposed Amendments to Mortgage Revenue Bonds" below have not
been effected. CAPREIT also has agreed to fund reserves of $4.5 million for
capital expenditures on all of the properties as additional security under the
Surety Reimbursement Agreement.
EVENTS OF DEFAULT AND TERMINATION OF FINANCING
Under the Master Trust Agreement, if an issue of Mortgage Revenue Bonds is
not amended by its scheduled remarketing date in order to eliminate any
remarketing features, establish new interest rates, and make certain other
changes, an amount of Floater Certificates corresponding to that issue of
Mortgage Revenue Bonds will be required to be tendered and retired, that issue
of Mortgage Revenue Bonds will be required to be sold out of the Trust, and, as
a result, the Financing will terminate as to that issue of Mortgage Revenue
Bonds. In addition, if certain events occur with respect to the Letter of Credit
Bank for a Trust, such as bankruptcy, the downgrading of its credit rating below
investment grade, or its failure to make any payment under its credit
enhancement facility which is not cured within five (5) days, then all Mortgage
Revenue Bonds in that Trust must be sold or placed in a custody arrangement for
later sale, and the Financing will terminate as to the issues of Mortgage
Revenue Bonds in that Trust.
Under the Surety Reimbursement Agreement an event of default will occur if
certain conditions with respect to CAPREIT or its affiliates or the Owner
Partnerships or their affiliates occur or upon certain failures of payment or
performance by the Owner Partnerships or their affiliates. Upon an event of
default, the Surety will have the right to cause a mandatory tender and
subsequent retirement or remarketing of the Floater Certificates, as well as the
right to
-74-
<PAGE>
pursue remedies against the properties owned by the Owner Partnerships
and other collateral securing the indebtedness due under the Surety
Reimbursement Agreement and other related payment obligations.
Under the Bank Reimbursement Agreement, an event of default will occur if
certain conditions with respect to the Owner Partnerships or Surety or other
parties involved in the Financing occur, or upon certain failures of payment or
performance by the Owner Partnerships or Surety. Upon an event of default, the
Letter of Credit Bank will have the right to cause a mandatory tender and
retirement of all Trust Certificates for one or more Trusts, thereby terminating
the Financing with respect to all issues of Mortgage Revenue Bonds in those
Trusts. The Credit Enhancer may also have the right to pursue remedies against
the properties owned by the Owner Partnerships and other collateral pursuant to
a collateral assignment of the Surety's liens and security interests obtained in
connection with the Surety Reimbursement Agreement.
PROPOSED AMENDMENTS TO MORTGAGE REVENUE BONDS
If the Financing is not consummated prior to September 24, 1996, it
appears, based upon recently issued IRS regulations, that the Financing would
constitute a reissuance of the Mortgage Revenue Bonds for federal income tax
purposes with the effect that the cooperation of the issuers of the Mortgage
Revenue Bonds in, among other things, making certain filings with the Internal
Revenue Service and amending the Mortgage Revenue Bonds to write off all accrued
and unpaid base interest, would be required in order to maintain the tax-exempt
status of the Mortgage Revenue Bonds after the Financing.
CAPREIT, under the supervision of the General Partners, has commenced
approaching the issuers of the Mortgage Revenue Bonds to obtain their consent,
contingent upon and to be effective concurrently with and only in the event of
the consummation of the Mergers and the Financing, to amend the Mortgage Revenue
Bonds to write off all accrued and unpaid base interest and to eliminate all or
certain of the contingent interest. CAPREIT believes that it will be able to
obtain the consent of the issuers to such amendments prior to the Effective
Date.
It is also currently contemplated that, in connection with the Financing,
CAPREIT and the Owner Partnerships will attempt to effect amendments to the
relevant documents relating to the Mortgage Revenue Bonds and the additional
mortgage revenue bond issue to be contributed by CAPREIT to the Trusts in order
to eliminate any remarketing features, to establish new interest rates and to
make certain other changes affecting such Mortgage Revenue Bonds and the other
mortgage revenue bond issue, including the possible extension of the scheduled
maturity dates of the Mortgage Revenue Bonds and the additional bond issue. In
connection therewith, CAPREIT also may approach the issuers of the Mortgage
Revenue Bonds prior to the Effective Date of the Mergers, with the consent and
under the supervision of the Funds, in order to obtain such issuers' consent, to
be contingent upon and not to be effective prior to the consummation of the
Mergers, to make some or all of such amendments. There is no assurance that any
such amendments will be effected or that, if effected, such amendments will
result in the Bond Properties and the CAPREIT Bond Property generating
sufficient cash flow to
-75-
<PAGE>
fund timely payment of the principal of and interest on the Mortgage Revenue
Bonds and the additional mortgage revenue bond issue.
MISCELLANEOUS
In the event one Fund, but not the other, approves and adopts a Merger and
the related transactions and CAPREIT elects to consummate the Merger with the
Fund that approved the Merger, CAPREIT will still be able to consummate the
Financing in the manner described above, with proportional reductions in the
amount of proceeds and a reduction in the amount of collateral provided by
CAPREIT. BAC Holders of the Fund which approved and adopted the Merger and the
related transactions will receive the Redemption Price set forth in this Proxy
Statement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGERS AND
RELATED TRANSACTIONS
INTRODUCTION
The following discussion is intended to provide BAC Holders with a summary
of certain federal income tax matters that should be considered in connection
with the Mergers and the related transactions. The following discussion is based
upon the advice of Arent Fox Kintner Plotkin & Kahn, counsel to the Funds.
Although the material federal income tax aspects of general application to BAC
Holders regarding the Mergers and related transactions are discussed herein, no
attempt has been made to comment on all tax matters affecting the BAC Holders.
Moreover, the tax consequences to a particular BAC Holder will depend, in part,
on such BAC Holder's own tax circumstances. The following discussion may not be
applicable to certain categories of BAC Holders including, without limitation,
nonresident aliens, foreign corporations, certain domestic corporations, tax-
exempt entities and dealers in securities. Also, the state and local income tax
consequences of the Mergers and related transactions, which may vary among the
BAC Holders based upon the jurisdiction in which they are subject to tax, have
not been discussed. Accordingly, each BAC Holder should consult his or her own
tax advisor about the federal, state, local, foreign and other tax consequences
of the Mergers and related transactions with respect to his or her own
particular circumstances.
GENERAL PRINCIPLES OF PARTNERSHIP TAXATION
The Funds have been treated as partnerships and the BAC Holders as partners
for federal income tax purposes. A partnership is not subject to federal income
tax. Instead, each partner of a partnership includes his or her allocable share
of the partnership's items of taxable income, gain, loss, deduction and credit
in determining his or her income tax. Although a partnership is not subject to
federal income tax, it must file a federal information income tax return upon
which it reports its income, gain, loss, deduction and credit for each taxable
year.
A partnership will allocate to each partner his or her share of the
partnership's income and loss. Generally, each partner must treat partnership
items on his or her return consistently with the treatment of those items on the
partnership return. The partnership will also allocate to
-76-
<PAGE>
each partner his or her share of items of partnership expense. Due to the tax-
exempt nature of the Funds' interest income in prior years, BAC Holders were not
permitted in prior years to deduct certain items of Fund expense in calculating
their income tax.
Under the Code, a partner does not recognize gain upon receipt of a
partnership distribution unless the distribution exceeds his or her adjusted tax
basis for his or her interest in the partnership immediately prior to the
distribution. A partner's adjusted tax basis for his or her interest in a
partnership generally will be equal to the amount paid for the partnership
interest, increased by his or her allocable share of partnership taxable income
and tax-exempt income, and decreased by his or her allocable share of
partnership distributions and his or her allocable share of partnership tax
losses and deductions (including his or her allocable share of partnership
expenditures which are not deductible in computing its taxable income and are
not capital expenditures, such as the Partnership's expenses allocable to tax-
exempt interest income).
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGERS
The Mergers should be treated for federal income tax purposes as
redemptions of the BAC Holders' interests in the Funds. The formation,
transitory existence and merger of the Merger Partnerships should be disregarded
for federal income tax purposes and the Mergers should be treated as redemptions
of partnership interests since the funds to effect the Mergers are being
generated from the transfer of the assets of the Funds rather than from CAPREIT
or its affiliates. To the extent a portion of the merger consideration is viewed
as having been provided by CAPREIT, either directly or indirectly, there is a
risk that the Internal Revenue Service could assert that the Mergers should be
treated as sales of a minority portion of the partnership interests in the Funds
by the BAC Holders, although a characterization as a sale would not have an
adverse impact on the federal income tax consequences of the Mergers to the BAC
Holders. Pursuant to the Merger Agreement, the Funds and the General Partners
have agreed to treat the Mergers consistently with their characterization as
redemptions for income tax purposes.
Generally, pursuant to Section 731(a) of the Code, each BAC Holder will
recognize gain or loss upon receipt of cash in the Mergers in exchange for BACs.
The amount of gain or loss recognized by a BAC Holder will be equal to the
difference between (a) the amount of cash received in the Mergers and (b) such
BAC Holder's adjusted tax basis in his or her BACs. Generally, if a BAC Holder
holds his or her BACs as a capital asset, such gain or loss should be treated as
capital gain or capital loss, and will generally constitute long term capital
gain or loss if such BAC Holder has held his BACs for more than one year. A
capital loss recognized by a BAC Holder in connection with the Mergers and
related transactions may offset other capital gains of that BAC Holder, the
excess of such BAC Holder's capital losses over capital gains may offset an
individual BAC Holder's ordinary income, subject to an annual $3,000 limitation,
and the remainder may be carried forward to subsequent years. In determining a
BAC Holder's gain or loss on the receipt of cash in the Mergers, and consistent
with the discussion above, a BAC Holder's adjusted tax basis in his or her BACs
generally equals the amount paid for such BACs increased by his or her allocable
share of partnership income (including all tax-exempt income) and decreased by
his or her allocable share of partnership distributions and his or her allocable
share of taxable losses and deductions (including his or her share of the tax
loss resulting from
-77-
<PAGE>
the Financing, as discussed below, and his or her share of certain expenditures
which are not deductible in computing taxable income and which are not capital
expenditures, including certain expenses allocable to tax-exempt interest).
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE FINANCING
As described in detail in "The Transaction Proposals--The Merger Proposal--
The Financing," the redemption of the BAC Holders' interests in the Funds
through the Mergers will be financed by the transfer of the Funds' portfolio of
Mortgage Revenue Bonds to the Trusts and the receipt of cash in connection with
the sale of interests in the Trusts in the amount of approximately $228 million.
The Trusts will be treated as partnerships for federal income tax purposes. The
Funds' aggregate tax basis in such Mortgage Revenue Bonds is currently
approximately $240 million and the aggregate tax basis in the working capital
loan is currently approximately $3 million. It is expected that the transfer of
the Mortgage Revenue Bonds to the Trusts and the sale of interests in the Trusts
will result in the Funds recognizing a substantial tax loss in an amount
currently estimated to aggregate approximately $15 million. The Funds believe
that this tax loss will constitute a long term capital loss and that such loss
will be allocable, pursuant to the Funds' Limited Partnership Agreements and
relevant provisions of the Code and Regulations dealing with the allocation of
partnership income and losses, to the BAC Holders rather than to CAPREIT and its
affiliates which will acquire limited partnership interests in the Funds
immediately prior to or concurrently with the consummation of the Mergers. The
portion of such long term capital loss allocated to a BAC Holder will reduce
such BAC Holder's tax basis in his or her BACs for the purpose of determining
gain or loss on the receipt of cash in the Merger in redemption of his or her
BACs. Such long term capital gain should be treated by the BAC Holder in the
manner described above in "Certain Federal Income Tax Consequences of the
Mergers."
OVERALL FEDERAL INCOME TAX CONSEQUENCES TO BAC HOLDERS
The income tax treatment of the Mergers as a redemption and the concurrent
consummation of the Financing, which will result in a significant tax loss being
allocated to the BAC Holders will, generally, result in a BAC Holder recognizing
the same net gain or net loss for federal income tax purposes as he or she would
have recognized if he or she had sold his or her BACs for an amount of cash
equal to the Redemption Price. The allocation of a loss to a BAC Holder as a
result of the Financing will reduce a BAC Holder's tax basis in his or her BACs,
which will result in the BAC Holder recognizing a larger gain (or a smaller
loss) on the redemption by an equivalent amount. Accordingly, on an aggregate
basis, each BAC Holder's net gain or loss generally will be the same as such BAC
Holder would have recognized on a sale of his or her BACs for an amount of cash
equal to the Redemption Price, since each BAC Holder
would offset the loss allocated to his or her BACs as a result of the Financing
against the equivalent amount of additional gain recognized on the redemption of
such BACs, or, in the case of a BAC Holder who recognizes a loss on the
redemption, such BAC Holder would increase the loss recognized on the redemption
by the loss allocated to him or her as a result of the Financing. Therefore,
generally there will be no income tax benefit or detriment to a BAC Holder as a
result of the structure of the Mergers and Financing when compared to the income
tax consequences of
-78-
<PAGE>
that BAC Holder's direct sale of his or her BACs for an amount of cash equal to
the Redemption Price. However, for a BAC Holder who acquired BACs within 12
months of the Effective Date, such BAC Holder's overall tax liability resulting
from the Mergers and the Financing may be higher than if such BAC Holder had
sold his or her BACs for cash in an amount equal to the Redemption Price if such
BAC Holder had net long-term capital gains in the year of the Merger from other,
unrelated transactions and had taxable gain on the redemption. The long-term
loss allocable on the Financing would offset the unrelated long-term gain,
resulting in such BAC Holder paying tax on short-term rather than long-term
capital gain.
BAC HOLDERS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE
SPECIFIC TAX CONSEQUENCES TO THEM RESULTING FROM THE TRANSACTION, INCLUDING
THECONSEQUENCES UNDER FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS.
CERTAIN TAX MATTERS RELATING TO TAX-EXEMPT BONDS
In 1991, the U.S. Supreme Court decided Cottage Savings Association v.
------------------------------
Commissioner, which may affect then-existing authority addressing the
- ------------
modification of debt instruments. In response to this decision, on June 26,
1996, the IRS issued Final Regulations Section 1.1001-3 which specifically
address the tax consequences of modifications of debt instruments. Among other
things, these regulations provide that certain modifications of the current
interest payments or maturity date of a debt instrument will be treated as a
taxable exchange of the original instrument for the modified debt instrument. As
a result, certain future modifications of the mortgage loans which secure the
Mortgage Revenue Bonds could be treated as a deemed reissuance of the Mortgage
Revenue Bonds for federal income tax purposes. Any reissuance without the
cooperation of the Mortgage Revenue Bond issuers would result in the loss of the
tax-exempt status of the Mortgage Revenue Bonds. Such issuers might cooperate
and consent to the reissuance; however, there can be no assurance that such
issuers would do so or would not impose additional requirements that could have
an adverse impact on the Mortgage Revenue Bonds. A reissuance with issuer
consent could result in a write-off of most or all accrued and unpaid interest
and changes to the contingent interest feature of the existing mortgage loans.
Final Regulations Section 1.1001-3 will become effective only with respect
to modifications made on or after September 24, 1996. It is unclear at this time
what effect the Cottage Savings decision may have on that have already been made
to mortgage loans which secure the Mortgage Revenue Bonds or on modifications
that might be made prior to September 24, 1996. The General Partners believe
that the modifications which already have been made were consistent with the
relevant tax authority which existed at the time of those modifications and have
not jeopardized the tax-exempt status of the Mortgage Revenue Bonds.However,
there can be no assurance as to the tax-exempt status of the Mortgage Revenue
Bonds at present. The consummation of the Mergers will have no effect on past
modifications or failures to modify Mortgage Revenue Bonds. The effect of any
determination made after the Mergers of loss of tax-exempt status on account of
actions taken prior to consummation of the Mergers will not be eliminated or in
any way affected by the Mergers.
-79-
<PAGE>
MARKET PRICE DATA FOR FUND I-II
On July 1, 1993, Fund I-II GP listed the BACs on the AMEX with a trading
symbol of CRA for Series I and CRB for Series II. As of June 30, 1996, there
were 2,280,000 and 3,238,760 BACs issued and outstanding for Series I and Series
II, respectively. The following table sets forth the high and low closing sales
price and the distributions per BAC for Series I and Series II during the
periods indicated:
//SERIES I
- ----------
<TABLE>
<CAPTION>
Return of
Capital on a
Sales Price Distribution GAAP Basis
--------------------------
1996 Quarter Ended High Low per BAC per BAC
------------ ------------ --------------------- --------------------
<S> <C> <C> <C> <C>
March 31 $13 5/8 $12 7/8 $0.2825 $0.00
June 30 14 13 1/8 0.2825 0.04
September 30
(through ___________)
</TABLE>
//
- --
<TABLE>
<CAPTION>
Return of
Capital on a
Sales Price Distribution GAAP Basis
--------------------------
1995 Quarter Ended High Low per BAC per BAC
----------- ------------ -------------------- --------------------
<S> <C> <C> <C> <C>
March 31 $12 3/8 $ 10 $ 0.27 $0.00
June 30 12 3/8 11 1/2 0.27 0.00
September 30 13 1/8 11 1/4 0.27 0.00
December 31 13 1/2 12 5/8 0.27 0.00
-------
$ 1.08 0.00
=======
</TABLE>
<TABLE>
<CAPTION>
Return of
Capital on a
Sales Price Distribution GAAP Basis
--------------------------
1994 Quarter Ended High Low per BAC per BAC
----------- ------------ ------------------- --------------------
<S> <C> <C> <C> <C>
March 31 $12 3/4 $11 3/8 $ 0.25 $0.25
June 30 12 1/2 11 1/4 0.25 0.00
September 30 12 10 7/8 0.25 0.00
December 31 11 1/4 9 3/8 0.25 0.00
-------
$ 1.00 0.92
=======
</TABLE>
-80-
<PAGE>
<TABLE>
<CAPTION>
Return of
Capital on a
Sales Price Distribution GAAP Basis
--------------------------
1993 Quarter Ended High Low per BAC per BAC
----------- ------------ ------------------- --------------------
<S> <C> <C> <C> <C>
March 31 $ N/A $ N/A $ 0.25 $ 0.22
June 30 N/A N/A 0.25 0.22
September 30 13 1/4 11 0.25 0.25
December 31 11 1/4 11 5/8 0.25 0.09
-------
$ 1.00 0.80
=======
</TABLE>
//
- --
SERIES II//
- -----------
<TABLE>
<CAPTION>
Return of
Capital on a
Sales Price Distribution GAAP Basis
--------------------------
1996 Quarter Ended High Low per BAC per BAC
----------- ------------ ------------------- --------------------
<S> <C> <C> <C> <C>
March 31 $13 3/8 $12 1/4 $ 0.29 $ 0.00
June 30 13 1/2 13 0.29 0.03
September 30
(through ___________)
</TABLE>
<TABLE>
<CAPTION>
Return of
Capital on a
Sales Price Distribution GAAP Basis
--------------------------
1995 Quarter Ended High Low per BAC per BAC
----------- ------------ ------------------- --------------------
<S> <C> <C> <C> <C>
March 31 $11 3/8 $ 9 3/4 $ 0.27 $ 0.00
June 30 11 1/2 11 0.27 0.00
September 30 13 10 7/8 0.27 0.00
December 31 12 7/8 12 1/8 0.27 0.00
-------
$ 1.08 0.00
=======
</TABLE>
<TABLE>
<CAPTION>
Return of
Capital on a
Sales Price Distribution GAAP Basis
--------------------------
1994 Quarter Ended High Low per BAC per BAC
----------- ------------ ------------------- --------------------
<S> <C> <C> <C> <C>
March 31 $12 3/8 $11 3/8 $ 0.25 $ 0.25
June 30 12 1/8 11 0.25 0.00
September 30 11 1/2 10 0.25 0.00
December 31 10 3/8 9 1/8 0.25 0.00
-------
$ 1.00 1.00
=======
</TABLE>
-81-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Return of
Capital on a
Sales Price Distribution GAAP Basis
--------------------------
1993 Quarter Ended High Low per BAC per BAC
----------- ------------ ------------------- --------------------
March 31 $ N/A $ N/A $ 0.25 $ 0.20
June 30 12 1/8 N/A 0.25 0.05
September 30 12 3/2 9 1/2 0.25 0.25
December 31 12 5/8 10 3/8 0.25 0.00
--------
$ 1.00 0.50
========
</TABLE>
On September 8, 1995, the last full trading day prior to the public
announcement of the execution of each of the Merger Agreements, the closing
price per BAC as reported on the AMEX Composite Tape was $11.75 and $10.875,
respectively. On January 31, 1996, the last trading day prior to the public
announcement of the increase in the Redemption Price, the closing price per BAC
as reported on the AMEX Composite Tape was $12.875 and $12.625, respectively.
On May 22, 1996, the last trading day prior to the public announcement of the
revised terms of the Merger Agreements providing for the elimination of the
downward adjustment and an increase in the aggregate amount of the upward
adjustment in determining the Redemption Price, the closing price per BAC as
reported on the AMEX Composite Tape was $13.375 and $13.25, respectively. On
August __, 1996, the last trading day prior to the public announcement of the
additional increase in the Redemption Price, the closing price per BAC as
reported on the AMEX Composite Tape was $____ and $____, respectively. On
_________ ___, 1996, the day prior to the date of this Proxy Statement, the
closing per BAC as reported on the AMEX Composite Tape was $___________ and
$_____________, respectively.
Fund I-II is a partnership and therefore the distributions paid to BAC
Holders are not taxable. However, each year Fund I-II does report tax-exempt
interest and any portfolio income to BAC Holders on IRS Form 1065, Schedule K-1.
For the years ended December 31, 1995, 1994, and 1993, Fund I-II, Series I
reported tax-exempt interest income on a per BAC basis of $1.24, $1.15 and
$1.03. Fund I-II, Series II reported tax-exempt income on a per BAC basis of
$1.28, $1.14 and $1.03 for the years ended December 31, 1995, 1994 and 1993,
respectively. On a per BAC basis, neither series reported any portfolio income
for the years ended December 31, 1995, 1994 and 1993.
MARKET PRICE DATA FOR FUND IIIMARKET PRICE DATA FOR FUND III
On July 1, 1993, Fund III GP listed the BACs on the AMEX with a trading
symbol of CRL. As of June 30, 1996, 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:
-82-
<PAGE>
<TABLE>
<CAPTION>
Return of
Capital on a
Sales Price Distribution GAAP Basis
--------------------------
1996 Quarter Ended High Low per BAC per BAC
----------- ------------ ------------------- --------------------
<S> <C> <C> <C> <C>
March 31 $14 3/8 $13 3/8 $ 0.30 $ 0.00
June 30 14 1/2 13 5/8 0.30 0.00
September 30
(through -----------)
</TABLE>
<TABLE>
<CAPTION>
Return of
Capital on a
Sales Price Distribution GAAP Basis
--------------------------
1995 Quarter Ended High Low per BAC per BAC
----------- ------------ ------------------- --------------------
<S> <C> <C> <C> <C>
March 31 $12 2/8 $10 1/4 $ 0.30 $ 0.00
June 30 12 3/4 11 3/4 0.30 0.00
September 30 14 11 5/8 0.30 0.00
December 31 13 3/4 13 1/8 0.30 0.00
-------
$ 1.20 0.00
=======
</TABLE>
<TABLE>
<CAPTION>
Return of
Capital on a
Sales Price Distribution GAAP Basis
--------------------------
1994 Quarter Ended High Low per BAC per BAC
----------- ------------ ------------------- --------------------
<S> <C> <C> <C> <C>
March 31 $13 3/8 $11 1/4 $ 0.40 $ 0.40
June 30 12 3/4 11 3/4 0.41 0.10
September 30 12 3/8 10 5/8 0.41 0.13
December 31 10 7/8 9 1/4 0.41 0.03
-------
$ 1.63 1.63
=======
</TABLE>
<TABLE>
<CAPTION>
Return of
Capital on a
Sales Price Distribution GAAP Basis
--------------------------
1995 Quarter Ended High Low per BAC per BAC
----------- ------------ ------------------- --------------------
<S> <C> <C> <C> <C>
March 31 N/A N/A $ 0.40 $ 0.32
June 30 N/A N/A 0.41 0.30
September 30 $15 $11 1/2 0.41 0.29
December 31 13 1/2 11 3/8 0.41 0.23
-------
$ 1.63 1.14
=======
</TABLE>
On September 8, 1995, the last full trading day prior to the public
announcement of the execution of each of the Merger Agreements, the closing
price per BAC as reported on the AMEX Composite Tape was $12.00. On January 31,
1996, the last trading day prior to the public announcement of the increase in
the Redemption Price, the closing price per BAC as reported on the AMEX
Composite Tape was $13.375. On May 22, 1996, the last trading day prior to the
public announcement of the revised terms of the Merger Agreements providing for
the elimination of the downward adjustment and an increase in the aggregate
amount of the upward adjustment in determining the Redemption Price, the closing
price per BAC as reported on the AMEX Composite Tape was $13.875. On August __,
1996, the last trading day prior to the public announcement of the additional
increase in the Redemption Price, the closing price
-83-
<PAGE>
per BAC as reported on the AMEX Composite Tape was $____. On _________ ___,
1996, the day prior to the date of this Proxy Statement, the closing price per
BAC as reported on the AMEX Composite Tape was $___________.
Fund III is a partnership and therefore the distributions paid to the BAC
Holders are not taxable. However, each year Fund III does report tax-exempt
interest and portfolio income to BAC Holders on IRS Form 1065, Schedule K-1. For
the years ended December 31, 1995, 1994 and 1993, Fund III reported on a per BAC
basis tax-exempt income of $1.29, $1.28 and $1.30, respectively, and portfolio
income of $.05 per BAC for each of the years ending December 31, 1995, 1994 and
1993.
SELECTED FINANCIAL DATA OF FUND I-II
The following selected financial and other data for the years ended
December 31, 1995, 1994, 1993, 1992, and 1991 are derived from the audited
financial statement of Fund I-II. The remaining selected financial and other
data are derived from the unaudited financial statements of Fund I-II. In the
opinion of Fund I-II GP, the data for the six months ended June 30, 1996 and
1995 reflect all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation. The data should be read in conjunction with the other
financial information included elsewhere herein.
-84-
<PAGE>
//SERIES I
==========
<TABLE>
<CAPTION>
For the six months ended
June 30, For the years ended December 31,
------------------------------ --------------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest from mortgage
revenue bonds $ 1,577,436 $ 1,451,754 $ 3,103,783 $ 2,829,665 $ 128,000 $ 157,288 $ --
Net rental income (1) -- -- 512,569 326,545 595,498
Other expenses (301,824) (78,5663) (291,067) (170,934) (189,188) (200,956) (369,287)
Valuation adjustment on
investment in real estate
(1)(2) -- -- -- -- -- -- (405,071)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Income before cumulative
effect of accounting
change $ 1,275,612 $ 1,373,191 $ 2,812,716 $ 2,658,731 $ 451,381 $ 282,877 $ (178,860)
Cumulative effect of
change in accounting for
mortgage revenue bonds (1) -- -- -- (2,475,448) -- -- --
------------ ------------ ------------ ------------ ------------ ------------ ------------
Net income (loss) $ 1,275,612 $ 1,373,191 $ 2,812,716 $ 183,283 $ 451,381 $ 282,877 $ (178,860)
============ ============ ============ ============ ============ ============ ============
Net income (loss)
allocated to BAC Holders
(98.99%) $ 1,262,728 $ 1,359,322 $ 2,784,308 $ 181,432 $ 446,822 $ 280,020 $ (177,054)
============ ============ ============ ============ ============ ============ ============
Net income (loss) per BAC
outstanding $ 0.55 $ 0.60 $ 1.22 $ 0.08 $ 0.20 $ 0.12 $ (0.08)
============ ============ ============ ============ ============ ============ ============
Cumulative effect of
change in accounting for
mortgage revenue bonds
per BAC outstanding $ -- $ -- $ -- $ (1.07) $ -- $ -- $ --
============ ============ ============ ============ ============ ============ ============
Total cash distribution
per BAC outstanding $ 0.565 $ 0.54 $ 1.08 $ 1.00 $ 1.00 $ 1.16 $ 1.37
============ ============ ============ ============ ============ ============ ============
Number of BACs outstanding 2,280,000 2,280,000 2,280,000 2,280,000 2,280,000 2,280,000 2,280,000
============ ============ ============ ============ ============ ============ ============
Investment in mortgage
revenue bonds (1)(2) $30,740,285 $30,740,285 $30,740,285 $30,740,285 $ 1,600,000 $ 1,600,000 $ --
============ ============ ============ ============ ============ ============ ============
Investment in real estate,
before accumulated
depreciation (1) $ -- $ -- $ -- $ -- $37,721,666 $37,721,666 $37,721,666
============ ============ ============ ============ ============ ============ ============
</TABLE>
-85-
<PAGE>
<TABLE>
<CAPTION>
For the six months ended
June 30, For the years ended December 31,
------------------------------ --------------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment in real estate,
before accumulated
depreciation, per BAC
outstanding $ -- $ -- $ -- $ -- $ 16.38 $ 16.38 $ 16.38
============ ============ ============ ============ ============ ============ ============
Asset held for sale (2) $ -- $ -- $ -- $ -- $ -- $ -- $ 2,050,000
============ ============ ============ ============ ============ ============ ============
Total assets $33,554,318 $33,078,330 $33,421,019 $32,882,518 $37,124,695 $38,826,296 $40,943,991
============ ============ ============ ============ ============ ============ ============
Total assets per BAC
outstanding $ 14.57 $ 14.36 $ 14.51 $ 14.28 $ 16.12 $ 16.86 $ 17.78
============ ============ ============ ============ ============ ============ ============
Net assets $31,953,112 $31,783,081 $31,978,844 $31,653,652 $33,773,632 $35,625,514 $38,011,429
============ ============ ============ ============ ============ ============ ============
Net assets per BAC
outstanding $ 13.87 $ 13.80 $ 13.88 $ 13.74 $ 14.66 $ 15.47 $ 16.50
============ ============ ============ ============ ============ ============ ============
</TABLE>
//
==
-86-
<PAGE>
//SERIES II
<TABLE>
<CAPTION>
For the six months ended
June 30, For the years ended December 31,
------------------------------ --------------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest from mortgage
revenue bonds $ 2,302,033 $ 2,097,833 $ 4,276,936 $ 3,824,910 $ -- $ -- $ --
Net rental income (1) -- -- -- -- 1,511,870 428,325 737,795
Other expenses (285,111) (70,905) (292,014) (170,583) (281,593) (127,970) (186,200)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Income before
extraordinary item and
cumulative effect of
accounting change $ 2,016,922 $ 2,026,928 $ 3,984,922 $ 3,654,327 $ 1,230,277 $ 300,355 $ 551,595
Extraordinary gain (3) -- -- -- -- 416,432 -- --
Cumulative effect of
change in accounting for
mortgage revenue bonds (1) -- -- -- (4,600,720) -- -- --
------------ ------------ ------------ ------------ ------------ ------------ ------------
Net income (loss) $ 2,016,922 $ 2,026,928 $ 3,984,922 $ (946,393) $ 1,646,709 $ 300,355 $ 551,595
============ ============ ============ ============ ============ ============ ============
Net income (loss)
allocated to BAC Holders
(98.99%) $ 1,996,551 $ 2,006,456 $ 3,944,674 $ (936,834) $ 1,630,077 $ 297,321 $ 546,024
============ ============ ============ ============ ============ ============ ============
Net income (loss) per BAC
outstanding $ 0.62 $ 0.62 $ 1.22 $ (0.29) $ 0.50 $ 0.09 $ 0.17
============ ============ ============ ============ ============ ============ ============
Cumulative effect of
change in accounting
for mortgage revenue
bonds per BAC outstanding $ -- $ -- $ -- $ (1.41) $ -- $ -- $ --
============ ============ ============ ============ ============ ============ ============
Total cash distribution
per BAC outstanding $ 0.58 $ 0.54 $ 1.08 $ 1.00 $ 1.00 $ 1.00 $ 1.37
============ ============ ============ ============ ============ ============ ===========
Number of BACs outstanding 3,238,760 3,238,760 3,238,760 3,238,760 3,238,760 3,238,760 3,238,760
============ ============ ============ ============ ============ ============ ============
Investment in mortgage
revenue bonds (1) $43,793,252 $43,793,252 $43,793,252 $43,793,252 $ -- $ -- $ --
============ ============ ============ ============ ============ ============ ============
Investment in real estate,
before accumulated
depreciation (1) $ -- $ -- $ -- $ -- $56,382,005 $56,382,005 $56,382,005
============ ============ ============ ============ ============ ============ ============
</TABLE>
-87-
<PAGE>
<TABLE>
<CAPTION>
For the six months ended
June 30, For the years ended December 31,
------------------------------ --------------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment in real estate,
before accumulated
depreciation, per BAC
outstanding $ -- $ -- $ -- $ -- $ 17.23 $ 17.23 $ 17.23
============ ============ ============ ============ ============ ============ ============
Total assets $48,085,140 $47,407,323 $47,738,900 $47,031,996 $53,638,123 $55,477,180 $57,453,236
============ ============ ============ ============ ============ ============ ============
Total assets per BAC
outstanding $ 14.70 $ 14.49 $ 14.59 $ 14.37 $ 16.39 $ 16.96 $ 17.56
============ ============ ============ ============ ============ ============ ============
Net assets $45,867,265 $45,556,772 $45,747,989 $45,296,618 $49,514,816 $51,139,913 $54,111,366
============ ============ ============ ============ ============ ============ ============
Net assets per BAC
outstanding $ 14.02 $ 13.92 $ 13.98 $ 13.84 $ 15.13 $ 15.63 $ 16.54
============ ============ ============ ============ ============ ============ ============
</TABLE>
//
==
-88-
<PAGE>
(1) All properties collateralizing the Mortgage Revenue Bonds have been
transferred by foreclosure or deed in lieu of foreclosure to the Owner
Partnerships which assumed the existing indebtedness (Observatory II in
Series I was subsequently sold, as discussed below). As a result, through
December 31, 1993 Fund I-II accounted for these as investments in real
estate for financial statement purposes. Fund I-II recorded valuation
adjustments representing the lower of (a) the carrying value of the
Mortgage Revenue Bond 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 foreclosure (ISF) at the earlier of
transfer of the deed or ISF.
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115). This statement
requires that most investments in securities be classified into one of the
following investment categories based upon circumstances under which
securities might be sold: held to maturity, available for sale, and
trading. Generally, investments in securities for which an enterprise has
both the ability and the intent to hold to maturity should be accounted for
using the amortized cost method and all other securities must be recorded
at their fair values. Fund I-II implemented SFAS 115 in 1994 for its
marketable securities. Following such adoption, Fund I-II (as did others
in the industry) continued to account for its investments in Mortgage
Revenue Bonds, except Observatory II, as investments in real estate based
on consolidation of the Owner Partnerships in accordance with SEC rules.
In conjunction with the review of Fund I-II's 1995 financial statements by
the Securities and Exchange Commission Staff, Fund I-II agreed that it
would account for all of its investments in Mortgage Revenue Bonds as debt
securities under the provisions of SFAS 115 effective January 1, 1994, and
restate its 1995 and 1994 financial statements to reflect this change.
Accordingly, effective January 1, 1994, all investments in Mortgage Revenue
Bonds are classified and accounted for as held to maturity securities and
carried at amortized cost because of Fund I-II's ability and intent to hold
these investments to maturity. The effect of adopting SFAS 115 on net
income previously reported for the six months ended June 30, 1995 and the
years ended December 31, 1995 and 1994 is $792,315, $1,648,217 and
$(830,356), respectively for Series I, and $983,047, $2,189,007 and
$(2,321,946), respectively, for Series II. Income per BAC as previously
reported was $0.25, $0.51 and $0.44 for the six months ended June 30, 1995
and the years ended December 31, 1995 and 1994, respectively, for Series I,
and $0.32, $0.55 and $0.42, respectively, for Series II. Income (loss) per
BAC as previously reported has been revised to $0.60, $1.22 and $0.08 per
BAC for the six months ended June 30, 1995 and the years ended December 31,
1995 and 1994, respectively, for Series I and $0.62, $1.22 and $(0.29) per
BAC for the six months ended June 30, 1995 and the years ended December 31,
1995 and 1994, respectively, for Series II. The impact on partners' capital
of adopting SFAS 115 for 1995 and 1994 is $817,861 and $830,356,
respectively, for Series I, and $132,939 and $2,321,946, respectively, for
Series II.
(2) The Observatory II Mortgage Revenue Bond (Series I) was classified as an
asset held for sale as of December 31, 1991 pursuant to a signed letter of
intent from CRICO of Greenhaven, Inc., an Owner Partnership, to sell the
property underlying the mortgage loan which secured the bond to an
unrelated third party for $2,050,000, with Fund I-II providing tax-exempt
mortgage revenue bond financing for $1,600,000. The valuation adjustment
of $405,071 for the sale of the asset was recorded in the statement of
operations for 1991. Subsequent to the sale of the property, which occurred
on March 31, 1992, the $1,600,000 financing was classified as an investment
in Mortgage Revenue Bond.
(3) In the fourth quarter of 1992, Fund I-II was planning to take a deed-in-
lieu of foreclosure (which occurred in March 1993) on James Street Crossing
(Series II), therefore Fund I-II evaluated the liabilities of the property.
As such Fund I-II believed that the Owner Partnership was obligated for a
$416,000 liability to the former general partner of James Street Crossing.
This obligation was recorded at December 31, 1992. After the Owner
Partnership took possession of the property in the first quarter of 1993
through a deed-in-lieu of foreclosure and sorted through the liabilities
related to the real estate, Fund I-II concluded that the Owner Partnership
would not be required to assume this liability. Therefore it was treated
as a debt extinguishment under SFAS No. 4, "Reporting Gains and Losses for
Extinguishment of Debt."
-89-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF FUND I-II
BUSINESS
Fund I-II's Management's Discussion and Analysis of Financial Condition and
Results of Operations contains information that may be considered forward-
looking. This information contains a number of risks and uncertainties, as
discussed herein, that could cause actual results to differ materially.
Fund I-II was organized on August 1, 1986 under the Delaware Revised
Uniform Limited Partnership Act and will continue until December 31, 2016,
unless dissolved earlier in accordance with its Agreement of Limited
Partnership. Fund I-II was formed to acquire a portfolio of tax-exempt mortgage
revenue bonds issued by various state or local governments or their agencies or
authorities and collateralized by nonrecourse participating first mortgage loans
on multifamily residential developments (the Observatory II bond, as modified in
1992, no longer has a participating loan feature).
Fund I-II commenced a public offering of Beneficial Assignee Certificates
(BACs) representing assignment of limited partnership interests in October 1986
and completed the offering in October 1987. As provided in the original
offering, Fund I-II issued BACs in two series.
On July 1, 1993, the General Partner listed the BACs on the American Stock
Exchange (AMEX) with a trading symbol of CRA for Series I and CRB for Series II.
The General Partner believes that the benefits to the BAC Holders from listing
the BACs on AMEX include increased liquidity and reduced transaction costs.
However, a publicly traded partnership is treated as a corporation for income
tax purposes unless it meets certain exceptions. To qualify under these
exceptions, the General Partner annually invests in de minimis taxable
investments for both Series I and Series II. In 1995, 1994 and 1993, Series I
and Series II met the exceptions, and Fund I-II was not taxed as a corporation.
Fund I-II accounts for each Series of BACs separately as though it held a
separate and distinct pool of Mortgage Revenue Bonds secured by real estate and,
if applicable, certain balances in Fund I-II's interest reserves. Organization
and offering costs, Fund I-II's working capital reserves and certain general and
administrative expenses of Fund I-II's have been allocated, unless specifically
attributed to a Series, pro rata among the Series, based on the gross offering
proceeds raised by each Series (except for costs relating to the proposed
Merger, discussed below, which are allocated evenly between Series I and Series
II). Deposits to Fund I-II's interest reserves and subsequent distributions
from the interest reserves to BAC Holders are accounted for by Mortgage Revenue
Bond investment by Series. The amounts and distributions of cash flow, residual
proceeds, liquidation proceeds, profits and losses and all other priorities and
allocations are separately determined for each Series of BACs.
Fund I-II's objectives have been to: (1) provide semi-annual cash
distributions that will be exempt from regular federal income tax; (2) provide
additional cash distributions that will be
-90-
<PAGE>
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 repayment on the redemption or
remarketing of the applicable mortgage revenue bond or (ii) the appraised value
of the mortgaged properties upon repayment of the mortgage loans or remarketing
of the mortgage revenue bonds; and (3) preserve and protect Fund I-II's capital.
Title to all of the properties securing the loans (except Observatory II in
Series I, as discussed herein) has been taken by the Owner Partnerships from the
original, unaffiliated borrowers through foreclosure or deed in lieu of
foreclosure, with assumption of the existing indebtedness, which resulted in
significant valuation adjustments to the carrying values of these investments,
primarily during 1990. Although Fund I-II will use diligent efforts to recover
its investment, it is probable that the full amount of BAC Holder invested
capital, based on the original offering price of $25 per BAC, 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, in the
absence of the proposed Merger it may be advisable, with BAC Holder consent, to
extend the maturity dates of the mortgage loans, which currently mature from
1998-1999. Pursuant to recently issued IRS regulations, Fund I-II can only
extend the mortgage loans for up to 5 years without triggering a deemed
reissuance of the mortgage revenue bonds for federal income tax purposes. An
extension of the mortgage loan maturity dates beyond five years would be a
deemed reissuance, and would result in the loss of the tax-exempt status of the
Mortgage Revenue Bonds.
Base interest income on the mortgage loans is funded from property
operations and reserves, if any, established at the time of closing on the
acquisition of the Mortgage Revenue Bonds. Since base interest could not be
paid in full, Fund I-II GP evaluated various courses of action, including sale,
recapitalization, loan modification, deed in lieu of foreclosure, or
foreclosure.
Fund I-II GP pursued the option of conversion of certain Minnesota
properties to cooperatives owned by the existing residents of the properties in
order to qualify for favorable homestead property tax treatment. Fund I-II GP
submitted a ruling request for the first such proposed transaction in 1991 to
the IRS to ensure that the proposed transaction would not affect the tax-exempt
nature of the Mortgage Revenue Bond interest. The IRS did not respond to this
ruling request and the ruling request was withdrawn in February 1996, and Fund
I-II GP has abandoned pursuit of this option.
A description of the Mortgage Revenue Bonds held by Fund I-II is as
follows:
-91-
<PAGE>
Series I
<TABLE>
<CAPTION>
Loan Loan Carrying
Mortgaged Property No. of Origination Face Amount Maturity Value
Name and Location Rental Units Date (000's) Date (000's)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OBSERVATORY II
BURNSVILLE, MN 75 3/31/92 $ 1,600 2/11/98 $ 1,600
ROYAL OAKS
EAGAN, MN 231 12/05/86 12,580 2/22/98 8,019
TRAILWAY POND I
BURNSVILLE, MN 75 8/07/87 4,675 5/01/99 2,717
VALLEY CREEK
WOODBURY, MN 225 3/23/87 12,815 2/01/99 9,487
WHITE BEAR WOODS
WHITE BEAR LAKE, MN 225 3/31/87 12,485 1/31/99 8,917
-------------------------------------------------------------------------
831 $44,155 $30,740
===== ======= =======
</TABLE>
Series II
<TABLE>
<CAPTION>
Loan Loan Carrying
Mortgaged Property No. of Origination Face Amount Maturity Value
Name and Location Rental Units Date (000's) Date (000's)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ETHAN'S RIDGE AND
ETHAN'S GLEN IIB 5/29/87 $15,500 4/01/98 $12,612
KANSAS CITY, MO 364 10/26/88 2,300 12/15/99
FOUNTAIN PLACE I
EDEN PRAIRIE, MN 332 12/23/87 20,900 7/01/99 13,643
JAMES STREET CROSSING
KENT, WA 300 3/31/88 13,878 12/31/99 11,703
TRAILWAY POND II
BURNSVILLE, MN 165 8/07/87 10,030 5/01/99 5,835
------------------------------------------------------------------------------
1,161 $62,608 $43,793
===== ======= =======
</TABLE>
Prior to January 1, 1994, investments in Mortgage Revenue Bonds were
accounted for as real estate on the earlier of the date of foreclosure, deed in
lieu of foreclosure, or in-substance foreclosure, and were recorded as real
estate at the lower of (a) the carrying value of the Mortgage Revenue Bonds 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 were the amounts the owners of the properties could reasonably expect
to receive in an as-is sale between a willing buyer and a willing seller. Fund
I-II GP determined the estimated fair values of the properties acquired based
upon information obtained from independent real estate appraisers and/or its own
market analyses. To the extent fair value was less than the carrying value,
direct write-downs were recorded to establish a new cost basis for these assets.
Subsequent to recording its investments as real estate, Fund I-II evaluated
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 (the "AICPA") Statement of Position 92-3
-92-
<PAGE>
"Accounting for Foreclosed Assets". Fund I-II's net realizable value
determination took into account Fund I-II's intention to hold these properties
for the long term, if necessary, to recover its recorded investment. If Fund I-
II's determined that its estimated net realizable value was less than the
recorded investment in the property, an additional valuation adjustment was
recorded if the decline in value was considered permanent.
In May 1993, the Financial Accounting Standards Board (the "FASB") issued
Statement on Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115). This statement requires
that most investments in securities be classified into one of the following
investment categories based upon circumstances under which securities might be
sold: held to maturity, available for sale, and trading. Generally, investments
in securities for which an enterprise has both the ability and the intent to
hold to maturity should be accounted for using the amortized cost method and all
other securities must be recorded at their fair values. Fund I-II implemented
SFAS 115 in 1994 for its marketable securities. Following such adoption, Fund I-
II (as did others in the industry) continued to account for its investments in
Mortgage Revenue Bonds, except Observatory II, as investments in real estate
based on consolidation of the Owner Partnerships in accordance with SEC rules.
In conjunction with the review of Fund I-II's 1995 financial statements by
the Securities and Exchange Commission Staff, Fund I-II agreed that it would
account for all of its investments in Mortgage Revenue Bonds as debt securities
under the provisions of SFAS 115 effective January 1, 1994, and restate its 1995
and 1994 financial statements to reflect this change. Accordingly, effective
January 1, 1994, all investments in Mortgage Revenue Bonds are classified and
accounted for as held to maturity securities and carried at amortized cost
because of Fund I-II's ability and intent to hold these investments to maturity.
The effect of adopting SFAS 115 on net income previously reported for the six
months ended June 30, 1995 and the years ended December 31, 1995 and 1994 is
$792,315, $1,648,217 and $(830,356), respectively for Series I and $983,047,
$2,189,007 and $(2,321,946), respectively, for Series II. Income per BAC as
previously reported was $0.25, $0.51 and $0.44 for the six months ended June 30,
1995 and the years ended December 31, 1995 and 1994, respectively, for Series I
and $0.32, $0.55 and $0.42 for 1995 and 1994, respectively, for Series II.
Income (loss) per BAC as previously reported has been revised to $0.62, $1.22
and $0.08 per BAC for the six months ended June 30, 1995 and the years ended
December 31, 1995 and 1994, respectively, for Series I and $0.62, $1.22 and
$(0.29) per BAC for the six months ended June 30, 1995 and the years ended
December 31, 1995 and 1994, respectively, for Series II. The impact on partners'
capital of adopting SFAS 115 for 1995 and 1994 is $817,861 and $830,356,
respectively, for Series I and $132,939 and $2,321,946, respectively, for Series
II.
As discussed above, Fund I-II accounted for its investment in Mortgage
Revenue Bonds as real estate until January 1, 1994, when the financial
statements were restated to reflect implementation of SFAS 115. Net realizable
value, prior to implementation of SFAS 115, was based on holding the assets for
long-term income production - as such net realizable value only considered the
recovery of Fund I-II's investments over time based on the properties' ability
to generate sufficient cash flow to recover Fund I-II's investment over the long
term. Based on the SEC's requirement that Fund I-II account for its Mortgage
Revenue Bonds as debt securities, the implementation of SFAS 115 has a different
accounting framework for evaluating realizability. In
-93-
<PAGE>
accordance with SFAS 115's provisions for held to maturity securities, Fund I-II
evaluates the fair value of its Mortgage Revenue Bonds to determine if
impairment exists. If a decline in fair value is determined to be other-than-
temporary, the security is written down to its fair value. Since most of these
Mortgage Revenue Bonds are in default, Fund I-II has concluded that permanent
impairment has occurred. As such, the amount of permanent impairment is measured
by Fund I-II's estimate of the Mortgage Revenue Bonds' fair value at January 1,
1994. Fund I-II has measured fair value as discussed below. This effect of
adopting SFAS 115 is reflected as a cumulative effect of change in accounting
for Mortgage Revenue Bonds in the statements of operations. On an ongoing
basis, Fund I-II evaluates permanent impairment; however, subsequent to January
1, 1994, Fund I-II did not recognize any impairment losses.
Since all of the Mortgage Revenue Bonds except Observatory II are in
default, base interest and contingent interest on the Mortgage Revenue Bonds is
recognized as revenue when collected.
Series I
As of February 12, 1987, 2,280,000 BACs had been sold, representing capital
contributions of $57,000,000 and the completion of the offering of Series I.
The five original Series I mortgage loans securing the Mortgage Revenue
Bonds, with a current aggregate principal amount of $44,155,000, went into
default, resulting in title transfer by actual foreclosures or deeds in lieu of
foreclosure to Owner Partnerships which assumed the existing indebtedness. In
connection with the transfers of properties to Owner Partnerships, Fund I-II
obtained an opinion from its former independent accounting firm in July of 1991
that the reduction in pay rate and compounding of unpaid base interest at the
original base interest rate would not cause a reissuance of the bonds under
Section 103 of the Code (which would cause the bonds to lose their tax-exempt
status). Fund I-II also obtained opinions from certain bond counsel that
transfers of the properties to Owner Partnerships would not cause Fund I-II to
become a substantial user of the projects or a related party to a substantial
user pursuant to Section 103 of the Code (which also could have caused the bonds
to lose their tax-exempt status). The bond counsel opinions were obtained in
connection with the Observatory II, Royal Oaks, Trailway Pond and Valley Creek
transfers.
In conjunction with the transfer of the Royal Oaks deed to an Owner
Partnership, the Royal Oaks mortgage revenue bond was modified. Fund I-II, based
on information and advice from outside counsel, believes that the modification
does not adversely affect the tax-exempt nature of the Royal Oaks bond interest.
The modification complied with IRS guidelines in effect at that time. The IRS
has since issued Final Regulations Section 1.1001-3, which applies only to
modifications made on or after September 24, 1996. Fund I-II believes that the
modification to the Royal Oaks Mortgage Revenue bond was consistent with the
relevant tax authority which existed at the time of the modification and has,
therefore, not jeopardized the tax-exempt status of the Royal Oaks Mortgage
Revenue Bond. However, there can be no assurance as to the tax-exempt status of
the Royal Oaks Mortgage Revenue Bond at present.
-94-
<PAGE>
Series II
As of October 29, 1987, 3,238,760 BACs had been sold, representing capital
contributions of $80,969,000 and the completion of the offering of Series II.
The five original Series II mortgage loans securing the Mortgage Revenue
Bonds with an aggregate principal amount of $62,608,001 went into default,
resulting in deeds in lieu of foreclosure to Ownership Partnerships which
assumed the existing indebtedness. In connection with the transfers of
properties to Owner Partnerships, Fund I-II obtained an opinion from its former
independent accounting firm in July of 1991 that the reduction in pay rate and
compounding of unpaid base interest at the original base interest rate would not
cause a reissuance of the bonds under Section 103 of the Code (which would cause
the bonds to lose their tax-exempt status). Fund I-II also obtained opinions
from certain bond counsel that certain transfers of the properties to Owner
Partnerships would not cause Fund I-II to become a substantial user of the
projects or a related party to a substantial user 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 Ridge and
Ethan's Glen IIB, Fountain Place and Trailway Pond II transfers.
Series I and II
In April 1991, the U.S. Supreme Court decided a case, Cottage Savings
---------------
Association V. Commissioner ("Cottage Savings"), that could be interpreted to
- --------------------------- ---------------
impact then existing authority addressing the modification of debt instruments.
In response to this decision, on June 26, 1996, the IRS issued Final Regulations
Section 1.1001-3 which specifically address the tax consequences of
modifications of debt instruments. Among other things, these regulations
provide that certain modifications of the current interest payments or maturity
date of a debt instrument will be treated as a taxable exchange of the original
instrument for the modified debt instrument. As a result, certain future
modifications of the mortgage loans which secure the Mortgage Revenue Bonds
could be treated as a deemed reissuance of the Mortgage Revenue Bonds for
federal income tax purposes. Any reissuance without the cooperation of the
Mortgage Revenue Bond issuers would result in the loss of the tax-exempt status
of the Mortgage Revenue Bonds. Such issuers might cooperate and consent to the
reissuance; however, there can be no assurance that such issuers would do so or
would not impose additional requirements that would have an adverse impact on
the Mortgage Revenue Bonds. Even if issuer consent were obtained, all accrued
and unpaid base interest of the existing mortgage loans would have to be written
off. The write-off of accrued and unpaid base interest would not be recoverable
upon ultimate disposition or payoff of the Mortgage Revenue Bonds and would
instead accrue to the benefit of the Owner Partnerships to the extent realized.
Final Regulations Section 1.001-3 will become effective only with respect
to modifications made on or after September 24, 1996. It is unclear at this time
what effect the Cottage Savings decision may have on modifications that have
---------------
already been made to mortgage loans which secure the Mortgage Revenue Bonds.
Fund I-II GP believes that the modifications which have already been made were
consistent with the relevant tax authority which existed at the time of those
-95-
<PAGE>
modifications and have not jeopardized the tax-exempt status of the Mortgage
Revenue Bonds. However, there can be no assurance as to the tax-exempt status of
the Mortgage Revenue Bonds at present.
Fund I-II GP's ongoing strategy has been to continue holding the Mortgage
Revenue Bonds until the loan maturity dates. If the Merger proposal is approved,
the interests of the BAC Holders will be redeemed for cash. If the Merger
proposal is not approved, in order to maximize the overall yield, Fund I-II GP
may recommend, subject to satisfactory resolution of any issues relating to the
tax-exempt status of the Mortgage Revenue Bonds, for investor approval of the
extension of certain loan maturity dates and, if approved, arrange any necessary
related amendments to the pertinent Mortgage Revenue Bonds.
FINANCIAL CONDITION AND LIQUIDITY
The primary sources of Fund I-II's future cash flows are expected to be
from receipts of base interest on mortgage loans, which are dependent upon the
net operating income of the properties. Therefore, Fund I-II's investment in the
Mortgage Revenue Bonds is subject to the general risks inherent to the ownership
of real property. These risks include reduction in rental income due to an
inability to maintain occupancy levels, adverse changes in general economic
conditions, and adverse changes in local conditions. Fund I-II GP expects that
the properties transferred to Owner Partnerships will continue to generate
sufficient cash flow to pay all operating expenses, meet escrow deposit
requirements and pay some, but not all, of the base interest due to Fund I-II.
Fund I-II has no material commitments for capital expenditures. However, in the
event the Merger is terminated or abandoned under certain circumstances, Fund I-
II will be liable for certain fees and expenses, as discussed in this proxy
statement.
Series I
Series I expects to continue to make distributions to BAC Holders on a
semi-annual basis. The amended Merger Agreement stipulates that 1996
distributions cannot exceed $0.09417 per BAC per month. There are no other legal
restrictions on Series I's present or future ability to make cash distributions
other than as set forth in the amended Merger Agreement. However, property level
reserves are depleted and estimated cash flows from the properties' operations
are insufficient to pay full monthly base interest (except for Observatory II),
therefore, the distribution to BAC Holders may fluctuate from current levels.
Fund I-II GP seeks to optimize cash flow from the properties owned by Owner
Partnerships. Despite these efforts, the amounts paid to Fund I-II from the
borrowers 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 Series I, Fund I-II GP expects the 1996
distribution to approximate $1.13 per BAC, the maximum amount stipulated in the
amended Merger Agreement.
The following distributions were paid or accrued to Series I BAC Holders of
record during the six months ended June 30, 1996 and 1995, and the years ended
December 31, 1995, 1994 and 1993:
-96-
<PAGE>
//
<TABLE>
<CAPTION>
// 1996 1995 1994 1993
Distributions to Distributions to Distributions to Distributions to
BAC Holders BAC Holders BAC Holders BAC Holders
---------------------- ---------------------- ---------------------- ----------------------
Six-Month Period
Ended Total Per BAC Total Per BAC Total Per BAC Total Per BAC
- --------------------- ----------- -------- ----------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
June 30 $ 1,288,200 $ 0.5650 $ 1,231,200 $ 0.54 $ 1,140,000 $ 0.50 $ 1,140,000 $ 0.50
December 31 1,231,200 0.54 1,140,000 0.50 1,140,000 0.50
----------- -------- ----------- -------- ----------- --------
Total $ 2,462,400 $ 1.08 $ 2,280,000 $ 1.00 $ 2,280,000 $ 1.00
=========== ======== =========== ======== =========== ========
</TABLE>
//Distributions to Series I BAC Holders for the six months ended June 30, 1996
and 1995 and the years ended December 31, 1995, 1994 and 1993 were funded as
follows:
<TABLE>
<CAPTION>
// For the six
months ended
June 30
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Cash flow (1) $ 1,363,630 $ 1,368,306
Net deposits to working capital reserves (62,286) (124,544)
-------------- --------------
Total cash available for distribution $ 1,301,344 $ 1,243,762
============== ==============
Distribution to:
General Partner (1.01%) $ 13,144 $ 12,562
-------------- --------------
BAC Holders (98.99%) $ 1,288,200 $ 1,231,200
============== ==============
</TABLE>
//
<TABLE>
<CAPTION>
// For the years For the years For the years
ended ended ended
December 31, December 31, December 31,
--------------- --------------- ---------------
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flow (1) $ 2,850,265 $ 2,654,529 $ 2,382,906
Net deposits to working capital reserves (362,741) (351,266) (79,643)
--------------- --------------- ---------------
Total cash available for distribution $ 2,487,524 $ 2,303,263 $ 2,303,263
=============== =============== ===============
Distributions to:
General Partner (1.01%) $ 25,124 $ 23,263 $ 23,263
=============== =============== ===============
BAC Holders (98.99%) $ 2,462,400 $ 2,280,000 $ 2,280,000
=============== =============== ===============
</TABLE>
//(1) Defined in the Limited Partnership Agreement as (a) all revenues received
by Fund I-II during such period, plus (b) any amounts which the Fund I-II
GP releases from the Working Capital Reserve as being no longer necessary
to hold as part of the Working Capital Reserve, plus (c) any amounts
released to Fund I-II from the Interest Reserve Account with respect to a
mortgaged property after completion of construction of such
-97-
<PAGE>
mortgaged property, less (i) operating expenses of Fund I-II paid from
reserves during the period, including any expenses paid to the Fund I-II
GP, but not including such amounts paid from the Working Capital Reserve,
(ii) all cash payments made from Revenues during such period to discharge
Fund I-II's partnership indebtedness, and (iii) all amounts from revenues,
if any, added to the Working Capital Reserve during such period. Cash flow
as defined in the Limited Partnership Agreement is not to be construed as
an alternative to operating income in accordance with generally accepted
accounting principles ("GAAP") as an indication of the Fund I-II's
operating performance.
Although distributions are paid on a semi-annual basis, in July 1993, Fund
I-II began declaring distributions on a monthly basis as a result of listing the
BACs on AMEX. Fund I-II GP expects the distribution to Series I BAC Holders for
the six months ended December 31, 1996 to total approximately $0.565 per BAC
payable on February 28, 1997 or possibly earlier depending on the Merger closing
date, to Series I BAC Holders of record as of the last day in each month during
this period.
Fund I-II's working capital reserves are available for the payment of
ongoing costs of operating and administering Fund I-II's business, for
supplementing distributions to BAC Holders and for making working capital loans
to borrowers. Working capital reserves invested in marketable securities for
Series I were $1,346,956 and $1,284,670 as of June 30, 1996 and December 31,
1995, respectively. None of the distributions made to BAC Holders during the six
months ended June 30, 1996 or 1995 and the years ended December 31, 1995, 1994
and 1993 was funded from the working capital reserves. During the six months
ended June 30, 1996 and 1995 and the years ended December 31, 1995, 1994 and
1993 working capital reserves were increased by $62,286 and $124,544 and
$362,741, $351,266 and $79,643, respectively, from surplus operating cash.
As of June 30, 1996, Series I had cash and cash equivalents of $91,841,
unrestricted marketable securities of $1,353,070 and working capital reserves
invested in marketable securities of $1,346,956. Marketable securities consist
of tax-exempt municipal bonds which generally contain a seven-day put option
with established banks or brokerage houses. Fund I-II has classified its
investments in marketable securities into the available for sale category under
SFAS 115. Realized gains and losses on the sale of marketable securities were
determined on a specific identification basis. There were no net unrealized
holding gains or losses recognized during the six months ended June 30, 1996 or
1995 or the years ended December 31, 1995 and 1994 for Series as the cost for
the tax-exempt municipal bonds approximated market value throughout the
respective periods.
As of December 31, 1995, Series I had aggregate investments in marketable
securities with the following maturities:
<TABLE>
<CAPTION>
Amount Maturity
-------------- --------------------------
<S> <C>
$ 99,852 Within one year
100,000 Between one and five years
2,400,000 After ten years
---------
$ 2,599,852
==============
</TABLE>
-98-
<PAGE>
In December 1991, the FASB issued Statement of Financial Accounting
Standards No. 107 "Disclosures 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. Fund
I-II implemented SFAS 107 in 1995. Fund I-II has determined that the carrying
value of its cash and cash equivalents approximates fair value. The estimated
fair value of marketable securities and working capital 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 Mortgage Revenue Bonds is
based upon the redemption amount relating to the Mortgage Revenue Bonds under
the amended Merger Agreement.
The following table presents information on Series I's financial
instruments:
<TABLE>
<CAPTION>
Carrying Estimated Fair
Value at Value at
December 31, 1995 December 31, 1995
000's 000's
----------------- -----------------
<S> <C> <C>
Cash and cash equivalents $ 59 $ 59
Marketable securities 1,315 1,315
Working capital reserves invested in 1,285 1,285
marketable securities
Mortgage revenue bonds 30,740 30,248
</TABLE>
Fund I-II closely monitors its cash flow and liquidity position for Series
I in an effort to ensure that sufficient cash is available for operating
requirements and distributions to BAC Holders. Series I's net cash provided by
operating activities, which consists primarily of receipt of base interest on
mortgage loans, for the six months ended June 30, 1996 and the years ended
December 31, 1995 and 1994 was adequate to support operating, investing and
financing requirements and the declared distributions to BAC Holders and Fund I-
II GP. Cash and cash equivalents decreased in 1995 primarily as a result of
deposits to the working capital reserves. Fund I-II estimates that future cash
flows from receipt of base interest on mortgage loans, in the aggregate, will be
sufficient to pay operating expenses and make distributions to BAC Holders and
Fund I-II GP.
Series II
Series II expects to continue to make distributions to BAC Holders on a
semi-annual basis. The amended Merger Agreement stipulates that 1996
distributions cannot exceed $0.09667 per BAC per month. There are no other
legal restrictions on Series II's present or future ability to make cash
distributions other than as set forth in the amended Merger Agreement. However,
property level reserves are depleted and estimated cash flows from the
properties' operations are insufficient to pay full monthly base interest,
therefore, the distribution to BAC Holders may fluctuate from current levels.
Fund I-II GP seeks to optimize cash flow from the properties owned by Owner
Partnerships. Despite these efforts, the amounts paid to Fund I-II from the
borrowers 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 Series II, Fund I-II
-99-
<PAGE>
GP expects the 1996 distribution to approximate $1.16 per BAC, the maximum
amount stipulated in the amended Merger Agreement.
The following distributions were paid or accrued to Series II BAC Holders
of record during the six months ended June 30, 1996 and 1995 and the years ended
December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
1996 1995 1994 1993
Distributions to Distributions to Distributions to Distributions to
BAC Holders BAC Holders BAC Holders BAC Holders
---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
</TABLE>
<TABLE>
<CAPTION>
Six-Month Period
Ended Total Per BAC Total Per BAC Total Per BAC Total Per BAC
- --------------------- ----------- -------- ----------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
June 30 $ 1,878,480 $ 0.5800 $ 1,748,930 $ 0.54 $ 1,619,380 $ 0.50 $ 1,619,380 $ 0.50
December 31 1,748,932 0.54 1,619,380 0.50 $ 1,619,380 0.50
----------- -------- ----------- -------- ----------- --------
Total $ 3,497,862 $ 1.08 $ 3,238,760 $ 1.00 $ 3,238,760 $ 1.00
=========== ======== =========== ======== =========== ========
</TABLE>
Distributions to Series II BAC Holders for the six months ended June 30,
1996 and 1995 and years ended December 31, 1995, 1994 and 1993 were funded as
follows:
<TABLE>
<CAPTION>
\\ For the six months ended
June 30,
-------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Cash Flow (1) $ 1,873,928 $ 2,065,830
Net withdrawals from (deposits to) working capital reserves 23,718 (299,056)
-------------- --------------
Total cash available for distribution $ 1,897,646 $ 1,766,744
============== ==============
Distribution to:
General Partner (1.01%) $ 19,166 $ 17,844
============== ==============
BAC Holders (98.99%) $ 1,878,480 $ 1,748,930
============== ==============
</TABLE>
\\
-100-
<PAGE>
<TABLE>
<CAPTION>
For the years ended
December 31,
-----------------------------------------------------
1995 1994 1993
------------- ------------- ------------
<S> <C> <C> <C>
Cash flow (1) $ 4,194,190 $ 3,731,519 $ 3,310,726
Net deposits to working capital/interest reserves (660,639) (459,714) (38,920)
------------- ------------- ------------
Total cash available for distribution $ 3,533,551 $ 3,271,805 $ 3,271,806
============= ============= ============
Distributions to:
General Partner (1.01%) $ 35,689 $ 33,045 $ 33,046
============= ============= ============
BAC Holders (98.99%) $ 3,497,862 $ 3,238,760 $ 3,238,760
============= ============= ============
</TABLE>
(1) Defined in the Limited Partnership Agreement as (a) all revenues received
by the Fund I-II during such period, plus (b) any amounts which the Fund I-
II GP releases from the Working Capital Reserve as being no longer
necessary to hold as part of the Working Capital Reserve, plus (c) any
amounts released to Fund I-II from the Interest Reserve Account with
respect to a mortgaged property after completion of construction of such
mortgaged property, less (i) operating expenses of Fund I-II paid from
reserves during the period, including any expenses paid to Fund I-II GP,
but not including such amounts paid from the Working Capital Reserve, (ii)
all cash payments made from revenues during such period to discharge Fund
I-II's partnership indebtedness, and (iii) all amounts from revenues, if
any, added to the Working Capital Reserve during such period. Cash flow as
defined in the Limited Partnership Agreement is not to be construed as an
alternative to operating income in accordance with GAAP as an indication of
Fund I-II's operating performance.
Although distributions are paid on a semi-annual basis, in July 1993, Fund
I-II began declaring distributions on a monthly basis as a result of listing the
BACs on AMEX. Fund I-II GP expects the distribution to Series II BAC Holders
for the six months ending December 31, 1996 to total approximately $0.58 per
BAC, payable on February 28, 1997, or possibly earlier depending on the Merger
closing date, to Series II BAC Holders of record as of the last day in each
month during this period.
Working capital reserves for Series II were $2,283,667 and $2,307,385 as of
June 30, 1996 and December 31, 1995, respectively. Of the total distributions
made to BAC Holders during the six months ended June 30, 1996, $23,718 was
funded from the working capital reserves. None of the distributions to BAC
Holders during the six months ended June 30, 1995 and the years ended December
31, 1995, 1994 and 1993 was funded from working capital reserves. During the
six months ended June 30, 1996 and 1995 and the years ended December 31, 1995,
1994 and 1993 working capital reserves were increased by $0, $299,056, $660,639,
$459,714 and $38,920, respectively from surplus operating cash.
As of June 30, 1996, Series II had cash and cash equivalents of $70,264,
unrestricted marketable securities of $1,881,213, and working capital reserves
invested in marketable securities of $2,283,667. Marketable securities consist
of tax-exempt municipal bonds which generally contain a seven-day put option
with established banks or brokerage houses. Fund I-II has classified
-101-
<PAGE>
its investments in marketable securities into the available for sale category
under SFAS 115. Realized gains and losses on the sale of marketable securities
were determined on a specific identification basis. There were no net unrealized
holding gains or losses recognized during the six months ended June 30, 1996 or
1995 or the years ended December 31, 1995 and 1994 for Series II as the cost for
the tax-exempt Mortgage Revenue Bonds approximated market value throughout these
periods.
As of December 31, 1995, Series II had aggregate investments in marketable
securities with the following maturities:
<TABLE>
<CAPTION>
Amount Maturity
------------ --------------------------
<S> <C>
$ 17,379 Within one year
630,917 Between one and five years
200,000 Between five and ten years
2,571,370 After ten years
---------
$ 3,819,666
===========
</TABLE>
Fund I-II implemented SFAS 107 in 1995. Fund I-II has determined that the
=
carrying value of its cash and cash equivalents approximates fair value. The
estimated fair value of marketable securities and working capital 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 Mortgage
Revenue Bonds is based upon the redemption amount relating to the Mortgage
Revenue Bonds under the amended Merger Agreement.
The following table presents information on Series II's financial
instruments:
<TABLE>
<CAPTION>
Carrying Estimated Fair
Value at Value at
December 31, 1995 December 31, 1995
000's 000's
----------------- -----------------
<S> <C> <C>
Cash and cash equivalents $ 89 $ 89
Marketable securities 1,512 1,508
Working capital reserves invested in
marketable securities 2,307 2,301
Mortgage revenue bonds 43,793 42,251
</TABLE>
Fund I-II closely monitors its cash flow and liquidity position for Series
II in an effort to ensure that sufficient cash is available for operating
requirements and distributions to BAC Holders. Series II's net cash provided by
operating activities for the six months ended June 30, 1996, which consists
primarily of receipt of base interest on mortgage loans was supplemented by
withdrawals from the working capital reserves to support operating, investing
and financing requirements and the payment of declared distributions to BAC
Holders and Fund I-II GP. Series II's net cash provided by operating
activities, as described above, for the years ended December 31, 1995 and 1994
was adequate to support operating, investing and financing requirements and the
payment of declared distributions to BAC Holders and Fund I-II GP. Cash and
cash equivalents decreased in
-102-
<PAGE>
1995 primarily due to deposits to the working capital reserves. Fund I-II
estimates that future cash flows from receipt of base interest on mortgage
loans, in the aggregate, will be sufficient to pay operating expenses and make
distributions to BAC Holders and Fund I-II GP.
RESULTS OF OPERATIONS
Series I
Fund I-II's Series I net income for the six months ended June 30, 1996,
decreased approximately $98,000, or 7%, from the corresponding period in 1995
primarily due to merger-related expenses of approximately $234,000 incurred
during the six months ended June 30, 1996. Partially offsetting the decrease in
net income was an increase in interest from mortgage revenue bonds during the
six months ended June 30, 1996 of approximately $126,000, resulting principally
from an increase in rental rates at all of the underlying properties. There
were no material increases or decreases in Series I's remaining income or
expenses for the six months ended June 30, 1996.
Fund I-II's Series I net income for 1995 increased $2.6 million from 1994
primarily due to the cumulative effect of change in accounting for Mortgage
Revenue Bonds of $2.5 million in 1994, as discussed above. Contributing to the
increase in net income was an increase in interest from Mortgage Revenue Bonds
of approximately $274,000 resulting principally from an increase in occupancy
and rental rates at all of the underlying properties. Also contributing to the
increase in net income was an increase of approximately $29,000 in interest and
other income as a result of larger investment balances and higher yields on
investments. Partially offsetting the increase in net income were 1995 Merger
related expenses of approximately $169,000, including fees incurred by Fund I-II
for an independent fairness opinion in connection with the consideration to be
received by BAC Holders in the proposed Merger, as previously discussed. There
were no material increases or decreases in Series I's remaining income or
expenses.
Fund I-II's Series I net income for 1994 decreased approximately $268,000
from 1993 primarily due to the cumulative effect of change in accounting for
Mortgage Revenue Bonds of $2.5 million in 1994, as discussed above. Partially
offsetting the decrease in net income was an increase in income from investments
of $2.2 million due to the reclassification of all of its Mortgage Revenue Bonds
from real estate to securities, as discussed above. The 1993 income from
investments, except Observatory II, was limited to the underlying properties'
net rental income. Actual interest received by Series I from the borrowers
increased approximately $292,000 in 1994 from 1993 primarily due to an increase
in rental rates at the underlying properties. There were no material increases
or decreases in Series I's remaining income or expenses.
Series II
Fund I-II's Series II net income for the six months ended June 30, 1996
decreased approximately $10,000 or 0.5% from the corresponding period in 1995
primarily due to merger-related expenses of approximately $234,000 incurred
during 1996. Partially offsetting the decrease in net income was an increase in
interest from mortgage revenue bonds of approximately $204,000 resulting
principally from the release of $140,500 in excess tax and insurance reserves
relating to three of the underlying properties. Contributing to the increase in
interest from mortgage revenue
-103-
<PAGE>
bonds was an increase in rental rates and occupancy at all of the underlying
properties. There were no material increases or decreases in Series II's
remaining income or expenses for the six months ending June 30, 1996.
Fund I-II's Series II net income for 1995 increased $4.9 million from 1994
primarily due to the cumulative effect of change in accounting for Mortgage
Revenue Bonds of $4.6 million in 1994, as discussed above. Contributing to the
increase in net income was an increase in interest from Mortgage Revenue Bonds
of approximately $452,000 resulting principally from an increase in occupancy
and rental rates at all of the underlying properties. Also contributing to the
increase in net income was an increase of approximately $34,000 in interest and
other income as a result of larger investment balances and higher yields on
investments. Partially offsetting the increase in net income were 1995 Merger-
related expenses of approximately $169,000, including fees incurred by Fund I-II
for an independent fairness opinion in connection with the consideration to be
received by BAC Holders in the proposed Merger, as previously discussed. There
were no material increases or decreases in Series II's remaining income or
expenses.
Fund I-II's Series II net loss for 1994 increased $2.6 million from 1993
primarily due to the cumulative effect of change in accounting for mortgage
revenue bonds of $4.6 million in 1994, as discussed above. Contributing to the
increase in net loss was an extraordinary gain on debt reduction of
approximately $416,000 recognized in 1993, as discussed below. Partially
offsetting the increase in net loss was an increase in income from investments
of $2.3 million due to the reclassification of all of its Mortgage Revenue Bonds
from real estate to securities, as discussed above. The 1993 income from
investments was limited to the underlying properties' net rental income. Actual
interest received by Series II from the borrowers increased approximately
$190,000 in 1994 from 1993 primarily due to an increase in rental rates at the
underlying properties. Also offsetting the increase in net loss was a decrease
in general and administrative expenses of approximately $86,000 due to the 1993
transfer of the deed of James Street Crossing to an Owner Partnership. There
were no material increases or decreases in Series II's remaining income or
expenses.
In the fourth quarter of 1992, Fund I-II was planning to take a deed-in-
lieu of foreclosure (which occurred in March 1993) on James Street Crossing,
therefore Fund I-II evaluated the liabilities of the property. As such Fund I-
II believed that the Owner Partnership was obligated for a $416,000 liability to
the former general partner of James Street Crossing. This obligation was
recorded at December 31, 1992. After the Owner Partnership took possession of
the property in the first quarter of 1993 through a deed-in-lieu of foreclosure,
and sorted through the liabilities related to the real estate, Fund I-II
concluded that the Owner Partnership would not be required to assume this
liability. Therefore it was treated as a debt extinguishment under SFAS No. 4,
"Reporting Gains and Losses for Extinguishment of Debt."
Presented below is a summary of base interest payments for the six months
ended June 30, 1996 and 1995 and years ended December 31, 1995, 1994 and 1993
that are due to Fund I-II from the borrowers.
-104-
<PAGE>
\\Series I
<TABLE>
<CAPTION>
For the six months ended June 30, 1996
-------------------------------------------------------------------------------------
Base Interest Paid Current Base Cumulative
Current Base From Properties' Interest Unpaid Full
Interest Due(1) Operations Not Paid Base Interest
------------------- ----------------------- ----------------- --------------------
<S> <C> <C> <C> <C>
Observatory II $ 64,000 $ 64,000 $ - $ -
Royal Oaks 534,648 449,712 84,936 1,678,180
Trailway Pond I 230,244 120,264 109,980 962,452
Valley Creek I 663,176 471,557 191,619 2,942,800
White Bear Woods 655,463 471,903 183,560 2,184,311
----------- ----------- ----------- -----------
$2,147,531 $1,577,436 $ 570,095 $7,767,743
=========== =========== =========== ===========
</TABLE>
\\
<TABLE>
<CAPTION>
\\ For the six months ended June 30, 1995
-------------------------------------------------------------------------------------
Base Interest Paid Current Base Cumulative
Current Base From Properties' Interest Unpaid Full
Interest Due(1) Operations Not Paid Base Interest
------------------- ----------------------- ----------------- --------------------
<S> <C> <C> <C> <C>
Observatory II $ 64,000 $ 64,000 $ - $ -
Royal Oaks 534,648 391,387 143,261 1,505,734
Trailway Pond I 230,244 124,374 105,870 742,702
Valley Creek I 663,176 446,584 216,592 2,585,899
White Bear Woods 655,463 425,409 230,054 1,867,811
----------- ----------- ----------- -----------
$2,147,531 $1,451,754 $ 695,777 $6,702,146
=========== =========== =========== ===========
</TABLE>
\\
<TABLE>
<CAPTION>
\\ For the year ended December 31, 1995
-------------------------------------------------------------------------------------
Base Interest Paid Current Base Cumulative
Current Base From Properties' Interest Unpaid Full
Interest Due(1) Operations Not Paid Base Interest
------------------- ----------------------- ----------------- --------------------
<S> <C> <C> <C> <C>
Observatory II $ 128,000 $ 128,000 $ - $ -
Royal Oaks 1,069,296 838,525 230,771 1,593,244
Trailway Pond I 460,488 244,848 215,640 852,472
Valley Creek I 1,326,353 944,479 381,874 2,751,181
White Bear Woods 1,310,925 947,931 362,994 2,000,751
----------- ----------- ----------- -----------
$4,295,062 $3,103,783 $1,191,279 $7,197,648
=========== =========== =========== ===========
</TABLE>
\\
<TABLE>
<CAPTION>
\\ For the year ended December 31, 1994
-------------------------------------------------------------------------------------
Base Interest Paid Current Base Cumulative
Current Base From Properties' Interest Unpaid Full
Interest Due(1) Operations Not Paid Base Interest
------------------- ----------------------- ----------------- --------------------
<S> <C> <C> <C> <C>
Observatory II $ 128,000 $ 128,000 $ - $ -
Royal Oaks 1,069,296 754,518 314,778 1,362,473
Trailway Pond I 460,488 252,168 208,320 636,832
Valley Creek I 1,326,353 821,503 504,850 2,369,307
White Bear Woods 1,310,925 873,476 437,449 1,637,757
----------- ----------- ----------- -----------
$4,295,062 $2,829,665 $1,465,397 $6,006,369
=========== =========== =========== ===========
</TABLE>
-105-
<PAGE>
<TABLE>
<CAPTION>
\\ For the year ended December 31, 1993
-------------------------------------------------------------------------------------
Base Interest Paid Current Base Cumulative
Current Base From Properties' Interest Unpaid Full
Interest Due(1) Operations Not Paid Base Interest
------------------- ----------------------- ----------------- --------------------
<S> <C> <C> <C> <C>
Observatory II $ 128,000 $ 128,000 $ - $ -
Royal Oaks 1,069,296 679,224 390,072 1,047,695
Trailway Pond I 460,488 210,360 250,128 428,512
Valley Creek I 1,326,353 728,818 597,535 1,864,457
White Bear Woods 1,310,925 791,512 519,413 1,200,308
----------- ----------- ----------- -----------
$4,295,062 $2,537,914 $1,757,148 $4,540,972
=========== =========== =========== ===========
</TABLE>
(1) Fund I-II charges the borrowers interest on unpaid base interest, which
totaled $464,087 and $366,455 for the six months ended June 30, 1996 and
1995, respectively, and $783,685, $584,856 and $370,558 for the years ended
December 31, 1995, 1994 and 1993, respectively.
\\Series II
<TABLE>
<CAPTION>
For the six months ended June 30, 1996
-------------------------------------------------------------------------------------
Base Interest Paid Current Base Cumulative
Current Base From Properties' Interest Unpaid Full
Interest Due(1) Operations(3) Not Paid Base Interest
------------------- ----------------------- ----------------- --------------------
<S> <C> <C> <C> <C>
Ethan's Ridge and Ethan's
Glen IIB $ 759,375 $ 758,194 $ 1,181 $ 2,003,374
Fountain Place I 992,750 806,373 186,377 5,249,875
James Street Crossing 667,879 470,000 197,879 1,893,050
Trailway Pond II 501,500 267,465 234,035 2,802,741
----------- ----------- ----------- ------------
$2,921,504 $2,302,032 $ 619,472 $11,949,040
=========== =========== =========== ============
</TABLE>
\\
<TABLE>
<CAPTION>
\\ For the six months ended June 30, 1995
-------------------------------------------------------------------------------------
Base Interest Paid Current Base Cumulative
Current Base From Properties' Interest Unpaid Full
Interest Due(1) Operations Not Paid Base Interest
------------------- ----------------------- ----------------- --------------------
<S> <C> <C> <C> <C>
Ethan's Ridge and Ethan's
Glen IIB $ 759,375 $ 612,239 $ 147,136 $ 1,845,660
Fountain Place I 992,750 681,787 310,963 4,805,330
James Street Crossing 667,879 520,548 147,331 1,577,060
Trailway Pond II 501,500 283,259 218,241 2,359,117
----------- ----------- ----------- ------------
$2,921,504 $2,097,833 $ 823,671 $10,587,167
=========== =========== =========== ============
</TABLE>
-106-
<PAGE>
\\
<TABLE>
<CAPTION>
\\ For the year ended December 31, 1995
--------------------------------------------------------------------------------------
Base Interest Base Interest
Current Base Paid From Paid From Current Base Cumulative
Interest Properties' Non-Operating Interest Unpaid Full
Due(1) Operations (3) Sources (2) Not Paid Base Interest
---------------- ---------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Ethan's Ridge and Ethan's
Glen IIB $1,518,750 $1,215,081 $ - $ 303,669 $ 2,002,193
Fountain Place I 1,985,500 1,416,369 - 569,131 5,063,498
James Street Crossing 1,335,758 1,070,316 - 265,442 1,695,171
Trailway Pond II 1,003,000 575,170 - 427,830 2,568,706
---------- ----------- ---------- ---------- -----------
$5,843,008 $4,276,936 $ - $1,566,072 $11,329,568
========== =========== ========== ========== ===========
</TABLE>
\\
<TABLE>
<CAPTION>
\\ For the year ended December 31, 1994
---------------------------------------------------------------------------------------
Base Interest Base Interest
Current Base Paid From Paid From Current Base Cumulative
Interest Properties' Non-Operating Interest Unpaid Full
Due (1) Operations Sources (2) Not Paid Base Interest
---------------- ---------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
Ethan's Ridge and Ethan's
Glen IIB $1,518,750 $1,185,957 $ 27,500 $ 305,293 $ 1,698,524
Fountain Place 1,985,500 1,271,575 - 713,925 4,494,367
James Street Crossing 1,335,758 879,491 - 456,267 1,429,729
Trailway Pond II 1,003,000 460,387 - 542,613 2,140,876
---------- ----------- ---------- ---------- -----------
$5,843,008 $3,797,410 $ 27,500 $2,018,098 $ 9,763,496
========== =========== ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1993
---------------------------------------------------------------------------------------
Base Interest Base Interest
Current Base Paid From Paid From Current Base Cumulative
Interest Properties' Non-Operating Interest Unpaid Full
Due (1) Operations Sources (2) Not Paid Base Interest
---------------- ---------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
Ethan's Ridge and Ethan's
Glen IIB $1,518,750 $1,051,763 $ - $ 466,987 $ 1,393,231
Fountain Place 1,985,500 1,343,102 - 642,398 3,780,442
James Street Crossing 1,335,758 767,321 23,288 545,149 973,462
Trailway Pond II 1,003,000 449,564 - 553,436 1,598,263
---------- ----------- ---------- ---------- -----------
$5,843,008 $3,611,750 23,288 $2,207,970 $ 7,745,398
========== =========== ========== ========== ===========
</TABLE>
(1) Fund I-II charges the borrowers interest on unpaid base interest, which,
not including current base interest due, totaled $690,400 and $567,098 for
the six months ended June 30, 1996 and 1995, respectively, and $1,197,825,
$932,242 and $582,804 for the years ended December 31, 1995, 1994 and 1993,
respectively.
(2) Amounts were funded from reserves provided for from the mortgage loan
proceeds and/or from the general partners of the borrowers.
(3) Amounts received by Fund I-II in January 1996 from the release of excess
tax and insurance reserves relating to 1995 are included in base interest
paid from properties operations for the six months ended June 30, 1996.
Such amounts received from Ethan's Ridge and Ethan's Glen IIB, Fountain
Place and James Street Crossing totaled $107,000, $25,700 and $7,800,
respectively.
-107-
<PAGE>
SELECTED FINANCIAL DATA OF FUND III
The following selected financial and other data for the years ended
December 31, 1995, 1994, 1993, 1992, and 1991 are derived from the audited
financial statement of Fund III. The remaining selected financial and other
data are derived from the unaudited financial statements of Fund III. In the
opinion of Fund III GP, the data for the six months ended June 30, 1996 and 1995
reflect all adjustments (consisting of normal recurring accruals) necessary for
a fair presentation. The data should be read in conjunction with the other
financial information included elsewhere herein.
\\
\\
<TABLE>
<CAPTION>
For the six months ended
June 30, For the years ended December 31,
---------------------------------------------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------------- ------------- ------------- -------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest from mortgage revenue
bonds and working capital
loans (1) $4,012,400 $3,519,662 $7,064,848 $6,906,896 $ -- $ -- $769,025
Net rental income (1) -- -- -- -- 2,822,609 2,198,325 1,067,970
Income from investment in
mortgage revenue bonds and
working capital loan -- -- -- -- -- -- 989,152
Other income (expenses) (536,559) (126,766) (541,312) (173,586) (230,847) 50,411 (19,760)
Valuation adjustment on
investment in real estate (1) -- -- -- -- -- -- (373,637)
------------- ------------- ------------- -------------- ------------- ------------- --------------
Income before cumulative effect
of accounting change 3,475,841 3,392,896 6,523,536 6,733,310 2,591,762 2,248,736 2,432,750
Cumulative effect of change in
accounting for mortgage
revenue bonds (1) -- -- -- (10,155,671) -- -- --
------------- ------------- ------------- -------------- ------------- ------------- --------------
Net income (loss) $3,475,841 $3,392,896 $6,523,536 $(3,422,361) $2,591,762 $2,248,736 $2,432,750
============= ============= ============= ============== ============= ============= ==============
Net income (loss) allocated to
BAC Holders (98.99%) $3,440,735 $3,358,628 $6,457,648 $(3,387,795) $2,565,585 $2,226,024 $2,408,179
============= ============= ============= ============== ============= ============= ==============
Net income (loss) per BAC
outstanding $0.65 $0.64 $1.23 $(0.64) $0.49 $0.42 $0.46
============= ============= ============= ============== ============= ============= ==============
</TABLE>
-108-
<PAGE>
<TABLE>
<CAPTION>
For the six months ended
June 30, For the years ended December 31,
---------------------------------------------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------------- ------------- ------------- -------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cumulative effect of change in
accounting for mortgage
revenue bonds per BAC
outstanding -- $ -- $ -- $(1.91) $ -- $ -- $ --
============= ============= ============= ============== ============= ============= ==============
Total cash distribution per BAC
outstanding $0.60 $0.60 $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 5,258,268 5,258,268
============= ============= ============= ============== ============= ============= ==============
Investment in mortgage revenue
bonds and working capital
loans (1) $70,951,947 $70,951,947 $70,951,947 $70,951,947 $ -- $ -- $ --
============= ============= ============= ============== ============= ============= ==============
Investment in real estate, before
accumulated depreciation (1) $ -- $ -- $ -- $ -- $91,576,714 $91,576,714 $91,576,714
============= ============= ============= ============== ============= ============= ==============
Investment in real estate, before
accumulated depreciation, per
BAC outstanding $ -- $ -- $ -- $ -- $ 17.24 $ 17.24 $ 17.24
============= ============= ============= ============== ============= ============= ==============
Total assets $77,409,362 $76,715,167 $76,933,879 $77,121,563 $92,296,205 $97,929,180 $102,798,278
============= ============= ============= ============== ============= ============= ==============
Total assets per BAC
outstanding $ 14.57 $ 14.44 $ 14.48 $ 14.52 $ 17.38 $ 18.44 $ 19.35
============= ============= ============= ============== ============= ============= ==============
Net assets $75,235,648 $75,003,469 $74,946,957 $74,797,723 $86,878,511 $92,918,617 $99,301,738
============= ============= ============= ============== ============= ============= ==============
Net assets per BAC outstanding $ 14.16 $ 14.12 $ 14.11 $ 14.08 $ 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 the Owner Partnerships, which
assumed the existing indebtedness, or considered in-substance foreclosed
(ISF), generally as a result of defaults of the borrowers. As a result,
through December 31, 1993, Fund III has accounted for these investments as
investments in real estate for financial statement purposes. Fund III
recorded valuation adjustments representing the lower of (a) the carrying
value of the Mortgage Revenue Bond 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.
-109-
<PAGE>
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. Following such adoption, Fund III (as did others in
the industry) continued to account for its investments in Mortgage Revenue
Bonds as investments in real estate based on ADC determination or
consolidation of the Owner Partnerships in accordance with SEC Rules.
In conjunction with the review of Fund III's 1995 financial statements by
the SEC staff, Fund III agreed that it would account for all of its
investments in Mortgage Revenue Bonds as debt securities under the
provisions of SFAS 115 effective January 1, 1994, and restate its 1995 and
1994 financial statements to reflect this change. Accordingly, effective
January 1, 1994, all investments in Mortgage Revenue Bonds are classified
and accounted for as held to maturity securities and are carried at
amortized cost because of Fund III's ability and intent to hold these
investments to maturity. The effect of adopting SFAS 115 on net income
previously reported for the six months ended June 30, 1995 and the years
ended December 31, 1995 and 1994 is $1,455,253, $2,795,175 and
$(6,678,675), respectively. Income per BAC as previously reported was
$0.36, $0.70 and $0.61 for the six months ended June 30, 1995 and the years
ended December 31, 1995 and 1994, respectively. Income (loss) per BAC as
previously reported has been revised to $0.64, $1.23 and $(0.64) per BAC
for the six months ended June 30, 1995 and the years ended December 31,
1995 and 1994, respectively. The impact on partners capital of adopting
SFAS 115 for 1995 and 1994 is $(3,883,500) and $(6,678,675), respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF FUND III
BUSINESS
Fund III's Management's Discussion and Analysis of Financial Condition and
Results of Operations contains information that may be considered forward-
looking. This information contains a number of risks and uncertainties, as
discussed herein, that could cause actual results to differ materially.
Fund III 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. Fund III was formed to acquire a portfolio of tax-exempt Mortgage
Revenue Bonds, issued by various state or local governments or their agencies or
authorities and collateralized by non-recourse participating first mortgage
loans on multifamily residential developments. Additionally, Fund III was
permitted to use up to 5% of its gross offering proceeds to make taxable working
capital loans to borrowers to cover certain expenses which could not be financed
from the proceeds of the Mortgage Revenue Bonds.
Fund III commenced a public offering of Series A Beneficial Assignee
Certificates (BACs) representing assignment of limited partnership interests in
February 1988. As provided in the original offering, Fund III could issue BACs
in additional series at the discretion of Fund III GP. As of December 31, 1995,
5,258,268 Series A BACs had been sold, representing total capital contributions
of $131,456,700.
On July 1, 1993, Fund III GP listed the BACs on the American Stock Exchange
(AMEX) with a trading symbol of CRL. Fund III GP 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, Fund III met these exceptions and was not taxed as a
corporation.
-110-
<PAGE>
Fund III 's objectives have been to: (1) provide quarterly cash
distributions that will be exempt from regular federal income tax from base
interest on the Mortgage Revenue Bonds; (2) provide additional cash
distributions that will be exempt from regular federal income tax from payments
of contingent interest on the Mortgage Revenue Bonds which will be determined
(a) on the basis of the cash flow of the mortgaged properties, or (b) to the
extent that cash flow is not sufficient to provide for the current payment of
the maximum amount of contingent interest, on the basis of either (i) the net
proceeds resulting from the sale of the mortgaged properties or redemption or
remarketing of the applicable Mortgage Revenue Bond or (ii) the appraised value
of the mortgaged properties upon repayment of the mortgage loans or remarketing
of the Mortgage Revenue Bonds; (3) in certain circumstances, provide additional
taxable cash distributions from payments of interest on the working capital
loans; and (4) preserve and protect Fund III capital. As of June 30, 1996, six
of the eight properties securing the loans have been taken control of by Owner
Partnerships through deed in lieu of foreclosure or through transfer of
partnership interests of the borrower (in the case of Geary Courtyard), with the
Owner Partnerships assuming the existing indebtedness, which resulted in
significant valuation adjustments to the carrying values of these investments
during 1991 and 1990. Although Fund III will use diligent efforts to recover its
investment, it is probable that the full amount of BAC Holder invested capital,
based on the original offering price of $25 per BAC, 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, in the absence of
the proposed Merger, it may be advisable, with BAC Holder consent, to extend the
maturity dates of the mortgage loans, which currently mature from 1999 through
2000. Pursuant to recently issued IRS regulations, Fund III can only extend
mortgage loans for up to five years without triggering a deemed reissuance of
the Mortgage Revenue Bonds for federal income tax purposes. An extension of the
mortgage loan maturity dates beyond five years would be a deemed reissuance, and
would result in the loss of the tax-exempt status of the Mortgage Revenue Bonds.
Base interest income on the mortgage loans is funded from property
operations, certain borrowers' operating deficit guarantees, and reserves, if
any, established at the time of closing on the acquisition of the Mortgage
Revenue Bonds. If base interest payments cannot be fully satisfied, Fund III GP
evaluates various courses of action, including sale, recapitalization, loan
modification, deed in lieu of foreclosure or foreclosure.
Fund III invested in eight Federally tax-exempt Mortgage Revenue Bonds with
an aggregate principal amount of $97,101,000 and made three working capital
loans with an aggregate principal amount of $3,409,604. A description of the
Mortgage Revenue Bonds and working capital loans held by Fund III is as follows:
-111-
<PAGE>
<TABLE>
<CAPTION>
Loan Maturity
Loan Face Carrying
Mortgaged Property No. of Origination Amount Maturity Value
Name and Location Rental Units Date (000'S) Date (000's)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ETHAN'S GLEN IIA
KANSAS CITY, MO 242 8/18/88 $ 10,525 3/31/2000 $ 8,840
GEARY COURTYARD
SAN FRANCISCO, CA (1) 164 8/18/88 18,900 9/01/2000 8,706
OCEAN WALK
KEY WEST, FL 296 1/27/89 19,826 4/01/2000 16,084
PACES RIVER 2
ROCK HILL, SC (1) 230 7/28/88 9,600 2/02/2000 7,842
REGENCY WOODS
WEST DES MOINES, IA (1) 200 1/29/90 7,560 2/01/2000 4,812
VALLEY CREEK II
WOODBURY, MN 177 2/21/89 10,100 7/01/2000 6,508
WASHINGTON RIDGE
KNOXVILLE, TN 248 12/14/88 10,000 7/01/2000 7,642
WOODLANE PLACE
WOODBURY, MN 216 9/16/88 14,000 1/01/1999 10,518
---------------------------------------------------------------------
1,773 $100,511 $70,952
===== ======== =======
</TABLE>
(1) The amount listed under face amount of mortgage includes both the first
lien tax-exempt loan and the second lien working capital loan.
Prior to January 1, 1994, Fund III accounted for its investment in Mortgage
Revenue Bonds in accordance with the American Institute of Certified Public
Accountants (the "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. Further, if the
lender is expected to receive over 50 percent of the expected residual profits
from a project, the lender should account for the arrangement as real estate. As
such, the Ocean Walk, Regency Woods, Valley Creek II, and Washington Ridge
investments originally qualified as ADC arrangements and followed real estate
accounting policies. However, Owner Partnerships received deeds in lieu of
foreclosure on all of these investments, except Washington Ridge, from 1993
through 1995 and assumed the existing indebtedness.
Also prior to January 1, 1994, investments in Mortgage Revenue Bonds and
working capital loans were 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, and were recorded at the lower of (a)
the carrying value of the Mortgage Revenue Bonds and working capital loans 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 were the amounts the owners of the
-112-
<PAGE>
properties could reasonably expect to receive in an as-is sale between a willing
buyer and a willing seller. Fund III GP determined the estimated fair value of
the properties acquired based upon information obtained from independent real
estate appraisers and/or its own market analyses. To the extent fair value was
less than carrying value, direct write-downs were recorded to establish a new
basis for these assets. Since the working capital loans are subordinate to the
first mortgage loan on the properties, write-downs were first applied against
the working capital loans and then against the Mortgage Revenue Bonds. As of
January 1, 1994, Fund III's investment in working capital loans had been written
down to zero.
Subsequent to the recording of its investment as real estate, Fund III
evaluated its recorded investment in the properties on a lower of cost or net
realizable value basis, under the guidance of the AICPA Statement of Position
92-3 "Accounting for Foreclosed Assets". Fund III's net realizable value
determination took into account the partnership's intention to hold these
properties for the long term, if necessary, to recover its recorded investment.
If Fund III determined that its estimated net realizable value was less than the
recorded investment in the property, an additional valuation adjustment was
recorded if the decline was considered permanent.
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.
Following such adoption, Fund III (as did others in the industry) continued to
account for its investments in Mortgage Revenue Bonds as investments in real
estate based on ADC determination or consolidation of the Owner Partnerships in
accordance with SEC Rules.
In conjunction with the review of Fund III's 1995 financial statements by
the SEC staff, Fund III agreed that it would account for all of its investments
in Mortgage Revenue Bonds as debt securities under the provisions of SFAS 115
effective January 1, 1994, and restate its 1995 and 1994 financial statements to
reflect this change. Accordingly, effective January 1, 1994, all investments in
Mortgage Revenue Bonds are classified and accounted for as held to maturity
securities and are carried at amortized cost because of Fund III's ability and
intent to hold these investments to maturity. The effect of adopting SFAS 115
on net income previously reported for the six months ended June 30, 1995 and the
years ended December 31, 1995 and 1994 is $1,455,253, $2,795,175 and
$(6,678,675), respectively. Income per BAC as previously reported was $0.36,
$0.70 and $0.61 for the six months ended June 30, 1995 and the years ended
December 31, 1995 and 1994, respectively. Income (loss) per BAC as previously
reported has been revised to $0.64, $1.23 and $(0.64) per BAC for the six months
ended June 30, 1995 and the years ended December 31, 1995 and 1994,
respectively. The impact on partners capital of adopting SFAS 115 for 1995 and
1994 is $(3,883,500) and $(6,678,675), respectively.
As discussed above, Fund III accounted for its investment in Mortgage
Revenue Bonds and working capital loans as real estate, until January 1, 1994,
when the financial statements were
-113-
<PAGE>
restated to reflect implementation of SFAS 115. Net realizable value, prior to
implementation of SFAS 115, was based on holding the assets for long-term income
production - as such net realizable value only considered the recovery of Fund
III's investments over time based on the properties' ability to generate
sufficient cash flow to recover Fund III's investment over the long term. Based
on the SEC's requirement that Fund III account for its Mortgage Revenue Bonds as
debt securities, the implementation of SFAS 115 has a different accounting
framework for evaluating realizability. In accordance with SFAS 115's provisions
for held to maturity securities, Fund III evaluates the fair value of its
Mortgage Revenue Bonds to determine if impairment exists. If a decline in fair
value is determined to be other-than-temporary, the security is written down to
its fair value. Since most of these bonds are in default, Fund III has concluded
that permanent impairment has occurred. As such, the amount of permanent
impairment is measured by Fund III's estimate of the Mortgage Revenue Bonds'
fair value at January 1, 1994. Fund III has measured fair value as discussed
below. This effect of adopting SFAS 115 is reflected as a cumulative effect of
change in accounting for Mortgage Revenue Bonds in the statements of operations.
On an ongoing basis, Fund III evaluates the permanent impairment; however,
subsequent to January 1, 1994, Fund III did not recognize any impairment losses.
Since all the underlying mortgage loans that secure the bonds are either in
default or have been previously written down due to impairment, base interest
and contingent interest on the Mortgage Revenue Bonds is recognized as revenue
when collected.
As of June 30, 1996, six properties collateralizing certain of the Mortgage
Revenue Bonds have been transferred by deed in lieu of foreclosure (or by
transfer of partnership interests in the borrower entity) to Owner Partnerships
which assumed the existing indebtedness. In connection with the transfers of
properties to Owner Partnerships, Fund III obtained an opinion from its former
independent accounting firm in July of 1991 that the reduction in pay rate and
compounding of unpaid base interest at the original base interest rate would not
cause a reissuance of the bonds under Section 103 of the Code (which would cause
the bonds to lose their tax-exempt status). Fund III also obtained opinions from
certain bond counsel that certain transfers of the properties to Owner
Partnerships would not cause Fund III to become a substantial user of the
projects or a related party to a substantial user 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 April 1991, the U.S. Supreme Court decided a case, Cottage Savings
---------------
Association V. Commissioner ("Cottage Savings"), that could be interpreted to
- --------------------------- ---------------
impact then existing authority addressing the modification of debt instruments.
In response to this decision, on June 26, 1996, the IRS issued Final Regulations
Section 1.1001-3 which specifically address the tax consequences of
modifications of debt instruments. Among other things, these regulations
provide that certain modifications of the current interest payments or maturity
date of a debt instrument will be treated as a taxable exchange of the original
instrument for the modified debt instrument. As a result, certain future
modifications of the mortgage loans which secure the Mortgage Revenue Bonds
could be treated as a deemed reissuance of the Mortgage Revenue Bonds for
federal income tax purposes. Any reissuance without the cooperation of the
Mortgage Revenue Bond issuers would result in the loss of the tax-exempt status
of the Mortgage Revenue Bonds. Such issuers might
-114-
<PAGE>
cooperate and consent to the reissuance; however, there can be no assurance that
such issuers would do so or would not impose additional requirements that would
have an adverse impact on the Mortgage Revenue Bonds. Even if issuer consents
were obtained, all accrued and unpaid base interest on the existing mortgage
loans would have to be written off. The write-off of accrued and unpaid base
interest would not be recoverable upon ultimate disposition or payoff of the
Mortgage Revenue Bond and the amounts written off would instead accrue to the
benefit of the Owner Partnership to the extent realized.
Final Regulations Section 1.001-3 will become effective only with respect
to modifications made on or after September 24, 1996. It is unclear at this
time what effect the Cottage Savings decision may have on modifications that
---------------
have already been made to mortgage loans which secure the Mortgage Revenue
Bonds. Fund III GP believes that the modifications which have already been made
were consistent with the relevant tax authority which existed at the time of
those modifications and have not jeopardized the tax-exempt status of the
Mortgage Revenue Bonds. However, there can be no assurance as to the tax-exempt
status of the Mortgage Revenue Bonds.
In March 1995, Fund III 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.
Fund III GP's ongoing strategy has been to continue holding the Mortgage
Revenue Bonds until the loan maturity dates. If the Merger proposal, as
discussed below, is approved, the interests of the BAC Holders will be redeemed
for cash. If the Merger proposal is not approved, in order to maximize the
overall yield, Fund III GP may recommend, subject to satisfactory resolution of
any issues relating to the tax-exempt status of the Mortgage Revenue Bonds, for
investor approval of the extension of certain loan maturity dates and, if
approved, arrange any necessary related amendments to the pertinent Mortgage
Revenue Bonds.
FINANCIAL CONDITION AND LIQUIDITYFINANCIAL CONDITION AND LIQUIDITY
The primary sources of Fund III's future cash flows are expected to be from
receipts of base interest on mortgage loans, which are dependent upon the net
operating income of the properties. Therefore, Fund III's investment in the
Mortgage Revenue Bonds and working capital loans is subject to the general risks
inherent to the ownership of real property. These risks include reduction in
rental income due to an inability to maintain occupancy levels, adverse changes
in general economic conditions, and adverse changes in local conditions. Fund
III GP expects that the properties transferred to Owner Partnerships will
continue to generate sufficient cash flow to pay all operating expenses, meet
escrow deposit requirements and pay some, but not all, of the base interest due
to Fund III. Fund III has no material commitments for capital expenditures.
However,
-115-
<PAGE>
in the event the Merger is terminated or abandoned under certain circumstances,
Fund III will be liable for certain fees and expenses, as discussed in this
proxy statement.
Fund III 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 Fund III'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 Fund III, 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 Fund III's operations.
Cash flow from Fund III'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 Fund III expenses. Fund III GP seeks to
optimize cash flow from the properties owned by Owner Partnerships. Despite
these efforts, the amounts paid to Fund III from the borrowers 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 Fund III, Fund III GP expects the 1996 distribution to approximate
$1.20 per BAC, the maximum amount stipulated in the amended Merger Agreement.
The following distributions were paid or accrued to BAC Holders of record
during the six months ended June 30, 1996 and 1995, and the years ended December
31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
1996 1995 1994 1993
Distributions to Distributions to Distributions to Distributions to
BAC Holders BAC Holders BAC Holders BAC Holders
---------------------- ---------------------- --------------------- ------------------------
Quarter Ended Total Per BAC Total Per BAC Total Per BAC Total Per BAC
- ------------- ---------- --------- ----------- --------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31 $1,577,480 $0.30 $1,577,480 $0.30 $2,103,307 $0.40 $2,106,988 $0.40
June 30 1,577,480 0.30 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 six months ended June 30, 1996 and 1995
and the years ended December 31, 1995, 1994 and 1993 were funded as
follows:
-116-
<PAGE>
<TABLE>
<CAPTION>
For the six months ended
June 30,
-------------------------------------
1996 1995
------------ -------------
<S> <C> <C>
Cash flow (1) $3,423,451 $3,378,151
Deposits to working capital/interest reserves (236,301) (191,001)
------------ -------------
Total cash available for distribution $3,187,150 $3,187,150
============ =============
Distribution to:
General Partner (1.01%) $ 32,190 $ 32,190
------------ -------------
BAC Holders (98.99%) $3,154,960 $3,154,960
============ =============
</TABLE>
<TABLE>
<CAPTION>
For the years ended
December 31,
---------------------------------------------------------------
1995 1994 1993
--------------- ---------------- ------------------
<S> <C> <C> <C>
$ 647,350 $ 6,740,474 $ 7,132,542
Cash flow (1)
Net (deposits to) withdrawals from working
capital/interests 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:
$ 64,380 $ 87,450 $ 87,182
=============== ================ ==================
General Partner (1.01%)
BAC Holders (98.99%) $ 6,309,922 $ 8,570,977 $ 8,544,686
=============== ================ ==================
</TABLE>
\\(1) Defined in the Limited Partnership Agreement as (a) all revenues received
by Fund III during such period, plus (b) any amounts which the Managing
General Partner releases from the Working Capital Reserve as being no
longer necessary to hold as part of the Working Capital Reserve, plus (c)
any amounts released to Fund III from the Interest Reserve Account with
respect to a mortgaged property after completion of construction of such
mortgaged property, less (i) operating expenses of Fund III paid from
reserves during the period, including any expenses paid to Fund III GP,
but not including such amounts paid from the Working Capital Reserve,
(ii) all cash payments made from Revenues during such period to discharge
Fund III's partnership indebtedness, and (iii) all amounts from revenues,
if any, added to the Working Capital Reserve during such period. Cash
flow as defined in the Limited Partnership Agreement is not to be
construed as an alternative to operating income in accordance with
generally accepted accounting principles (GAAP) as an indication of the
Partnership's operating performance.
(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, Fund
III began declaring distributions on a monthly basis as a result of listing the
BACs on AMEX. Fund III GP expects the distribution for the quarter ending
September 30, 1996, to be approximately $0.30 per BAC, payable on November 14,
1996, or possibly earlier depending on the Merger closing date, to BAC Holders
of record as of the last day in each month.
-117-
<PAGE>
Fund III's working capital reserves may be available for the ongoing costs
of operating Fund III, for supplementing distributions to investors and for
making working capital loans to the borrowers. As of June 30, 1996 and December
31, 1995, the working capital reserves were $4,471,445 and $4,235,144,
respectively, both of which exceed Fund III's minimum working capital reserve
balance of approximately $3,718,000. The minimum working capital reserve balance
may be increased or decreased from time to time as deemed necessary by the Fund
III GP. The surplus working capital reserve balance of approximately $753,000 as
of June 30, 1996 may be used to supplement distributions to BAC Holders. Of the
total distributions made during the six months ended June 30, 1996, and the
years ended December 31, 1995, 1994 and 1993, $0, $0, $0, 1,917,953 and
$1,499,326, respectively, were funded from the surplus working capital reserves.
Fund III established interest reserves which represent Fund III GP's
estimate of the total base interest on the investment in Mortgage Revenue Bonds
and working capital loans to be deferred during the deferral period (generally,
the project construction period), as defined by the respective loan agreements.
The interest reserves also included debt service reserves established by Fund
III for six mortgage loans. Funds in the interest reserves are invested in tax-
exempt municipal bonds with terms similar to Fund III's marketable securities
and are stated at 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 Fund III during the deferral period. Interest reserves
were $298,750, $298,750 and $414,326 as of June 30, 1996 and December 31, 1995
and 1994, respectively. There were no interest reserves established during the
six months ended June 30, 1996 and the years ended December 31, 1995, 1994 or
1993. During the six months ended June 30, 1996 and the years ended December 31,
1995, 1994 and 1993, amounts of $0, $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 June 30, 1996, Fund III had cash and cash equivalents of $54,677, and
unrestricted marketable securities of $1,552,569 and working capital invested in
marketable securities of $4,471,445 and interest reserves invested in marketable
securities of $298,750. Marketable securities consist of tax-exempt municipal
bonds which generally contain a seven-day put option with established banks or
brokerage houses. Fund III has classified its investments in marketable
securities into the available for sale category under SFAS 115. Realized gains
and losses on the sale of marketable securities were determined on a specific
identification basis. There were no net unrealized holding gains or losses
recognized during the six months ended June 30, 1996 or 1995 and the years ended
December 31, 1995 and 1994 as the cost for the tax-exempt municipal bonds
approximated fair value throughout the respective periods.
As of December 31, 1995, Fund III had aggregate investments in marketable
securities (including those held in working capital and interest reserves) with
the following maturities:
-118-
<PAGE>
<TABLE>
<CAPTION>
Amount Maturity
------------- --------------------------
<C> <S>
$ 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
=============
</TABLE>
In December 1991, the FASB issued Statement of Financial Accounting
Standards No. 107 "Disclosures 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. Fund
III implemented SFAS 107 in 1995. Fund III has determined that the carrying
amount of its 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 Mortgage
Revenue Bonds is based upon the redemption amount relating to the Mortgage
Revenue Bonds under the amended Merger Agreement.
The following table presents information on Fund III's financial
instruments:
<TABLE>
<CAPTION>
Carrying Estimated Fair
Value at Value at
December 31, 1995 December 31, 1995
(000's) (000's)
<S> <C> <C>
Cash and cash equivalents $ 188 $ 188
Marketable securities 1,214 1,211
Working capital reserves
invested in marketable
securities 4,235 4,228
Interest reserves invested in
marketable securities 299 298
Mortgage revenue bonds 70,952 73,896
</TABLE>
Fund III closely monitors its cash flow and liquidity position in an effort
to ensure that sufficient cash is available for operating requirements and
distributions to BAC Holders. Fund III's net cash provided by operating
activities, which consisted primarily of receipt of base interest on mortgage
loans for the six months ended June 30, 1996 and the years ended December 31,
1995 and 1994, was adequate to support operating requirements and the payment of
declared distributions to BAC Holders and Fund III GP. Cash and cash equivalents
decreased during the six months ended June 30, 1996 due to deposits to working
capital reserves. Fund III estimates that future cash flows from receipt of base
interest on mortgage loans, in the aggregate, will be sufficient to pay
operating expenses and make distributions to BAC Holders and Fund III GP.
Distributions to BAC Holders may be supplemented by withdrawals from working
capital and interest reserves, as discussed above.
-119-
<PAGE>
RESULTS OF OPERATIONS
Fund III's net income for the six months ended June 30, 1996 increased
approximately $83,000 or 2% from the corresponding period in 1995 primarily due
to an increase in interest from mortgage revenue bonds of approximately
$493,000, resulting principally from the receipt of interest due to the release
of $105,000 in excess tax and insurance reserves relating to three of the
underlying properties during the first quarter of 1996. Also contributing to
the increase in interest from mortgage revenue bonds was an increase in rental
rates and occupancy levels at most of the underlying properties, as discussed
above. Contributing to the increase in net income was a decrease in general and
administrative expenses of approximately $58,000 primarily due to decreased
payroll costs during 1996 and foreclosure expenses incurred during the three
months ended June 30, 1995. Partially offsetting the increase in net income was
an increase in merger-related expenses of $468,000 as discussed above. There
were no material increases or decreases in the Fund III's remaining income or
expenses for the six months ended June 30, 1996.
Fund III's net income for 1995 increased approximately $9.9 million from
1994 primarily due to the cumulative effect of change in accounting for Mortgage
Revenue Bonds of approximately $10.2 million in 1994, as discussed above.
Contributing to the increase in net income was an increase in interest from
Mortgage Revenue Bonds and working capital loans of approximately $158,000
resulting principally from an increase in occupancy and rental rates at certain
of the underlying properties. Partially offsetting the increase in interest from
Mortgage Revenue Bonds and working capital loans was a decrease in interest from
Regency Woods due to the borrower's default on the working capital loan, as
discussed below. Partially offsetting the increase in net income were 1995
Merger related expenses of approximately $339,000, including fees incurred by
Fund III for an independent fairness opinion in connection with the
consideration to be received by BAC Holders in the proposed Merger, as
previously discussed. There were no material increases or decreases in Fund
III's remaining income or expenses.
Fund III's net loss for 1994 increased approximately $6.0 million from 1993
primarily due to the cumulative effect of change in accounting for Mortgage
Revenue Bonds of approximately $10.2 million in 1994, as discussed above.
Contributing to the increase in net loss was a decrease in other interest income
of approximately $131,000 resulting from less cash available for short-term
investments. Partially offsetting the increase in net loss was an increase in
income from investments of $4.1 million due to the reclassification of all of
the Mortgage Revenue Bonds and working capital loans from real estate to
securities and loans, respectively, as discussed above. The 1993 income from
investments was limited to the underlying properties' net rental income. Actual
interest received by Fund III from the borrowers decreased approximately
$379,000 in 1994 from 1993 primarily due to an increase in non-recurring repairs
and maintenance, payroll expense and marketing fees at certain underlying
properties. Also partially offsetting the increase in net loss was a decrease in
general and administrative expenses and professional fees of approximately
$170,000 primarily related to loan workout negotiations in 1993 concerning Paces
River 2 and the transfer of the deed of Ocean Walk. There were no material
increases or decreases in Fund III's remaining income or expenses.
-120-
<PAGE>
In March 1993, Fund III finalized a three-year workout agreement (the
"Workout") with Paces River 2. 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, Fund III 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 expired in March 1996. Effective April 1996, Paces
River 2 is required to pay full base interest on both the tax-exempt loan and
the working capital loan.
Shortfalls in interest payments from Regency Woods were being paid from
draws on a $250,000 irrevocable letter of credit. Fund III drew down the full
amount remaining under the letter of credit in January 1995, resulting in the
default by the borrower on the working capital loan. The borrower transferred
the property by deed in lieu of foreclosure to an Owner Partnership as of
February 28, 1995.
In the fourth quarter of 1994, Washington Ridge informed Fund III that the
debt service coverage requirement had been met. Upon review of documentation
from the borrower's independent accounting firm, Fund III GP released the
operating deficit guarantee on March 30, 1995. Contingent interest is being paid
on a quarterly basis.
In March 1994, Fund III was notified by the management agent of Woodlane
Place that certain buildings at the property experienced damage due to frost
heaving. The Owner Partnerships 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 at least $600,000, and will not be covered by the property's
insurance carrier. 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
borrowers existing replacement reserves, future property cash flow, and/or a
loan to the borrower from the working capital reserves of Fund III. Fund III has
joined with the borrower's insurance carrier in a lawsuit against the original
architect and general contractor of Woodlane Place. Fund III has joined on a
contingent basis, with no legal fees being incurred unless Fund III receives a
settlement or judgment, and with other legal expenses estimated to be less than
$20,000. All depositions have been taken, and the lawsuit is currently in
discovery mode. There is no assurance that Fund III will receive any funds as a
result of this lawsuit.
Presented below is a summary of base interest payments for the six months
ended June 30, 1996 and 1995 and the years ended December 31, 1995, 1994 and
1993 that are due to Fund III from the borrowers.
-121-
<PAGE>
<TABLE>
<CAPTION>
\\ For the six months ended June 30, 1996
-------------------------------------------------------------------------------------------------------
Base Interest Base Interest
Current Base Paid From Paid From Current Base Cumulative
Interest Properties' Non-Operating Interest Unpaid Base
Due(1) Operations(3) Sources(2) Not Paid Interest
------------------ ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Ethan's Glen IIA $ 460,469 $ 507,164 $ -- $(46,695) $ 274,567
Geary Courtyard 870,300 452,000 -- 418,300 6,140,803
Ocean Walk 887,214 882,120 -- 5,094 1,471,510
Paces River 2 384,513 472,876 -- 88,363 108,996
Regency Woods 346,730 259,600 -- 87,130 357,180
Valley Creek II 459,550 378,598 -- 80,952 788,295
Washington Ridge 437,500 437,500 -- -- 72,917
Woodlane Place 703,500 622,542 -- 80,958 2,743,366
------------------ ------------------ ------------------ ------------------ ------------------
$ 4,549,776 $ 4,012,400 $ -- $537,376 $ 11,957,634
================== ================== ================== ================== ==================
</TABLE>
<TABLE>
<CAPTION>
For the six months ended June 30, 1996
-------------------------------------------------------------------------------------------------------
Base Interest Base Interest
Current Base Paid From Paid From Current Base Cumulative
Interest Properties' Non-Operating Interest Unpaid Base
Due(1) Operations(3) Sources(2) Not Paid Interest
------------------ ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Ethan's Glen IIA $ 460,469 $ 391,352 $ -- $ 69,117 $ 224,34
Geary Courtyard 870,300 347,000 -- 523,300 5,267,203
Ocean Walk 887,214 871,546 -- 15,668 1,356,497
Paces River 2 384,513 420,147 -- (35,634) 188,222
Regency Woods 346,730 203,762 17,834 125,134 182,922
Valley Creek II 459,550 340,940 -- 118,610 629,216
Washington Ridge 437,500 437,500 -- - 72,917
Woodlane Place 703,500 442,834 -- 260,666 2,470,552
------------------ ------------------ ------------------ ------------------ ------------------
$ 4,549,776 $3,455,081 $ 17,834 $ 1,076,861 $10,391,871
================== ================== ================== ================== ==================
</TABLE>
<TABLE>
<CAPTION>
\\ For the six months ended June 30, 1996
-------------------------------------------------------------------------------------------------------
Base Interest Base Interest
Current Base Paid From Paid From Current Base Cumulative
Interest Properties' Non-Operating Interest Unpaid Base
Due(1) Operations(3) 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>
-122-
<PAGE>
<TABLE>
<CAPTION>
For the year ended December 31, 1994
-----------------------------------------------------------------------------------------
Base Interest Base Interest
Current Base Paid From Paid from Current Cumulative
Interest Properties' Non-Operating Base Interest Unpaid Base
Due(1) Operations Sources(2) Not Paid Interest
-------------- ---------------- --------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Ethan's Glen IIA $ 920,937 $ 776,803 $ 16,053 $ 128,081 $ 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 $201,081 $2,192,651 $ 9,315,010
============== ================ =============== ================== ================
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1993
--------------------------------------------------------------------------------------------
Base Interest Base Interest Current
Current Base Paid From Paid from Base Cumulative
Interest Properties' Non-Operating Interest Unpaid Base
Due(1) Operations Sources(2) Not Paid Interest
----------------- ---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Ethan's Glen IIA $ 920,937 $ 811,075 $159,463 $ (49,601) $ 27,144
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 $671,661 $1,793,438 $ 7,122,359
================= ================ ================= ================ ================
</TABLE>
(1) Fund III charges the borrowers interest on unpaid base interest, which,
totaled $616,961 and $492,361 for the six months ended June 30, 1996 and
1995, respectively, and $1,050,137, $803,279 and $518,381 for the years
ended December 31, 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) Amounts received by Fund III in January 1996 from the release of excess tax
and insurance reserves relating to 1995 are included in base interest paid
from properties operations for the six months ended June 30, 1996. Such
amounts received from Ethan's Glen IIA, Paces River 2 and Woodlane Place
totaled $70,000, $12,000 and $23,000, respectively.
(4) Excludes contingent interest of $46,747 and $70,549 received by Fund III
from Washington Ridge during the six months ended June 30, 1995, and the
year ended December 31, 1995, respectively.
\\Contingent interest is payable quarterly on an estimated basis, in
arrears but only to the extent of available net cash flow, if any, and is
recognized as revenue when collected. Contingent interest due as of June 30,
1996 and December 31, 1995 amounted to $41,067,109 and $37,635,033,
respectively. Fund III received contingent interest of $46,747 from Washington
Ridge during the six months ended June 30, 1995. No contingent interest was
received during six months ended June 30, 1996.
-123-
<PAGE>
LITIGATION
On September 22, 1995, Irving Zakin commenced the Zakin Action as a
----- -----
putative class action against Messrs. William Dockser and, H. William
Willoughby, CRI, the General Partners, the Assignor Limited Partners, CAPREIT
and each of the Funds (collectively, the "Defendants") in the Court of Chancery
of the State of Delaware in New Castle County (C. A. No. 14558). The complaint
alleges, among other things, that the price offered to the BAC Holders in the
Mergers at the time the complaint was filed was inadequate, and that the
Defendants breached their fiduciary duty to the BAC Holders, or aided and
abetted such a breach, engaged in self-dealing and misled BAC Holders, in
connection with the Mergers. The suit seeks to enjoin the Transaction Proposals,
damages in an unspecified amount for the BAC Holders, and to compel the
Defendants to maximize the price paid to the BAC Holders and consider
unspecified alternatives to the Transaction Proposals.
On October 5, 1995, David and Johanna Wingard commenced (the "Wingard
------- -------
Action"), a second putative class action, against the Defendants in the Court of
Chancery of the State of Delaware in New Castle County (C. A. No. 14604). The
complaint in the Wingard Action contains virtually the identical allegations and
-------
seeks virtually the identical relief as in the Zakin Action. A request to the
-----
Court has been made by the plaintiffs in both lawsuits to consolidate the two
actions.
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.
On January 31, 1996, the defendants and the plaintiffs and their respective
attorneys reached a tentative settlement of the Zakin and Wingard Actions
----- -------
memorialized in the Memorandum of Understanding, dated as of such date. In
accordance with the Memorandum, the Merger Agreements were amended on January
31, 1996, to provide that (a) the aggregate cash consideration to be paid to the
BAC Holders was increased by $8.5 million from $150.0 million to $158.5 million
(subject to adjustment up or down based upon available cash), and (b) the
aggregate amount payable in consideration for the Accrued Fees payable to CRI
was reduced to no more than $2,000,000 as compared with $4,023,000 provided for
in the original Merger Agreements. The defendants also agreed that they would
not object to an application for attorneys' fees and reimbursement of out-of-
pocket expenses of plaintiffs' counsel for up to 20% of the improved Merger
consideration negotiated by them with such fees and expenses as are awarded by
the Court to plaintiffs' counsel to be paid from the improved Merger
consideration negotiated by them. Counsel for the plaintiffs and experts
retained by them have reviewed voluminous documents relating to the Mergers,
including this Preliminary Proxy Statement, and have taken depositions of
representatives of the General Partners and CAPREIT and Oppenheimer.
On May 16, 1996, the defendants and the plaintiffs filed the Stipulation
and Agreement of Settlement with the Chancery Court, and sought preliminary
approval of the putative classes (the "Class") and approval of a form of notice
to the Class of the proposed Settlement. The
-124-
<PAGE>
Stipulation of Settlement contemplates the complete discharge, settlement and
release of all claims that have been, could have been, or in the future might be
asserted in any action or any other proceeding in connection with the Mergers.
The Stipulation of Settlement also permits plaintiffs to terminate the proposed
Settlement if, in their opinion, a superior financial offer is presented for the
Funds.
On August 13, 1996, following further negotiations between counsel for the
plaintiffs and the defendants and the failure of Dominium to come forward with a
firmly committed acquisition proposal superior to CAPREIT's by the dates
specified by Dominium itself for delivery of an offer, CAPREIT agreed with
plaintiffs' counsel to increase the aggregate Redemption Prices being offered by
it to the BAC Holders by $2,000,000 and the parties entered into an amendment to
the Stipulation of Settlement pursuant to which CAPREIT agreed to so increase
the Redemption Prices and plaintiffs' counsel agreed to support the Stipulation
of Settlement, as improved by the amendment, notwithstanding any actions
Dominium has taken or in the future may take.
On August 14, 1996, at the fairness hearing on the Stipulation of
Settlement, as amended, in the Zakin and Wingard Actions, the Delaware Court of
----- -------
Chancery certified the class of BAC Holders, found that the proposed settlement
was fair, reasonable, adequate and in the best interests of the BAC Holders,
approved the Stipulation of Settlement, awarded to plaintiffs' counsel fees in
the amount of $2 million and entered a final judgment dismissing the actions.
Martin C. Schwartzberg, formerly a general partner of Fund I-II GP, is a
former shareholder and executive officer of CRI who retired from CRI as of
January 1, 1990. In connection therewith, he relinquished his general partner
duties for all CRI-sponsored partnerships, including those of Fund I-II GP. In
the fall of 1995, Mr. Schwartzberg publicly stated that he would oppose the
Mergers until the Funds made their financial statements and the financial
statements of the Owner Partnerships publicly available. The financial
statements of the Funds are included in this Proxy Statement. The financial
statements of the Owner Partnerships were filed as exhibits to Current Reports
on Form 8-K, filed with the Securities and Exchange Commission (the "SEC") by
each of the Funds on March 25, 1996. As discussed below, Mr. Schwartzberg has
since reviewed the requested information and has determined to support the
Mergers and vote his BACs in favor of the Transaction Proposals. See "SECURITY
OWNERSHIP OF BENEFICIAL HOLDERS AND MANAGEMENT".
On November 9, 1995, CRI filed a complaint seeking declaratory relief in
the Circuit Court for Montgomery County, Maryland against Capital Management
Strategies, Inc. ("CMS"), a company controlled by Mr. Schwartzberg, to determine
the proper amount of fees to be paid in 1996 under an Asset Management
Agreement. CMS answered the complaint on January 10, 1996, but asserted no
counterclaims. Thereafter, Mr. Schwartzberg launched a hostile consent
solicitation to be designated as managing general partner of 125 private
partnerships sponsored by CRI.
On January 18, 1996, Mr. Schwartzberg and CMS filed a complaint in the
Circuit Court for Montgomery County, Maryland, against CRI and Messrs. Dockser
and Willoughby alleging,
-125-
<PAGE>
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 Mergers involve self-dealing and constitute a breach of their fiduciary
duties to Mr. Schwartzberg, and (iii) that the actions in connection with the
merger of CRIIMI Mae Inc. in June 1995 involved self-interest and led in part to
the proposed reduction of the Asset Management Agreement budget. Neither of the
Funds nor the General Partners was named as a defendant in this action, and Mr.
Schwartzberg did not allege that he was a BAC Holder. Messrs. Dockser and
Willoughby entered an answer denying all of Mr. Schwartzberg's claims and moved
to dismiss or strike the allegations concerning the Funds and CRIIMI Mae Inc.
Messrs. Dockser and Willoughby publicly responded that Mr. Schwartzberg's suit
is motivated by his budget dispute with CRI and personal animosity.
On February 8, 1996, CRI and Messrs. Dockser and Willoughby filed an
Amended Complaint for Injunctive, Declaratory and Other Relief and Payment of
Damages against Mr. Schwartzberg and CMS. In addition to claims for damages and
declaratory relief, CRI and Messrs. Dockser and Willoughby also sought
preliminary and permanent injunctive relief against Mr. Schwartzberg and CMS
requiring them to turn over books and records relating to the Asset Management
Agreement, prohibiting them from interfering in the transfer of asset management
duties from CMS to another entity, prohibiting the disclosure of confidential
information of CRI , prohibiting them from making false and misleading
statements to investors and prohibiting the further solicitation of consents
from investors.
On February 12, 1996, the Montgomery County Circuit Court issued a
memorandum opinion and order enjoining CMS and Mr. Schwartzberg from using or
disclosing information made confidential under the Asset Management Agreement.
Despite the Court's injunction, Mr. Schwartzberg made use of confidential
information gained through CMS's participation as a party under the Asset
Management Agreement. As a result, CRI petitioned the Circuit Court for an Order
to Show Cause why Mr. Schwartzberg and CMS should not be held in contempt of the
Court's February 12, 1996 Order. A hearing was held on April 3, 1996, and on
April 19, 1996, the Court issued an opinion and order which found Mr.
Schwartzberg and CMS in contempt. The Court ordered Mr. Schwartzberg and CMS to
desist from any further use of investor lists in their possession and to
surrender the investor lists to CRI forthwith. The Court also fined CMS $5,000
for violating its order. Pursuant to the resolution of disputes with Mr.
Schwartzberg described below, on motion by CMS and Mr. Schwartzberg, without
opposition by CRI, the Court vacated its order for the payment of a $5,000 fine.
All parties were enjoined from referring to the order or the rulings of the
court as supporting the position of any party in any communication to investors
relating to the solicitation of votes establishing the identity of the managing
general partner of such partnerships.
Mr. Schwartzberg and CMS appealed the Court's April 19, 1996 order to the
Maryland Court of Special Appeals. Contemporaneously with filing their appeal,
Mr. Schwartzberg and CMS moved for a stay of the April 19, 1996 order. On April
30, 1996, the Court of Special
-126-
<PAGE>
Appeals issued an order which stayed the April 19, 1996 order, but only as it
related to the $5,000 fine and turning over the investor lists. The Court of
Special Appeals did not stay the prohibition against using the investor list
pending appeal.
In response to Mr. Schwartzberg's consent solicitations, CRI filed 27
actions regarding different CHP partnerships in the District of Columbia
Superior Court. The first seven actions were filed as Complaints for
Declaratory Relief in response to Mr. Schwartzberg's claims that he had the
requisite number of consents necessary to become Managing General Partner of
those 27 CHPs. In one of the declaratory judgment actions, the Court granted
Mr. Schwartzberg's request for injunctive relief enjoining CRI from interfering
with Mr. Schwartzberg's actions as Managing General Partner of the partnership
and required CRI to turn over the books and records of the partnership to Mr.
Schwartzberg. Subsequently, the Court at CRI's request compelled arbitration
with respect to 19 of the CHPs.
On February 15, 1996, Mr. Schwartzberg filed suit in the New Castle County,
Delaware Chancery Court against the General Partners (No. 14837) alleging that
he had made demands upon the General Partners, in his capacity as a general and
limited partner of Fund I-II GP and as a limited partner of Fund III GP, to
inspect and obtain copies of the BAC Holder lists and other documents and that
his demands were rejected. On February 23, 1996, the General Partners answered
the complaint, admitting that his demands have been rejected and denying that
Mr. Schwartzberg is entitled to the materials requested because, among other
things, he lacks standing and proper purpose to inspect and obtain copies of the
requested materials. Following a hearing on March 6 and 7, 1996, on June 7,
1996, the Chancery Court denied Mr. Schwartzberg's request for relief, holding
that Mr. Schwartzberg's request was for an "improper purpose" under Delaware
law.
On February 16, 1996, the Funds, together with the General Partners, CRI,
and CAPREIT filed suit against Mr. Schwartzberg in the United States District
Court for the Southern District of New York, No. 96 Civ. 1186 (LAK). The
complaint alleged that Mr. Schwartzberg is engaged in an unlawful solicitation
of proxies of the BAC Holders through two press releases he issued. On March
18, 1996, the District Court enjoined Mr. Schwartzberg from (1) making any
further solicitation of BAC Holders within the meaning of Section 14(a) of the
Exchange Act without complying with Regulation 14A under the Exchange Act, and
(2) committing any violation of Rule 14a-9 promulgated under the Exchange Act
(regarding false or misleading statements) in connection with any solicitation
relating to the Funds.
On March 18, 1996, Mr. Schwartzberg filed a counterclaim against the
General Partners alleging that three press releases issued by the General
Partners and the Funds constituted solicitations in violation of the Exchange
Act and that they were false and misleading. The counter-defendants denied the
allegations. On April 23, 1996, the Court denied Mr. Schwartzberg's motion for
an injunction. The Court held that an injunction was unwarranted, given the
scope and extent of Mr. Schwartzberg's prospects for succeeding on the merits,
and the fact he could show neither a sufficient threat of irreparable injury nor
a balance in his favor of the hardships associated with granting or denying an
injunction.
-127-
<PAGE>
Pursuant to the resolution of the various disputes between Mr.
Schwartzberg, and CRI and its affiliates, the actions in the United States
District Court for the Southern District of New York were dismissed with
prejudice and the injunction against Mr. Schwartzberg was dissolved on August 8,
1996. All other pending litigation between Mr. Schwartzberg and CRI, Mr.
Dockser, and Mr. Willoughby is to be dismissed.
After extensive review of the Merger Agreements, the Funds' financial
statements and other materials and pursuant to the terms of the agreement
between CAPREIT and Mr. Schwartzberg and CMS (the "CAPREIT Agreement"), Mr.
Schwartzberg has advised CAPREIT, the General Partners and the Funds that he and
his family members and entities under his control (the "Schwartzberg Entities")
will vote their BACs in favor of each of the Transaction Proposals and in
accordance with the recommendations of the General Partners. In connection
therewith, the Schwartzberg Entities have agreed to grant to CAPREIT an
irrevocable proxy to vote their interests in the Funds. See "SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT".
The Schwartzberg Entities have agreed not to attempt to (i) dispose of or
acquire any interest in the Funds or join or participate with any group seeking
to do the same, (ii) solicit proxies or participate in a solicitation in
opposition to the Mergers, in opposition to the recommendations of the General
Partners with respect to the Mergers, or to remove the General Partners or seek
have himself or his designee become a general partner of the Funds, (iii) make
any public statements in opposition to the Mergers, (iv) make any public
statements with respect to, or offer, solicit, or submit a proposal relating to
any acquisition of all or part of the assets of the Funds, any merger,
consolidation or combination with the Funds, or the admission of new general
partners into the Funds.
In addition, Mr. Schwartzberg disclosed that he has had discussions with
Lennar Corp. regarding the terms of the offer and the submission of a competing
bid. Lennar Corp. declined to submit a competing offer to the Funds and has
entered into a confidentiality and standstill agreement with CAPREIT regarding
the Mergers and the Funds.
Provided that the Schwartzberg Entities comply with the terms of the
CAPREIT Agreement, CAPREIT is obligated to cause to be paid into escrow the
aggregate amount of $867,000 in four installments over a three year period.
These funds will be used for the partial payment of Mr. Schwartzberg's counsel
and consultants in connection with their review of the Merger Agreements, drafts
of this Proxy Statement, financial information of the Funds, Fund partnership
documents, Delaware-related claims, and other documents. CRI will provide
CAPREIT with $400,000 in respect of CAPREIT's obligations under the CAPREIT
Agreement, counsel for the plaintiffs in the Zakin and Wingard Actions will
----- -------
provide $100,000 in respect of such payments and Mr. Schwartzberg will provide
$33,500 of such payments. No such payments other than the first installment
will be paid into escrow until the Mergers have been consummated and each of the
payments is contingent upon there having been no defaults on the part of the
Schwartzberg Entities or under the third party standstills in respect thereof.
-128-
<PAGE>
The Schwartzberg Entities are personally liable to CAPREIT for any breaches
occasioned by them of the CAPREIT Agreement. Mr. Schwartzberg has covenanted to
CAPREIT that he will maintain a net worth of at least $3.5 million through
December 31, 2002. In the event that the Schwartzberg Entities are in default
under the CAPREIT Agreement as a result of a violation of a third party
standstill agreement, Mr. Schwartzberg shall pay CAPREIT liquidated damages in
accordance with the terms of the CAPREIT Agreement.
The agreement between Mr. Schwartzberg, CMS and CRI (the "CRI Agreement"),
in addition to providing that Mr. Schwartzberg will not oppose the Mergers, also
provides for a settlement of all disputes between CRI and Schwartzberg,
including, but not limited to, the disputes involving the CHPs. As part of the
CRI Agreement, Mr. Schwartzberg will be designated as managing general partner
of 12 of the CHPs and CRI will remain the managing general partner of the
remainder of 113 CHPs. Messrs. Dockser, Willoughby and Schwartzberg will each
equally share in any residuals and disposition fees generated by the assisted
housing portfolio (properties which are not owned by or related to the Funds)
with Schwartzberg to receive a guaranteed share of disposition fees of $125,000
semi-annually from 1997 to 2002. CAPREIT will be responsible for guaranteeing
some of these fees from January 1, 2001 through June 30, 2002.
As part of the CRI Agreement, Schwartzberg and CRI, have all agreed not to
take any actions which might interfere with each others' businesses.
Schwartzberg has also retracted any derogatory statements that he previously
made about CRI and its principals and the Mergers and has promised not to make
any similar statements in the future. As security for these agreements,
Schwartzberg assigned certain of his partnership interests to CRI and pledged
the distributions, residuals and other fees that he receives from other
partnerships to CRI. Additionally, CRI agreed to cause the partnerships that
own property covered by certain property management agreements to keep their
management agreements in force until June 30, 2002 and to pay Schwartzberg
certain amounts if such management agreements are terminated prior to that date
under certain conditions. CAPREIT has also agreed to make certain payments (not
to exceed $100,000) to Schwartzberg in the event that those management
agreements are terminated. Although the CRI Agreement provides that it is
legally binding, that agreement contemplates execution of a more detailed
agreement (referred to as the Definitive Agreement) and the exchange of full
general releases between Mr. Schwartzberg and CRI, and Messrs. Dockser and
Willoughby.
MANAGEMENT OF THE FUNDS
The Funds have no directors, executive officers or employees of their own.
Set forth below are the names, ages and business experience of the directors and
current executive officers of CRI, the corporate general partner of the General
Partners. The business address of each of the persons listed below is CRI, Inc.,
The CRI Building, 11200 Rockville Pike, Rockville, Maryland 20852.
-129-
<PAGE>
William B. Dockser, 59, Chairman of the Board and Treasurer of CRI and a
Director since 1974. Prior to forming CRI, he served as President of Kaufman and
Broad Asset Management, Inc., an affiliate of Kaufman and Broad, Inc., which
managed a number of publicly held limited partnerships created to invest in low
and moderate income multifamily apartment complexes. For a period of 2-1/2 years
prior to joining Kaufman and Broad, he served in various positions at HUD,
culminating in the post of Deputy FHA Commissioner and Deputy Assistant
Secretary for Housing Production and Mortgage Credit, where he was responsible
for all federally insured housing production programs. Before coming to
Washington, Mr. Dockser was a practicing attorney in Boston and also was a
special Assistant Attorney General for the Commonwealth of Massachusetts. He
holds a Bachelor of Laws degree from Yale University Law School and a Bachelor
of Arts degree, cum laude, from Harvard University. He is also Chairman of the
Board of CRIIMI Mae Inc., CRIIMI, Inc., and CRI Liquidating REIT, Inc.
H. William Willoughby, 50, President, Secretary and a Director of CRI since
January 1990 and Senior Executive Vice President, Secretary and a Director of
CRI from 1974 to 1989. He is principally responsible for the financial
management of CRI and its associated partnerships. Prior to joining CRI in 1974,
he was Vice President of Shelter Corporation of America and a number of its
subsidiaries dealing principally with real estate development and equity
financing. Before joining Shelter Corporation, he was a Senior Tax Accountant
with Arthur Andersen & Co. He holds a Juris Doctorate degree, a Master of
Business Administration degree and a Bachelor of Science degree in Business
Administration from the University of South Dakota. He is also a Director and
executive officer of CRIIMI Mae Inc., CRIIMI, Inc. and CRI Liquidating REIT,
Inc.
Ronald W. Thompson, 49, Group Executive Vice President-Hotel Asset
Management. Prior to joining CRI in 1985, he was employed at the Hyatt
Organization where he most recently served as the General Manager of the Hyatt
Regency in Flint, Michigan. During his nine year tenure with Hyatt, he held
senior management positions with the Hyatt Regency in Dearborn, Michigan, the
Hyatt in Richmond, Virginia, the Hyatt in Winston-Salem, North Carolina and the
Hyatt Regency in Atlanta, Georgia. Before joining Hyatt, Mr. Thompson worked in
London, England for the English Tourist Board as well as holding management
positions in Europe, Australia, and New Zealand in the hotel industry. Mr.
Thompson received his education in England where he received a business degree
in Hotel Administration from Winston College.
Susan R. Campbell, 37, Senior Vice President-CRI Realty Services. Prior to
joining CRI in March 1985, she was a budget analyst for the B.F. Saul Advisory
Company. She holds a Bachelor of Science degree in business from the University
of Maryland.
Melissa Cecil Lackey, 40, Senior Vice President and General Counsel. Prior
to joining CRI in 1990, she was associated with the firms of Zuckerman, Spaeder,
Goldstein, Taylor & Kolker in Washington, D.C. and Hirsch & Westheimer in
Houston, Texas. She holds a Juris Doctorate from the University of Virginia
School of Law and a Bachelor of Arts degree from the College of William & Mary.
-130-
<PAGE>
THE MERGER PARTNERSHIPS AND CAPREIT GP
The Merger Partnerships are Delaware limited partnerships which were
created during August 1995 solely for the purpose of effecting the Mergers.
CAPREIT GP is a Delaware corporation formed during August 1996 for the sole
purpose of acquiring the general partner interest of each of the General
Partners and serving as the general partner of the Funds and conducts no other
business. CAPREIT, the general partner of the Merger Partnerships and the owner
of all of the outstanding capital stock of CAPREIT GP, is a self-managed, self-
administered private real estate investment trust incorporated under the laws of
Maryland. It currently owns 30 multi-family complexes located in 10 states.
In addition to managing the 7,512 apartments that it owns, CAPREIT manages
another 8,942 apartments (including most of the apartments owned by the Owner
Partnerships) for third-party owners. CAPREIT has a total capitalization in
excess of $331 million. AP CAPREIT, a Delaware limited partnership, holds
99.83% of the outstanding capital stock of CAPREIT. CAPREIT Limited
Partnership, a Maryland limited partnership, is the initial limited partner of
each of the Merger Partnerships.
The Merger Partnerships, CAPREIT and CAPREIT GP each has executive offices
at 11200 Rockville Pike, Rockville, Maryland 20852.
By effecting the Mergers and the Financing and acquiring ownership of
certain of the underlying properties which secure the Mortgage Revenue Bonds,
which include 14 properties currently managed by CAPREIT Residential under
management contracts with the Owner Partnerships, CAPREIT is seeking to
guarantee its continued management of such properties, strengthen its
competitive position by integrating these properties with its current housing
portfolio which is located, for the most part, in the same geographic areas as
these properties, and replace existing indebtedness on certain of the properties
owned by it with lower cost financing.
None of CAPREIT, CAPREIT GP, or the Merger Partnerships own any BACs.
Except as otherwise disclosed in this Proxy Statement, none of CAPREIT, CAPREIT
GP, or the Merger Partnerships entered into, or was within the past year a party
to, any contract, arrangement or understanding with any person with respect to
any of the securities of the Funds. Except for certain property management
contracts between CAPREIT Residential and certain CRI-related entities, none of
CAPREIT, CAPREIT GP, or the Merger Partnerships have any arrangement or
understanding with any person with respect to any future employment by the Funds
or their affiliates or with respect to any future transactions to which the
Funds or any of their affiliates will or may be a party.
MANAGEMENT OF THE MERGER PARTNERSHIPS AND CAPREIT GP
The Merger Partnerships have no directors, executive officers or employees
of their own. Set forth below are the names, ages and business experience of the
directors and senior executive officers of CAPREIT, the general partner of the
Merger Partnerships and of CAPREIT GP. Each of the following individuals has a
business address c/o Capital Apartment Properties, Inc., 11200 Rockville Pike,
Rockville, Maryland 20852, unless otherwise indicated.
-131-
<PAGE>
Richard L. Kadish, 52, President, Chief Executive Officer and a Director of
CAPREIT and CAPREIT GP. Mr. Kadish oversees and directs all business affairs of
CAPREIT. Prior to joining CAPREIT in January, 1994, Mr. Kadish was Group
Executive Vice President-Multifamily Acquisitions for CRI where he had served in
various positions since 1978. See "SPECIAL FACTORS--Certain Relationships and
Related Transactions". Prior to 1978, he served as a Deputy Attorney General of
the State of New Jersey, where he was counsel to the Division of Local Finance
and Housing and Urban Renewal. He then served as counsel to the New Jersey
Housing Finance Agency (now New Jersey Housing and Mortgage Finance Agency) and
later was appointed as the Deputy Executive Director of the New Jersey Housing
Finance Agency. Mr. Kadish is a member of the American Bar Association and the
New Jersey Bar Association and is a director of both the National Housing &
Rehabilitation Association and the National Multi Housing Council. He holds
Juris Doctorate and Master of Arts degrees from Rutgers University and a
Bachelor of Arts degree from the University of Pennsylvania.
Bruce A. Esposito, 41, Chief Financial Officer and a Senior Vice President
of CAPREIT and CAPREIT GP. As CFO, Mr. Esposito is principally responsible for
the administration of all financial affairs of CAPREIT. Prior to joining
CAPREIT in April, 1994, Mr. Esposito was a Senior Engagement Manager with
Coopers & Lybrand, dealing principally with clients in the real estate industry
with concentrations in real estate investment trusts, SEC reporting matters and
initial public offerings. Mr. Esposito holds a Master of Business
Administration degree and Bachelor of Science degree from the University of
Maryland and is a Certified Public Accountant.
Jeffrey A. Goldshine, 43, Director of Management Operations and a Senior
Vice President of CAPREIT and a Senior Vice President of CAPREIT GP. Mr.
Goldshine is principally responsible for directing the property management
affairs of CAPREIT. Prior to joining CAPREIT in January, 1994, Mr. Goldshine
was President and Chief Operating Officer of Artery Property Management, Inc.,
where he was responsible for all operations of a portfolio of 30 properties of
12, 000 apartments. Prior to joining Artery in 1984, Mr. Goldshine held
supervisory positions in property management with Kay Management Company, Inc.,
Charles E. Smith Management, Inc. and Arlen Realty, Inc. Mr. Goldshine is a
Certified Property Manager (CPM) affiliated with the Institute of Real Estate
Management (IREM). Mr. Goldshine holds a Bachelor of Arts degree from George
Washington University.
Ernest L. Heymann, 34, Director of Acquisitions and Strategic Planning and
Senior Vice President of CAPREIT and a Senior Vice President of CAPREIT GP. Mr.
Heymann is the chief financial underwriter for all acquisitions and developments
of CAPREIT. Prior to joining CAPREIT in January, 1994, Mr. Heymann was Vice
President-Multifamily Acquisitions of CRI where he was responsible for the
financial underwriting of multifamily properties. Prior to 1987, Mr. Heymann
served as a project finance officer with Oxford Mortgage and Investment
Corporation where he assisted in the structuring and placement of equity and
debt for multifamily properties. He holds a Master of Business Administration
(Finance) degree from George Washington University and a Bachelor of Science
degree in finance from Gannon University.
-132-
<PAGE>
Michael D. Weiner, 43, Director of CAPREIT. Mr. Weiner became a Director of
CAPREIT in January, 1994. Mr. Weiner has been an officer since 1992 of the
general partner of Apollo Advisors, L.P., which, together with its affiliates,
serves as the managing general partner of Apollo Investment Fund, L.P., AIF II,
L.P. and Apollo Investment Fund III, L.P., private securities investment funds,
and since 1993 an officer of the general partner of Apollo Real Estate Advisors,
L.P. ("Apollo") which serves as the managing general partner of Apollo Real
Estate Investment Fund L.P., a private real estate investment fund. Prior to
1992, Mr. Weiner was a partner of the national law firm of Morgan, Lewis &
Bockius. Mr. Weiner is also a director of Applause, Inc., Continental Graphics
Holdings, Inc., The Florsheim Shoe Company, Inc. and Furniture Brands
International, Inc. Mr. Weiner's business address is Apollo Advisors, L.P., 1999
Avenue of the Stars, Suite 1900, Los Angeles, California 90057.
W. Edward Scheetz, 31, a Director of CAPREIT. Mr. Scheetz became a Director
of CAPREIT in January, 1994. Mr. Scheetz has been a principal of Apollo Real
Estate Advisors, L.P. since May 1993 directing Apollo Real Estate Investment
Fund's investment program since that time. Prior to joining Apollo Real Estate
Advisors, L.P., Mr. Scheetz was a principal of Trammel Crow Ventures, a national
real estate investment firm. Mr. Scheetz is also a director of Crocker Realty
Trust, Inc. and Roland International. Mr. Scheetz's business address is Apollo
Real Estate Advisors, L.P., 1301 Avenue of the Americas, 38th Floor, New York,
New York 10019.
Lee S. Neibart, 45, a Director of CAPREIT. Mr. Neibart became a director
of CAPREIT in 1994. Mr. Neibart has been an associate of Apollo since December
1993. Since October 1994, Mr. Neibart has been a Director of Deforest Capital,
Deforest Capital I, NPI and NPI Equity. Prior to 1993, Mr. Neibart also served
as Executive Vice President and Chief Operating Officer of the Robert Martin
Company, a private real estate development and management firm based in
Westchester County, New York. Mr. Neibart is also a director of Crocker Realty
Trust, Inc. and Roland International, Inc. Mr. Neibart's business address is
c/o Apollo Real Estate Advisors, L.P., 1301 Avenue of the Americas, 38th Floor,
New York, New York 10019.
Jay Sugarman, 33, a Director of CAPREIT. Mr. Sugarman became a Director of
CAPREIT in January, 1994. Mr. Sugarman is President of Starwood Mezzanine
Investors, L.P. ("Starwood Mezzanine"), a $220 million partnership dedicated to
investing in junior and participating mortgages, subordinated CMBS, and other
real estate related debt. Starwood Mezzanine focuses on creating and structuring
subordinated debt investments which provide superior returns on a risk-adjusted
basis. Prior to forming Starwood Mezzanine, Mr. Sugarman managed a diversified
investment fund on behalf of the Burden family, a branch of the Vanderbilts, and
the Ziff family, former owners of Ziff-Davis Communications. While in that
position, he was responsible for negotiating and structuring the formation of
Starwood Capital Group on behalf of the Burden and Ziff families and for
reviewing all real estate investments for both families. Earlier in his career,
Mr. Sugarman worked in the merger and acquisition department of the First Boston
Corporation and the commodity and derivatives trading area of Goldman Sachs &
Co. Mr. Sugarman graduated summa cum laude from Princeton University, where he
was nominated for valedictorian and received the Paul Volcker Award in
Economics. He is also a graduate of the Harvard Business School, receiving Baker
Scholar Honors. Mr.
-133-
<PAGE>
Sugarman's business address is c/o Starwood Mezzanine Investors, L.P., Three
Pickwick Plaza, Suite 250, Greenwich, CT 06830.
CERTAIN LEGAL MATTERS
Except as set forth in this Proxy Statement, the General Partners are not
aware of any filings, approvals or other action by any domestic or foreign
governmental agency that would be required prior to the consummation of the
Mergers and the related transactions. As noted above, the making of such
filings, the obtaining of such approvals and the taking of such other action
is a condition to the consummation of the Mergers and the related transactions.
The General Partners believe that the Mergers and the related Transactions
are exempt from the filing requirements of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, pursuant to the exemptions therefrom for
acquisitions of real estate and interests in real estate by a real estate
investment trust.
ACCOUNTANTS
Representatives of Arthur Andersen, LLP, the independent public accountants
for each of the Funds, will be present at the Special Meetings and will be
available to respond to questions.
AVAILABLE INFORMATION
Pursuant to Rule 13e-3 of the General Rules and Regulations under the
Exchange Act, the Funds, the General Partners, CAPREIT and the Merger
Partnerships, have filed with the Securities and Exchange Commission (the
"Commission") a Rule 13e-3 Transaction Statement on Schedule 13E-3 (including
any amendments thereto, the "Schedule 13E-3"), together with exhibits thereto,
furnishing certain additional information with respect to the Mergers and
related transactions. This Proxy Statement does not contain all the information
contained in the Schedule 13E-3 and the exhibits thereto, certain portions of
which are omitted as permitted by the rules and regulations of the Commission.
The Funds are subject to the informational requirements of the
Exchange Act and, in accordance therewith, file reports, proxy statements and
other information with the Commission. The Schedule 13E-3 and the respective
exhibits thereto, as well as such reports, proxy statements and other
information filed by the Funds with the Commission, can be inspected and copied
at the public reference facilities maintained by the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the public
reference facilities maintained by the Commission at 7 World Trade Center, Suite
1300, New York, New York, 10048 and at Northwestern Atrium Center, Suite 1400,
500 West Madison Street, Chicago, Illinois 60661. Copies of such materials can
be obtained at prescribed rates from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The Schedule 13E-3
and the respective exhibits thereto, as well as recent reports and proxy
statements of the Funds, have been filed through the Electronic Data Gathering,
Analysis and Retrieval (EDGAR) system and are publicly available through the
Commission's Web site (http://www.sec.gov). The BACs are listed for trading on
the American
-134-
<PAGE>
Stock Exchange. Copies of documents filed by the Funds can also be inspected at
the offices of the American Stock Exchange at 86 Trinity Place, New York, New
York 10006.
All reports and opinions from outside parties filed as exhibits to the
Schedule 13E-3 filed with the Commission in connection with the Transactions
also will be made available for inspection and copying at the principal
executive offices of the Funds during their regular business hours by any
interested BAC Holder or representative thereof who has been so designated in
writing.
-135-
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
<S> <C>
Report of Independent Public Accountants............................ F-2
Audited Financial Statements of Capital Realty Investors Tax Exempt
Fund Limited Partnership as of December 31, 1995 and 1994 and for
the Years Ended December 31, 1995, 1994 and 1993
Balance Sheet.................................................. F-3
Statements of Operations....................................... F-4
Statements of Changes in Partners' Capital (Deficit)........... F-6
Statements of Cash Flows....................................... F-8
Notes to Financial Statements.................................. F-10
Unaudited Interim Financial Statements of Capital Realty Investors
Tax Exempt Fund Limited Partnership as of June 30, 1996 and
December 31, 1995 and for the Three and Six Months Ended June 30,
1996 and 1995
Balance Sheets................................................. F-48
Consolidated Statements of Income.............................. F-49
Statements of Changes in Partner Capital (Deficit)............. F-51
Statements of Cash Flows....................................... F-52
Notes to Unaudited Financial Statements........................ F-54
Report of Independent Public Accountants............................ F-76
Audited Financial Statements of Capital Realty Investors Tax Exempt
Fund III Limited Partnership as of December 31, 1995 and 1994 and
for the Years Ended December 31, 1995, 1994 and 1993
Balance Sheet.................................................. F-77
Statements of Operations....................................... F-78
Statements of Changes in Partners' Capital (Deficit)........... F-79
Statements of Cash Flows....................................... F-80
Notes to Financial Statements.................................. F-81
Unaudited Interim Financial Statements of Capital Realty Investors
Tax Exempt Fund III Limited Partnership as of June 30, 1996 and
December 31, 1995 and for the Three and Six Months Ended June 30,
1996 and 1995
Balance Sheets................................................. F-111
Consolidated Statements of Income.............................. F-112
Statements of Changes in Partners' Capital (Deficit)........... F-113
Statements of Cash Flows....................................... F-114
Notes to Unaudited Financial Statements........................ F-115
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Series I and Series II Partners and Beneficial Assignee
Certificate Holders of Capital Realty Investors Tax
Exempt Fund Limited Partnership:
We have audited the accompanying balance sheets of Series I and Series II
of Capital Realty Investors Tax Exempt Fund Limited Partnership (the
Partnership, a Delaware limited partnership) as of December 31, 1995 and 1994,
the related statements of operations, changes in partners' capital (deficit) and
cash flows for the years ended December 31, 1995 and 1994 and the related
consolidated statements of operations, changes in partners' capital (deficit)
and cash flows for the year ended December 31, 1993. These financial statements
are the responsibility of the Partnership's management. Our responsiblity is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the financial statements, the Partnership's 1994
and 1995 financial statements have been restated to account for its investments
in mortgage revenue bonds as debt securities.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Series I and Series II of
Capital Realty Investors Tax Exempt Fund Limited Partnership as of December 31,
1995 and 1994, and the results of operations and cash flows of Series I and
Series II for the years ended December 31, 1995, 1994 and 1993, in conformity
with generally accepted accounting principles.
Washington, D.C. Arthur Andersen LLP
May 8, 1996
F-2
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SERIES I SERIES II
------------------------ ------------------------
As of December 31, As of December 31,
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Investment in mortgage revenue bonds $30,740,285 $30,740,285 $43,793,252 $43,793,252
Cash and cash equivalents 58,924 103,864 88,986 101,283
Marketable securities 1,315,182 1,089,522 1,512,281 1,447,843
Working capital reserves invested in
marketable securities 1,284,670 921,929 2,307,385 1,646,746
Receivables and other assets 21,958 26,918 36,996 42,872
----------- ----------- ----------- -----------
Total assets $33,421,019 $32,882,518 $47,738,900 $47,031,996
=========== =========== =========== ===========
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
<S> <C> <C> <C> <C>
Distributions payable $ 1,243,762 $ 1,151,631 $ 1,766,776 $ 1,635,903
Accounts payable and accrued expenses 198,413 77,235 224,135 99,475
----------- ----------- ----------- -----------
Total liabilities 1,442,175 1,228,866 1,990,911 1,735,378
----------- ----------- ----------- -----------
Partners' capital (deficit):
General Partner (214,083) (217,367) (289,808) (294,367)
Beneficial Assignee Certificates
(BACs) - issued and outstanding,
2,280,000 of Series I BACs and
3,238,760 of Series II BACs 32,192,927 31,871,019 46,037,797 45,590,985
----------- ----------- ----------- -----------
Total partners' capital 31,978,844 31,653,652 45,747,989 45,296,618
----------- ----------- ----------- -----------
Total liabilities and
partners' capital $33,421,019 $32,882,518 $47,738,900 $47,031,996
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-3
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SERIES I
---------------------------------------
For the years ended December 31,
1995 1994 1993
---------- ----------- -----------
<S> <C> <C> <C>
Interest from mortgage revenue bonds $3,103,783 $ 2,829,665 $ 128,000
---------- ----------- -----------
Income from investments in real estate:
Rental revenues -- -- 5,612,280
Rental expenses -- -- (3,358,479)
Depreciation -- -- (1,741,232)
---------- ----------- -----------
Net rental income -- -- 512,569
---------- ----------- -----------
3,103,783 2,829,665 640,569
---------- ----------- -----------
Other income (expenses):
Other interest income 75,750 46,713 47,738
Merger-related expenses (169,157) -- --
General and administrative (155,396) (169,257) (185,885)
Professional fees (42,264) (48,390) (34,063)
AMEX Listing -- -- (16,978)
---------- ----------- -----------
(291,067) (170,934) (189,188)
---------- ----------- -----------
Income before cumulative effect of
accounting change 2,812,716 2,658,731 451,381
Cumulative effect of change in accounting for
mortgage revenue bonds -- (2,475,448) --
---------- ----------- -----------
Net income $2,812,716 $ 183,283 $ 451,381
========== =========== ===========
Net income allocated to General Partner (1.01%) $ 28,408 $ 1,851 $ 4,559
========== =========== ===========
Net income allocated to BAC Holders (98.99%) $2,784,308 $ 181,432 $ 446,822
========== =========== ===========
Per BAC data:
Income before cumulative effect of
accounting change $1.22 $ 1.15 $0.20
Cumulative effect of change in accounting for
mortgage revenue bonds -- (1.07) --
---------- ----------- -----------
Net income per BAC $1.22 $ 0.08 $0.20
========== =========== ===========
BACs outstanding 2,280,000 2,280,000 2,280,000
========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-4
<PAGE>
CAPTIAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SERIES II
----------------------------------------
For the years ended December 31,
1995 1994 1993
---------- ----------- -----------
<S> <C> <C> <C>
Interest from mortgage revenue bonds $4,276,936 $ 3,824,910 $ --
---------- ----------- ------------
Income from investments in real estate:
Rental revenues -- -- 7,950,088
Rental expenses -- -- (4,291,557)
Depreciation -- -- (2,146,661)
---------- ----------- -----------
Net rental income -- -- 1,511,870
---------- ----------- -----------
4,276,936 3,824,910 1,511,870
---------- ----------- -----------
Other income (expenses):
Other interest income 126,506 92,536 73,571
Merger-related expenses (169,462) -- --
General and administrative (191,711) (203,936) (290,178)
Professional fees (57,347) (59,183) (43,402)
AMEX listing -- -- (21,584)
---------- ----------- -----------
(292,014) (170,583) (281,593)
---------- ----------- -----------
Income before extraordinary item
and cumulative
effect of accounting change 3,984,922 3,654,327 1,230,277
Extraordinary item - gain on debt
reduction -- -- 416,432
Cumulative effect of change in
accounting for
mortgage revenue bonds -- (4,600,720) --
---------- ----------- -----------
Net income (loss) $3,984,922 $ (946,393) $ 1,646,709
========== =========== ===========
Net income (loss) allocated to
General Partner (1.01%) $ 40,248 $ (9,559) $ 16,632
========== =========== ===========
Net income (loss) allocated to BAC
Holders (98.99%) $3,944,674 $ (936,834) $ 1,630,077
========== =========== ===========
Per BAC data:
Income before extraordinary item
and cumulative
effect of accounting change $1.22 $ 1.12 $ 0.37
Extraordinary gain -- -- 0.13
Cumulative effect of change in
accounting for
mortgage revenue bonds -- (1.41) --
---------- ----------- -----------
Net income (loss) per BAC $1.22 $ (0.29) $ 0.50
========== =========== ===========
BACs outstanding 3,238,760 3,238,760 3,238,760
========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-5
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
SERIES I
----------------------------------------
Beneficial
Assignee
Certificate General
Holders Partner Total
----------- ----------- -----------
<S> <C> <C> <C>
Balance, December 31, 1992 $35,802,765 $(177,251) $35,625,514
Net income 446,822 4,559 451,381
Distributions of $1.00 per BAC (including return
of capital of $0.80 per BAC) (2,280,000) (23,263) (2,303,263)
----------- --------- -----------
Balance, December 31, 1993 33,969,587 (195,955) 33,773,632
Net income 181,432 1,851 183,283
Distributions of $1.00 per BAC (including return
of capital of $0.92 per BAC) (2,280,000) (23,263) (2,303,263)
----------- --------- -----------
Balance, December 31, 1994 31,871,019 (217,367) 31,653,652
Net income 2,784,308 28,408 2,812,716
Distributions of $1.08 per BAC
(none of which is
return of capital) (2,462,400) (25,124) (2,487,524)
----------- --------- -----------
Balance, December 31, 1995 $32,192,927 $(214,083) $31,978,844
=========== ========= ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-6
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
SERIES II
---------------------------------------
Beneficial
Assignee
Certificate General
Holders Partner Total
----------- ----------- -----------
<S> <C> <C> <C>
Balance, December 31, 1992 $51,375,262 $(235,349) $51,139,913
Net income 1,630,077 16,632 1,646,709
Distributions of $1.00 per BAC (including return
of capital of $0.50 per BAC) (3,238,760) (33,046) (3,271,806)
----------- --------- -----------
Balance, December 31, 1993 49,766,579 (251,763) 49,514,816
Net loss (936,834) (9,559) (946,393)
Distributions of $1.00 per BAC (all of which is
return of capital) (3,238,760) (33,045) (3,271,805)
----------- --------- -----------
Balance, December 31, 1994 45,590,985 (294,367) 45,296,618
Net income 3,944,674 40,248 3,984,922
Distributions of $1.08 per BAC (none of which is
return of capital) (3,497,862) (35,689) (3,533,551)
----------- --------- -----------
Balance, December 31, 1995 $46,037,797 $(289,808) $45,747,989
=========== ========= ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements
F-7
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SERIES I
-----------------------------------------
For the years ended December 31,
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,812,716 $ 183,283 $ 451,381
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation -- -- 1,741,232
Cumulative effect of accounting change -- 2,475,448 --
Changes in assets and liabilities:
Increase in restricted cash and cash equivalents -- -- (9,584)
Decrease (increase) in receivables and other assets 4,960 6,938 (2,424)
Increase in accrued mortgage administration and
servicing fees due to related parties -- -- 265,968
Decrease in other liabilities related to
real estate operations -- -- (96,940)
Increase (decrease) in accounts payable and
accrued expenses 121,178 (6,922) (12,528)
----------- ----------- -----------
Net cash provided by operating activities 2,938,854 2,658,747 2,337,105
----------- ----------- -----------
Cash flows from investing activities:
Sale of marketable securities 2,612,435 3,177,612 2,966,087
Purchase of marketable securities (2,838,095) (3,111,515) (2,883,255)
Deposits to working capital reserves invested in
marketable securities (362,741) (351,266) (79,643)
----------- ----------- -----------
Net cash (used in) provided by investing activities (588,401) (285,169) 3,189
----------- ----------- -----------
Cash flows from financing activities:
Distributions to BAC Holders and General Partner (2,395,393) (2,303,263) (2,309,482)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (44,940) 70,315 30,812
Cash and cash equivalents, beginning of year 103,864 33,549 2,737
----------- ----------- -----------
Cash and cash equivalents, end of year $ 58,924 $ 103,864 $ 33,549
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-8
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SERIES II
----------------------------------------
For the years ended December 31,
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 3,984,922 $ (946,393) $ 1,646,709
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation -- -- 2,146,661
Cumulative effect of accounting change -- 4,600,720 --
Changes in assets and liabilities:
Increase in restricted cash and cash equivalents -- -- (312,337)
Decrease (increase) in receivables and other assets 5,876 (6,253) 68,391
Increase in accrued mortgage administration and
servicing fees due to related parties -- -- 391,297
Decrease in other liabilities related to real
estate operations -- -- (587,414)
Increase (decrease) in accounts payable and accrued
expenses 124,660 (6,100) (9,007)
----------- ----------- -----------
Net cash provided by operating activities 4,115,458 3,641,974 3,344,300
----------- ----------- -----------
Cash flows from investing activities:
Sale of marketable securities 7,528,134 5,874,674 6,590,743
Purchase of marketable securities (7,592,572) (5,886,656) (6,459,193)
Deposits to working capital reserves invested in marketable
securities (660,639) (459,714) (75,409)
Withdrawals from interest reserves invested in
marketable securities -- -- 16,939
Withdrawals from working capital reserves invested in
marketable securities -- -- 19,550
----------- ----------- -----------
Net cash (used in) provided by investing activities (725,077) (471,696) 92,630
----------- ----------- -----------
Cash flows from financing activities:
Distributions to BAC Holders and General Partner (3,402,678) (3,271,805) (3,280,642)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (12,297) (101,527) 156,288
Cash and cash equivalents, beginning of year 101,283 202,810 46,522
----------- ----------- -----------
Cash and cash equivalents, end of year $ 88,986 $ 101,283 $ 202,810
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-9
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. Organization
Capital Realty Investors Tax Exempt Fund Limited Partnership (the
Partnership) was organized on August 1, 1986 under the Delaware Revised Uniform
Limited Partnership Act and will continue until December 31, 2016, unless
dissolved earlier in accordance with its 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 (the Observatory II bond, as modified in
1992, no longer has a participating loan feature).
The Partnership received initial capital contributions from the
General Partner and the Assignor Limited Partner. The General Partner is CRITEF
Associates Limited Partnership (CRITEF Associates) whose general partners
include C.R.I., Inc. (CRI) and the shareholders of CRI. The limited partners of
CRITEF Associates are the shareholders of CRI, a general partnership consisting
of certain current and former employees of CRI and others. The Assignor Limited
Partner is CRITEF, Inc., whose outstanding shares of stock are owned by the
shareholders of CRI.
The Assignor Limited Partner has assigned certain of the ownership
attributes of its limited partnership interests (including rights to a
percentage of the income, gains, losses, deductions and distributions of the
Partnership) to the purchasers of Beneficial Assignee Certificates (BACs) on the
basis of one unit of limited partnership interest for one BAC.
A Form S-11 Registration Statement was filed with the Securities and
Exchange Commission (SEC) and became effective October 29, 1986 for a maximum
offering of 12,000,000 BACs at $25 per BAC (the public offering). The
Registration Statement provided, as was allowed for in the Limited Partnership
Agreement, that the BACs could be issued in series at the discretion of the
General Partner. On February 12, 1987, the Partnership completed offering BACs
in Series I after raising $57,000,000 from the sale of 2,280,000 BACs, and on
October 29, 1987, the Partnership completed offering BACs in Series II after
raising $80,969,000 from the sale of 3,238,760 BACs. The public offering
terminated on October 29, 1987.
On July 1, 1993, the General Partner listed the BACs on the American
Stock Exchange (AMEX) with a trading symbol of CRA for Series I and CRB for
Series II. The General Partner believes that the benefits from listing the
BACs on AMEX include increased liquidity and reduced transaction costs.
However, a publicly traded partnership is treated as a corporation for income
tax purposes unless it meets certain exceptions. To qualify under these
exceptions,the General Partner annually invests in de minimus taxable
investments for both Series I and Series II. In 1995, 1994 and 1993 Series I
and Series II met the exceptions, and the Partnership was not taxed as a
corporation.
The Partnership accounts for each Series of BACs separately as though
it held a separate and distinct pool of mortgage revenue bonds secured by real
estate and, if applicable, certain balances in the Partnership's interest
reserves. Organization and offering costs, the Partnership's
F-10
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. Organization - continued
working capital reserves and certain general and administrative expenses of the
Partnership have been allocated, unless specifically attributed to a Series, pro
rata among the Series, based on the gross offering proceeds raised by each
Series (except for costs relating to the proposed merger, discussed in Note 7,
which are allocated evenly between Series I and Series II.) Deposits to the
Partnership's interest reserves and subsequent distributions from the interest
reserves to BAC Holders are accounted for by mortgage revenue bond investment by
Series. The amounts and distributions of cash flow, residual proceeds,
liquidation proceeds, profits and losses and all other priorities and
allocations are separately determined for each Series of BACs.
2. Summary of significant accounting policies
a. Method of accounting
--------------------
The financial statements of each Series of the Partnership are
prepared in accordance with generally accepted accounting principles
(GAAP).
b. Use of estimates
----------------
In preparing financial statements in conformity with GAAP, 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. Investment in mortgage revenue bonds
------------------------------------
Prior to January 1, 1994, investments in mortgage revenue bonds were
accounted for as real estate on the earlier of the date of foreclosure,
deed in lieu of foreclosure, or in-substance foreclosure, and were recorded
as real estate at the lower of (a) the carrying value of the mortgage
revenue bonds 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 were the amounts the owners of the properties
could reasonably expect to receive in an as-is sale between a willing buyer
and a willing seller. The General Partner determined the estimated fair
values of the properties acquired based upon information obtained from
independent real estate appraisers and/or its own market analyses. To the
extent fair value was less than the carrying value, direct write-downs were
recorded to establish a new cost basis for these assets.
Subsequent to recording its investments as real estate, the
Partnership evaluated 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)
F-11
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies - continued
Statement of Position 92-3 "Accounting for Foreclosed Assets". The
Partnership's net realizable value determination took into account the
Partnership's intention to hold these properties for the long term, if
necessary, to recover its recorded investment. If the Partnership
determined that its estimated net realizable value was less than the
recorded investment in the property, an additional valuation adjustment was
recorded if the decline in value was considered permanent.
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115). This statement
requires that most investments in securities be classified into one of the
following investment categories based upon circumstances under which
securities might be sold: Held to Maturity, Available for Sale, and
Trading. Generally, investments in securities for which an enterprise has
both the ability and the intent to hold to maturity should be accounted for
using the amortized cost method and all other securities must be recorded
at their fair values. The Partnership implemented SFAS 115 in 1994 for its
marketable securities. Following such adoption, the Partnership (as did
others in the industry) continued to account for its investments in
mortgage revenue bonds, except Observatory II, as investments in real
estate based on consolidation of the affiliates of the Partnership formed
to take title to the properties (Owner Partnerships) in accordance with the
SEC rules.
In conjunction with the review of the Partnership's 1995 financial
statements by the Securities and Exchange Commission (SEC) Staff the
Partnership agreed that it would account for all of its investments in
mortgage revenue bonds as debt securities under the provisions of SFAS 115
effective January 1, 1994, and restate its 1995 and 1994 financial
statements to reflect this change. Accordingly, effective January 1, 1994,
all investments in mortgage revenue bonds are classified and accounted for
as held to maturity securities and carried at amortized cost because of the
Partnership's ability and intent to hold these investments to maturity.
The effect of adopting SFAS 115 on net income previously reported for 1995
and 1994 is $1,648,217 and $(830,356), respectively for Series I and
$2,189,007 and $(2,321,946), respectively for Series II. Income per BAC as
previously reported was $0.51 and $0.44 for 1995 and 1994, respectively for
Series I and $0.55 and $0.42 for 1995 and 1994, respectively for Series II.
Income(loss) per BAC as previously reported has been revised to $1.22 and
$0.08 per BAC for 1995 and 1994, respectively for Series I and $1.22 and
$(0.29) per BAC for 1995 and 1994, respectively for Series II. The impact
on partners capital of adopting SFAS 115 for 1995 and 1994 is $817,861 and
$830,356, respectively for Series I and $132,939 and $2,321,946,
respectively for Series II.
As discussed above, the Partnership accounted for its investment in
mortgage revenue bonds as real estate, until January 1, 1994, when the
financial statements were restated to reflect implementation of
F-12
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies - continued
SFAS 115. Net realizable value, prior to implementation of SFAS 115, was
based on holding the assets for long-term income production - as such net
realizable value only considered the recovery of the Partnership's
investments over time based on the properties' ability to generate
sufficient cash flow to recover the Partnership's investment over the long
term. Based on the SEC's requirement that the Partnership account for its
mortgage revenue bonds as debt securities, the implementation of SFAS 115
has a different accounting framework for evaluating realizability. In
accordance with SFAS 115's provisions for held to maturity securities, the
Partnership evaluates the fair value of its mortgage revenue bonds to
determine if impairment exists. If a decline in fair value is determined
to be other-than-temporary, the security is written down to its fair value.
Since most of these bonds are in default, the Partnership has concluded
that permanent impairment has occurred. As such, the amount of permanent
impairment is measured by the Partnership's estimate of the mortgage
revenue bonds' fair value at January 1, 1994. The Partnership has measured
fair value as discussed below. This effect of adopting SFAS 115 is
reflected as a cumulative effect of change in accounting for mortgage
revenue bonds in the statements of operations. On an ongoing basis, the
Partnership evaluates permanent impairment; however, subsequent to January
1, 1994, the Partnership did not recognize any impairment losses.
Interest Income Recognition
---------------------------
Since all of the mortgage revenue bonds, except Observatory II, are in
default, base interest and contingent interest on the mortgage revenue
bonds is recognized as revenue when collected.
d. Depreciation
------------
Through December 31, 1993, depreciation of real estate was based on
the estimated useful lives of the properties, which consist of 27.5 years
for buildings and 7 years for personal property. The straight-line method
was used for buildings, and the double declining-balance method was used
for personal property.
e. Cash and cash equivalents
-------------------------
Cash and cash equivalents consist of tax-exempt money market funds
with original maturities of three months or less.
f. Marketable securities
---------------------
Marketable securities, consisting of tax-exempt municipal bonds with
carrying amounts as of December 31, 1995 and 1994 of $1,315,182 and
$1,089,522, respectively, for Series I, and $1,512,281 and $1,447,843,
respectively, for Series II, are stated at their approximate market value.
The Partnership has the option to resell
F-13
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies - continued
certain bonds to the seller on seven days' notice at the bonds' par value.
Proceeds from the sale of marketable securities totalled $2,612,435,
$3,177,612 and $2,966,087 for the years ended December 31, 1995, 1994 and
1993, respectively, for Series I. Proceeds from the sale of marketable
securities totalled $7,528,134, $5,874,674 and $6,590,743 for the years
ended December 31, 1995, 1994 and 1993, respectively, for Series II.
Realized gains and losses on these sales were determined on a specific
identification basis. The interest rate on the bonds is generally adjusted
weekly.
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
for Series I or Series II as the cost for the tax-exempt municipal bonds
approximated fair value throughout 1995 and 1994.
As of December 31, 1995, the Partnership had aggregate investments in
marketable securities (including those held in working capital reserves, as
discussed below) with the following maturities:
SERIES I
--------
Amount Maturity
----------- --------
$ 99,852 Within one year
100,000 Between one and five years
2,400,000 After ten years
-----------
$ 2,599,852
===========
SERIES II
---------
Amount Maturity
----------- --------
$ 417,379 Within one year
630,917 Between one and five years
200,000 Between five and ten years
2,571,370 After ten years
-----------
$ 3,819,666
===========
g. Working capital reserves
------------------------
The Partnership established working capital reserves for each Series
from the offering proceeds. The working capital reserves may be increased
or reduced by the General Partner as it deems advisable under the
circumstances. The funds held in the working capital
F-14
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies - continued
reserves are invested in tax-exempt municipal bonds with terms similar to
the Partnership's marketable securities and are stated at cost, which
generally represents par value and approximates market value. The reserves
are available for the payment of ongoing costs of operating and
administering the Partnership's business, for supplementing distributions
to BAC Holders and for making working capital loans to borrowers.
SERIES I
--------
Working capital reserves were $1,284,670 and $921,929 as of December
31, 1995 and 1994, respectively. None of the distributions made to BAC
Holders during 1995, 1994 and 1993 were funded from the working capital
reserves. During 1995, 1994 and 1993, working capital reserves were
increased by $362,741, $351,266 and $79,643, respectively, from surplus
operating cash.
SERIES II
---------
Working capital reserves were $2,307,385 and $1,646,746 as of December
31, 1995 and 1994, respectively. None of the distributions made to BAC
Holders during 1995, 1994 and 1993 were funded from the working capital
reserves. During 1995, 1994 and 1993, $660,639, $459,714 and $55,859,
respectively, were added to the working capital reserves from the interest
reserves or surplus operating cash.
h. Interest reserves
-----------------
The Partnership established interest reserves for each Series which
represented the General Partner's estimate of the total base interest on
the mortgage revenue bonds to be deferred during the deferral period
(generally the project construction period) for the loans of that Series,
as defined by the respective loan agreements. The interest reserves also
included debt service reserves established by the Partnership for three
mortgage loans. The interest reserves have been used to supplement
distributions to BAC Holders in an amount sufficient to achieve an
equivalent gross base interest rate as if the full amount of base interest
had been paid during the deferral period.
SERIES I
--------
Interest reserves were depleted during 1990.
SERIES II
---------
Interest reserves were depleted during 1993. Of the total
distributions made to BAC Holders during 1995, 1994 and 1993, $0, $0 and
$16,939, respectively, were funded from the interest reserves.
F-15
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies - continued
i. Fair value of financial instruments
-----------------------------------
In December 1991, the FASB issued Statement of Financial Accounting
Standards No. 107 "Disclosures 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. The Partnership implemented SFAS 107 in 1995. The
Partnership has determined that the carrying value of its cash and cash
equivalents approximates fair value. The estimated fair value of
marketable securities and working capital 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 mortgage revenue bonds
is based upon the redemption amount relating to the mortgage revenue bonds
under the amended merger agreement.
The following tables present information on the Partnership's
financial instruments:
SERIES I
--------
<TABLE>
<CAPTION>
Carrying Estimated Fair
Value at Value at
December 31, 1995 December 31, 1995
000's 000's
----------------- -----------------
<S> <C> <C>
Cash and cash equivalents $ 59 $ 59
Marketable securities 1,315 1,315
Working capital reserves
invested in marketable
securities 1,285 1,285
Mortgage revenue bonds 30,740 30,248
</TABLE>
F-16
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies - continued
SERIES II
---------
<TABLE>
<CAPTION>
Carrying Estimated Fair
Value at Value at
December 31, 1995 December 31, 1995
000's 000's
----------------- -----------------
<S> <C> <C>
Cash and cash equivalents $ 89 $ 89
Marketable securities 1,512 1,508
Working capital reserves
invested in marketable
securities 2,307 2,301
Mortgage revenue bonds 43,793 42,251
</TABLE>
j. Statements of Cash Flows
------------------------
The 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 balance sheets.
k. Income taxes
------------
No provision has been made for federal, state or local income taxes in
the financial statements for each Series of the Partnership since the
General Partner and the BAC Holders are required to report on their
individual tax returns their allocable share of taxable income, gains,
losses, deductions and credits of the Partnership. For federal income tax
purposes, the Partnership's investment in mortgage revenue bonds is carried
at cost in the aggregate amount of $44,155,000 for Series I and $62,608,001
for Series II as of both December 31, 1995 and 1994. Interest income from
the mortgage revenue bonds is exempt from regular federal income tax, as
discussed in Notes 5 and 6.
l. Net income (loss) and distributions per BAC
-------------------------------------------
Net income (loss) and distributions per BAC represent 98.99% of net
income and distributions declared, respectively, divided by the number of
BACs outstanding during the year.
F-17
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies - continued
m. Reclassifications
-----------------
Certain amounts in the financial statements for the year ended
December 31, 1993 and 1994 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.
SERIES I
--------
Expense reimbursements to an affiliate of the General Partner for 1995,
1994 and 1993 were $113,124, $118,266 and $108,374, respectively, and are
included in general and administrative expense and merger-related expenses in
the statements of operations.
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, a
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
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 were due to CRI/CRICO Mortgage and CRIIMI from
the borrowers as of December 31, 1995 and 1994:
F-18
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
3. Related-party transactions - continued
<TABLE>
<CAPTION>
As of December 31,
1995 1994
----------- -----------
<S> <C> <C>
CRI/CRICO Mortgage $1,225,393 $1,093,242
CRIIMI 133,817 --
---------- -----------
Total $1,359,210 $1,093,242
========== ===========
</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, unpaid fees accrued through June 30, 1995
will be purchased by Capital Apartment Properties, Inc. (CAPREIT) from CRI for
the discounted amount of $511,680, which represents approximately 42% of the
total accrued fees owed to CRI. In addition, unpaid fees accrued from July 1,
1995 through June 30, 1996 will be purchased by CAPREIT from CRIIMI for
$265,968, which represents 100% of the accrued fees which are expected to be
owed to CRIIMI for that period. 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 of the accrued
servicing fees will be adjusted upward at a rate of $22,164 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 $ 5,000 $10,000 $10,000
CRIIMI 5,000 - -
------- ------- --------
Total $10,000 $10,000 $10,000
======= ======= =======
</TABLE>
CRICO Management Corporation (CRICO), an affiliate of the General
Partner, assumed property management responsibilities for White Bear Woods on
October 1, 1991 and for Trailway Pond and Royal Oak on January 1, 1992. The
General Partner engaged CRICO Management of Minnesota , Inc. (CRICO
F-19
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
3. Related-party transactions - continued
Minnesota), another affiliate of the General Partner, as management agent for
Valley Creek on July 1, 1992. Effective August 1, 1992, CRICO transferred its
property management responsibilities for White Bear Woods, Trailway Pond and
Royal Oak to CRICO Minnesota. Management fees of $16,916 were paid or accrued
to this affiliate of the General Partner by the properties for the month ended
January 31, 1994. Management fees of $209,057 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 0.50% payable only if certain performance standards were met.
On February 1, 1994, CRICO and CRICO Minnesota contributed their
property management contracts and personnel to CAPREIT Residential Corporation
(Residential). Residential was formed by CRI, but on February 1, 1994,
Residential was sold to A.P. CAPREIT Limited Partnership, which is not currently
owned or controlled by CRI and/or its affiliates, although CRI and several
affiliates held up to an aggregate 22% residual profit interest until June 30,
1995, when the interests were redeemed. This change did not result in any
increase in property management fees.
Owner Partnerships formed to take title to properties, subject to the
existing indebtedness, are structured as limited partnerships. The Owner
Partnerships and the managing general partner of the General Partner have
primarily common ownership and are under common control. The Owner Partnerships,
rather than the Partnership, became holders of title to the properties in an
effort to maintain the tax-exempt nature of interest on the mortgage revenue
bonds and to hold the properties until their ultimate disposition. No
compensation or fees were paid by the Partnership to the Owner Partnerships or
their principals in connection with the transfers of ownership.
In connection with the amended merger agreement, each of the Owner
Partnerships has agreed to either (a) sell, assign and transfer the partnership
interests in, or the real property and other assets of, such Owner Partnerships
to CAPREIT or its designee for no additional consideration or (b) admit CAPREIT
or its designee as the managing general partner, whereupon the general partner
interests of the current general partners will be converted into limited partner
interests, and CAPREIT will have the option to acquire all of the limited
partner interests at any time within five years from the closing date 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 Owner Partnerships.
SERIES II
---------
Expense reimbursements to an affiliate of the General Partner for 1995,
1994 and 1993 were $131,437, $134,468 and $130,050, respectively, and are
included in general and administrative expense and merger-related expenses in
the statement of operations.
F-20
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
3. Related-party transactions - continued
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, an affiliate of the REIT. The REIT was originally sponsored by CRI, 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 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. This merger did
not result in any increase in fees or changes in the amount of fees which are
currently payable.
The following unpaid fees were due CRI/CRICO Mortgage and CRIIMI from the
borrowers as of December 31, 1995 and 1994:
<TABLE>
<CAPTION>
As of December 31,
1995 1994
---------- -----------
<S> <C> <C>
CRI/CRICO Mortgage $1,847,496 $1,670,426
CRIIMI 195,648 --
---------- -----------
Total $2,043,144 $1,670,426
========== ===========
</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. During the years ended December 31,
1995, 1994 and 1993, no fees were paid by the borrowers.
In connection with the amended merger agreement entered into by the
Partnership, as discussed in Note 7, the unpaid fees accrued through June 30,
1995 will be purchased from CRI for the discounted amount of $770,835, which
represents approximately 42% of the total accrued fees owed to CRI. In
addition, unpaid fees accrued from July 1, 1995 through June 30, 1996 will be
purchased by CAPREIT from CRIIMI for $391,296, which represents 100% of the
accrued fees which are expected to be owed to CRIIMI for that period. 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 $32,608 per
month.
F-21
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
3. Related-party transactions - continued
CRICO Management Corporation (CRICO), an affiliate of the General
Partner, assumed property management responsibilities for Trailway Pond II on
January 1, 1992 and for Ethan's Ridge and Ethan's Glen IIB on June 1, 1992.
Effective August 1, 1992, CRICO transferred its property management
responsibilities for these properties to CRICO Management of Minnesota, another
affiliate of the General Partner. CRICO Management Northwest, Inc., another
affiliate of the General Partner, assumed management responsibilities for James
Street Crossing effective May 1, 1993. Management fees of $15,446 were paid or
accrued to these affiliates of the General Partner by the properties for the
month ended January 31, 1994. In addition, 1993 incentive management fees of
$8,927 and $1,356 relating to Ethan's Ridge and Ethan's Glen IIB, respectively,
were paid to CRICO Minnesota in December 1994. Management fees of $173,849 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 0.50% payable only if certain performance
standards were met.
On February 1, 1994, CRICO and CRICO Minnesota contributed their
property management contracts and personnel to CAPREIT Residential Corporation
(Residential). Residential was formed by CRI, but on February 1, 1994,
Residential was sold to A.P. CAPREIT Limited Partnership, which is not currently
owned or controlled by CRI and/or its affiliates, although CRI and several
affiliates held up to an aggregate 22% residual profit interest until June 30,
1995, when the interests were redeemed. This change did not result in any
increase in property management fees.
Owner Partnerships formed to take title to properties, subject to
existing indebtedness, are structured as limited partnerships. The Owner
Partnerships and the managing general partner of the General Partner have
primarily common ownership (except for Ethan's Ridge and Ethan's Glen IIB prior
to March 14, 1996, as discussed below) and are under common control. The Owner
Partnerships, rather than the Partnership, became holders of title to the
properties in an effort to maintain the tax-exempt nature of interest on the
mortgage revenue bonds and to hold the properties until their ultimate
disposition. No compensation or fees were paid by the Partnership to the Owner
Partnerships in connection with the transfers of ownership.
In connection with the amended merger agreement, each of the Owner
Partnerships has agreed to either (a) sell, assign and transfer the partnership
interests in, or the real property and other assets of, such Owner Partnerships
to CAPREIT or its designee for no additional consideration or (b) admit CAPREIT
or its designee as the managing general partner, whereupon the general partner
interests of the current general partners will be converted into limited partner
interests, and CAPREIT will have the option to acquire all of the limited
partner interests at any time within five years from the closing date 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 Owner Partnerships.
F-22
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
4. Profits, losses and cash distributions to Partners
Cash available for distribution (defined below) is distributed within
60 days after the end of each six-month period ending June 30 and December 31
for both Series I and Series II. Each year, cash available for distribution is
distributed 98.99% to the BAC Holders and 1.01% to the General Partner until the
BAC Holders receive a noncumulative return equal to 10% of their adjusted
capital contribution (adjusted for any return of capital contributions and any
distribution of residual or liquidation proceeds from the sale of a mortgaged
property or the dissolution of the Partnership, described below). Thereafter,
during such year, the balance of all such cash available for distribution will
be distributed 90% to the BAC Holders and 10% to the General Partner.
Cash available for distribution,as defined in the Partnership Agreement, is
as follows:
(1) all revenues received by the Partnership, plus
(2) any amounts released by the General Partner from the working
capital reserves, plus
(3) any amounts released from the interest reserves after completion
of any applicable interest deferral period with respect to the
mortgage loan in connection with such mortgaged property, less:
(i) payments from revenues of operating expenses and Partnership
indebtedness, and
(ii) any amounts set aside for deposit into the working capital
reserves.
All cash receipts of the Partnership arising from a sale or other
disposition of a mortgaged property or the repayment of the principal and the
payment of interest, if any, payable upon the redemption or remarketing of the
applicable mortgage revenue bond (residual proceeds) will be distributed as
follows:
(1) to pay all debts and obligations of the Partnership and add to
the working capital reserves as the General Partner deems
necessary;
(2) to the General Partner and BAC Holders in an amount equal to the
positive balance in their respective capital accounts as of the
date of sale or repayment adjusted for operations and
distributions to that date but prior to any allocation of
profit from such sale or repayment;
(3) to the BAC Holders in the amount of their adjusted capital
contributions;
(4) to the General Partner in the amount of its adjusted capital
contributions;
(5) 98.99% to the BAC Holders and 1.01 % to the General Partners
until the BAC Holders have received any unpaid portion of
the preferred cash flow return (i.e., an annual
noncompounded return of 10% on their adjusted capital
contribution); provided, however, that the distribution to
the General Partner pursuant to this subsection will be
deferred until the BAC Holders have received any unpaid
portion of the preferred cash flow return;
F-23
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
4. Profits, losses and cash distributions to Partners - continued
(6) to the extent applicable by reason of foreclosure of a mortgage loan,
payment to an affiliate of the General Partner of a disposition fee
not to exceed 2% of the gross sales proceeds from the mortgaged
property; and,
(7) the remainder, 90% to the BAC Holders and 10% to the General Partner.
All cash receipts other than residual proceeds arising from the dissolution
of the Partnership and the liquidation of the Partnership's assets less the
amounts utilized to pay the expenses of such liquidation (liquidation proceeds)
will be allocated in the same order as residual proceeds.
All profits and losses not arising from a sale of a mortgaged property or
repayment of a mortgage loan shall be allocated 98.99% to the BAC Holders and
1.01% to the General Partner until the BAC Holders have received any unpaid
portion of the preferred cash flow return. Thereafter, such profits and losses
shall be allocated 90% to the BAC Holders and 10% to the General Partner.
Gains arising from a sale of a mortgaged property or repayment of a
mortgage loan will be allocated to the General Partner and BAC Holders as
follows: first, in proportion to the negative balances in their capital
accounts, if any, to bring such negative balances in their capital accounts to
zero; and second, in proportion to their share of residual proceeds from steps
(5) and (7) as described above. Losses from such a sale or repayment will be
allocated to the General Partner and BAC Holders as follows: first, in an
amount equal to the amount by which the total of all capital accounts exceeds
the total capital contributions in the ratio that each Partner's and BAC
Holder's excess balance bears to the aggregate excess balances; second, to the
General Partner and BAC Holders until their capital accounts are reduced to
zero; and third, any remaining losses 1.01% to the General Partner and 98.99% to
the BAC Holders. No proceeds were received in connection with any transfer of
properties to Owner Partnerships.
The Partnership expects to continue to make distributions to BAC Holders on
a semi-annual basis. The amended merger agreement stipulates that 1996
distributions cannot exceed $0.09417 and $0.09667 per BAC per month for Series I
and Series II, respectively. 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. However, property level reserves are
depleted and estimated cash flows from the properties' operations are
insufficient to pay full monthly base interest (except for Observatory II in
Series I), therefore, the distribution to BAC Holders may fluctuate from current
levels. The General Partner seeks to optimize cash flow from the properties
owned by Owner Partnerships. Despite these efforts, the amounts paid to the
Partnership from the borrowers may be expected to fluctuate from period to
period due to changes in occupancy rates, rental rates, operating expenses and
other variables.
The following distributions were paid or accrued to BAC Holders of record
during 1995, 1994 and 1993:
F-24
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
4. Profits, losses and cash distributions to Partners - continued
SERIES I
--------
<TABLE>
<CAPTION>
1995 1994 1993
Distributions to Distributions to Distributions to
BAC Holders BAC Holders BAC Holders
------------------------ ------------------------- ------------------------
Six-Month Period Ended Total Per BAC Total Per BAC Total Per BAC
- ---------------------- ----------- ----------- ----------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
June 30 $1,231,200 $0.54 $1,140,000 $ 0.50 $1,140,000 $0.50
December 31 1,231,200 0.54 1,140,000 0.50 1,140,000 0.50
---------- ----- ---------- --------- ---------- -----
Total $2,462,400 $1.08 $2,280,000 $ 1.00 $2,280,000 $1.00
========== ===== ============ ========== ========== =====
</TABLE>
Distributions to Series I 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) $2,850,265 $2,654,529 $2,382,906
Net deposits to working capital reserves (362,741) (351,266) (79,643)
------------ ------------ ------------
Total cash available for distribution $2,487,524 $2,303,263 $2,303,263
============ ============ ============
Distributions to:
General Partner (1.01%) $ 25,124 $ 23,263 $ 23,263
============ ============ ============
BAC Holders (98.99%) $2,462,400 $2,280,000 $2,280,000
============ ============ ============
</TABLE>
(1) Defined in the Limited Partnership Agreement as (a) all revenues received
by the Partnership during such period, plus (b) any amounts which the
Managing General Partner releases from the Working Capital Reserve as being
no longer necessary to hold as part of the Working Capital Reserve, plus
(c) any amounts released to the Partnership from the Interest Reserve
Account with respect to a mortgaged property after completion of
construction of such mortgaged property, less (i) operating expenses of the
Partnership paid from reserves during the period, including any expenses
paid to the General Partner, but not including such amounts paid from the
Working Capital Reserve, (ii) all cash payments made from revenues during
such period to discharge Partnership indebtedness, and (iii) all amounts
from revenues, if any, added to the Working Capital Reserve during such
period. Cash flow as defined in the Limited Partnership Agreement is not
to be construed as an alternative to operating income in accordance with
GAAP as an indication of the Partnership's operating performance.
Although distributions are paid on a semi-annual basis, in July 1993,
the Partnership began declaring distributions on a monthly basis as a result of
listing the BACs on AMEX. Distributions to BAC Holders totalling $858,808 or
$0.37667 per BAC were declared payable for the four months ending April 30, 1996
to BAC Holders of record as of the last day of each month.
F-25
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
4. Profits, losses and cash distributions to Partners - continued
SERIES II
---------
<TABLE>
<CAPTION>
1995 1994 1993
Distributions to Distributions to Distributions to
BAC Holders BAC Holders BAC Holders
----------------------- --------------------- -----------------------
Six-Month Period Ended Total Per BAC Total Per BAC Total Per BAC
- ---------------------- ----------- -------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
June 30 $ 1,748,930 $ 0.54 $ 1,619,380 $ 0.50 $ 1,619,380 $ 0.50
December 31 1,748,932 0.54 1,619,380 0.50 1,619,380 0.50
---------- ----- ---------- -------- ---------- -------
Total $ 3,497,862 $ 1.08 $ 3,238,760 $ 1.00 $ 3,238,760 $ 1.00
========== ===== ========== ======== ========== =======
</TABLE>
Distributions to Series II 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) $ 4,194,190 $ 3,731,519 $ 3,310,726
Net deposits to working capital/interest reserves (660,639) (459,714) (38,920)
---------- ---------- ----------
Total cash available for distribution $ 3,533,551 $ 3,271,805 $ 3,271,806
========== ========== ==========
Distributions to:
General Partner (1.01%) $ 35,689 $ 33,045 $ 33,046
========== ========== ==========
BAC Holders (98.99%) $ 3,497,862 $ 3,238,760 $ 3,238,760
========== ========== ==========
</TABLE>
(1) Defined in the Limited Partnership Agreement as (a) all revenues received
by the Partnership during such period, plus (b) any amounts which the
Managing General Partner releases from the Working Capital Reserve as being
no longer necessary to hold as part of the Working Capital Reserve, plus
(c) any amounts released to the Partnership from the Interest Reserve
Account with respect to a mortgaged property after completion of
construction of such mortgaged property, less (i) operating expenses of the
Partnership paid from reserves during the period, including any expenses
paid to the General Partner, but not including such amounts paid from the
Working Capital Reserve, (ii) all cash payments made from revenues during
such period to discharge Partnership indebtedness, and (iii) all amounts
from revenues, if any, added to the Working Capital Reserve during such
period. Cash flow as defined in the Limited Partnership Agreement is not
to be construed as an alternative to operating income in accordance with
GAAP as an indication of the Partnership's operating performance.
Although distributions are paid on a semi-annual basis, in July 1993, the
Partnership began declaring distributions on a monthly basis as a result of
listing the BACs on AMEX. Distributions to BAC Holders totalling $1,252,331 or
$0.38667 per BAC were declared payable for the four months ending April 30, 1996
to BAC Holders of record as of the last day of each month.
F-26
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds
Description of the portfolios
- -----------------------------
The Partnership acquired a portfolio of ten tax-exempt mortgage revenue
bonds issued by various state and local governments or their agencies or
authorities. The proceeds from the mortgage revenue bonds were used by the
issuers to make nonrecourse participating mortgage loans to finance construction
and ownership of multifamily residential developments (the Observatory II loan
in Series I no longer has a participation feature, as discussed previously).
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 mortgage revenue bonds held by the Partnership is as
follows:
SERIES I
<TABLE>
<CAPTION>
Loan Loan Carrying
Mortgaged Property No. of Origination Face Amount Maturity Value
Name and Location Rental Units Date (000's) Date (000's)
- ------------------- ------------ ----------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
OBSERVATORY II
BURNSVILLE, MN 75 3/31/92 $ 1,600 2/11/98 $ 1,600
ROYAL OAKS
EAGAN, MN 231 12/05/86 12,580 2/22/98 8,019
TRAILWAY POND
BURNSVILLE, MN 75 8/07/87 4,675 5/01/99 2,717
VALLEY CREEK
WOODBURY, MN 225 3/23/87 12,815 2/01/99 9,487
WHITE BEAR WOODS
WHITE BEAR LAKE, MN 225 3/31/87 12,485 1/31/99 8,917
--- ------ -----
831 $44,155 $30,740
=== ====== ======
</TABLE>
F-27
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds - Continued
SERIES II
---------
<TABLE>
<CAPTION>
Loan Loan Carrying
Mortgaged Property No. of Origination Face Amount Maturity Value
Name and Location Rental Units Date (000's) Date (000's)
-----------------_ ----------- ----------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
ETHAN'S RIDGE AND
ETHAN'S GLEN IIB 5/29/87 $15,500 4/01/98 $12,612
KANSAS CITY, MO 364 10/26/88 2,300 12/15/99
FOUNTAIN PLACE
EDEN PRAIRIE, MN 332 12/23/87 20,900 7/01/99 13,643
JAMES STREET CROSSING
KENT, WA 300 3/31/88 13,878 12/31/99 11,703
TRAILWAY POND II
BURNSVILLE, MN 165 8/07/87 10,030 5/01/99 5,835
----- ------ ------
1,161 $62,608 $43,793
===== ====== ======
</TABLE>
Collateral
- ----------
The mortgage revenue bonds are secured by mortgage loans which are
collateralized by first mortgages on the properties and by assignments of
existing and future rents and security agreements with respect to personal
property evidenced by the filing of Uniform Commercial Code (UCC) financing
statements. Additionally, the Partnership required the borrowers to establish
operating reserves, tax and insurance escrows, replacement reserves and debt
service reserves and provide operating deficit guarantees. As a result of
various circumstances, including, but not limited to, slow rent-up of the
properties, unstable operations and depletion of the properties' operating and
debt service reserves, Owner Partnerships had received the title to nine of the
ten properties as of December 31, 1995 through deeds in lieu of foreclosure and
one property via foreclosure (Observatory II, which was ultimately sold to an
independent purchaser subject to a modified mortgage held by the Partnership.)
SERIES I
--------
The five original Series I mortgage loans securing the mortgage
revenue bonds, with a current aggregate principal amount of $44,155,000, went
into default, resulting in title transfer by actual foreclosures or deeds in
lieu of foreclosure to Owner Partnerships subject to the existing indebtedness.
In connection with the transfers of properties to Owner Partnerships, 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
F-28
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds - Continued
the bonds to lose their tax-exempt status). The Partnership also obtained
opinions from certain bond counsel that certain transfers of the properties to
Owner Partnerships would not cause the Partnership to become a substantial user
of the projects or a related party to a substantial user pursuant to Section 103
of the Code (which also could have caused the bonds to lose their tax-exempt
status). The bond counsel opinions were obtained in connection with the
Observatory II, Royal Oaks, Trailway Pond and Valley Creek transfers.
In April 1991, the U.S. Supreme Court decided a case, Cottage Savings
Association V. Commissioner (Cottage Savings) that could be interpreted to
impact then existing authority addressing the modification of debt instruments.
In response to this decision in December 1992 the Internal Revenue Service
issued Proposed Regulation Section 1.1001-3 which specifically address the tax
consequences of modifications of debt instruments. Among other things, these
proposed regulations, if they become effective in their current form, would
provide that certain modifications of the current interest payments or maturity
date of a debt instrument will be treated as a taxable exchange of the original
instrument for the modified debt instrument. As a result of this treatment,
modifications of the mortgage loans which secure the mortgage revenue bonds
could be treated as a deemed reissuance of the mortgage revenue bonds for
federal income tax purposes. Any reissuance without the cooperation of the
mortgage revenue bond issuers would result in the loss of the tax-exempt status
of the mortgage revenue bonds. Such issuers might cooperate and consent to the
reissuance; however, there can be no assurance that such issuers would do so or
would not impose additional requirements that would have an adverse impact on
the properties.
Even if issuer consent were obtained, if the modifications are
considered material, the debt would have to be re-examined to determine whether
it would still be considered debt for tax purposes. This could result in a
write-down of principal, would most likely result in a write-off of all accrued
and unpaid past due interest and could change the contingent interest feature of
the existing mortgage loans. The write down of principal and unpaid interest
would not be recoverable upon ultimate disposition or payoff of the mortgage
revenue bond and would instead accrue to the benefit of the Owner Partnership to
the extent realized.
Proposed Regulation Section 1.001-3 will become effective only with
respect to modifications made on or after the date that is 30 days after the
publication of final regulations in the Federal Register. It is uncertain at
this time when this proposed regulation will be finalized and whether it will be
finalized in its current form. It is also unclear at this time what effect the
Cottage Savings decision may have on modifications that have been made to
mortgage loans which secure the mortgage revenue bonds or on modifications that
might be appropriate in the future. The General Partner believes that the
modifications which have been made were consistent with the relevant tax
authority which existed at the time of those modifications and have not
jeopardized the tax-exempt status of the mortgage revenue bonds. However, these
can be no assurance as to the tax-exempt status of the mortgage revenue bonds.
F-29
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds - Continued
The General Partner's ongoing strategy has been to continue holding
the mortgage revenue bonds until the loan maturity dates. If the merger
proposal, discussed in Note 7, is approved, the interests of the BAC Holders
will be redeemed for cash. 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.
In conjunction with the transfer of the Royal Oaks deed to an Owner
Partnership, the Royal Oaks mortgage revenue bond was modified. The
Partnership, based on information and advice from outside counsel, believes that
the modification does not adversely affect the tax-exempt nature of the Royal
Oaks bond interest. The modification complied with IRS guidelines in effect at
that time. The IRS has since issued proposed regulations which could be
interpreted as adversely affecting the tax-exempt nature of the modified
mortgage revenue bond. However, the IRS has stated that the regulations will
apply only to modifications made on or after 30 days from the final publication
of the regulations in the Federal Register. As of April 23, 1996, the
regulations have not been finalized and no changes to these positions have been
announced by the IRS. The Partnership believes the interest on the Royal Oaks
bond should continue to be tax-exempt. However, there can be no assurance that
interest from the Royal Oaks bond will remain tax-exempt.
SERIES II
---------
The five original Series II mortgage loans securing the mortgage
revenue bonds with an aggregate principal amount of $62,608,001 went into
default, resulting in deeds in lieu of foreclosure, subject to the existing
indebtedness, to Ownership Partnerships. In connection with the transfers of
properties to Owner Partnerships, 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 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 Owner Partnerships would not cause the Partnership to become a
substantial user of the projects or a related party to a substantial user
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 Ridge and Ethan's Glen IIB, Fountain Place and
Trailway Pond II transfers.
In April 1991, the U.S. Supreme Court decided a case, Cottage Savings
Association V. Commissioner (Cottage Savings) that could be interpreted to
impact then existing authority addressing the modification of debt instruments.
In response to this decision in December 1992 the Internal Revenue Service
issued Proposed Regulation Section 1.1001-3 which specifically address the tax
consequences of modifications of debt instruments. Among other things, these
proposed regulations, if they
F-30
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds - Continued
become effective in their current form, would provide that certain modifications
of the current interest payments or maturity date of a debt instrument will be
treated as a taxable exchange of the original instrument for the modified debt
instrument. As a result of this treatment, modifications of the mortgage loans
which secure the mortgage revenue bonds could be treated as a deemed reissuance
of the mortgage revenue bonds for federal income tax purposes. Any reissuance
without the cooperation of the mortgage revenue bond issuers would result in the
loss of the tax-exempt status of the mortgage revenue bonds. Such issuers might
cooperate and consent to the reissuance; however, there can be no assurance that
such issuers would do so or would not impose additional requirements that would
have an adverse impact on the properties.
Even if issuer consent were obtained, if the modifications are
considered material, the debt would have to be re-examined to determine whether
it would still be considered debt for tax purposes. This could result in a
write-down of principal, would most likely result in a write-off of all accrued
and unpaid past due interest and could change the contingent interest feature of
the existing mortgage loans. The write-down of principal and unpaid interest
would not be recoverable upon ultimate disposition or payoff of the mortgage
revenue bond and would instead accrue to the benefit of the Owner Partnership to
the extent realized.
Proposed Regulation Section 1.001-3 will become effective only with
respect to modifications made on or after the date that is 30 days after the
publication of final regulations in the Federal Register. It is uncertain at
this time when this proposed regulation will be finalized and whether it will be
finalized in its current form. It is also unclear at this time what effect the
Cottage Savings decision may have on modifications that have been made to
mortgage loans which secure the mortgage revenue bonds or on modifications that
might be appropriate in the future. The General Partner believes that the
modifications which have been made were consistent with the relevant tax
authority which existed at the time of those modifications and have not
jeopardized the tax-exempt status of the mortgage revenue bonds. However, these
can be no assurance as to the tax-exempt status of the mortgage revenue bonds.
The General Partner's ongoing strategy has been to continue holding
the mortgage revenue bonds until the loan maturity dates. If the merger
proposal, discussed in Note 7, is approved, the interests of the BAC Holders
will be redeemed for cash. 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 extension of certain loan maturity
dates and, if approved, arrange any necessary related amendments to the
pertinent mortgage revenue bonds.
Interest
- --------
The mortgage loans, and accordingly the mortgage revenue bonds, bear
interest at a base interest rate and provide for contingent interest, payable as
described below, in an amount equal to the difference between
F-31
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds - Continued
the base mortgage interest rate and an annual noncompounding rate of return to
the Partnership of 16% per annum. The mortgage loans provide for base mortgage
interest which is unconditional and payable monthly, in arrears. However, due
to depletion of the properties' reserves, the payment of base mortgage interest
is solely from cash flow from these properties' operations. The unpaid base
mortgage interest bears interest at the base mortgage interest rate and is to be
repaid prior to contingent interest.
Contingent interest will be equal to the sum of (i) 100% of the
project cash flow for each year up to an amount which provides the Partnership a
noncompounded interest rate between 1.5% and 2.0% over the base mortgage
interest rate in effect, and (ii) 50% to 60% of remaining cash flow (subject to
certain priority payments) to provide the Partnership a total return of 16% per
annum. Contingent interest is payable quarterly on an estimated basis, in
arrears, but only to the extent of available net cash flow, if any. Contingent
interest is recognized as revenue when collected. No contingent interest was
received or accrued by either Series I or Series II during these years.
Contingent interest due for Series I as of December 31, 1995, 1994 and 1993
amounted to $20,083,162, $17,441,428 and $14,799,693, respectively. Contingent
interest due for Series II as of December 31, 1995, 1994 and 1993 amounted to
$27,897,543, $23,723,272 and $19,548,999, respectively.
To the extent that the aggregate of all interest payments, including
contingent interest, for any period after completion of construction does not
equal 16% per annum, the difference will be deferred (without interest on
contingent interest) until the mortgaged property is sold or the mortgage loan
is otherwise repaid and will only be payable if sufficient proceeds exist. The
amount of deferred contingent interest payable in such event will equal the sum
of (i) 100% of the sale or repayment proceeds (after certain priority payments)
up to the amount necessary for the Partnership to achieve a noncompounded return
at a rate 1.5% to 2.0% over the base mortgage interest rate and (ii) 50% to 60%
of any excess sale or repayment proceeds for the Partnership to achieve a total
return of 16% per annum. Consequently, the ability of the Partnership to collect
all contingent interest will be dependent upon the mortgaged property's
operating performance and the sale or repayment proceeds. Because the
Partnership may not be able ultimately to collect contingent interest, the
Partnership has not recorded any contingent interest since inception of the
Partnership.
Presented below is a summary of base interest payments for the years ended
December 31, 1995, 1994 and 1993 that are due to the Partnership from the
borrowers:
F-32
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds - Continued
SERIES I
--------
<TABLE>
<CAPTION>
For the year ended December 31, 1995
---------------------------------------------------------
Base Interest Cumulative
Paid From Current Base Unpaid
Current Base Properties' Interest Full Base
Interest Due(1) Operations Not Paid Interest
------------ ------------- ------------ -----------
<S> <C> <C> <C> <C>
Observatory II $ 128,000 $ 128,000 $ -- $ --
Royal Oaks 1,069,296 838,525 230,771 1,593,244
Trailway Pond 460,488 244,848 215,640 852,472
Valley Creek 1,326,353 944,479 381,874 2,751,181
White Bear Woods 1,310,925 947,931 362,994 2,000,751
------------ ------------- ------------ -----------
$ 4,295,062 $ 3,103,783 $ 1,191,279 $ 7,197,648
============ ============= ============ ===========
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1994
---------------------------------------------------------
Base Interest Cumulative
Paid From Current Base Unpaid
Current Base Properties' Interest Full Base
Interest Due(1) Operations Not Paid Interest
------------ ------------- ------------ -----------
<S> <C> <C> <C> <C>
Observatory II $ 128,000 $ 128,000 $ -- $ --
Royal Oaks 1,069,296 754,518 314,778 1,362,473
Trailway Pond 460,488 252,168 208,320 636,832
Valley Creek 1,326,353 821,503 504,850 2,369,307
White Bear Woods 1,310,925 873,476 437,449 1,637,757
------------ ------------- ------------ -----------
$ 4,295,062 $ 2,829,665 $ 1,465,397 $ 6,006,369
============ ============= ============ ===========
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1993
---------------------------------------------------------
Base Interest Cumulative
Paid From Current Base Unpaid
Current Base Properties' Interest Full Base
Interest Due(1) Operations Not Paid Interest
------------ ------------- ------------ -----------
<S> <C> <C> <C> <C>
Observatory II $ 128,000 $ 128,000 $ -- $ --
Royal Oaks 1,069,296 679,224 390,072 1,047,695
Trailway Pond 460,488 210,360 250,128 428,512
Valley Creek 1,326,353 728,818 597,535 1,864,457
White Bear Woods 1,310,925 791,512 519,413 1,200,308
------------ ------------- ------------ -----------
$ 4,295,062 $ 2,537,914 $ 1,757,148 $ 4,540,972
============ ============= ============ ===========
</TABLE>
(1) The Partnership charges the borrowers interest on unpaid base
interest, which totalled $783,685, $584,856 and $370,558 for 1995,
1994 and 1993, respectively.
F-33
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds - Continued
SERIES II
<TABLE>
<CAPTION>
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 Full Base
Interest Due(1) Operations(3) Sources(2) Not Paid Interest
------------ ------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Ethan's Ridge and
Ethan's Glen IIB $ 1,518,750 $ 1,215,081 $ -- $ 303,669 $ 2,002,193
Fountain Place 1,985,500 1,416,369 -- 569,131 5,063,498
James Street
Crossing 1,335,758 1,070,316 -- 265,442 1,695,171
Trailway Pond II 1,003,000 575,170 -- 427,830 2,568,706
------------ ------------- ------------- ------------ -----------
$ 5,843,008 $ 4,276,936 $ -- $ 1,566,072 $11,329,568
============ ============= ============= ============ ===========
</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 Full Base
Interest Due(1) Operations Sources(2) Not Paid Interest
------------ ------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Ethan's Ridge and
Ethan's Glen IIB $ 1,518,750 $ 1,185,957 $ 27,500 $ 305,293 $ 1,698,524
Fountain Place 1,985,500 1,271,575 -- 713,925 4,494,367
James Street
Crossing 1,335,758 879,491 -- 456,267 1,429,729
Trailway Pond II 1,003,000 460,387 -- 542,613 2,140,876
------------ ------------- ------------- ------------ -----------
$ 5,843,008 $ 3,797,410 $ 27,500 $ 2,018,098 $ 9,763,496
============ ============= ============= ============ ===========
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1993
-----------------------------------------------------------------------------
Base Interest Base Interest Cumulative
Paid From Paid From Current Base Unpaid
Current Base Properties' Non-Operating Interest Full Base
Interest Due(1) Operations Sources(2) Not Paid Interest
------------ ------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Ethan's Ridge and
Ethan's Glen IIB $ 1,518,750 $ 1,051,763 $ -- $ 466,987 $ 1,393,231
Fountain Place 1,985,500 1,343,102 -- 642,398 3,780,442
James Street
Crossing 1,335,758 767,321 23,288 545,149 973,462
Trailway Pond II 1,003,000 449,564 -- 553,436 1,598,263
------------ ------------- ------------- ------------ -----------
$ 5,843,008 $ 3,611,750 $ $23,288 $ 2,207,970 $ 7,745,398
============ ============= ============= ============ ===========
</TABLE>
(1) The Partnership charges the borrowers interest on unpaid base interest,
which, not including current base interest due, totaled $1,197,825,
$932,242 and $582,804 for 1995, 1994 and 1993, respectively.
F-34
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds - Continued
(2) Amounts were funded from reserves provided for from the mortgage loan
proceeds and/or 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 Ridge and Ethan's Glen IIB, Fountain Place
and James Street Crossing totalled $107,000, $25,700 and $7,800,
respectively.
Terms
- -----
In general, the terms of the mortgage loans extend for 10 years after the
completion of construction. The corresponding bonds contain provisions
requiring payment or redemption of the bonds upon maturity of the related loan.
The Partnership may seek authority from investors and the issuers of the
mortgage revenue bonds to hold the mortgage loans with respect to the mortgaged
properties through longer periods within the mortgage revenue bond terms, as
described above, 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 term of the bond and will be required to be repaid in a lump-sum balloon
payment at the expiration of the loan term or at such earlier time as the loan
may require. Each mortgage loan is non-assumable and due on sale of the
mortgaged property. Prepayment and sale of the mortgaged property is prohibited
during the first seven years of the mortgage loan following the completion of
construction. Thereafter, prepayment in full is permitted under the mortgage
loan subject to the payment to the Partnership of:
(1) the contingent interest payable from 100% of project cash flow accrued
to the date of prepayment; and
(2) additional interest in an amount equal to the highest total amount of
contingent interest paid in any of the three years preceding the date
of prepayment, compounded at the base mortgage interest rate then in
effect.
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.
6. Income taxes
For income tax purposes, base interest income is accrued when earned.
The accrual of base interest is discontinued when, at the time of accrual,
ultimate collectibility of the base interest due is considered unlikely. Once a
loan has been placed in a non-accrual status, income is recorded only as cash
payments are received from the borrower until such time as the uncertainty of
collection of unpaid base interest is eliminated. All loans except Observatory
II were on non-accrual status throughout 1995,
F-35
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
6. Income taxes - continued
1994 and 1993; therefore, for income tax purposes, income was recognized to the
extent of cash received. Contingent interest from the investment is recognized
as revenue when collected. No contingent interest was recognized for the years
ended December 31, 1995, 1994 or 1993.
For federal income tax purposes, the investments in all of the mortgage
revenue bonds are treated as loans, interest on which is exempt from regular
federal income tax. A reconciliation of the primary differences between the
financial statement net income (loss) and municipal income for tax purposes is
as follows:
SERIES I
--------
<TABLE>
<CAPTION>
For the years ended
December 31,
----------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Financial statement net income $2,812,716 $ 183,283 $ 451,381
Municipal interest income not recognized (1) -- -- 2,444,174
Rental income, net (2) -- -- (512,569)
Expenses not allowed for tax purposes 757 2,703 633
Adjustment for timing of municipal income recognition 37,550 (4,202) --
Cumulative effect of accounting change -- 2,475,448 --
---------- ---------- ----------
Municipal income, net for tax purposes $2,851,023 $2,657,232 $2,383,619
========== ========== ==========
Municipal income per BAC outstanding $ 1.24 $ 1.15 $ 1.03
========== ========== ==========
</TABLE>
(1) Represents the adjustment for interest income received or receivable during
the period, which was previously eliminated from net income for financial
statement purposes.
(2) Represents net income from investments accounted for as real estate.
SERIES II
---------
<TABLE>
<CAPTION>
For the years ended
December 31,
---------------------------------------
1995 1994 1993
---------- ---------- -----------
<S> <C> <C> <C>
Financial statement net income (loss) $3,984,922 $ (946,393) $ 1,646,709
Municipal interest income not recognized (1) 3,657,305
Rental income, net (2) -- -- (1,511,870)
Expenses not allowed for tax purposes 1,279 3,401 863
Adjustment for timing of municipal income recognition 209,264 77,192 --
Cumulative effect of accounting change -- 4,600,720 (416,432)
---------- ---------- -----------
Municipal income, net for tax purposes $4,195,465 $3,734,920 $ 3,376,575
========== ========== ===========
Municipal income per BAC outstanding $ 1.28 $ 1.14 $ 1.03
========== ========== ===========
</TABLE>
F-36
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
6. Income taxes - continued
(1) Represents the adjustment for interest income received during the period,
which was previously eliminated from net income for financial statement
purposes.
(2) Represents net income from investments accounted for as real estate.
7. 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
CAPREIT, a private real estate investment trust. An affiliate of CAPREIT is the
property manager for four of the five properties securing the bonds held by
Series I, and all five properties securing the bonds in Series II. All nine
properties managed by an affiliate of CAPREIT are presently in default with
respect to their mortgage loans held by the Partnership. If the merger proposal
is approved by a majority vote of BAC Holders, all of the BACs in both Series I
and Series II will be redeemed for cash and the interests represented by such
BACs will be canceled. 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
$13.761 and $13.313 for Series I and Series II, respectively. Under the first
modified agreement, the redemption amount per BAC for Series I was to be
$14.4096, subject to adjustment but not less than $14.2713 or greater than
$14.5479. The modified redemption amount per BAC for Series II was to be
$14.1597, subject to adjustment but not less than $14.0152 or greater than
$14.3042. On March 14, 1996, the merger agreement was modified for the second
time to round the expected redemption amount per BAC for Series I from $14.4096
to $14.41. The redemption amount per BAC for Series I is subject to adjustment
for available cash as defined in the amended merger agreement, but not less than
$14.27 or greater than $14.55. The merger agreement was also modified to
improve the redemption amount per BAC for Series II from $14.1597 to $14.24,
subject to adjustment for available cash, but not less than $14.10 or greater
than $14.38. In addition, the redemption amounts for Series I and Series II
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 naming the
Partnership and others, as described below. Such legal fees and expenses are
not expected to exceed $0.16 and $0.20 per BAC for Series I and Series II,
respectively.
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 accounts receivables held by
CRI and CRIIMI, for the accrued mortgage servicing and administration fees on
certain property mortgage loans of both Series I and Series II. 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 $511,680 and $770,835 to CRI for the
fees of Series I and Series II, respectively, accrued through June 30, 1996.
The amounts to be paid to CRI represent approximately 42% of the total accrued
fees owed to CRI.
F-37
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
7. Merger Proposal - Continued
Also, CAPREIT will pay $265,968 and $391,296 to CRIIMI for the fees of Series I
and Series II, respectively, accrued from July 1, 1995 through June 30, 1996
which represents 100% of the fees which are expected to be owed to CRIIMI for
that period. 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 $22,164 and $32,608 per month for Series I and
Series II, respectively.
Each of the Owner Partnerships has agreed to either (a) sell, assign and
transfer the partnership interests in, or the real property and other assets of,
such Owner Partnerships to CAPREIT or its designee for no additional
consideration or (b) admit CAPREIT or its designee as the managing general
partner, whereupon the general partner interests of the current general partners
will be converted into limited partner interests, and CAPREIT will have the
option to acquire all of the limited partner interests at any time within five
years from the closing date of the merger at the then fair market value thereof
(defined as the proportionate interest of such limited partner in the fair
market value of the partnership property as encumbered by the mortgage loans).
Although such interests currently have nominal value, if the fair market value
of the partnership properties increases prior to the time CAPREIT exercises its
option, such increase in value may benefit the owners of the Owner Partnership.
This feature is required by CAPREIT as a condition of their merger.
Consummation of the merger is contingent upon the approval of a majority of
combined Series I and Series II BAC Holders, voting together as one class. The
proposed merger is also contingent upon receiving a favorable opinion regarding
the fairness of the redemption amount to BAC Holders from a financial point of
view. Favorable opinions from an independent investment banking firm were
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 by the SEC. A
preliminary proxy statement was filed with the SEC on March 18, 1996. The
definitive proxy materials include a full description of the proposed merger and
the independent fairness opinion.
8. Litigation
On September 22, 1995, Irving Zakin commenced a putative class action (the
Zakin Action) against the Partnership, its general partner (CRITEF Associates
Limited Partnership), its Assignor Limited Partner (CRITEF, Inc.), CRI, William
B. Dockser, H. William Willoughby, Capital Realty Investors Tax Exempt Fund III
Limited Partnership, CRITEF III Associates Limited Partnership, CRITEF III,
Inc., and CAPREIT (collectively, the Defendants) in 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
F-38
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
8. Litigation - Continued
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 purported class actions which is
memorialized in a Memorandum of Understanding (the Memorandum), dated as of such
date. The proposed settlement must be approved by the 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 previously 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 and $0.20 per BAC for
Series I and Series II, respectively. 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.
F-39
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
8. Litigation - Continued
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.
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. On
March 28, 1996, Mr. Schwartzberg filed a preliminary proxy statement with the
SEC opposing the proposed merger.
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 of 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 County Circuit Court issued a memorandum opinion
and order enjoining CMS and Mr. Schwartzberg from disclosing information made
confidential under the asset management agreement.
On February 15, 1996, Mr. Schwartzberg filed suit in the Chancery Court
against the General Partner and CRITEF III Associates Limited
F-40
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
8. Litigation - Continued
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 Chancery 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 III 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 the General Partner alleging that three press releases
issued by the General Partner of the Partnership
F-41
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
8. Litigation - Continued
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 counterclaims sought a temporary restraining order
against the General Partners regarding further alleged solicitations and false
and misleading statements. The District Court denied the injunction request by
order on April 23, 1996. On April 16, 1996, Mr. Schwartzberg also filed a
Notice of Appeal with respect to the injunction against him with the U. S. Court
of Appeals for the Second Circuit.
The Partnership Agreement provides for the indemnification of the General
Partners and its affiliates for acts or omissions by the General Partner in good
faith and in the best interest of the Partnership. Such indemnification does
not extend to a finding of liability for conduct which constitutes fraud, bad
faith, misconduct, breach of fiduciary duties, or violation of state or federal
securities laws. 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 a material adverse affect on the
Partnership.
9. Summary of Quarterly Results of Operations (Unaudited)
The following is a summary of unaudited quarterly results of operations for
the years ended December 31, 1995, 1994 and 1993:
SERIES I
--------
<TABLE>
<CAPTION>
1995
Quarter Ended
March 31 June 30 September 30 December 31
----------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Income (principally interest from mortgage
revenue bonds) $ 805,519 $ 679,950 $ 815,140 $ 878,924
Net income 743,533 629,658 627,707 811,818
Net income per BAC 0.32 0.28 0.27 0.35
</TABLE>
<TABLE>
<CAPTION>
1994
Quarter Ended
March 31 June 30 September 30 December 31
----------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Income (principally interest from mortgage
revenue bonds) $ 604,146 $ 750,688 $ 682,547 $ 838,997
Cumulative effect of change in accounting
for mortgage revenue bonds (2,475,448) -- -- --
Net (loss) income (1,927,277) 686,847 641,981 781,732
Cumulative effect of change in accounting
for mortgage revenue bonds per BAC (1.07) -- -- --
Net (loss) income per BAC (0.84) 0.30 0.28 0.34
</TABLE>
F-42
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
9. Summary of Quarterly Results of Operations (unaudited) - Continued
<TABLE>
<CAPTION>
1993
Quarter Ended
March 31 June 30 September 30 December 31
----------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Income (principally rental income) $ 1,425,443 $1,463,408 $1,438,179 $1,460,988
Net income (loss) 73,083 66,601 (58,967) 370,664
Net income (loss) per BAC 0.03 0.03 (0.03) 0.17
</TABLE>
SERIES II
---------
<TABLE>
<CAPTION>
1995
Quarter Ended
March 31 June 30 September 30 December 31
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income (principally interest from mortgage
revenue bonds) $ 1,073,540 $1,090,173 $1,100,554 $1,139,175
Net income 998,483 1,028,445 902,752 1,055,242
Net income per BAC 0.31 0.31 0.28 0.32
</TABLE>
<TABLE>
<CAPTION>
1994
Quarter Ended
March 31 June 30 September 30 December 31
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income (principally interest from mortgage
revenue bonds) $ 939,700 $ 927,046 $ 969,760 $1,080,940
Cumulative effect of change in accounting
for mortgage revenue bonds (4,600,720) -- -- --
Net (loss) income (3,737,817) 839,633 930,506 1,021,285
Cumulative effect of change in accounting
for mortgage revenue bonds per BAC (1.41) -- -- --
Net (loss) income per BAC (1.14) 0.26 0.28 0.31
</TABLE>
<TABLE>
<CAPTION>
1993
Quarter Ended
March 31 June 30 September 30 December 31
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income (principally rental income) $ 1,895,782 $2,035,177 $1,972,908 $2,119,792
Extraordinary item gain on debt reduction -- 416,432 -- --
Net income 147,276 668,394 2,379 828,660
Net income per BAC 0.05 0.20 -- 0.25
</TABLE>
F-43
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
10. Condensed Financial Information
Condensed combined financial information on a GAAP basis for the years
ended December 31, 1995 and 1994 for all of the borrowers is as follows:
SERIES I
--------
<TABLE>
<CAPTION>
As of December 31, 1995
------------------------------------------
Investments- Investments-
Less Than 20% Greater Than
Of Total 20% of Total
Assets Assets Total
------------ ------------ ------------
<S> <C> <C> <C>
Rental property, net of accumulated
depreciation $ 4,628,842 $ 26,401,608 $ 31,030,450
Other assets 280,870 1,520,366 1,801,236
----------- ------------ ------------
Total Assets $ 4,909,712 $ 27,921,974 $ 32,831,686
=========== ============ ============
Mortgage loans payable $ 6,275,000 $ 37,880,000 $ 44,155,000
Accrued interest payable 1,246,519 6,545,421 7,791,940
Other liabilities 241,100 1,856,082 2,097,182
----------- ------------ ------------
Total liabilities 7,762,619 46,281,503 54,044,122
Partners' capital (2,852,907) (18,359,529) (21,212,436)
----------- ------------ ------------
Total liabilities and partners'
capital $ 4,909,712 $ 27,921,974 $ 32,831,686
=========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1994
-----------------------------------------
Investments- Investments-
Less Than 20% Greater Than
Of Total 20% of Total
Assets Assets Total
------------ ------------ ------------
<S> <C> <C> <C>
Rental property, net of accumulated
depreciation $ 4,875,671 $ 27,720,971 $ 32,596,642
Other assets 233,315 1,471,162 1,704,477
----------- ------------ ------------
Total Assets $ 5,108,986 $ 29,192,133 $ 34,301,119
=========== ============ ============
Mortgage loans payable $ 6,275,000 $ 37,880,000 $ 44,155,000
Accrued interest payable 1,033,136 5,369,778 6,402,914
Other liabilities 198,003 1,620,989 1,818,992
----------- ------------ ------------
Total liabilities 7,506,139 44,870,767 52,376,906
Partners' capital (2,397,153) (15,678,634) (18,075,787)
----------- ------------ ------------
Total liabilities and partners'
capital $ 5,108,986 $ 29,192,133 $ 34,301,119
=========== ============ ============
</TABLE>
F-44
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
10. Condensed Financial Information - Continued
<TABLE>
<CAPTION>
For the year ended December 31, 1995
-------------------------------------------
Investments- Investments-
Less Than 20% Greater Than
Of Total 20% of Total
Assets Assets Total
------------- ------------- -------------
<S> <C> <C> <C>
Rental Income $1,165,842 $ 5,658,218 $ 6,824,060
Rental Expenses (539,141) (3,113,172) (3,652,313)
Interest Expense (588,488) (3,706,578) (4,295,066)
Depreciation (248,472) (2,150,155) (2,398,627)
---------- ----------- -----------
Net Loss $ (210,259) $(3,311,687) $(3,521,946)
========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1994
------------------------------------------
Investments- Investments-
Less Than 20% Greater Than
Of Total 20% of Total
Assets Assets Total
------------ ------------ ------------
<S> <C> <C> <C>
Rental Income $1,122,732 $ 5,417,697 $ 6,540,429
Rental Expenses (509,819) (2,991,871) (3,501,690)
Interest Expense (593,732) (3,676,167) (4,269,899)
Depreciation (277,071) (2,217,138) (2,494,209)
---------- ----------- -----------
Net Loss $ (257,890) $(3,467,479) $(3,725,369)
========== =========== ===========
</TABLE>
F-45
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
10. Condensed Financial Information - Continued
SERIES II
---------
<TABLE>
<CAPTION>
As of December 31, 1995
------------------------------------------
Investments- Investments-
Less Than 20% Greater Than
Of Total 20% of Total
Assets Assets Total
------------ ------------ ------------
<S> <C> <C> <C>
Rental property, net of accumulated
depreciation $ 6,274,228 $ 38,631,510 $ 44,905,738
Other assets 399,032 1,912,388 2,311,420
----------- ------------ ------------
Total Assets $ 6,673,260 $ 40,543,898 $ 47,217,158
=========== ============ ============
Mortgage loans payable $10,030,000 $ 52,578,001 $ 62,608,001
Accrued interest payable 3,927,065 9,579,202 13,506,267
Other liabilities 430,970 2,265,812 2,696,782
----------- ------------ ------------
Total liabilities 14,388,035 64,423,015 78,811,050
Partners' capital (7,714,775) (23,879,117) (31,593,892)
----------- ------------ ------------
Total liabilities and partners'
capital $ 6,673,260 $ 40,543,898 $ 47,217,158
=========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1994
------------------------------------------
Investments- Investments-
Less Than 20% Greater Than
Of Total 20% of Total
Assets Assets Total
------------ ------------ ------------
<S> <C> <C> <C>
Rental property, net of accumulated
depreciation $ 6,572,222 $ 40,328,194 $ 46,900,416
Other assets 358,439 1,582,286 1,940,725
----------- ------------ ------------
Total Assets $ 6,930,661 $ 41,910,480 $ 48,841,141
=========== ============ ============
Mortgage loans payable $10,030,000 $ 52,578,001 $ 62,608,001
Accrued interest payable 3,499,235 8,440,961 11,940,196
Other liabilities 336,193 1,795,565 2,131,758
----------- ------------ ------------
Total liabilities 13,865,428 62,814,527 76,679,955
Partners' capital (6,934,767) (20,904,047) (27,838,814)
----------- ------------ ------------
Total liabilities and partners'
capital $ 6,930,661 $ 41,910,480 $ 48,841,141
=========== ============ ============
</TABLE>
F-46
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
10. Condensed Financial Information - Continued
<TABLE>
<CAPTION>
For the year ended December 31, 1995
-------------------------------------------
Investments- Investments-
Less Than 20% Greater Than
Of Total 20% of Total
Assets Assets Total
------------- ------------- -------------
<S> <C> <C> <C>
Rental Income $ 1,318,441 $ 7,441,433 $ 8,759,874
Rental Expenses (797,458) (3,887,812) (4,685,270)
Interest Expense (1,003,000) (4,840,007) (5,843,007)
Depreciation (297,994) (1,696,594) (1,994,588)
----------- ----------- -----------
Net Income $ (780,011) $(2,982,980) $(3,762,991)
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1994
----------------------------------------------
Investments- Investments-
Less Than 20% Greater Than
Of Total 20% Of Total
Assets Assets Total
------------ ------------ ------------
<S> <C> <C> <C>
Rental Income $ 1,239,068 $ 7,021,646 $ 8,260,714
Rental Expenses (793,170) (3,868,054) (4,661,224)
Interest Expense (1,003,000) (4,769,113) (5,772,113)
Depreciation (321,160) (1,722,133) (2,043,293)
----------- ----------- -----------
Net Income $ (878,262) $(3,337,654) $(4,215,916)
=========== =========== ===========
</TABLE>
In accordance with Staff Accounting Bulletin 71, complete financial
statements for all borrowers in which the Partnership investment in mortgage
revenue bond is 20% or more of the total assets of the Partnership at December
31, 1995 and 1994 are included as an exhibit to the Partnership's financial
statements. The borrowers' financial statements are prepared on an income tax
basis, which differs from GAAP. The principal differences between income tax
basis and GAAP are (i) for income tax purposes the apartment properties are not
valued at the lower of cost or net realizable value and a write down to fair
value at deed-in-lieu of foreclosure was not taken, (ii) an intangible asset was
recognized for tax purposes representing the value to the borrower of its
favorable financing when the properties were transferred to Owner Partnerships
and (iii) depreciable life and method.
F-47
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
SERIES I SERIES II
---------------------------- --------------------------
As of As of As of As of
June 30, December 31, June 30, December 31,
1996 1995 1996 1995
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Investment in mortgage revenue bonds $30,740,285 $30,740,285 $43,793,252 $43,793,252
Cash and cash equivalents 91,841 58,924 70,264 88,986
Marketable securities 1,353,070 1,315,182 1,881,213 1,512,281
Working capital reserves invested in
marketable securities 1,346,956 1,284,670 2,283,667 2,307,385
Receivables and other assets 22,166 21,958 56,744 36,996
----------- ----------- ----------- -----------
Total assets $33,554,318 $33,421,019 $48,085,140 $47,738,900
=========== =========== =========== ===========
</TABLE>
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Distributions payable $ 1,301,344 $ 1,243,762 $ 1,897,646 $ 1,766,776
Accounts payable and accrued expenses 299,862 198,413 320,229 224,135
----------- ----------- ----------- -----------
Total liabilities 1,601,206 1,442,175 2,217,875 1,990,911
----------- ----------- ----------- -----------
Partners' capital (deficit):
General Partner (214,343) (214,083) (288,603) (289,808)
Beneficial Assignee Certificates
(BACs) - issued and outstanding,
2,280,000 of Series I BACs and
3,238,760 of Series II BACs 32,167,455 32,192,927 46,155,868 46,037,797
----------- ----------- ----------- -----------
Total partners' capital 31,953,112 31,978,844 45,867,265 45,747,989
----------- ----------- ----------- -----------
Total liabilities and
partners' capital $33,554,318 $33,421,019 $48,085,140 $47,738,900
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-48
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
SERIES I
------------------------------------------------------
For the three months ended For the six months ended
June 30, June 30,
------------------------- ------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest from mortgage revenue bonds $ 746,334 $ 658,558 $1,577,436 $1,451,754
---------- ---------- ---------- ----------
Other income (expenses):
Other interest income 23,435 21,392 45,281 33,715
Merger-related expenses (158,087) -- (234,126) --
General and administrative (42,962) (42,711) (77,225) (93,337)
Professional fees (13,463) (7,581) (35,754) (18,941)
---------- ---------- ---------- ----------
(191,077) (28,900) (301,824) (78,563)
---------- ---------- ---------- ----------
Net income $ 555,257 $ 629,658 $1,275,612 $1,373,191
========== ========== ========== ==========
Net income allocated to General Partner (1.01%) $ 5,608 $ 6,359 $ 12,884 $ 13,869
========== ========== ========== ==========
Net income allocated to BAC Holders (98.99%) $ 549,649 $ 623,299 $1,262,728 $1,359,322
========== ========== ========== ==========
Net income per BAC $0.24 $0.28 $0.55 $0.60
========== ========== ========== ==========
BACs outstanding 2,280,000 2,280,000 2,280,000 2,280,000
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-49
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
SERIES II
-----------------------------------------------------
For the three months ended For the six months ended
June 30, June 30,
------------------------- ------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest from mortgage revenue bonds $1,032,970 $1,047,325 $2,302,033 $2,097,833
---------- ---------- ---------- ----------
Other income (expenses):
Other interest income 41,287 42,848 82,320 65,880
Merger-related expenses (157,772) -- (233,811) --
General and administrative (46,679) (49,600) (85,631) (110,562)
Professional fees (17,456) (12,128) (47,989) (26,223)
---------- ---------- ---------- ----------
(180,620) (18,880) (285,111) (70,905)
---------- ---------- ---------- ----------
Net income $ 852,350 $1,028,445 $2,016,922 $2,026,928
========== ========== ========== ==========
Net income allocated to General Partner (1.01%) $ 8,609 $ 10,387 $ 20,371 $ 20,472
========== ========== ========== ==========
Net income allocated to BAC Holders (98.99%) $ 843,741 $1,018,058 $1,996,551 $2,006,456
========== ========== ========== ==========
Net income per BAC $ 0.26 $ 0.31 $ 0.62 $ 0.62
========== ========== ========== ==========
BACs outstanding 3,238,760 3,238,760 3,238,760 3,238,760
========== ========== ========== ==========
</TABLE>
The accompanying notes are integral part
of these financial statements
F-50
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the six months ended June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
SERIES I
----------------------------------------
Beneficial
Assignee
Certificate General
Holders Partner Total
------------ ----------- -------------
<S> <C> <C> <C>
Balance, December 31, 1995 $32,192,927 $(214,083) $31,978,844
Net income 1,262,728 12,884 1,275,612
Distributions paid or accrued of $0.565 per BAC
(including return of capital of $0.01 per BAC) (1,288,200) (13,144) (1,301,344)
------------ ---------- ------------
Balance, June 30, 1996 $32,167,455 $(214,343) $31,953,112
============ ========== ============
SERIES II
----------------------------------------
Beneficial
Assignee
Certificate General
Holders Partner Total
------------ ---------- ------------
<S> <C> <C> <C>
Balance, December 31, 1995 $46,037,797 $(289,808) $45,747,989
Net income 1,996,551 20,371 2,016,922
Distributions paid or accrued of $0.58 per BAC
(none of which is return on capital) (1,878,480) (19,166) (1,897,646)
------------ ---------- ------------
Balance, June 30, 1996 $46,155,868 $(288,603) $45,867,265
============ ========== ============
</TABLE>
The accompanying notes are an integral part
of these financial statements
F-51
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SERIES I
--------------------------
For the six months ended
June 30,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,275,612 $ 1,373,191
Adjustments to reconcile net income to net cash provided by
operating activities:
(Increase) decrease in receivables and other assets (208) 4,868
Increase (decrease) in accounts payable and accrued expenses 101,449 (25,748)
----------- -----------
Net cash provided by operating activities 1,376,853 1,352,311
----------- -----------
Cash flows from investing activities:
Sale of marketable securities 962,286 1,211,451
Purchase of marketable securities (1,000,174) (1,376,371)
Deposits to working capital reserves invested in marketable
securities (62,286) (124,544)
----------- -----------
Net cash used in investing activities (100,174) (289,464)
----------- -----------
Cash flows from financing activities:
Distributions to BAC Holders and General Partner (1,243,762) (1,151,631)
----------- -----------
Net increase (decrease) in cash and cash equivalents 32,917 (88,784)
Cash and cash equivalents, beginning of period 58,924 103,864
----------- -----------
Cash and cash equivalents, end of period $ 91,841 $ 15,080
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements
F-52
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SERIES II
--------------------------
For the six months ended
June 30,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,016,922 $ 2,026,928
Adjustments to reconcile net income to net cash provided by
operating activities:
Increase in receivables and other assets (19,748) (41,356)
Increase (decrease) in accounts payable and accrued expenses 96,094 (15,698)
----------- -----------
Net cash provided by operating activities 2,093,268 1,969,874
----------- -----------
Cash flows from investing activities:
Sale of marketable securities 2,417,379 3,522,098
Purchase of marketable securities (2,786,311) (3,646,595)
Withdrawals from (deposits to) working capital reserves
invested in marketable securities 23,718 (299,056)
----------- -----------
Net cash used in investing activities (345,214) (423,553)
----------- -----------
Cash flows from financing activities:
Distributions to BAC Holders and General Partner (1,766,776) (1,635,903)
----------- -----------
Net decrease in cash and cash equivalents (18,722) (89,582)
Cash and cash equivalents, beginning of period 88,986 101,283
----------- -----------
Cash and cash equivalents, end of period $ 70,264 $ 11,701
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements
F-53
<PAGE>
CAPITAL REALITY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of CRITEF Associates Limited Partnership (the General
Partner), the accompanying unaudited financial statements of Capital Realty
Investors Tax Exempt Fund Limited Partnership (the Partnership) contain all
adjustments of a normal recurring nature necessary to present fairly the
Partnership's financial position as of June 30, 1996 and December 31, 1995, and
the results of its operations for the three and six months ended June 30, 1996
and 1995 and its cash flows for the six months ended June 30, 1996 and 1995.
These unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. While the General Partner believes that the disclosures
presented are adequate to make the information not misleading, it is suggested
that these financial statements be read in conjunction with the amended and
restated financial statements and notes included in the Partnership's Annual
Report filed on Form 10-K/A on May 17, 1996 for the year ended December 31,
1995.
The financial statements for the three and six months ended June 30, 1995
have been restated to conform to 1996 presentation, as well as to conform with
the restated 1995 financial statements as discussed in
Note 3.
2. MERGER PROPOSAL
On September 11, 1995, the Partnership and its General Partner entered into
a merger agreement, subject to BAC Holder approval, with an affiliate of Capital
Apartment Properties, Inc. (CAPREIT), a private real estate investment trust.
On that date, another CAPREIT affiliate entered into a merger agreement with
Capital Realty Investors Tax Exempt Fund III Limited Partnership (CRITEF III), a
similar tax exempt bond fund sponsored by CRI. The two merger agreements are
independent of one another, but the closing of each merger is conditioned on
closing of the other, at CARPEIT's election. Another affiliate of CAPREIT is
the property manager for four of the five properties securing the bonds held by
Series I, and all five properties securing the bonds in Series II. All nine
properties managed by the CAPREIT affiliate had defaulted with respect to their
mortgage loans held by the Partnership. If the merger proposal is approved by a
majority vote of BAC Holders, all of the BACs in both Series I and Series II
will be redeemed for cash and the interests represented by such BACs will be
canceled. The agreement for the proposed merger has been modified to improve
the terms of the original proposal. Under the original proposal, the redemption
amount per BAC was to be $13.761 and $13.313 for Series I and Series II,
respectively. Under the most recent modification, the Third Amended and
Restated Agreement and Plan of Merger (Restated Merger Agreement), all of the
BACs will be redeemed for cash at a redemption price of $14.28 per BAC, net to
the holder, without interest, subject to upward adjustment based on Available
Cash (as defined in the Restated Merger Agreement) to not greater than $14.49
per BAC for Series I, and $14.07 per BAC, net to the holder, without interest,
subject to
F-54
<PAGE>
CAPITAL REALITY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. MERGER PROPOSAL - Continued
upward adjustment based on Available Cash to not greater than $14.28 per BAC for
Series II. In arriving at the base redemption price, the consideration to be
paid to BAC holders in the mergers has been reduced by the fees and expenses
payable to counsel for the plaintiffs in certain class action litigation, as
discussed in Note 6. If there is any upward adjustment to the base redemption
price based on Available Cash, plaintiffs' counsel shall be entitled to an
additional amount equal to 20% of the increased amount, up to a maximum of
$75,000.
The BAC Holders will also vote upon the sale of the Partnership's General
Partner's interest to an affiliate of CAPREIT immediately prior to consummation
of the proposed merger. 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 accounts receivables held by
CRI and CRIIMI MAE Services Limited Partnership (CRIIMI), for the accrued
mortgage servicing and administration fees on certain property mortgage loans of
both Series I and Series II. The general partner of CRIIMI is a subsidiary of
CRIIMI MAE Inc., a publicly-traded company affiliated with the General Partners.
Under the Restated Merger Agreement, CAPREIT will pay the discounted amount of
$511,680 and $770,835 to CRI for the fees of Series I and Series II,
respectively, accrued through June 30, 1995. The amounts to be paid to CRI
represent approximately 42% of the total accrued fees owed to CRI. Also,
CAPREIT will pay $265,968 and $391,296 to CRIIMI for the fees of Series I and
Series II, respectively, accrued from July 1, 1995 through June 30, 1996, which
represents 100% of the fees which are expected to be owed to CRIIMI for that
period. From July 1, 1996 to the closing of the proposed merger, 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 $22,164 and $32,608 per month for Series I and Series II, respectively.
Each of the affiliates of the Partnership formed to take title to
properties and assume the existing indebtedness when the original unaffiliated
borrowers defaulted (Owner Partnerships) has agreed to either (a) sell, assign
and transfer the partnership interests in, or the real property and other assets
of, such Owner Partnerships to CAPREIT or its designee for no additional
consideration or (b) admit CAPREIT or its designee as the managing general
partner, whereupon the general partner interests of the current general partners
will be converted into limited partner interests, and CAPREIT will have the
option to acquire all of the limited partner interests at any time within five
years from the closing date of the merger at the then fair market value thereof
(based on the fair market value of the property as encumbered by the mortgage
loans). Although such interests currently have nominal value, if the fair
market value of the partnership properties increases substantially prior to the
time CAPREIT exercises its option, such increase in value may benefit the owners
of the Owner Partnerships. This feature was required by CAPREIT as a material
business term of the merger.
F-55
<PAGE>
CAPITAL REALITY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. MERGER PROPOSAL - Continued
Consummation of the merger is contingent upon the approval of a majority of
combined Series I and Series II BAC Holders, voting together as one class. The
proposed merger is also contingent upon receiving a favorable opinion regarding
the fairness of the redemption amount to BAC Holders from a financial point of
view. Favorable opinions from an independent investment banking firm were
issued on March 14, 1996. As of August 5, 1996, the independent investment
banking firm is updating their analysis regarding the fairness of the redemption
amount to BAC Holders from a financial point of view. A proxy statement is
expected to be issued to BAC Holders after it is filed with and clearance is
received by the SEC. A preliminary proxy statement has been filed with the SEC,
and the Partnership is awaiting the SEC's clearance. The definitive proxy
materials include a full description of the proposed merger and the independent
fairness opinions.
In accordance with the Restated Merger Agreement, CAPREIT is to pay the
legal costs incurred by the Partnership associated with the proposed merger,
upon consummation of the proposed merger. As the Partnership is not responsible
for payment of these costs, they have not been reflected in the accompanying
financial statements. However, in the event that the proposed merger is not
consummated with CAPREIT, the Partnership will be responsible for these costs,
as discussed below. As of August 5, 1996, the Partnership had incurred legal
costs of approximately $45,000 for Series I and II, respectively, related to the
proposed merger. There is no reasonable estimate of remaining legal costs to be
incurred by the Partnership related to the proposed merger.
In the event the Restated Merger Agreement is terminated or abandoned under
the specified circumstances, the Partnership may be liable for the payment of a
fee equal of $2,250,000 with respect to such terminated or abandoned Restated
Merger Agreement if there is a Fiduciary Out Termination (as defined in the
Restated Merger Agreement), a Triggering Event (as defined in the Restated
Merger Agreement) or the Partnership consummates an alternative transaction
within 270 days of the date of termination or abandonment of such Restated
Merger Agreement.
In addition, if the Restated Merger Agreement is terminated or abandoned due
to (i) a Fiduciary Out Termination, (ii) a willful and material breach by the
Partnership or any applicable Owner Partnership (other than a breach of the
representations and warranties), (iii) the failure by the Partnership or any of
such Owner Partnerships to perform in all material respects its obligations and
duties thereunder, or (iv) a termination of such Restated Merger Agreement by
such CAPREIT affiliate because the Partnership shall have settled designated
actions for an amount in excess of an agreed upon amount or such settlement or
compromise contains terms to which such CAPREIT affiliate reasonably objects,
then the Partnership shall bear all of its own expenses, as mentioned above, and
reimburse such CAPREIT affiliate and its affiliates for reasonable out-of-pocket
expenses (including, without limitation, all fees and expenses of counsel, and
its financing sources and consultants to the CAPREIT affiliate and its
affiliates) in connection with such merger and related transactions and the
proxy statement. In no event, however,
F-56
<PAGE>
CAPITAL REALITY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. MERGER PROPOSAL - Continued
shall the amount paid to reimburse expenses under the Restated Merger Agreement
exceed $2,500,000.
During February 1996, the General Partner received an inquiry concerning the
possible acquisition of the funds from a group of investors led by Mr. Terry
McNellis and Mr. Gary Petrucci, of Piper Jaffrey Inc., and Mr. David Brierton
and Mr. Jack Safar, of Dominium Management Services Inc. (collectively, the
Dominium Group). The Dominium Group executed confidentiality and non-
circumvention agreements, and by the beginning of April 1996, the Partnership
had provided the Dominium Group with all of the due diligence materials they had
requested. Thereafter, the General Partner did not hear from any representative
of the Dominium Group again until June 28, 1996, just days prior to the
initially scheduled date for the fairness hearing to be held on the Stipulation
of Settlement in the Zakin and Wingard putative class actions (the Zakin and
Wingard Actions), as discussed in Note 6.
On June 28, 1996, counsel to the plaintiffs in the Zakin and Wingard Actions
and the Partnership received a letter from Dominium Tax Exempt Fund L.L.P.
(Dominium), which was signed by Mr. Safar of the Dominium Group, indicating an
interest in entering into merger agreements with the Partnership having similar
terms as the merger agreement and purportedly offering the BAC Holders of the
Partnership and CRITEF III an aggregate merger consideration of approximately
$168,230,000. After reviewing the Dominium letter, the General Partner
determined that Dominium had not demonstrated any firm financing ability.
Notwithstanding such determination, the General Partner, in a letter dated July
3, 1996, notified Dominium that they would make documents available to Dominium
for its due diligence. The General Partner, however, also cautioned Dominium
that they would not jeopardize the merger agreements with CAPREIT by an
unwarranted delay while Dominium and its potential lenders continued to study
the Partnership and the mortgage revenue bonds and complete their due diligence.
On July 12, 1996, the Partnership received copies of correspondence from
Dominium to counsel for the plaintiffs in the Zakin and Wingard Actions,
indicating that Dominium had received a purported financing commitment, subject
to payment of a fee and satisfactory results of a 21 business day due diligence
period. Representatives of Dominium came to the General Partners' offices on
July 11, 12, 26, 29 and 30, 1996 to conduct such review.
3. INVESTMENTS
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115). This statement requires
that most investments in securities be classified into one of the following
investment categories based upon circumstances under which securities might be
sold: held to maturity, available for sale, and trading. Generally,
investments in securities for which an enterprise has both the ability and the
intent to hold to maturity should be accounted
F-57
<PAGE>
CAPITAL REALITY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENTS - Continued
for using the amortized cost method and all other securities must be recorded at
their fair values. The Partnership implemented SFAS 115 in 1994 for its
marketable securities. Following such adoption, the Partnership (as did others
in the industry) continued to account for its investments in mortgage revenue
bonds, except Observatory II, as investments in real estate based on
consolidation of the Owner Partnerships in accordance with the Securities and
Exchange Commission (SEC) rules.
In conjunction with the review of the Partnership's 1995 financial
statements by the SEC staff, the Partnership agreed to account for all of its
investments in mortgage revenue bonds as debt securities under the provisions of
SFAS 115 effective January 1, 1994, and restate its 1995 and 1994 financial
statements to reflect this change. Accordingly, effective January 1, 1994, all
investments in mortgage revenue bonds are classified and accounted for as held
to maturity securities and carried at amortized cost because of the
Partnership's ability and intent to hold these investments to maturity. In
accordance with SFAS 115's provisions for held to maturity securities, the
Partnership evaluates the fair value of its mortgage revenue bonds to determine
if impairment exists. If a decline in fair value is determined to be other-
than-temporary, the security is written down to its fair value. The Partnership
did not recognize any impairment losses during the three or six months ended
June 30, 1996 or 1995. Since all of the underlying mortgage loans, except
Observatory II, are in default, base interest and contingent interest on the
mortgage revenue bonds is recognized as revenue when collected.
The restatement of the 1995 financial statements resulted in increases of
$374,989 and $792,315 in the previously reported net income for the three and
six months ended June 30, 1995, respectively, for Series I, and increases of
$410,106 and $983,047 in the previously reported net income for the three and
six months ended June 30, 1995, respectively, for Series II. The restatement of
the 1995 financial statements also resulted in increases of $0.17 and $0.35 in
the previously reported net income per BAC for the three and six months ended
June 30, 1995, respectively, for Series I, and increases of $0.12 and $0.30 in
the previously reported net income per BAC for the three and six months ended
June 30, 1995, respectively, for Series II. Net income per BAC as previously
reported was $.11 and $.25 for the three and six months ended June 30, 1995,
respectively, for Series I, and $.19 and $.32 for the three and six months ended
June 30, 1995, respectively, for Series II.
SERIES I
--------
The five original Series I mortgage loans securing the mortgage revenue
bonds, with current aggregate principal and carrying amounts of $44,155,000 and
$30,740,285, respectively, went into default, resulting in title transfer by
actual foreclosure(one) or deeds in lieu of foreclosure (four) to Owner
Partnerships which assumed the existing indebtedness. In connection with the
transfers of properties to Owner Partnerships, the Partnership obtained an
opinion from its former independent accounting
F-58
<PAGE>
CAPITAL REALITY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENTS - Continued
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 bond counsel that certain transfers of
the properties to Owner Partnerships would not cause the Partnership to become a
substantial user of the projects or a related party to a substantial user
pursuant to Section 103 of the Code (which also could have caused the bonds to
lose their tax-exempt status). The bond counsel opinions were obtained in
connection with the Observatory II, Royal Oaks, Trailway Pond and Valley Creek
transfers.
In conjunction with the transfer of the Royal Oaks deed to an Owner
Partnership, the Royal Oaks mortgage revenue bond was modified. The
Partnership, based on information and advice from outside counsel, believes that
the modification does not adversely affect the tax-exempt nature of the Royal
Oaks bond interest. The modification complied with IRS guidelines in effect at
that time. The IRS has since issued Final Regulations Section 1.1001-3, which
applies only to modifications made on or after September 24, 1996. The General
Partner believes that the modification to the Royal Oaks mortgage revenue bond
was consistent with the relevant tax authority which existed at the time of the
modification and has, therefore, not jeopardized the tax-exempt status of the
Royal Oaks mortgage revenue bond. However, there can be no assurance as to the
tax-exempt status of the Royal Oaks mortgage revenue bond at present.
Presented below is a summary of base interest payments for the six months
ended June 30, 1996 and 1995 that are due to Series I from the borrowers:
<TABLE>
<CAPTION>
For the six months ended June 30, 1996
---------------------------------------------------------------------
Base Interest Cumulative
Paid From Current Base Unpaid
Current Base Properties' Interest Full Base
Interest Due(1) Operations Not Paid Interest
------------ ------------- ------------ -----------
<S> <C> <C> <C> <C>
Observatory II $ 64,000 $ 64,000 $ -- $ --
Royal Oaks 534,648 449,712 84,936 1,678,180
Trailway Pond 230,244 120,264 109,980 962,452
Valley Creek 663,176 471,557 191,619 2,942,800
White Bear Woods 655,463 471,903 183,560 2,184,311
------------ ------------ ----------- -----------
$2,147,531 $1,577,436 $570,095 $7,767,743
============ ============ =========== ===========
</TABLE>
F-59
<PAGE>
CAPITAL REALITY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENTS - Continued
<TABLE>
<CAPTION>
For the six months ended June 30, 1995
---------------------------------------------------------
Base Interest Cumulative
Paid From Current Base Unpaid
Current Base Properties' Interest Full Base
Interest Due(1) Operations Not Paid Interest
--------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Observatory II $ 64,000 $ 64,000 $ -- $ --
Royal Oaks 534,648 391,387 143,261 1,505,734
Trailway Pond 230,244 124,374 105,870 742,702
Valley Creek 663,176 446,584 216,592 2,585,899
White Bear Woods 655,463 425,409 230,054 1,867,811
-------------- ---------- -------- ----------
$ 2,147,531 $ 1,451,754 $ 695,777 $ 6,702,146
============== ============= ============ ===========
</TABLE>
(1) The Partnership charges the borrowers interest on unpaid base
interest, which totalled $464,087 and $366,455 for the six months
ended June 30, 1996 and 1995, respectively.
Contingent interest is recognized as revenue when collected. No contingent
interest was received or accrued by Series I during the three or six months
ended June 30, 1996 or 1995. Contingent interest due for Series I as of June
30, 1996 and December 31, 1995 amounted to $21,404,029 and $20,083,162,
respectively.
As of June 30, 1996, Series I had cash and cash equivalents of $91,841,
unrestricted marketable securities of $1,353,070 and working capital reserves
invested in marketable securities of $1,346,956. Marketable securities consist
of tax-exempt municipal bonds which generally contain a seven-day put option
with established banks or brokerage houses. The Partnership has classified its
investments in marketable securities into the available for sale category under
SFAS 115. Realized gains and losses on the sale of marketable securities were
determined on a specific identification basis. There were no net unrealized
holding gains or losses recognized during the three or six months ended June 30,
1996 or 1995 for Series I as the cost for the tax-exempt municipal bonds
approximated market value throughout the respective periods.
SERIES II
---------
The five original Series II mortgage loans securing the mortgage revenue bonds
with aggregate principal and carrying amounts of $62,608,001 and $43,793,252,
respectively, went into default, resulting in deeds in lieu of foreclosure to
Ownership Partnerships which assumed the existing indebtedness. In connection
with the transfers of properties to Owner Partnerships, 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 Code (which would cause the bonds to lose their tax-exempt status). The
Partnership also obtained opinions from bond counsel that certain
F-60
<PAGE>
CAPITAL REALITY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENTS - Continued
transfers of the properties to Owner Partnerships would not cause the
Partnership to become a substantial user of the projects or a related party to a
substantial user 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 Ridge and Ethan's Glen IIB,
Fountain Place and Trailway Pond II transfers.
Presented below is a summary of base interest payments for the six months
ended June 30, 1996 and 1995 that are due to Series II from the borrowers:
<TABLE>
<CAPTION>
For the six months ended June 30, 1996
-------------------------------------------------------------------
Base Interest Cumulative
Paid From Current Base Unpaid
Current Base Properties' Interest Full Base
Interest Due(1) Operations(2) Not Paid Interest
--------------- ---------------- ------------ ------------
<S> <C> <C> <C> <C>
Ethan's Ridge and
Ethan's Glen IIB $ 759,375 $ 758,194 $ 1,181 $ 2,003,374
Fountain Place 992,750 806,373 186,377 5,249,875
James Street
Crossing 667,879 470,000 197,879 1,893,050
Trailway Pond II 501,500 267,465 234,035 2,802,741
---------- ---------- -------- ------------
$2,921,504 $2,302,032 $619,472 $11,949,040
========== ========== ======== ============
<CAPTION>
For the six months ended June 30, 1995
-------------------------------------------------------------------
Base Interest Cumulative
Paid From Current Base Unpaid
Current Base Properties' Interest Full Base
Interest Due(1) Operations Not Paid Interest
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Ethan's Ridge and
Ethan's Glen IIB $ 759,375 $ 612,239 $147,136 $ 1,845,660
Fountain Place 992,750 681,787 310,963 4,805,330
James Street
Crossing 667,879 520,548 147,331 1,577,060
Trailway Pond II 501,500 283,259 218,241 2,359,117
---------- ---------- -------- ------------
$2,921,504 $2,097,833 $823,671 $10,587,167
========== ========== ======== ============
</TABLE>
(1) The Partnership charges the borrowers interest on unpaid base interest,
which totalled $690,400 and $567,098 for the six months ended June 30, 1996
and 1995, respectively.
(2) Includes 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 Ridge and Ethan's Glen IIB, Fountain Place
and James Street Crossing totalled $107,000, $25,700 and $7,800,
respectively.
F-61
<PAGE>
CAPITAL REALITY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENTS - Continued
Contingent interest is recognized as revenue when collected. No contingent
interest was received or accrued by Series II during the three or six months
ended June 30, 1996 or 1995. Contingent interest due for Series II as of June
30, 1996 and December 31, 1995 amounted to $29,984,679 and $27,897,543,
respectively.
As of June 30, 1996, Series II had cash and cash equivalents of $70,264,
unrestricted marketable securities of $1,881,213, and working capital reserves
invested in marketable securities of $2,283,667. Marketable securities consist
of tax-exempt municipal bonds which generally contain a seven-day put option
with established banks or brokerage houses. The Partnership has classified its
investments in marketable securities into the available for sale category under
SFAS 115. Realized gains and losses on the sale of marketable securities were
determined on a specific identification basis. There were no net unrealized
holding gains or losses recognized during the three or six months ended June 30,
1996 or 1995 for Series II as the cost for the tax-exempt municipal bonds
approximated market value throughout these periods.
SERIES I and II
---------------
In April 1991, the U.S. Supreme Court decided a case, Cottage Savings
Association V. Commissioner (Cottage Savings) that could be interpreted to
impact then existing authority addressing the modification of debt instruments.
In response to this decision, on June 26, 1996, the IRS issued Final Regulations
Section 1.1001-3 which specifically address the tax consequences of
modifications of debt instruments. Among other things, these regulations
provide that certain modifications of the current interest payments or the
maturity date of a debt instrument will be treated as a taxable exchange of the
original instrument for the modified debt instrument. As a result, certain
future modifications of the mortgage loans which secure the mortgage revenue
bonds could be treated as a deemed reissuance of the mortgage revenue bonds for
federal income tax purposes. Any reissuance without the cooperation of the
mortgage revenue bond issuers would result in the loss of the tax-exempt status
of the mortgage revenue bonds. Such issuers might cooperate and consent to the
reissuance; however, there can be no assurance that such issuers would do so or
would not impose additional requirements that could have an adverse impact on
the mortgage revenue bonds. Even if issuer consent were obtained, all accrued
and unpaid interest of the existing mortgage loans would have to be written off.
The write-off of accrued and unpaid interest would not be recoverable upon
ultimate disposition or payoff of the mortgage revenue bond and would instead
accrue to the benefit of the Owner Partnership to the extent realized.
Final Regulations Section 1.1001-3 will become effective only with respect to
modifications made on or after September 24, 1996. It is unclear at this time
what effect the Cottage Savings decision may have on modifications that have
already been made to mortgage loans which secure the mortgage revenue bonds.
The General Partner believes that the modifications which have already been made
were consistent with the
F-62
<PAGE>
CAPITAL REALITY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENTS - Continued
relevant tax authority that existed at the time of those modifications and have
not jeopardized the tax-exempt status of the mortgage revenue bonds. However,
there can be no assurance as to the tax-exempt status of the mortgage revenue
bonds at present.
The General Partner's ongoing strategy had been to continue holding the
mortgage revenue bonds until the loan maturity dates. If the merger proposal,
discussed in Note 2, is approved, the interests of the BAC Holders will be
redeemed for cash. 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 extension of certain loan maturity dates
and, if approved, arrange any necessary related amendments to the pertinent
mortgage revenue bonds.
4. DISTRIBUTIONS TO BAC HOLDERS
The Partnership expects to continue to make distributions to BAC Holders on a
semi-annual basis. The Restated Merger Agreement stipulates that 1996
distributions cannot exceed $0.09417 and $0.09667 per BAC per month for Series I
and Series II, respectively. 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 Restated Merger Agreement. However, property level reserves
are depleted and estimated cash flows from the properties' operations are
insufficient to pay full monthly base interest (except for Observatory II in
Series I), therefore, the distributions to BAC Holders may fluctuate from
current levels. The General Partner seeks to optimize cash flow from the
properties owned by the Owner Partnerships. Despite these efforts, the amounts
paid to the Partnership from the borrowers may be expected to fluctuate from
period to period due to changes in occupancy rates, rental rates, operating
expenses and other variables.
SERIES I
--------
The following distributions were paid or accrued to BAC Holders of record
during the six months ended June 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
Distributions to Distributions to
BAC Holders BAC Holders
--------------------------- -----------------------------
Quarter Ended Total Per BAC Total Per BAC
- ------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
March 31, $ 644,100 $ 0.2825 $ 615,600 $ 0.2700
June 30, 644,100 0.2825 615,600 0.2700
---------- ---------- ---------- ------------
$1,288,200 $ 0.5650 $1,231,200 $ 0.5400
========== ========== =========== ============
</TABLE>
F-63
<PAGE>
CAPITAL REALITY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
4. DISTRIBUTIONS TO BAC HOLDERS - Continued
Distributions to BAC Holders for the three and six months ended June
30, 1996 and 1995 were funded as follows:
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
--------------- --------------- --------------- -----------------
1996 1995 1996 1995
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Cash Available for Distribution:
Cash flow (1) $ 679,348 $ 630,894 $ 1,363,630 $ 1,368,306
Net deposits to working capital reserves (28,676) (9,013) (62,286) (124,544)
--------------- --------------- --------------- ----------------
Total cash available for distribution $ 650,672 $ 621,881 $ 1,301,344 $ 1,243,762
=============== =============== =============== ================
Distributions to:
General partner (1.01%) $ 6,572 $ 6,281 $ 13,144 $ 12,562
=============== =============== =============== ================
BAC Holders (98.99%) $ 644,100 $ 615,600 $ 1,288,200 $ 1,231,200
=============== =============== =============== ================
</TABLE>
(1) Defined in the Limited Partnership Agreement as (a) all revenues received
by the Partnership during such period, plus (b) any amounts which the
Managing General Partner releases from the Working Capital Reserve as being
no longer necessary to hold as part of the Working Capital Reserve, plus
(c) any amounts released to the Partnership from the Interest Reserve
Account with respect to a mortgaged property after completion of
construction of such mortgaged property, less (i) operating expenses of the
Partnership paid from reserves during the period, including any expenses
paid to the General Partner, but not including such amounts paid from the
Working Capital Reserve, (ii) all cash payments made from Revenues during
such period to discharge Partnership indebtedness, and (iii) all amounts
from revenues, if any, added to the Working Capital Reserve during such
period. Cash flow as defined in the Limited Partnership Agreement is not
to be construed as an alternative to operating income in accordance with
generally accepted accounting principles (GAAP) as an indication of the
Partnership's operating performance.
SERIES II
---------
The following distributions were paid or accrued to BAC Holders of record
during the six months ended June 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
Distributions to Distributions to
BAC Holders BAC Holders
------------------------- ------------------------
Quarter Ended Total Per BAC Total Per BAC
- -------------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
March 31, $ 939,240 $ 0.2900 $ 874,465 $ 0.2700
June 30, 939,240 0.2900 874,465 0.2700
---------- ---------- ----------- ----------
$1,878,480 $ 0.5800 $1,748,930 $ 0.5400
========== ========== =========== ==========
</TABLE>
Distributions to BAC Holders for the three and six months ended June
30, 1996 and 1995 were funded as follows:
F-64
<PAGE>
CAPITAL REALITY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
4. DISTRIBUTIONS TO BAC HOLDERS - Continued
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
-------------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Cash Available for Distribution:
Cash flow (1) $ 958,579 $1,149,834 $1,873,928 $2,065,830
Net (deposits to) withdrawals from working
capital reserves (9,756) (266,447) 23,718 (299,056)
---------- ---------- ---------- -----------
Total cash available for distribution $ 948,823 $ 883,387 $1,897,646 $1,766,774
========== ========== ========== ===========
Distributions to:
General partner (1.01%) $ 9,583 $ 8,922 $ 19,166 $ 17,844
========== ========== ========== ===========
BAC Holders (98.99%) $ 939,240 $ 874,465 $1,878,480 $1,748,930
========== ========== ========== ===========
</TABLE>
(1) Defined in the Limited Partnership Agreement as (a) all revenues received
by the Partnership during such period, plus (b) any amounts which the
Managing General Partner releases from the Working Capital Reserve as being
no longer necessary to hold as part of the Working Capital Reserve, plus
(c) any amounts released to the Partnership from the Interest Reserve
Account with respect to a mortgaged property after completion of
construction of such mortgaged property, less (i) operating expenses of the
Partnership paid from reserves during the period, including any expenses
paid to the General Partner, but not including such amounts paid from the
Working Capital Reserve, (ii) all cash payments made from Revenues during
such period to discharge Partnership indebtedness, and (iii) all amounts
from revenues, if any, added to the Working Capital Reserve during such
period. Cash flow as defined in the Limited Partnership Agreement is not
to be construed as an alternative to operating income in accordance with
GAAP as an indication of the Partnership's operating performance.
5. INCOME TAXES
For income tax purposes, base interest income is accrued when earned.
The accrual of base interest is discontinued when, at the time of accrual,
ultimate collectibility of the base interest due is considered unlikely. Once a
loan has been placed in a non-accrual status, income is recorded only as cash
payments are received from the borrower until such time as the uncertainty of
collection of unpaid base interest is eliminated. All loans except Observatory
II were on non-accrual status throughout the six months ended June 30, 1996 and
1995; therefore, for income tax purposes, income was recognized to the extent of
cash received. Contingent interest from the investment is recognized as revenue
when collected. No contingent interest was recognized for the three and six
months ended June 30, 1996 or 1995.
For federal income tax purposes, the investments in all of the
mortgage revenue bonds are treated as loans, interest on which is exempt from
regular federal income tax. A reconciliation of the primary differences between
the financial statement net income and municipal income for tax purposes is as
follows:
F-65
<PAGE>
CAPITAL REALITY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
5. INCOME TAXES - Continued
SERIES I
--------
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
---------------------- -----------------------
1996 1995 1996 1995
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Financial statement net income $555,257 $629,658 $1,275,612 $1,373,191
Adjustment for timing of municipal income
recognition 124,476 1,233 88,401 (4,887)
-------- -------- ---------- ----------
Municipal income, net for tax purposes $679,733 $630,891 $1,364,013 $1,368,304
======== ======== ========== ==========
Municipal income per BAC outstanding $ 0.30 $ 0.27 $ 0.60 $ 0.59
======== ======== ========== ==========
</TABLE>
SERIES II
---------
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
----------------------- ------------------------
1996 1995 1996 1995
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial statement net income $852,350 $1,028,445 $2,016,922 $2,026,928
Adjustment for timing of municipal income
recognition 121,046 121,390 (128,180) 38,901
-------- ---------- ---------- ----------
Municipal income, net for tax purposes $973,396 $1,149,835 $1,888,742 $2,065,829
======== ========== ========== ==========
Municipal income per BAC outstanding $ 0.30 $ 0.35 $ 0.58 $ 0.63
======== ========== ========== ==========
</TABLE>
A publicly traded partnership is treated as a corporation for income tax
purposes unless it meets certain exceptions. To qualify under these exceptions,
the General Partner annually invests in de minimis taxable investments for both
Series I and Series II.
6. LITIGATION
On September 22, 1995, Irving Zakin commenced a putative class action
(the Zakin Action) against the Partnership, its general partner (CRITEF
Associates Limited Partnership), its Assignor Limited Partner (CRITEF, Inc.),
CRI, William B. Dockser, H. William Willoughby, CRITEF III, CRITEF III
Associates Limited Partnership, CRITEF III, Inc., and CAPREIT (collectively, the
Defendants) in the court of Chancery of the State of
F-66
<PAGE>
CAPITAL REALITY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
6. LITIGATION - Continued
Delaware in New Castle County (the Chancery Court) (C.A. No. 14558). The
complaint alleges, among other things, that the price offered to the BAC Holders
in the Mergers at the time the complaint was filed was inadequate, and that the
Defendants breached their fiduciary duty to the BAC Holders, or aided and
abetted such a breach, engaged in self-dealing and misled BAC Holders, in
connection with the proposed Mergers. 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 Court has been made by the plaintiffs in both
lawsuits to consolidate the two actions.
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.
On January 31, 1996, the Defendants and the plaintiffs and their
respective attorneys reached a tentative settlement of the Zakin and Wingard
Actions memorialized in a Memorandum of Understanding (the Memorandum), dated as
of such date. In accordance with the Memorandum, the merger agreements were
amended on January 31, 1996, to provide that (a) the aggregate cash
consideration to be paid to the BAC Holders of the Partnership and CRITEF III
was increased by $8.5 million from $150.0 million to $158.5 million (subject to
the adjustment up or down based upon available cash), and (b) the aggregate
amount payable in consideration for the Accrued Fees payable to CRI for the
Partnership and CRITEF III was reduced to no more than $2,000,000 (subsequently
reduced to $1,950,000) as compared with $4,023,000 provided for in the original
merger agreement. The Defendants also agreed that they would not object to an
application for attorneys' fees and reimbursement of out-of-pocket expenses of
plaintiffs' counsel for up to 20% of the improved Merger consideration
negotiated by them with such fees and expenses as are awarded by the Court to
plaintiffs' counsel to be paid from the improved Merger consideration negotiated
by them. Subsequently, the parties agreed that the maximum amount of fees and
expenses for the Partnership and CRITEF III, assuming the merger is consummated,
shall be $1,700,000, plus an amount equal to 20% (up to a maximum of $75,000) of
any adjustment amount at closing. These fees will reduce the cash paid 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 and experts retained by
them have reviewed voluminous documents relating to the proposed merger, and
have taken depositions of representatives of the General Partner and CAPREIT and
Oppenheimer and Co., Inc. the fairness opinion provider.
F-67
<PAGE>
CAPITAL REALITY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
6. LITIGATION -Continued
On May 16, 1996, the defendants and the plaintiffs filed the Stipulation
and Agreement of Settlement with the Chancery Court, and sought preliminary
approval of the putative classes (the Class) and approval of a form of notice to
the Class of the proposed Settlement. The Stipulation of Settlement
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 Stipulation of Settlement also permits plaintiffs to terminate the
proposed settlement if, in their opinion, a superior financial offer is
presented for the Partnership. It is expected that a hearing to determine
whether the settlement is fair, reasonable and in the best interest of the Class
will be held in early August, 1996.
Martin C. Schwartzberg, formerly a general partner of the General
Partner, is a former shareholder and executive officer of CRI who retired from
CRI as of January 1, 1990. In connection therewith, he relinquished his general
partner duties for all CRI-sponsored partnerships, including those of the
General Partner. In February 1996, Mr. Schwartzberg publicly stated that he
would oppose the proposed merger until the Partnership made its financial
statements and the financial statements of the Owner Partnerships publicly
available. The financial statements of the Partnership are included in this
Form 10-Q and have been filed quarterly. The financial statements of the Owner
Partnerships were filed as exhibits to Current Reports on Form 8-K, filed with
the SEC by the Partnership on March 25, 1996. As discussed below, Mr.
Schwartzberg has since reviewed the requested information and has determined to
support the merger.
On November 9, 1995, CRI filed a complaint seeking declaratory relief in
the Circuit Court for Montgomery County, Maryland (the Montgomery Circuit Court)
against Capital Management Strategies, Inc. (CMS), a company controlled by Mr.
Schwartzberg, to determine the proper amount of fees to be paid in 1996 under an
asset management agreement. CMS answered the complaint on January 10, 1996, but
asserted no counterclaims. Thereafter, Mr. Schwartzberg launched a hostile
consent solicitation to be designated as managing general partner of 125
private partnerships sponsored by CRI.
On January 18, 1996, Mr. Schwartzberg and CMS filed a complaint in the
Montgomery County, Maryland Circuit Court, against CRI and Messrs. Dockser and
Willoughby alleging, among other things, 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.
Neither the Partnership nor the General Partner was named as a defendant in this
action, and Mr. Schwartzberg did not allege that he was a BAC Holder. Messrs.
Dockser and Willoughby entered an answer denying all of Mr. Schwartzberg's
claims and moved to dismiss or strike the allegations concerning the Partnership
and CRIIMI MAE Inc. Messrs. Dockser and Willoughby publicly responded that Mr.
Schwartzberg's suit is motivated by his budget dispute with CRI and personal
animosity.
F-68
<PAGE>
CAPITAL REALITY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
6. LITIGATION -Continued
On February 12, 1996, the Montgomery Circuit Court issued a memorandum
opinion and order enjoining CMS and Mr. Schwartzberg from using or disclosing
information made confidential under the asset management agreement.
On February 15, 1996, Mr. Schwartzberg filed suit in the New Castle
County, Delaware Chancery Court (the Chancery Court) against the General Partner
and CRITEF III Associates Limited Partnership (CRITEF III LP) (collectively, the
General Partners) alleging that he had made demands upon the General Partners,
in his capacity as a general and limited partner of the General Partner and a
limited partner of CRITEF III LP, to inspect and obtain copies of the BAC Holder
lists and other documents and that his demands were rejected. On February 23,
1996, the General Partners answered the complaint, admitting that his demands
had 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. Following a hearing on
March 6 and 7, 1996, on June 7, 1996, the Chancery Court denied Mr.
Schwartzberg's request for relief, holding that Mr. Schwartzberg's request was
for an "improper purpose" under Delaware law.
On February 16, 1996, the Partnership and CRITEF III (collectively, the
Partnerships), together with the General Partners, CRI, and CAPREIT, filed suit
against Mr. Schwartzberg in the United States District Court for the Southern
District of New York, (LAK) (the New York Action). The complaint alleged that
Mr. Schwartzberg was engaged in an unlawful solicitation of proxies of the BAC
Holders through two press releases he issued. On March 18, 1996, the District
Court enjoined Mr. Schwartzberg from (1) making any further solicitation of BAC
Holders within the meaning of Section 14(a) of the Securities Exchange Act of
1934 without complying with SEC regulations, and (2) committing any violation of
Rule 14a-9 promulgated under the Securities Exchange Act (regarding false or
misleading statements) in connection with any solicitation relating to the
Partnerships.
On March 18, 1996, Mr. Schwartzberg filed a counterclaim against the
General Partners alleging that three press releases issued by the General
Partners and the Partnerships constituted solicitations in violation of the
Securities Exchange Act and that they were false and misleading. The counter-
defendants denied the allegations. On April 23, 1996, the District Court denied
Mr. Schwartzberg's motion for an injunction. The District Court held that an
injunction was unwarranted, given the scope and extent of Mr. Schwartzberg's
prospects for succeeding on the merits, and the fact that he could show neither
a sufficient threat of irreparable injury nor a balance in his favor of the
hardships associated with granting or denying an injunction.
On June 12, 1996, Mr. Schwartzberg withdrew as a general partner of the
General Partner of the Partnership, converting his interest to that of a special
limited partner.
F-69
<PAGE>
CAPITAL REALITY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
6. LITIGATION -Continued
On June 13, 1996, pursuant to a resolution of disputes with Mr.
Schwartzberg, the parties to the actions in the District Court filed with the
District Court a Stipulation of Dismissal with Prejudice.
After extensive review of the merger agreements, the Partnerships'
financial statements and other materials and pursuant to the terms of the
agreement between CAPREIT and Mr. Schwartzberg and CMS (the CAPREIT Agreement),
Mr. Schwartzberg has advised CAPREIT, the General Partners and the Partnerships
that he and his family members and entities under his control (the Schwartzberg
Entities) will vote their BACs in favor of the proposed merger and in accordance
with the recommendations of the General Partners. In connection therewith, the
Schwartzberg Entities have agreed to grant to CAPREIT an irrevocable proxy to
vote their interests in the Partnerships.
The Schwartzberg Entities have agreed not to attempt to (i) dispose of or
acquire any interest in the Partnerships or join or participate with any group
seeking to do the same, (ii) solicit proxies or participate in a solicitation in
opposition to the proposed merger, in opposition to the recommendations of the
General Partners with respect to the proposed merger, or to remove the General
Partners or seek to have himself or his designee become a general partner of the
Partnerships, (iii) make any public statements in opposition to the proposed
merger, (iv) make any public statements with respect to, or offer, solicit, or
submit a proposal relating to consolidation or combination with the
Partnerships, or the admission of new general partners into the Partnerships.
In addition, Mr. Schwartzberg disclosed that he has had discussions with
Lenner Corp. regarding the terms of the offer and the submission of a competing
bid. Lenner Corp. declined to submit a competing offer to the Partnership and
has entered into a confidentiality and standstill agreement with CAPREIT
regarding the proposed merger and the Partnerships.
Provided that the Schwartzberg Entities comply with the terms of the
CAPREIT Agreement, CAPREIT is obligated to cause to be paid into escrow the
aggregate amount of $867,000 in four installments over a three year period.
These funds will be used for the partial payment of Mr. Schwartzberg's counsel
and consultants in connection with their review of the merger agreements, drafts
of the preliminary proxy statement filed with the SEC on July 17, 1996,
financial information of the Partnership, partnership documents, Delaware-
related claims, and other documents. CRI will provide CAPREIT with $400,000 in
respect of CAPREIT's obligations under the CAPREIT Agreement, counsel for the
plaintiffs in the Zakin and Wingard Actions will provide $100,000 in respect of
such payments and Mr. Schwartzberg will provide $33,500 of such payments. No
such payments other than the first installment will be paid into escrow until
the proposed merger has been consummated and each of the payments is contingent
upon there having been no defaults on the part of the Schwartzberg Entities or
under the third party standstill agreement.
The Schwartzberg Entities are personally liable to CAPREIT for any
breaches occasioned by them of the CAPREIT Agreement. Mr. Schwartzberg
F-70
<PAGE>
CAPITAL REALITY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
6. LITIGATION -Continued
has covenanted to CAPREIT that he will maintain a net worth of at least $3.5
million through December 31, 2002. In the event that the Schwartzberg Entities
are in default under the CAPREIT Agreement as a result of a violation of a third
party standstill agreement, Mr. Schwartzberg shall pay CAPREIT liquidated
damages in accordance with the terms of the CAPREIT Agreement.
An agreement among Mr. Schwartzberg, CMS and CRI (the CRI Agreement), in
addition to providing that Mr. Schwartzberg will not oppose the proposed merger,
also provides for a resolution of all disputes between CRI and Mr. Schwartzberg.
As part of the CRI Agreement, Mr. Schwartzberg and CRI have agreed not to take
any actions which might interfere with each others' business. Mr. Schwartzberg
has also retracted any derogatory statements that he previously made about CRI,
its principals, and the proposed merger, and has promised not to make any
similar statements in the future. Although the CRI Agreement provides that it
is legally binding, that agreement contemplates execution of a more detailed
agreement (referred to as the Definitive Agreement) and the exchange of full
general releases between Mr. Schwartzberg and CRI, and Messrs. Dockser and
Willoughby.
7. RELATED-PARTY TRANSACTIONS
The General Partner has the authority and responsibility for, among other
things, the overall management and control of the Partnership. The General
Partner and its affiliates do not receive any fees from the Partnership for
their services to the Partnership, but are reimbursed by the Partnership for any
actual costs and expenses incurred in connection with the operation of the
Partnership.
SERIES I
--------
Expense reimbursements to an affiliate of the General Partner for the
three months and six months ended June 30, 1996, were $39,418 and $60,207,
respectively, and for the three and six months ended June 30, 1995, were $21,741
and $54,785, respectively, and are included in general and administrative
expense and merger-related expenses in the 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, an affiliate of CRIIMI MAE Inc., a
publicly traded real estate investment trust (the REIT). The REIT was
originally sponsored by CRI, a 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 merger was distributed by CRICO Mortgage to its
F-71
<PAGE>
CAPITAL REALITY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
7. RELATED-PARTY TRANSACTIONS - Continued
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 were due to CRI and CRIIMI from the borrowers
as of June 30, 1996, and December 31, 1995:
As of As of
June 30, December 31,
1996 1995
---------- ----------
CRI $1,225,393 $1,225,393
CRIIMI 265,968 132,984
---------- ----------
Total $1,491,361 $1,358,377
========== ==========
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 Restated Merger Agreement entered into by the
Partnership, as discussed in Note 2, unpaid fees accrued through June 30, 1995
will be purchased by CAPREIT from CRI for the discounted amount of $511,680,
which represents approximately 42% of the total accrued fees owed to CRI. In
addition, unpaid fees accrued from July 1, 1995 through June 30, 1996 will be
purchased by CAPREIT from CRIIMI for $265,968, which represents 100% of the
accrued fees which are expected to be owed to CRIIMI for that period. From July
1, 1996 to the closing of the proposed merger, the purchase price of CRIIMI's
portion will be adjusted upward at a rate of $22,164 per month.
Fees paid by the borrowers to CRI/CRICO Mortgage and CRIIMI for the three and
six months ended June 30, 1996 and 1995 were as follows:
F-72
<PAGE>
CAPITAL REALITY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
7. RELATED-PARTY TRANSACTIONS - Continued
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
---------------------------- --------------------------
1996 1995 1996 1995
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
CRI/CRICO Mortgage $ -- $ 2,500 $ -- $ 5,000
CRIIMI 2,500 -- 5,000 --
------------ ------------ ----------- -----------
Total $ 2,500 $ 2,500 $ 5,000 $5,000
============ ============ =========== ===========
</TABLE>
Owner Partnerships formed to take title to properties are structured as
limited partnerships. The Owner Partnerships and the managing general partner
of the General Partner have primarily common ownership and are under common
control. The Owner Partnerships, rather than the Partnership, became holders of
title to the properties in an effort to maintain the tax-exempt nature of
interest on the mortgage revenue bonds and to hold the properties until their
ultimate disposition. No compensation or fees were paid by the Partnership to
the Owner Partnerships or their principals in connection with the transfers of
ownership.
In connection with the Restated Merger Agreement, each of the Owner
Partnerships has agreed to either (a) sell, assign and transfer the partnership
interests in, or the real property and other assets of, such Owner Partnerships
to CAPREIT or its designee for no additional consideration or (b) admit CAPREIT
or its designee as the managing general partner, whereupon the general partner
interests of the current general partners will be converted into limited partner
interests, and CAPREIT will have the option to acquire all of the limited
partner interests at any time within five years from the closing date of the
merger at the then fair market value based on the fair market value of the
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 substantially prior to the time CAPREIT exercises its
option, such increase in value may benefit the owners of the Owner Partnerships.
SERIES II
---------
Expense reimbursements to an affiliate of the General Partner for the three
and six months ended June 30, 1996 were $40,921 and $64,948, respectively, and
for the three and six months ended June 30, 1995 were $24,955 and $62,568,
respectively, and are included in general and administrative expense and merger-
related expenses in the statements of income.
F-73
<PAGE>
CAPITAL REALITY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
7. RELATED-PARTY TRANSACTIONS - Continued
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, an affiliate of the REIT. The REIT was originally sponsored by CRI, 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 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. This merger did
not result in any increase in fees or changes in the amount of fees which are
currently payable.
The following unpaid fees were due CRI and CRIIMI from the borrowers as of
June 30, 1996 and December 31, 1995:
As of As of
June 30, December 31,
1996 1995
---------- ----------
CRI $1,847,496 $1,847,496
CRIIMI 391,296 195,648
---------- ----------
Total $2,238,792 $2,043,144
========== ==========
The unpaid fees are payable from available cash flow after payment of all
current and delinquent base interest and accrued interest on delinquent base
interest. If available cash flow from the borrower is insufficient to pay the
fee, it is payable on the earlier of prepayment or maturity of the loan, after
debt repayment. Any payments made with respect to unpaid fees will be applied
against the oldest outstanding fees first. During the six months ended June 30,
1996 and 1995, no fees were paid by the borrowers.
In connection with the Restated Merger Agreement entered into by the
Partnership, as discussed in Note 2, the unpaid fees accrued through June 30,
1995 will be purchased from CRI for the discounted amount of $770,835, which
represents approximately 42% of the total accrued fees owed to CRI. In
addition, unpaid fees accrued from July 1, 1995 through June 30, 1996 will be
purchased by CAPREIT from CRIIMI for $391,296, which represents 100% of the
accrued fees which are expected to be owed to CRIIMI for that period. From July
1, 1996 to the closing of the proposed merger, the purchase price of CRIIMI's
portion will be adjusted upward at a rate of $32,608 per month.
F-74
<PAGE>
CAPITAL REALITY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
7. RELATED-PARTY TRANSACTIONS - Continued
Owner Partnerships formed to take title to properties are structured as
limited partnerships. The Owner Partnerships and the managing general partner
of the General Partner have primarily common ownership (except for Ethan's Ridge
and Ethan's Glen IIB prior to March 14, 1996, as discussed below) and are under
common control. The Owner Partnerships, rather than the Partnership, became
holders of title to the properties in an effort to maintain the tax-exempt
nature of interest on the mortgage revenue bonds and to hold the properties
until their ultimate disposition. No compensation or fees were paid by the
Partnership to the Owner Partnerships in connection with the transfers of
ownership.
In connection with the Restated Merger Agreement, each of the Owner
Partnerships has agreed to either (a) sell, assign and transfer the partnership
interests in, or the real property and other assets of, such Owner Partnerships
to CAPREIT or its designee for no additional consideration or (b) admit CAPREIT
or its designee as the managing general partner, whereupon the general partner
interests of the current general partners will be converted into limited partner
interests, and CAPREIT will have the option to acquire all of the limited
partner interests at any time within five years from the closing date of the
merger at the then fair market value based on the fair market value of the
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 substantially prior to the time CAPREIT exercises its
option, such increase in value may benefit the owners of the Owner Partnerships.
F-75
<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 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, the related statements of
operations, changes in partners' capital (deficit) and cash flows for the years
ended December 31, 1995 and 1994 and the related consolidated statement of
operations, changes in partners' capital (deficit) and cash flows for the year
ended December 31, 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 and Regency Woods in 1993)
which received the proceeds of the Partnership's investments in mortgage revenue
bonds, which combined statement reflect total revenues of 21 percent of 1993
totals. Those statements were audited by other auditors whose reports have
been furnish 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.
As discussed in Note 2 to the financial statements, the Partnership's
1994 and 1995 financial statements have been restated to account for its
investments in mortgage revenue bonds as debt securities.
In our opinion, based on our audits and the reports of other auditors, the
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.
May 8, 1996
F-76
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
As of December 31,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Investment in mortgage revenue bonds $70,951,947 $70,951,947
Cash and cash equivalents 187,747 100,513
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 46,719 100,685
----------- -----------
Total assets $76,933,879 $77,121,563
=========== ==========
</TABLE>
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
<TABLE>
<S> <C> <C>
Distributions payable $ 1,593,577 $ 2,177,886
Accounts payable and accrued expenses 393,345 145,954
----------- -----------
Total liabilities 1,986,922 2,323,840
----------- -----------
Partners' capital (deficit):
General Partner (448,563) (450,071)
Beneficial Assignee Certificates (BACs) -
5,258,268 BACs
issued and outstanding 75,395,520 75,247,794
----------- -----------
Total partners' capital 74,946,957 74,797,723
----------- -----------
Total liabilities and partners' capital $76,933,879 $77,121,563
========== ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-77
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended December 31,
1995 1994 1993
---------- ------------ -----------
<S> <C> <C> <C>
Interest from mortgage revenue bonds and working
capital loans $7,064,848 $ 6,906,896 $ --
---------- ------------ -----------
Income from investment in real estate:
Rental revenue -- -- 13,433,679
Rental expense -- -- (7,144,288)
Depreciation -- -- (3,466,782)
---------- ------------ -----------
Net rental income -- -- 2,822,609
---------- ------------ -----------
7,064,848 6,906,896 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)
---------- ------------ -----------
Income before cumulative effect of accounting change 6,523,536 6,733,310 2,591,762
Cumulative effect of change in accounting for mortgage
revenue bonds -- (10,155,671) --
---------- ------------ -----------
Net income (loss) $6,523,536 $ (3,422,361) $ 2,591,762
========== ============ ===========
Net income (loss) allocated to General Partner (1.01%) $ 65,888 $ (34,566) $ 26,177
========== ============ ===========
Net income (loss) allocated to BAC Holders (98.99%) $6,457,648 $ (3,387,795) $ 2,565,585
========== ============ ===========
Per BAC data:
Income before cumulative effect of accounting change 1.23 1.27 0.49
Cumulative effect of change in accounting for
mortgage revenue bonds -- (1.91) --
---------- ------------ -----------
Net income (loss) per BAC $1.23 $ (0.64) $0.49
========== ============ ===========
BACs outstanding 5,258,268 5,258,268 5,258,268
========== ============ ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-78
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
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
(all of which is
return of capital) (8,570,977) (87,450) (8,658,427)
Net loss (3,387,795) (34,566) (3,422,361)
----------- --------- -----------
Balance, December 31, 1994 75,247,794 (450,071) 74,797,723
Distributions of $1.20 per BAC
(including return
of capital of $0.00 per BAC) (6,309,922) (64,380) (6,374,302)
Net income 6,457,648 65,888 6,523,536
----------- --------- -----------
Balance, December 31, 1995 $75,395,520 $(448,563) $74,946,957
=========== ========= ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-79
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
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 (loss) $ 6,523,536 $ (3,422,361) $ 2,591,762
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation -- -- 3,466,782
Cumulative effect of accounting change -- 10,155,671 --
Changes in assets and liabilities:
Decrease in restricted cash
and cash equivalents -- -- 577,009
Decrease in receivables and other assets 53,966 16,290 61,100
Increase in deferred revenue -- -- 252,996
Increase in accrued mortgage administration
and servicing fees due to related parties -- -- 416,811
Decrease in other liabilities
related to real estate operations -- -- (277,563)
Increase (decrease) in accounts payable and
accrued expenses 247,391 (231) 3,203
------------ ------------ ------------
Net cash provided by operating activities 6,824,893 6,749,369 7,092,100
------------ ------------ ------------
Cash flows from investing activities:
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 220,952 1,946,987 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 financial statements.
F-80
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO 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.
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.
F-81
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies
a. Method of accounting
--------------------
The financial statements of the Partnership are prepared in accordance
with generally accepted accounting principles (GAAP).
b. Use of estimates
----------------
In preparing financial statements in conformity with GAAP, 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
---------------------------------------------------------------
Prior to January 1, 1994, the Partnership accounted 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. Further, if the lender is expected to receive
over 50 percent of the expected residual profits from a project, the lender
should account for the arrangement as real estate. As such, the Ocean
Walk, Regency Woods, Valley Creek II, and Washington Ridge investments
originally qualified as ADC arrangements and followed real estate
accounting policies. However, affiliates of the Partnership formed to take
title to the properties (Owner Partnerships) received deeds in lieu of
foreclosure, subject to existing indebtedness, on all of these investments,
except Washington Ridge, from 1993 through 1995.
Also prior to January 1, 1994, investments in mortgage revenue bonds and
working capital loans were 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, and were recorded at
the lower of (a) the carrying value of the mortgage revenue bonds and
working capital loans 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 were 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
F-82
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies - Continued
than carrying value, direct write-downs were recorded to establish a new
basis for these assets. Since the working capital loans are subordinate to
the first mortgage loan on the properties, write-downs were first applied
against the working capital loans and then against the mortgage revenue
bonds. As of January 1, 1994, the Partnership's investment in working
capital loans had been written down to zero.
Subsequent to recording its investment as real estate, the Partnership
evaluated 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". The Partnership's net realizable value
determination took into account the Partnership's intention to hold these
properties for the long term, if necessary, to recover its recorded
investment. If the Partnership determined that its estimated net
realizable value was less than the recorded investment in the property, an
additional valuation adjustment was recorded if the decline was considered
permanent.
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. Following such adoption, the Partnership (as did
others in the industry) continued to account for its investments in
mortgage revenue bonds as investments in real estate based on ADC
determination or consolidation of the Owner Partnership in accordance with
SEC rules.
In conjunction with the review of the Partnership's 1995 financial
statements by the Securities and Exchange Commission (SEC) staff, the
Partnership agreed that it would account for all of its investments in
mortgage revenue bonds as debt securities under the provisions of SFAS 115
effective January 1, 1994, and restate its 1995 and 1994 financial
statements to reflect this change. Accordingly, effective January 1, 1994,
all investments in mortgage revenue bonds are classified and accounted for
as held to maturity securities and are carried at amortized cost because of
the Partnership's ability and intent to hold these investments to maturity.
The effect of adopting SFAS 115 on net income previously reported for 1995
and 1994 is $2,795,175 and $(6,678,675), respectively. Income per BAC as
previously reported was $0.70 and $0.61 for 1995 and 1994, respectively.
Income (loss) per BAC as previously reported has been revised to $1.23 and
$(0.64) per BAC for 1995 and 1994, respectively. The impact on partners
capital of adopting SFAS 115 for 1995 and 1994 is $(3,883,500) and
$(6,678,675), respectively.
F-83
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies - Continued
As discussed above, the Partnership accounted for its investment in
mortgage revenue bonds and working capital loans as real estate, until
January 1, 1994, when the financial statements were restated to reflect
implementation of SFAS 115. Net realizable value, prior to implementation
of SFAS 115, was based on holding the assets for long-term income
production - as such net realizable value only considered the recovery of
the Partnership's investments over time based on the properties' ability to
generate sufficient cash flow to recover the Partnership's investment over
the long term. Based on the SEC's requirement that the Partnership account
for its mortgage revenue bonds as debt securities, the implementation of
SFAS 115 has a different accounting framework for evaluating realizability.
In accordance with SFAS 115's provisions for held to maturity securities,
the Partnership evaluates the fair value of its mortgage revenue bonds to
determine if impairment exists. If a decline in fair value is determined
to be other-than-temporary, the security is written down to its fair value.
Since most of these bonds are in default the Partnership has concluded that
permanent impairment has occurred. As such, the amount of permanent
impairment is measured by the Partnership's estimate of the mortgage
revenue bonds' fair value at January 1, 1994. The Partnership has measured
fair value as discussed below. This effect of adopting SFAS 115 is
reflected as a cumulative effect of change in accounting for mortgage
revenue bonds in the statements of operations. On an ongoing basis, the
Partnership evaluates the permanent impairment; however, subsequent to
January 1, 1994, the Partnership did not recognize any impairment losses.
Interest Income Recognition
---------------------------
Since six of the eight mortgage revenue bonds are in default and
write-downs have been taken on all of the mortgage revenue bonds due to
impairment, base interest and contingent interest on the mortgage revenue
bonds is recognized as revenue when collected.
d. Depreciation
------------
Through December 31, 1993, depreciation of real estate was 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
was used for building, and the double declining balance method was used for
personal property.
e. Cash and cash equivalents
-------------------------
Cash and cash equivalents consist of tax-exempt money market funds
with original maturities of three months or less.
F-84
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies - Continued
f. 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
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 fair 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:
<TABLE>
<CAPTION>
Amount Maturity
---------- --------
<S> <C>
$ 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
===========
</TABLE>
g. 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.
F-85
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies - Continued
h. Interest reserves
-----------------
The Partnership established interest reserves which represent the General
Partner's estimate of the total base interest on the investment in mortgage
revenue bonds and working capital loans to be deferred during the deferral
period (generally, the project construction period), as defined by the
respective loan agreements. The interest reserves also included debt
service reserves established by the Partnership for six mortgage loans.
Funds in the interest reserves are invested in tax-exempt municipal bonds
with terms similar to the Partnership's marketable securities and are
stated at 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, respectively. 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.
i. Fair value of financial instruments
-----------------------------------
In December 1991, the FASB issued Statement of Financial Accounting
Standards No. 107 "Disclosures 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. The Partnership implemented SFAS 107 in 1995. The
Partnership has determined that the carrying value of its 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 mortgage revenue bonds
is based upon the redemption amount relating to the mortgage revenue bonds
under the amended merger agreement.
The following table presents information on the Partnership's financial
instruments:
F-86
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
2. Summary of significant accounting policies - Continued
<TABLE>
<CAPTION>
Carrying Estimated Fair
Value at Value at
December 31, 1995 December 31, 1995
(000's) (000's)
------------------ ------------------
<S> <C> <C>
Cash and cash equivalents $ 188 $ 188
Marketable securities 1,214 1,211
Working capital reserves
invested in marketable
securities 4,235 4,228
Interest reserves invested in
marketable securities 299 298
Mortgage revenue bonds 70,952 73,896
</TABLE>
j. Statements of Cash Flows
------------------------
The 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 balance sheets.
k. Income taxes
------------
No provision has been made for federal, state or local income taxes in
the 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. Interest
income from the mortgage revenue bonds is exempt from regular federal
income tax, as discussed in Notes 5 and 6.
l. Net income (loss) and distributions per BAC
-------------------------------------------
Net income (loss) and distributions per BAC represent 98.99% of net
income (loss) and distributions declared, respectively, divided by the
number of BACs outstanding during the year.
m. Reclassifications
-----------------
Certain amounts in the financial statements for the year ended
December 31, 1993 and 1994 have been reclassified to conform with the 1995
presentation.
F-87
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
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 statements of
operations.
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
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 were due to CRI/CRICO Mortgage and CRIIMI from
the borrowers 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.
F-88
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
3. Related-party transactions - Continued
In connection with the amended merger agreement entered into by the
Partnership, as discussed in Note 7, unpaid fees accrued through June 30, 1995
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 accrued from July 1, 1995 through June 30, 1996 will be purchased by
Capital Apartment Properties, Inc. (CAPREIT) from CRIIMI for $556,674, which
represents 100% of the accrued fees which are expected to be owed to CRIIMI for
that period. 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 of the accrued servicing fees 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>
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 A.P. CAPREIT Limited Partnership, which
F-89
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
3. Related-party transactions - Continued
is not currently owned or controlled by CRI and/or its affiliates, although CRI
and several affiliates held up to an aggregate 22% residual profit interest
until June 30, 1995, when the interests were redeemed. This change did not
result in any increase in property management fees.
Owner Partnerships formed to take title to properties, subject to
existing indebtedness, are structured as limited partnerships. The Owner
Partnerships 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 Owner Partnerships, 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 and to hold
their properties until their ultimate disposition. No compensation or fees were
paid by the Partnership to the Owner Partnerships or their principals in
connection with the transfers of ownership.
In connection with the amended merger agreement, each of the Owner
Partnerships has agreed to either (a) sell, assign and transfer the partnership
interests in, or the real property and other assets of, such Owner Partnerships
to CAPREIT or its designee for no additional consideration or (b) admit CAPREIT
or its designee as the managing general partner, whereupon the general partner
interests of the current general partners will be converted into limited partner
interests, and CAPREIT will have the option to acquire all of the limited
partner interests at any time within five years from the closing date 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 Owner Partnerships.
4. Profits, losses and cash distributions to Partners
Cash available for distribution (defined below) is distributed on a
quarterly basis within 45 days after the end of each quarter. Each year, cash
available for distribution is distributed 98.99% to the BAC Holders and 1.01% to
the General Partner for each year until the BAC Holders receive a noncumulative
return equal to 10% per annum of their adjusted capital contribution (adjusted
for any return of capital contributions and by any distributions of residual or
liquidation proceeds from the sale of mortgaged properties or the dissolution of
the Partnership, described below). Thereafter, during such year, the balance of
all such cash available for distribution will be distributed 90% to the BAC
Holders and 10% to the General Partner.
Cash available for distribution, as defined in the Partnership Agreement,
is as follows:
(1) all revenues received by the Partnership, plus
(2) any amounts released by the General Partner from the working
capital reserves, plus
F-90
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
4. Profits, losses and cash distributions to Partners - Continued
(3) any amounts released from the interest reserves after completion of
any applicable interest deferral period with respect to the mortgage
loan in connection with such mortgaged property, less:
(i) payments from revenues of operating expenses and Partnership
indebtedness, and
(ii) any amounts set aside for deposit into the working capital
reserves.
All cash receipts of the Partnership arising from a sale or other
disposition of a mortgaged property or the repayment of the principal and the
payment of interest, if any, payable upon the redemption or remarketing of the
applicable mortgage revenue bond (residual proceeds) will be distributed as
follows:
(1) to 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.
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
F-91
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
4. Profits, losses and cash distributions to Partners - Continued
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 Owner Partnerships.
Losses from such a sale or repayment shall be allocated as follows:
(i) an amount of loss to the Partners and BAC Holders to the extent and in such
proportions as shall be necessary such that, after giving effect thereto, the
respective balances in all Partners' and BAC Holders' capital accounts are
proportionate to their interests; (ii) an amount of loss, if any, to the
Partners and BAC Holders until each Partners' and BAC Holders' capital account
equals his capital contributions to the Partnership; (iii) an amount of loss to
the Partners and BAC Holders to the extent of and in proportion to the Partners'
and BAC Holders' capital accounts after the above-described adjustments; and
(iv) any remaining loss to the Partners and BAC Holders in accordance with the
manner in which they bear the economic risk of loss or, if none, in accordance
with their interests.
The Partnership expects to continue to make distributions to BAC Holders on
a quarterly basis. 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 Owner Partnerships. Despite these efforts, the amounts
paid to the Partnership from the borrowers may be expected to fluctuate from
period to period due to changes in occupancy rates, rental rates, operating
expenses and other variables.
F-92
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO 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) Defined in the Limited Partnership Agreement as (a) all revenues received
by the Partnership during such period, plus (b) any amounts which the
Managing General Partner releases from the Working Capital Reserve as being
no longer necessary to hold as part of the Working Capital Reserve, plus
(c) any amounts released to the Partnership from the Interest Reserve
Account with respect to a mortgaged property after completion of
construction of such mortgaged property, less (i) operating expenses of the
Partnership paid from reserves during the period, including any expenses
paid to the General Partner, but not including such amounts paid from the
Working Capital Reserve, (ii) all cash payments made from Revenues during
such period to discharge Partnership indebtedness, and (iii) all amounts
from revenues, if any, added to the Working Capital Reserve during such
period. Cash flow as defined in the Limited Partnership Agreement is not
to be construed as an alternative to operating income in accordance with
GAAP as an indication of the Partnership's operating performance.
(2) Excludes working capital loan advances and repayments of $153,000 and
$83,939, respectively.
F-93
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
4. Profits, losses and cash distributions to Partners - Continued
Although distributions are paid on a quarterly basis, in July 1993, the
Partnership began declaring distributions on a monthly basis as a result of
listing the BACs on AMEX. Distributions to BAC Holders totalling $2,103,307 or
$0.40 per BAC were declared for the four months ending April 30, 1996, payable
to BAC Holders of record as of the last day of each month.
5. Investment in Mortgage Revenue Bonds
Description of the portfolio
- ----------------------------
The Partnership acquired a portfolio of eight tax-exempt mortgage revenue
bonds issued by various state and local governments or their agencies or
authorities. The proceeds from the mortgage revenue bonds were used by the
issuers to make nonrecourse participating mortgage loans to finance construction
and ownership of multifamily residential developments. The mortgage revenue
bond with respect to each mortgaged property is payable only from payments made
on the corresponding mortgage loan. None of the mortgage revenue bonds
constitutes a general obligation of any state or local government agency or
authority and no such government agency or authority is liable for the mortgage
revenue bonds.
The Partnership invested in eight Federally tax-exempt mortgage revenue
bonds with an aggregate principal amount of $97,101,000 and made three working
capital loans with an aggregate principal amount of $3,409,604. A description
of the mortgage revenue bonds and working capital loans held by the Partnership
is as follows:
<TABLE>
<CAPTION>
Permanent
Loan
Loan Maturity Loan Carrying
Mortgaged Property No. of Origination Face Amount Maturity Value
Name and Location Rental Units Date (000's) Date (000's)
- -------------------- ------------ ----------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
ETHAN'S GLEN IIA
KANSAS CITY, MO 242 8/18/88 $ 10,525 3/31/2000 $ 8,840
GEARY COURTYARD
SAN FRANCISCO, CA (1) 164 8/18/88 18,900 9/01/2000 8,706
OCEAN WALK
KEY WEST, FL 296 1/27/89 19,826 4/01/2000 16,084
PACES RIVER 2
ROCK HILL, SC (1) 230 7/28/88 9,600 2/02/2000 7,842
REGENCY WOODS
WEST DES MOINES, IA (1) 200 1/29/90 7,560 2/01/2000 4,812
VALLEY CREEK II
WOODBURY, MN 177 2/21/89 10,100 7/01/2000 6,508
WASHINGTON RIDGE
KNOXVILLE, TN 248 12/14/88 10,000 7/01/2000 7,642
WOODLANE PLACE
WOODBURY, MN 216 9/16/88 14,000 11/01/1999 10,518
----- ------- -------
1,773 $100,511 $70,952
===== ======== =======
</TABLE>
(1) The amount listed under face amount of mortgage includes both the first
lien tax-exempt loan and the second lien working capital loan.
F-94
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds - Continued
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.
In March 1993, the Partnership finalized a three-year workout agreement
(the Workout) with Paces River 2. 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 expired in March 1996. Effective April
1996, Paces River 2 is required to pay full base interest on both the tax-exempt
loan and the working capital loan.
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 an Owner Partnership
as of February 28, 1995.
In the fourth quarter of 1994, Washington Ridge 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.
Collateral
- ----------
The mortgage revenue bonds are secured by mortgage loans which are
collateralized by first mortgages on the properties, assignments of existing and
future rents and security agreements with respect to personal property evidenced
by the filing of Uniform Commercial Code (UCC) financing statements.
Additionally, the Partnership required the borrowers to establish operating
reserves, replacement reserves, tax and insurance escrows and debt service
reserves and provide operating deficit guarantees. As a result of various
circumstances, including, but not limited to, slow rent-up of the properties,
unstable operations and depletion of certain properties' operating and debt
service reserves, Owner Partnerships had received title to six of the properties
as of December 31, 1995.
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 Owner
Partnerships, subject to existing indebtedness. In
F-95
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds - Continued
connection with the transfers of properties to Owner Partnerships, 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 Owner Partnerships would not cause the
Partnership to become a substantial user of the projects or a related party to a
substantial user 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 April 1991, the U.S. Supreme Court decided a case, Cottage Savings
Association V. Commissioner (Cottage Savings) that could be interpreted to
impact then existing authority addressing the modification of debt instruments.
In response to this decision in December 1992 the Internal Revenue Service
issued Proposed Regulation Section 1.1001-3 which specifically address the tax
consequences of modifications of debt instruments. Among other things, these
proposed regulations, if they become effective in their current form, would
provide that certain modifications of the current interest payments or maturity
date of a debt instrument will be treated as a taxable exchange of the original
instrument for the modified debt instrument. As a result of this treatment,
modifications of the mortgage loans which secure the mortgage revenue bonds
could be treated as a deemed reissuance of the mortgage revenue bonds for
federal income tax purposes. Any reissuance without the cooperation of the
mortgage revenue bond issuers would result in the loss of the tax-exempt status
of the mortgage revenue bonds. Such issuers might cooperate and consent to the
reissuance; however, there can be no assurance that such issuers would do so or
would not impose additional requirements that would have an adverse impact on
the properties.
Even if issuer consent were obtained, if the modifications are considered
material, the debt would have to be re-examined to determine whether it would
still be considered debt for tax purposes. This could result in a write-down of
principal, would most likely result in a write-off of all accrued and unpaid
past due interest and could change the contingent interest feature of the
existing mortgage loans. The write down of principal and unpaid interest would
not be recoverable upon ultimate disposition or payoff of the mortgage revenue
bond and would instead accrue to the benefit of the Owner Partnership to the
extent realized.
Proposed Regulation Section 1.001-3 will become effective only with respect
to modifications made on or after the date that is 30 days after the publication
of final regulations in the Federal Register. It is uncertain at this time when
this proposed regulation will be finalized and whether it will be finalized in
its current form. It is also unclear at this time what effect the Cottage
Savings decision may have on modifications that have been made to mortgage loans
which secure the mortgage revenue bonds or on modifications that might be
appropriate in the future. The General Partner believes that the modifications
which
F-96
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds - Continued
have been made were consistent with the relevant tax authority which existed at
the time of those modifications and have not jeopardized the tax-exempt status
of the mortgage revenue bonds. However, these can be no assurance as to the
tax-exempt status of the mortgage revenue bonds.
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.
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 Owner Partnerships 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. 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 borrowers existing replacement reserves, future property cash
flow, and/or a loan to the borrower from the working capital reserves of the
Partnership. The Partnership has joined with the borrower'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.
The General Partner's ongoing strategy has been to continue holding the
mortgage revenue bonds 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 for cash. 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 any necessary related amendments to the
pertinent mortgage revenue bonds.
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
F-97
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds - Continued
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,
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 only be payable if sufficient proceeds exist. The
amount of deferred contingent interest payable in such event will equal the sum
of (i) 100% of the sale or repayment proceeds (after certain priority payments)
up to the amount necessary for the Partnership to achieve 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.
F-98
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds - Continued
Presented below is a summary of base interest payments for the years ended
December 31, 1995, 1994 and 1993 that are due to the Partnership from the
borrowers.
<TABLE>
<CAPTION>
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 $ 16,053 $ 128,081 $ 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 $ 201,081 $2,192,651 $ 9,315,010
========== ========== ============= ========== ===========
</TABLE>
F-99
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds - Continued
<TABLE>
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 $159,463 $ (49,601) $ 27,144
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 $671,661 $1,793,438 $7,122,359
========== ========== ======== ========== ==========
</TABLE>
(1) The Partnership 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.
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 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:
F-100
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
5. Investment in Mortgage Revenue Bonds - Continued
(1) any 100% participation contingent interest accrued to the date of
prepayment, and
(2) additional interest in an amount equal to the highest total amount of
all contingent interest paid by the borrower in any of the three years
preceding the date of prepayment, capitalized at the base mortgage
loan interest rate then in effect.
The Partnership may require prepayment upon the occurrence of an "event of
taxability" which would include, among others, any act or event which presents
significant risk that interest on the mortgage revenue bonds would be subjected
to federal taxation. As of December 31, 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 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 base interest is discontinued when at the time of accrual, ultimate
collectibility of the base 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
F-101
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
6. Income taxes - Continued
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.
For federal income tax purposes, the investments in all of the mortgage
revenue bonds are treated as loans, interest on which is exempt from federal
income tax. A reconciliation of the primary differences between the financial
statement net income (loss) and municipal income for tax purposes is as follows:
<TABLE>
<CAPTION>
For the years ended
December 31,
-------------------------------------------
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Financial statement net income (loss) $6,523,536 $(3,422,361) $ 2,591,726
Municipal interest income not recognized (1) -- -- 6,830,474
Rental income, net (2) -- -- (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)
Adjustment for timing of municipal income
recognition 467,023 194,754 --
Taxable income on working capital loans, net -- -- (252,033)
Cumulative effect of accounting change -- 10,155,671 --
---------- ----------- -----------
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.
7. 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 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. All five of the properties managed by an affiliate of CAPREIT are
presently in default with respect to their mortgage loans 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
F-102
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
7. Merger Proposal - Continued
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 naming
the Partnership and others, as described below. Such legal fees and expenses
are not expected to exceed $0.19 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 accounts receivables held by CRI
and 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 fees accrued through June
30, 1995, which represents approximately 42% of the total accrued fees owed to
CRI. Also, CAPREIT will pay $566,676 to CRIIMI for its fees accrued from July
1, 1995 through June 30, 1996, which represents 100% of the fees which are
expected to be owed to CRIIMI for that period. 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 month.
Each of the Owner Partnerships has agreed to either (a) sell, assign and
transfer the partnership interests in, or the real property and other assets of,
such Owner Partnerships to CAPREIT or its designee for no additional
consideration or (b) admit CAPREIT or its designee as the managing general
partner, whereupon the general partner interests of the current general partners
will be converted into limited partner interests, and CAPREIT will have the
option to acquire all of the limited partner interests at any time within five
years from the closing date of the merger at the then fair market value thereof
(defined as the proportionate interest of such limited partner in the fair
market value of the partnership property as encumbered by the mortgage loans).
Although such interests currently have nominal value, if the fair market value
of the partnership properties increases prior to the time CAPREIT exercises its
option, such increase in value may benefit the owners of the Owner Partnerships.
This feature is required by CAPREIT as a condition of the merger.
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
SEC. A preliminary proxy statement was filed with the SEC on March 18, 1996.
This proxy statement
F-103
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
7. Merger Proposal - Continued
includes a full description of the proposed merger and the independent fairness
opinion.
8. 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
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 previously discussed above.
Pursuant to the Memorandum, the plaintiffs' counsel will
F-104
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
8. Litigation - Continued
be entitled to apply to the Chancery Court for an award of reasonable attorneys'
fees and expenses. Such expenses are not expected to exceed $0.19 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.
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. On
March 28, 1996, Mr. Schwartzberg filed a preliminary proxy statement with the
SEC opposing the proposed merger.
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.
F-105
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
8. Litigation - Continued
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 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 Chancery 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
F-106
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
8. Litigation - Continued
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 the General Partner 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 counter claims sought a temporary
restraining order against the General Partner regarding further alleged
solicitations and false and misleading statements. The District Court
denied the injunction request by order on April 23, 1996. On April 16,
1996, Mr. Schwartzberg also filed a Notice of Appeal with respect to the
injunction against him with the U. S. Court of Appeals for the Second
Circuit.
The Partnership Agreement provides for the indemnification of the
General Partners and its affiliates for acts or omissions by the General
Partner in good faith and in the best interest of the Partnership. Such
indemnification does not extend to a finding of liability for conduct which
constitutes fraud, bad faith, misconduct, breach of fiduciary duties or
violation of state or federal securities laws. 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 a material adverse affect on the Partnership.
9. Summary of Quarterly Results of Operations (Unaudited)
The following is a summary of unaudited quarterly results of opera-
tions for the years ended December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
1995
Quarter Ended
March 31 June 30 September 30 December 31
----------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Income (principally interest from mortgage
revenue bonds and working capital loans) $ 1,792,076 $ 1,825,340 $ 1,753,266 $ 1,869,672
Net income 1,656,548 1,736,348 1,397,099 1,733,541
Net income per BAC 0.31 0.33 0.26 0.33
</TABLE>
F-107
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
9. Summary of Quarterly Results of Operations (Unaudited) - Continued
<TABLE>
<CAPTION>
1994
Quarter Ended
March 31 June 30 September 30 December 31
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Income (principally interest from mortgage
revenue bonds and working capital loans) $ 1,664,038 $ 1,803,417 $ 1,564,260 $ 2,089,185
Cumulative effect of change in accounting
for mortgage revenue bonds (10,155,671) -- -- --
Net (loss) income (8,605,170) 1,671,292 1,511,190 2,000,327
Cumulative effect of change in accounting
for mortgage revenue bonds per BAC (1.91) -- -- --
Net (loss) income per BAC (1.62) 0.31 0.28 0.37
</TABLE>
<TABLE>
<CAPTION>
1993
Quarter Ended
March 31 June 30 September 30 December 31
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Income (principally rental income) $ 3,306,527 $ 3,349,443 $ 3,456,373 $ 3,666,702
Net income 432,414 574,392 615,836 969,120
Net income per BAC 0.08 0.11 0.12 0.18
</TABLE>
10. Condensed Combined Financial Information
Condensed combined financial information on a GAAP basis for the years
ended December 31, 1995 and 1994 for all of the borrowers is as follows:
<TABLE>
<CAPTION>
As of December 31, 1995
------------------------------------------
Investments- Investments-
Greater Than Less Than
20% of Total 20% of Total
Assets Assets Total
------------ ------------ ------------
<S> <C> <C> <C>
Rental property, net of accumulated
depreciation $14,873,382 $ 61,343,840 $ 76,217,222
Other assets 638,440 2,376,260 3,014,700
----------- ------------ ------------
Total Assets $15,511,822 $ 63,720,100 $ 79,231,922
=========== ============ ============
Mortgage loans payable $19,826,000 $ 79,834,604 $ 99,660,604
Accrued interest payable 1,466,416 11,884,948 13,351,364
Other liabilities 621,345 3,095,150 3,716,495
----------- ------------ ------------
Total liabilities 21,913,761 94,814,702 116,728,463
Partners' capital (6,401,939) (31,094,602) (37,496,541)
----------- ------------ ------------
Total liabilities and partners' capital $15,511,822 $ 63,720,100 $ 79,231,922
=========== ============ ============
</TABLE>
F-108
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
10. Condensed Combined Financial Information - Continued
<TABLE>
<CAPTION>
As of December 31, 1994
------------------------------------------
Investments- Investments-
Greater Than Less Than
10% of Total 20% Of Total
Assets Assets Total
------------ ------------ ------------
<S> <C> <C> <C>
Rental property, net of accumulated
depreciation $15,391,664 $ 64,012,930 $ 79,404,594
Other assets 647,832 1,829,009 2,476,841
----------- ------------ ------------
Total Assets $16,039,496 $ 65,841,939 $ 81,881,435
=========== ============ ============
Mortgage loans payable $19,826,000 $ 80,376,241 $100,202,241
Accrued interest payable 1,340,913 9,932,128 11,273,041
Other liabilities 529,330 2,731,381 3,260,711
----------- ------------ ------------
Total liabilities 21,696,243 93,039,750 114,735,993
Partners' capital (5,656,747) (27,197,811) (32,854,558)
----------- ------------ ------------
Total liabilities and partners' capital $16,039,496 $ 65,841,939 $ 81,881,435
=========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1995
-------------------------------------------
Investments- Investments-
Greater Than Less Than
20% of Total 20% Of Total
Assets Assets Total
------------ ------------ ------------
<S> <C> <C> <C>
Rental Income $ 3,135,481 $ 11,443,751 $ 14,579,232
Rental Expenses (1,587,965) (6,009,541) (7,597,506)
Interest Expense (1,774,427) (7,367,733) (9,142,160)
Depreciation (518,282) (2,669,089) (3,187,371)
----------- ------------ ------------
Net Loss $ (745,193) $ (4,602,612) $ (5,347,805)
=========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1994
------------------------------------------
Investments- Investments-
Greater Than Less Than
20% of Total 20% Of Total
Assets Assets Total
------------ ------------ ------------
<S> <C> <C> <C>
Rental Income $ 3,308,029 $ 11,059,336 $ 14,367,365
Rental Expenses (1,607,192) (6,019,660) (7,626,852)
Interest Expense (1,774,427) (7,334,514) (9,108,941)
Depreciation (504,271) (2,799,146) (3,303,417)
----------- ------------ ------------
Net Loss $ (577,861) $ (5,093,984) $ (5,671,845)
=========== ============ ============
</TABLE>
F-109
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
10. Condensed Combined Financial Information - Continued
In accordance with Staff Accounting Bulletin 71, complete financial
statements are for all borrowers in which the Partnership investment in mortgage
revenue bond is 20% or more of the total assets of the Partnership at December
31, 1995 and 1994 are included as an exhibit to the Partnership's financial
statements. The borrowers' financial statements are prepared on an income tax
basis, which differs from GAAP. The principal differences between income tax
basis and GAAP are (i) for income tax purposes the apartment properties are not
valued at the lower of cost or net realizable value and a write down to fair
value at deed-in-lieu of foreclosure was not taken, (ii) an intangible asset was
recognized for tax purposes representing the value to the borrower of its
favorable financing when the properties were transferred to Owner Partnership
and (iii) depreciable life and method.
F-110
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
As of As of
June 30, December 31,
1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
Investment in mortgage revenue bonds $70,951,947 $70,951,947
Cash and cash equivalents 54,677 187,747
Marketable securities 1,552,569 1,213,572
Working capital reserves invested in marketable securities 4,471,445 4,235,144
Interest reserves invested in marketable securities 298,750 298,750
Receivables and other assets 79,974 46,719
----------- -----------
Total assets $77,409,362 $76,933,879
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
<S> <C> <C>
Distributions payable $ 1,593,575 $ 1,593,577
Accounts payable and accrued expenses 580,139 393,345
----------- -----------
Total liabilities 2,173,714 1,986,922
----------- -----------
Partners' capital (deficit):
General Partner (445,647) (448,563)
Beneficial Assignee Certificates (BACs) - 5,258,268 BACs
issued and outstanding 75,681,295 75,395,520
----------- -----------
Total partners' capital 75,235,648 74,946,957
----------- -----------
Total liabilities and partners' capital $77,409,362 $76,933,879
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-111
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
-------------------------- -------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest from mortgage revenue bonds and
working capital loan $2,082,586 $1,796,834 $4,012,400 $3,519,662
---------- ---------- ---------- ----------
Other income (expenses):
Other interest income 63,005 28,506 121,170 97,754
Merger-related expenses (315,741) -- (467,817) --
General and administrative (49,913) (72,987) (129,176) (186,896)
Professional fees (38,134) (16,005) (60,736) (37,624)
---------- ---------- ---------- ----------
(340,783) (60,486) (536,559) (126,766)
---------- ---------- ---------- ----------
Net income $1,741,803 $1,736,348 $3,475,841 $3,392,896
========== ========== ========== ==========
Net income allocated to General
Partner (1.01%) $ 17,592 $ 17,537 $ 35,106 $ 34,268
========== ========== ========== ==========
Net income allocated to BAC
Holders (98.99%) $1,724,211 $1,718,811 $3,440,735 $3,358,628
========== ========== ========== ==========
Net income per BAC $0.33 $0.33 $0.65 $0.64
========== ========== ========== ==========
BACs outstanding 5,258,268 5,258,268 5,258,268 5,258,268
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-112
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the six months ended June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Beneficial
Assignee
Certificate General
Holders Partner Total
------------ ---------- ------------
<S> <C> <C> <C>
Balance, December 31, 1995 $75,395,520 $(448,563) $74,946,957
Net income 3,440,735 35,106 3,475,841
Distributions paid or accrued of $.60 per BAC
(none of which was return on capital) (3,154,960) (32,190) (3,187,150)
----------- ---------- -----------
Balance, June 30, 1996 $75,681,295 $(445,647) $75,235,648
=========== ========= ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-113
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
June 30,
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,475,841 $ 3,392,896
Adjustments to reconcile net income to net cash provided by operating
activities:
Decrease in receivables and other assets (33,255) (17,185)
Increase (decrease) in accounts payable and accrued expenses 186,794 (27,832)
----------- -----------
Net cash provided by operating activities 3,629,380 3,347,879
----------- -----------
Cash flows from investing activities:
Sale of marketable securities 5,219,546 6,748,576
Purchase of marketable securities (5,558,543) (6,214,779)
Deposits to working capital reserves invested in
marketable securities (236,301) (306,577)
Withdrawals from interest reserves invested in marketable securities -- 115,576
----------- -----------
Net cash (used in) provided by investing activities (575,298) 342,796
----------- -----------
Cash flows from financing activities:
Distributions paid to BAC Holders and General Partner (3,187,152) (3,771,461)
----------- -----------
Net decrease in cash and cash equivalents (133,070) (80,786)
Cash and cash equivalents, beginning of period 187,747 100,513
----------- -----------
Cash and cash equivalents, end of period $ 54,677 $ 19,727
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-114
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of CRITEF III Associates Limited Partnership (the General
Partner), the accompanying unaudited financial statements of Capital Realty
Investors Tax Exempt Fund III Limited Partnership (the Partnership) contain all
adjustments of a normal recurring nature necessary to present fairly the
Partnership's financial position as of June 30, 1996 and December 31, 1995 and
the results of its operations for the three and six months ended June 30, 1996
and 1995 and its cash flows for the six months ended June 30, 1996 and 1995.
These unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC). Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles (GAAP) have
been condensed or omitted. While the General Partner believes that the
disclosures presented are adequate to make the information not misleading, it is
suggested that these financial statements be read in conjunction with the
amended and restated financial statements and notes included in the
Partnership's Annual Report filed on Form 10-K/A on May 17, 1996, for the year
ended December 31, 1995.
The financial statements for the three and six months ended June 30, 1995
have been restated to conform to 1996 presentation, as well as to conform with
the restated 1995 and 1994 financial statements as discussed in Note 3.
2. MERGER PROPOSAL
On September 11, 1995, the Partnership and its General Partner entered into
a merger agreement, subject to BAC Holder approval, with an affiliate of Capital
Apartment Properties, Inc. (CAPREIT), a private real estate investment trust.
On that date, another CAPREIT affiliate entered into a merger agreement with
Capital Realty Investors Tax Exempt Fund Limited Partnership (CRITEF), a similar
tax exempt bond fund sponsored by CRI. The two merger agreements are
independent of one another, but the closing of each merger is conditioned on
closing of the other, at CAPREIT's election. Another affiliate of CAPREIT is
the property manager for five of the eight properties securing the bonds held by
the Partnership. All five of the properties managed by the CAPREIT affiliate
had defaulted with respect to their mortgage loans held by the Partnership. If
the merger proposal is approved by a majority vote of BAC Holders, all of the
BACs in the Partnership will be redeemed for cash and the interests represented
by such BACs will be canceled. The agreement for the proposed merger has been
modified to improve the terms of the original proposal. Under the original
proposal, the redemption amount per BAC was to be $14.36. Under the most recent
modification, the Third Amended and Restated Agreement and Plan of Merger
(Restated Merger Agreement), all of the BACs will be redeemed for cash at a
redemption price of $15.02 per BAC, net to the holder, without interest, subject
to upward adjustment based on Available Cash (as defined in the Restated Merger
Agreement) to not greater than $15.22 per BAC. In arriving at the
F-115
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. MERGER PROPOSAL - Continued
base redemption price, the consideration to be paid to BAC holders in the
merger has been reduced by the fees and expenses payable to counsel for the
plaintiffs in certain class action litigation, as discussed in Note 6. If there
is any upward adjustment to the base redemption price based on Available Cash,
plaintiffs' counsel shall be entitled to an additional amount equal to 20% of
the increased amount, up to a maximum of $75,000.
The BAC Holders will also vote upon the sale of the Partnership's General
Partner's interest to an affiliate of CAPREIT immediately prior to consummation
of the proposed merger. 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 accounts receivables 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 Restated Merger Agreement, CAPREIT will pay the discounted amount of
$667,485 to CRI for its fees accrued through June 30, 1995, which represents
approximately 42% of the total accrued fees owed to CRI. Also, CAPREIT will
pay $566,676 to CRIIMI for its fees accrued from July 1, 1995 through June 30,
1996, which represents 100% of the fees which are expected to be owed to
CRIIMI. From July 1, 1996, to the closing of the proposed merger, 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 month.
Each of the affiliates of the Partnership formed to take title to
properties and assume the existing indebtedness when the original, unaffiliated
borrowers defaulted (Owner Partnerships) has agreed to either (a) sell, assign
and transfer the partnership interests in, or the real property and other
assets of, such Owner Partnerships to CAPREIT or its designee for no additional
consideration or (b) admit CAPREIT or its designee as the managing general
partner, whereupon the general partner interests of the current general
partners will be converted into limited partner interests, and CAPREIT will
have the option to acquire all of the limited partner interests at any time
within five years from the closing date of the merger at the then fair market
value thereof (based on the fair market value of the property as encumbered by
the mortgage loans). Although such interests currently have nominal value, if
the fair market value of the partnership properties increases substantially
prior to the time CAPREIT exercises its option, such increase in value may
benefit the owners of the Owner Partnerships. This feature was required by
CAPREIT as a material business term of the merger.
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.
F-116
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. MERGER PROPOSAL - CONTINUED
As of August 5, 1996, the independent investment banking firm is updating their
analysis regarding the fairness of the redemption amount of BAC Holders from a
financial point of view. A proxy statement is expected to be issued to BAC
Holders after it is filed with and clearance is received from the SEC. A
preliminary proxy statement has been filed with the SEC, and the Partnership is
awaiting the SEC's clearance. These definitive proxy materials include a full
description of the proposed merger and the independent fairness opinions.
In accordance with the Restated Merger Agreement, CAPREIT will pay the
legal costs incurred by the Partnership associated with the proposed merger,
upon consummation of the proposed merger. As the Partnership is not
responsible for payment of these costs, they have not been reflected in the
accompanying financial statements. However, in the event that the proposed
merger is not consummated with CAPREIT, the Partnership will be responsible for
these costs, as discussed above. As of August 5, 1996, the Partnership had
incurred legal costs of approximately $90,000 related to the proposed merger.
There is no reasonable estimate of remaining legal costs to be incurred by the
Partnership associated with the proposed merger.
In the event the Restated Merger Agreement is terminated or abandoned under
the specified circumstances, the Partnership may be liable for the payment of a
fee equal of $2,250,000 with respect to such terminated or abandoned Restated
Merger Agreement if there is a Fiduciary Out Termination (as defined in the
Restated Merger Agreement), a Triggering Event (as defined in the Restated
Merger Agreement) or the Partnership consummates an alternative transaction
within 270 days of the date of termination or abandonment of such Restated
Merger Agreement.
In addition, if the Restated Merger Agreement is terminated or abandoned
due to (1) a Fiduciary Out Termination, (ii) a willful and material breach by
the Partnership or any applicable Owner Partnership (other than a breach of the
representations and warranties), (iii) the failure by the Partnership or any of
such Owner Partnerships to perform in all material respects its obligations and
duties thereunder, or (iv) a termination of such Restated Merger Agreement by
such CAPREIT affiliate because the Partnership shall have settled designated
actions for an amount in excess of an agreed upon amount or such settlement or
compromise contains terms to which such CAPREIT affiliate reasonably objects,
then the Partnership shall bear all of its own expenses, as mentioned above,
and reimburse such CAPREIT affiliate and its affiliates for reasonable out-of-
pocket expenses (including, without limitation, all fees and expenses of
counsel, and its financing sources and consultants to the CAPREIT affiliate
and its affiliates) in connection with such merger and related transactions and
the proxy statement. In no event, however, shall the amount paid to reimburse
expenses under the Restated Merger Agreement exceed $2,500,000.
During February 1996, the General Partner received an inquiry concerning
the possible acquisition of the funds from a group of investors led by Mr. Terry
McNellis and Mr. Gary Petrucci, of Piper Jaffrey Inc.,
F-117
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. MERGER PROPOSAL - CONTINUED
and Mr. David Brierton and Mr. Jack Safar, of Dominium Management Services Inc.
(collectively, the Dominium Group). The Dominium Group executed
confidentiality and non-circumvention agreements, and by the beginning of April
1996, the Partnership had provided the Dominium Group with all of the due
diligence materials they had requested. Thereafter, the General Partner did
not hear from any representative of the Dominium Group again until June 28,
1996, just days prior to the initially scheduled date for the fairness hearing
to be held on the Stipulation of Settlement in the Zakin and Wingard putative
class actions (the Zakin and Wingard Actions), as discussed in Note 6.
On June 28, 1996, counsel to the plaintiffs in the Zakin and Wingard Actions
and the Partnership received a letter from Dominium Tax Exempt Fund L.L.P.
(Dominium), which was signed by Mr. Safar of the Dominium Group, indicating an
interest in entering into merger agreement with the Partnership having similar
terms as the merger agreement and purportedly offering the BAC Holders of the
Partnership and CRITEF an aggregate merger consideration of approximately
$168,230,000. After reviewing the Dominium letter, the General Partner
determined that Dominium had not demonstrated any firm financing ability.
Notwithstanding such determination, the General Partner, in a letter dated July
3, 1996, notified Dominium that they would make documents available to Dominium
for its due diligence. The General Partner, however, also cautioned Dominium
that they would not jeopardize the merger agreements with CAPREIT by an
unwarranted delay while Dominium and its potential lenders continued to study
the Partnership and the mortgage revenue bonds and complete their due
diligence.
On July 12, 1996, the Partnership received copies of correspondence from
Dominium to counsel for the plaintiffs in the Zakin and Wingard Actions,
indicating that Dominium had received a purported financing commitment, subject
to payment of a fee and satisfactory results of a 21 business day due diligence
period. Representatives of Dominium came to the General Partners' offices on
July 11, 12, 26, 29 and 30, 1996 to conduct such review.
3. INVESTMENTS
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115). This statement requires
that most investments in securities be classified into one of the following
investment categories based upon circumstances under which securities might be
sold: held to maturity, available for sale, and trading. Generally,
investments in securities for which an enterprise has both the ability and the
intent to hold to maturity should be accounted for using the amortized cost
method and all other securities must be recorded at their fair values. The
Partnership implemented SFAS 115 in 1994 for its marketable securities.
Following such adoption, the Partnership (as did others in the industry)
continued to account for its investments in mortgage revenue bonds as
investments in real estate based on acquisition, development or construction
(ADC)determination or
F-118
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENTS - CONTINUED
consolidation of the Owner Partnerships in accordance with SEC rules.
In conjunction with the review of the Partnership's 1995 financial
statements by the SEC staff, the Partnership agreed to account for all of its
investments in mortgage revenue bonds as debt securities under the provisions
of SFAS 115 effective January 1, 1994, and restate its 1995 and 1994 financial
statements to reflect this change. Accordingly, effective January 1, 1994, all
investments in mortgage revenue bonds are classified and accounted for as held
to maturity securities and carried at amortized cost because of the
Partnership's ability and intent to hold these investments to maturity. In
accordance with SFAS 115's provisions for held to maturity securities, the
Partnership evaluates the fair value of its mortgage revenue bonds to determine
if impairment exists. If a decline in fair value is determined to be other-
than-temporary, the security is written down to its fair value. The
Partnership did not recognize any impairment losses during the three and six
months ended June 30, 1996 or 1995. Since all of the underlying mortgage loans
that secure the bonds are either in default or have been previously written
down due to impairment, base interest and contingent interest on the mortgage
revenue bonds is recognized as revenue when collected.
The restatement of the 1995 financial statements resulted in increases of
$817,483 and $1,455,253 in the Partnership's previously reported net income for
the three and six months ended June 30, 1995, respectively, and increases of
$0.16 and $0.28 in the Partnership's net income per BAC for the three and six
months ended June 30, 1995, respectively. Net income per BAC as previously
reported was $0.17 and $0.36 for the three and six months ended June 30, 1995,
respectively.
The Partnership invested in eight Federally tax-exempt mortgage revenue
bonds with aggregate principal and carrying amounts of $97,101,000 and
$70,951,947, respectively, and made three working capital loans with aggregate
principal and carrying amounts of $3,409,604 and $0, respectively. As of June
30, 1996, six properties collateralizing certain of the mortgage revenue bonds
have been transferred by deed in lieu of foreclosure (or by transfer of
partnership interests in the borrower entity) to Owner Partnerships which
assumed the existing indebtedness. In connection with the transfers of
properties to Owner Partnerships, 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 Owner
Partnerships would not cause the Partnership to become a substantial user of
the projects or a related party to a substantial user 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.
F-119
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENTS - CONTINUED
In April 1991, the U.S. Supreme Court decided a case, Cottage Savings
Association V. Commissioner (Cottage Savings) that could be interpreted to
impact then existing authority addressing the modification of debt instruments.
In response to this decision, on June 26, 1996, the IRS issued Final
Regulations Section 1.1001-3 which specifically address the tax consequences of
modifications of debt instruments. Among other things, these regulations
provide that certain modifications of the current interest payments or maturity
date of a debt instrument will be treated as a taxable exchange of the original
instrument for the modified debt instrument. As a result, certain future
modifications of the mortgage loans which secure the mortgage revenue bonds
could be treated as a deemed reissuance of the mortgage revenue bonds for
federal income tax purposes. Any reissuance without the cooperation of the
mortgage revenue bond issuers would result in the loss of the tax-exempt status
of the mortgage revenue bonds. Such issuers might cooperate and consent to the
reissuance; however, there can be no assurance that such issuers would do so or
would not impose additional requirements that could have an adverse impact on
the mortgage revenue bonds. Even if issuer consent were obtained, all accrued
and unpaid interest would have to be written off. The write-off of accrued and
unpaid interest would not be recoverable upon ultimate disposition or payoff of
the mortgage revenue bond and would instead accrue to the benefit of the Owner
Partnership to the extent realized.
Final Regulations Section 1.1001-3 will become effective only with respect
to modifications made on or after September 24, 1996. It is unclear at this
time what effect the Cottage Savings decision may have on modifications that
have already been made to mortgage loans which secure the mortgage revenue
bonds. The General Partner believes that the modifications which have already
been made were consistent with the relevant tax authority that existed at the
time of those modifications and have not jeopardized the tax-exempt status of
the mortgage revenue bonds. However, there can be no assurance as to the tax-
exempt status of the mortgage revenue bonds at present.
The General Partner's ongoing strategy had been to continue holding the
mortgage revenue bonds until the loan maturity dates. If the merger proposal,
as discussed in Note 2, is approved, the interests of the BAC Holders will be
redeemed for cash. 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 extension of certain loan maturity
dates and, if approved, arrange any necessary related amendments to the
pertinent mortgage revenue bonds.
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 Owner Partnership hired an engineer to analyze the
underlying problem of inadequate drainage at the property and to determine the
number of affected buildings and the severity of the drainage problem. Based
on this analysis, the costs associated with the
F-120
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENTS - CONTINUED
correction of the drainage problem are expected to be approximately $600,000,
and will not be covered by the property's insurance carrier. 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 borrower's existing replacement
reserves, future property cash flow, and/or a loan to the borrower from the
working capital reserves of the Partnership. The Partnership has joined with
the borrower'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. All depositions have been taken, and the lawsuit is
currently in discovery mode. There is no assurance that the Partnership will
receive any funds as a result of this lawsuit.
Presented below is a summary of base interest payments for the six months
ended June 30, 1996 and 1995 that are due to the Partnership from the
borrowers:
F-121
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENTS - CONTINUED
<TABLE>
<CAPTION>
For the six months ended June 30, 1996
-----------------------------------------------------------------------------
Base Interest Base Interest Cumulative
Paid From Paid From Current Base Unpaid
Current Base Properties' Non-Operating Interest Base
Interest Due(1) Operations(3) Sources(2) Not Paid Interest
------------- ------------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Ethan's Glen IIA $ 460,469 $ 507,164 $ -- $ -- $ 274,567
Geary Courtyard 870,300 452,000 -- 418,300 6,140,803
Ocean Walk 887,214 882,120 -- 5,094 1,471,510
Paces River 2 384,513 472,876 -- -- 108,996
Regency Woods 346,730 259,600 -- 87,130 357,080
Valley Creek II 459,550 378,598 -- 80,952 788,295
Washington Ridge 437,500 437,500 -- -- 72,917
Woodlane Place 703,500 622,542 -- 80,958 2,743,366
---------- ------------- ------------ ----------- -----------
$4,549,776 $4,012,400 $ -- $ 672,434 $11,957,534
========== ============= ============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
For the six months ended June 30, 1995
-----------------------------------------------------------------------------
Base Interest Base Interest Cumulative
Paid From Paid From Current Base Unpaid
Current Base Properties' Non-Operating Interest Base
Interest Due(1) Operations(4) Sources(2) Not Paid Interest
------------- ------------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Ethan's Glen IIA $ 460,469 $ 391,352 $ -- $ 69,117 $ 224,342
Geary Courtyard 870,300 347,000 -- 523,300 5,267,203
Ocean Walk 887,214 871,546 -- 15,668 1,356,497
Paces River 2 384,513 420,147 -- -- 188,222
Regency Woods 346,730 203,762 17,834 125,134 182,922
Valley Creek II 459,550 340,940 -- 118,610 629,216
Washington Ridge 437,500 437,500 -- -- 72,917
Woodlane Place 703,500 442,834 -- 260,666 2,470,552
---------- ---------- ------------ ----------- ------------
$4,549,776 $3,455,081 $ 17,834 $1,112,495 $10,391,871
========== ========== ============ =========== ============
</TABLE>
(1) The Partnership charges the borrowers interest on unpaid base interest
which totaled $616,961 and $492,361 for the six months ended June 30, 1996
and 1995, 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) Includes 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
totaled $70,000, $12,000 and $23,000, respectively.
(4) Excludes contingent interest of $18,816 and $46,747 received by the
Partnership from Washington Ridge during the three and six months ended
June 30, 1995, respectively.
Contingent interest is payable quarterly on an estimated basis, in arrears
but only to the extent of available net cash flow, if any. Contingent interest
is recognized as revenue when collected. Contingent interest due as of June
30, 1996 and December 31, 1995, amounted to $41,067,106 and $37,635,033,
respectively. The Partnership received contingent interest of $18,816 and
$46,747 from Washington Ridge during
F-122
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENTS - CONTINUED
the three and six months ended June 30, 1995, respectively. No contingent
interest was received for the three or six months ended June 30, 1996.
As of June 30, 1996, the Partnership had cash and cash equivalents of $54,677,
unrestricted marketable securities of $1,552,569, working capital reserves
invested in marketable securities of $4,471,445 and interest reserves invested
in marketable securities of $298,750. Marketable securities consist of tax-
exempt municipal bonds which generally contain a seven-day put option with
established banks or brokerage houses. The Partnership has classified its
investments in marketable securities into the available for sale category under
SFAS 115. Realized gains and losses on the sale of marketable securities were
determined on a specific identification basis. There were no net unrealized
holding gains or losses recognized during the three or six months ended June
30, 1996 or 1995 as the cost for the tax-exempt municipal bonds approximated
fair value throughout the respective periods.
4. DISTRIBUTIONS TO BAC HOLDERS
The Partnership expects to continue to make distributions to BAC Holders on a
quarterly basis. The Restated 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 Restated 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 Owner Partnerships. Despite these
efforts, the amounts paid to the Partnership from the borrowers may be expected
to fluctuate from period to period due to changes in occupancy rates, rental
rates, operating expenses and other variables.
The following distributions were paid or accrued to BAC Holders of record for
the first two quarters of 1996 and 1995:
F-123
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
4. DISTRIBUTIONS TO BAC HOLDERS - Continued
<TABLE>
<CAPTION>
1996 1995
Distributions to Distributions to
BAC Holders BAC Holders
------------------------- -------------------------
Quarter Ended Total Per BAC Total Per BAC
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
March 31, $1,577,480 $ 0.30 $1,577,480 $ 0.30
June 30, 1,577,480 0.30 1,577,480 0.30
---------- ---------- ---------- ------------
$3,154,960 $ 0.60 $3,154,960 $ 0.60
========== ========== ========== ============
</TABLE>
Distributions to BAC Holders for the three and six months ended June 30,
1996 and 1995 were funded as follows:
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
----------------------------- -------------------------
1996 1995 1996 1995
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Cash flow (1) $1,850,147 $1,782,859 $3,423,451 $3,378,151
Deposits to working capital/interest
reserves (256,572) (189,284) (236,301) (191,001)
---------- ---------- ---------- ------------
Total cash available for
distribution $1,593,575 $1,593,575 $3,187,150 $3,187,150
========== ========== ========== ============
Distributions to:
General Partner (1.01%) $ 16,095 $ 16,095 $ 32,190 $ 32,190
========== ========== ========== ============
BAC Holders (98.99%) $1,577,480 $1,577,480 $3,154,960 $3,154,960
========== ========== ========== ============
</TABLE>
(1) Defined in the Limited Partnership Agreement as (a) all revenues received
by the Partnership during such period, plus (b) any amounts which the
Managing General Partner releases from the Working Capital Reserve as being
no longer necessary to hold as part of the Working Capital Reserve, plus
(c) any amounts released to the Partnership from the Interest Reserve
Account with respect to a mortgaged property after completion of
construction of such mortgaged property, less (i) operating expenses of
the Partnership paid from reserves during the period, including any
expenses paid to the General Partner, but not including such amounts paid
from the Working Capital Reserve, (ii) all cash payments made from Revenues
during such period to discharge Partnership indebtedness, and (iii) all
amounts from revenues, if any, added to the Working Capital Reserve during
such period. Cash flow as defined in the Limited Partnership Agreement is
not to be construed as an alternative to operating income in accordance
with GAAP as an indication of the Partnership's operating performance.
The Partnership's working capital reserves 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 June
30, 1996 and December 31, 1995, the working capital reserves were $4,471,445 and
$4,235,144, 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
F-124
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
4. DISTRIBUTIONS TO BAC HOLDERS - Continued
General Partner. The surplus working capital reserve balance of approximately
$753,000 as of June 30, 1996 may be used to supplement distributions to BAC
Holders. None of the distributions made during the three and six months ended
June 30, 1996 and June 30, 1995, respectively, were funded from the surplus
working capital reserves.
Interest reserves relating to Washington Ridge were $298,750 as of June 30,
1996 and December 31, 1995. During the three and six months ended June 30,
1995, $96,090 and $19,486 were transferred to working capital reserves for the
three and six months ended June 30, 1995, respectively, to fund distributions
to BAC Holders from the interest reserves. No amounts were transferred to
working capital reserves for the three and six months ended June 30, 1996, to
fund distributions to BAC Holders.
5. INCOME TAXES
For income tax purposes, base interest income is accrued when earned. The
accrual of base interest is discontinued when at the time of accrual, ultimate
collectibility of the base interest due is considered unlikely. Once a loan has
been placed on a non-accrual status, income is recorded only as cash payments
are received from the borrower or nominee until such time as the uncertainty of
collection of unpaid base interest is eliminated. Loans relating to Geary
Courtyard, Valley Creek II and Woodlane Place were placed on a 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 $18,816 and $46,747 was
recognized from Washington Ridge for the three and six months ended June 30,
1995, respectively. No contingent interest was received for the three or six
months ended June 30, 1996.
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 of the primary differences between the financial
statement net income and municipal income for tax purposes is as follows:
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
------------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial statement net income $1,741,803 $1,736,348 $3,475,841 $3,392,896
Adjustment for timing of municipal
income recognition 349,353 112,129 617,546 179,480
---------- ---------- ---------- ----------
Municipal income, net for tax purposes $2,091,156 $1,848,477 $4,093,387 $3,572,376
========== ========== ========== ==========
Municipal income per BAC $ 0.40 $ 0.35 $ 0.78 $ 0.67
========== ========== ========== ==========
</TABLE>
F-125
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
6. LITIGATION
On September 22, 1995, Irving Zakin commenced a putative class action
(the Zakin Action) against the Partnership, its general partner (CRITEF
Associates III Limited Partnership), its Assignor Limited Partner (CRITEF III,
Inc.), CRI, William B. Dockser, H. William Willoughby, CRITEF, 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 price offered to the BAC Holders in the Mergers at the time the
complaint was filed was inadequate, and that the Defendants breached their
fiduciary duty to the BAC Holders, or aided and abetted such a breach, engaged
in self-dealing and misled BAC Holders, in connection with the proposed Mergers.
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 Court has been made by the plaintiffs in both
lawsuits to consolidate the two actions.
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.
On January 31, 1996, the Defendants and the plaintiffs and their
respective attorneys reached a tentative settlement of the Zakin and Wingard
Actions memorialized in a Memorandum of Understanding (the Memorandum), dated
as of such date. In accordance with the Memorandum, the merger agreements were
amended on January 31, 1996, to provide that (a) the aggregate cash
consideration to be paid to the BAC Holders of the Partnership and CRITEF was
increased by $8.5 million from $150.0 million to $158.5 million (subject to the
adjustment up or down based upon available cash), and (b) the aggregate amount
payable in consideration for the Accrued Fees payable to CRI for the Partnership
and CRITEF was reduced to no more than $2,000,000 (subsequently reduced to
$1,950,000) as compared with $4,023,000 provided for in the original merger
agreement. The Defendants also agreed that they would not object to an
application for attorneys' fees and reimbursement of out-of-pocket expenses of
plaintiffs' counsel for up to 20% of the improved Merger consideration
negotiated by them with such fees and expenses as are awarded by the Court to
plaintiffs' counsel to be paid from the improved Merger consideration negotiated
by them. Subsequently, the parties agreed that the maximum amount of fees
and expenses for the Partnership and CRITEF, assuming the merger is
consummated, shall be $1,700,000 plus an amount equal to 20% (up to a maximum of
$75,000) of any Adjustment Amount at closing. These fees will reduce the cash
paid to BAC Holders of the Partnership and CRITEF in connection with the
proposed merger, as discussed. In the event that the
F-126
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
6. LITIGATION - Continued
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 and experts retained
by them have reviewed voluminous documents relating to the proposed merger, and
have taken depositions of representatives of the General Partner and CAPREIT
and Oppenheimer and Co., Inc., the fairness opinion provider.
On May 16, 1996, the defendants and the plaintiffs filed the Stipulation
and Agreement of Settlement with the Chancery Court, and sought preliminary
approval of the putative classes (the Class) and approval of a form of notice
to the Class of the proposed Settlement. The Stipulation of Settlement
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 Stipulation of Settlement also permits plaintiffs to terminate the
proposed settlement if, in their opinion, a superior financial offer is
presented for the Partnership. It is expected that a hearing to determine
whether the settlement is fair, reasonable and in the best interest of the
Class will be held in early August, 1996.
Martin C. Schwartzberg is a former shareholder and executive officer of
CRI who retired from CRI as of January 1, 1990. In connection therewith, he
relinquished his general partner duties for all CRI-sponsored partnerships. In
February 1996, Mr. Schwartzberg publicly stated that he would oppose the
proposed merger until the Partnership made its financial statements and the
financial statements of the Owner Partnerships publicly available. The
financial statements of the Partnership are included in this Form 10-Q and have
been filed with the SEC quarterly. The financial statements of the Owner
Partnerships were filed as exhibits to Current Reports on Form 8-K, filed with
the SEC by the Partnership on March 25, 1996. As discussed below, Mr.
Schwartzberg has since reviewed the requested information and has determined to
support the merger.
On November 9, 1995, CRI filed a complaint seeking declaratory relief in
the Circuit Court for Montgomery County, Maryland (the Montgomery Circuit
Court) against Capital Management Strategies, Inc. (CMS), a company controlled
by Mr. Schwartzberg, to determine the proper amount of fees to be paid in 1996
under an asset management agreement. CMS answered the complaint on January 10,
1996, but asserted no counterclaims. Thereafter, Mr. Schwartzberg launched a
hostile consent solicitation to be designated as managing general partner of
125 private partnerships sponsored by CRI.
On January 18, 1996, Mr. Schwartzberg and CMS filed a complaint in the
Montgomery County, Maryland Circuit Court, against CRI and Messrs. Dockser and
Willoughby alleging, among other things, 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
F-127
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
6. LITIGATION - Continued
duties to Mr. Schwartzberg. Neither the Partnership nor the General Partner
was named as a defendant in this action, and Mr. Schwartzberg did not allege
that he was a BAC Holder. Messrs. Dockser and Willoughby entered an answer
denying all of Mr. Schwartzberg's claims and moved to dismiss or strike the
allegations concerning the Partnership and CRIIMI MAE Inc. Messrs. Dockser and
Willoughby publicly responded that Mr. Schwartzberg's suit is motivated by his
budget dispute with CRI and personal animosity.
On February 12, 1996, the Montgomery Circuit Court issued a memorandum
opinion and order enjoining CMS and Mr. Schwartzberg from using or disclosing
information made confidential under the asset management agreement.
On February 15, 1996, Mr. Schwartzberg filed suit in the New Castle
County, Delaware Chancery Court (the Chancery Court) against the General Partner
and CRITEF Associates Limited Partnership (CRITEF LP) (collectively, the
General Partners) alleging that he had made demands upon the General Partners,
in his capacity as a limited partner of the General Partner and a general and
limited partner of CRITEF LP, to inspect and obtain copies of the BAC Holder
lists and other documents and that his demands were rejected. On February 23,
1996, the General Partners of the Partnership and CRITEF III answered the
complaint, admitting that his demands had 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. Following a hearing on March 6 and 7, 1996, on June 7,
1996, the Chancery Court denied Mr. Schwartzberg's request for relief, holding
that Mr. Schwartzberg's request was for an "improper purpose" under Delaware
law.
On February 16, 1996, the Partnership and CRITEF (collectively, the
Partnerships), together with the General Partners, CRI, and CAPREIT, filed suit
against Mr. Schwartzberg in the United States District Court for the Southern
District of New York (the New York Action). The complaint alleged that Mr.
Schwartzberg was engaged in an unlawful solicitation of proxies of the BAC
Holders through two press releases he issued. On March 18, 1996, the District
Court enjoined Mr. Schwartzberg from (1) making any further solicitation of BAC
Holders within the meaning of Section 14(a) of the Securities Exchange Act of
1934 without complying with SEC regulations, and (2) committing any violation
of Rule 14a-9 promulgated under the Securities Exchange Act (regarding false or
misleading statements) in connection with any solicitation relating to the
Partnerships.
On March 18, 1996, Mr. Schwartzberg filed a counterclaim against the
General Partners alleging that three press releases issued by the General
Partners and the Partnerships constituted solicitations in violation of the
Securities Exchange Act and that they were false and misleading. The counter-
defendants denied the allegations. On April 23, 1996, the District Court
denied Mr. Schwartzberg's motion for an injunction. The District Court held
that an injunction was unwarranted, given the scope and extent of Mr.
Schwartzberg's prospects for succeeding on the merits,
F-128
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
6. LITIGATION - Continued
and the fact that he could show neither a sufficient threat of irreparable
injury nor a balance in his favor of the hardships associated with granting or
denying an injunction.
On June 13, 1996, pursuant to a resolution of disputes with Mr.
Schwartzberg, the parties to the actions in the District Court filed with the
District Court a Stipulation of Dismissal with Prejudice.
F-129
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
6. LITIGATION - Continued
After extensive review of the merger agreements, the Partnerships'
financial statements and other materials and pursuant to the terms of the
agreement between CAPREIT and Mr. Schwartzberg and CMS (the CAPREIT Agreement),
Mr. Schwartzberg has advised CAPREIT, the General Partners and the Partnerships
that he and his family members and entities under his control (the Schwartzberg
Entities) will vote their BACs in favor of the proposed merger and in
accordance with the recommendations of the General Partners. In connection
therewith, the Schwartzberg Entities have agreed to grant to CAPREIT an
irrevocable proxy to vote their interests in the Partnerships.
The Schwartzberg Entities have agreed not to attempt to (i) dispose of
or acquire any interest in the Partnerships or join or participate with any
group seeking to do the same, (ii) solicit proxies or participate in a
solicitation in opposition to the proposed merger, in opposition to the
recommendations of the General Partners with respect to the proposed merger, or
to remove the General Partners or seek to have himself or his designee become a
general partner of the Partnerships, (iii) make any public statements in
opposition to the proposed merger, (iv) make any public statements with respect
to, or offer, solicit, or submit a proposal relating to consolidation or
combination with the Partnerships, or the admission of new general partners
into the Partnerships.
In addition, Mr. Schwartzberg disclosed that he has had discussions with
Lenner Corp. regarding the terms of the offer and the submission of a competing
bid. Lenner Corp. declined to submit a competing offer to the Partnership and
has entered into a confidentiality and standstill agreement with CAPREIT
regarding the proposed merger and the Partnerships.
Provided that the Schwartzberg Entities comply with the terms of the
CAPREIT Agreement, CAPREIT is obligated to cause to be paid into escrow the
aggregate amount of $867,000 in four installments over a three year period.
These funds will be used for the partial payment of Mr. Schwartzberg's counsel
and consultants in connection with their review of the merger agreements,
drafts of the preliminary proxy statement filed with the SEC on July 17, 1996,
financial information of the Partnership, partnership documents, Delaware-
related claims, and other documents. CRI will provide CAPREIT with $400,000 in
respect of CAPREIT's obligations under the CAPREIT Agreement, counsel for the
plaintiffs in the Zakin and Wingard Actions will provide $100,000 in respect of
such payments and Mr. Schwartzberg will provide $33,500 of such payments. No
such payments other than the first installment will be paid into escrow until
the proposed merger has been consummated and each of the payments is
contingent upon there having been no defaults on the part of the Schwartzberg
Entities or under the third party standstill agreement.
The Schwartzberg Entities are personally liable to CAPREIT for any
breaches occasioned by them of the CAPREIT Agreement. Mr. Schwartzberg has
covenanted to CAPREIT that he will maintain a net worth of at least $3.5
million through December 31, 2002. In the event that the Schwartzberg Entities
are in default under the CAPREIT Agreement as a result of a violation of a
third party standstill agreement, Mr.
F-130
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
6. LITIGATION - Continued
Schwartzberg shall pay CAPREIT liquidated damages in accordance with the terms
of the CAPREIT Agreement.
F-131
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
6. LITIGATION - Continued
An agreement among Mr. Schwartzberg, CMS and CRI (the CRI Agreement), in
addition to providing that Mr. Schwartzberg will not oppose the proposed
merger, also provides for a resolution of all disputes between CRI and Mr.
Schwartzberg. As part of the CRI Agreement, Mr. Schwartzberg and CRI have
agreed not to take any actions which might interfere with each others'
business. Mr. Schwartzberg has also retracted any derogatory statements that he
previously made about CRI, its principals, and the proposed merger, and has
promised not to make any similar statements in the future. Although the CRI
Agreement provides that it is legally binding, that agreement contemplates
execution of a more detailed agreement (referred to as the Definitive
Agreement) and the exchange of full general releases between Mr. Schwartzberg
and CRI, and Messrs. Dockser and Willoughby.
7. 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 the three and six months ended June 30, 1996, $65,300
and $103,254, respectively and $42,584 and $96,143 for the three and six months
ended June 30, 1995, respectively, were reimbursed for such costs and are
included in general and administrative expense and merger-related expense in
the 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, 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 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 were due to CRI and CRIIMI from the borrowers
as of June 30, 1996 and December 31, 1995:
F-132
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
7. RELATED-PARTY TRANSACTIONS - Continued
<TABLE>
<CAPTION>
As of As of
June 30, December 31,
1996 1995
----------- ------------
<S> <C> <C>
CRI $1,578,694 $1,578,694
CRIIMI 566,676 283,338
---------- ----------
Total $2,145,370 $1,862,032
========== ==========
</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 Restated Merger Agreement entered into by the
Partnership, as discussed in Note 2, unpaid fees accrued through June 30, 1995
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 accrued from July 1, 1995 through June 30, 1996 will be
purchased by CAPREIT from CRIIMI for $566,676, which represents 100% of the
accrued fees which are expected to be owed to CRIIMI for that period. From
July 1, 1996, to the closing of the proposed merger, 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 three and
six months ended June 30, 1996 and 1995, were as follows:
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
1996 1995 1996 1995
------- ------- ------- -----------
<S> <C> <C> <C> <C>
CRI/CRICO Mortgage $ -- $26,625 $ -- $49,312
CRIIMI 18,750 -- 37,500 --
------- ------- ------- -----------
Total $18,750 $26,625 $37,500 $49,312
======= ======= ======= ===========
</TABLE>
Owner Partnerships formed to take title to properties are structured as
limited partnerships. The Owner Partnerships and the managing general
F-133
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
7. RELATED-PARTY TRANSACTIONS - Continued
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
Owner Partnerships, 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 Owner Partnerships or their principal in connection with the
transfers of ownership.
In connection with the Restated Merger Agreement, each of the Owner
Partnerships has agreed to either (a) sell, assign and transfer the partnership
interests in, or the real property and other assets of, such Owner Partnerships
to CAPREIT or its designee for no additional consideration or (b) admit CAPREIT
or its designee as the managing general partner, whereupon the general partner
interests of the current general partners will be converted into limited
partner interests, and CAPREIT will have the option to acquire all of the
limited partner interests at any time within five years from the closing date
of the merger at the then fair market value (based on the fair market value of
the 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 substantially prior to the time CAPREIT
exercises its option, such increase in value may benefit the owners of the
Owner Partnerships.
F-134
<PAGE>
Appendix A-1
FOURTH AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
among
WATERMARK PARTNERS, L.P.,
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED
PARTNERSHIP
and
CRITEF ASSOCIATES LIMITED PARTNERSHIP
<PAGE>
================================================================================
FOURTH AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
among
WATERMARK PARTNERS, L.P.,
CAPITAL REALTY INVESTORS TAX EXEMPT
FUND LIMITED PARTNERSHIP
and
CRITEF ASSOCIATES LIMITED PARTNERSHIP, et al.
--------------------------------------
Dated: as of August 21, 1996
--------------------------------------
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. The Merger......................................................................... 1
1.1 The Merger...................................................................... 1
1.2 Surviving Partnership........................................................... 2
1.3 Effective Time of the Merger.................................................... 2
1.4 Certificate of Limited Partnership.............................................. 2
1.5 Partnership Agreement........................................................... 2
2. Conversion of Partnership Interests................................................ 2
2.1 Conversion of Partnership Interests............................................. 2
2.2 Redemption of BACs.............................................................. 4
2.3 Purchase of the General Partner Interest........................................ 5
2.4 Additional Rights; Taking of Necessary Action; Further Action................... 5
2.5 Federal Income Tax Considerations............................................... 6
2.6 Deposit......................................................................... 6
2.7 Disclosure Schedule............................................................. 7
3. Representations and Warranties of the Merger Partnership........................... 7
3.1 Formation and Qualification..................................................... 7
3.2 Authority Relative to this Agreement............................................ 7
3.3 No Conflicts.................................................................... 8
3.4 Governmental Approvals.......................................................... 8
3.5 No Prior Activities............................................................. 8
3.6 Brokers......................................................................... 8
4. Representations and Warranties of the Partnership.................................. 8
4.1 Formation and Qualification..................................................... 9
4.2 No Subsidiaries................................................................. 9
4.3 Capitalization.................................................................. 9
4.4 Authority Relative to this Agreement............................................ 9
4.5 No Conflicts.................................................................... 10
4.6 Governmental Approvals.......................................................... 10
4.7 Commission Filings; Financial Statements........................................ 10
4.8 No Undisclosed Liabilities...................................................... 11
4.9 Absence of Certain Changes or Events............................................ 11
4.10 Litigation...................................................................... 12
4.11 Taxes........................................................................... 12
4.12 Assets.......................................................................... 12
4.13 Transactions with Affiliates.................................................... 12
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
4.14 Disclosure..................................................................... 13
4.15 Brokers........................................................................ 13
4.16 General Partner Recommendation................................................. 13
4.17 Compliance with Law............................................................ 13
4.18 Mortgage Revenue Bonds and Mortgage Revenue Documents.......................... 13
5. Representations and Warranties of the Owner Partnerships........................... 14
5.1 Formation and Qualification..................................................... 14
5.2 No Subsidiaries................................................................. 15
5.3 Partners and Capitalization..................................................... 15
5.4 Authority Relative to this Agreement............................................ 15
5.5 No Conflicts.................................................................... 15
5.6 Governmental Approvals.......................................................... 16
5.7 Financial Statements............................................................ 16
5.8 No Undisclosed Liabilities...................................................... 16
5.9 Absence of Certain Changes or Events............................................ 16
5.10 Mortgaged Properties............................................................ 17
5.11 No Action....................................................................... 17
5.12 Taxes........................................................................... 18
5.13 Compliance with Law............................................................. 18
5.14 Disclosure...................................................................... 18
6. Conduct of Business Pending the Merger............................................. 18
6.1 Conduct of Business by the Partnership Pending the Merger....................... 18
6.2 Conduct of Business by the Owner Partnerships Pending the Merger................ 20
7. Additional Agreements.............................................................. 21
7.1 Proxy Statement; Other Filings.................................................. 21
7.2 Meeting of the Limited Partners................................................. 22
7.3 Fees and Expenses............................................................... 22
7.4 Further Agreements.............................................................. 23
7.5 Shop Limitation................................................................. 25
7.6 Additional Financial Statements................................................. 26
7.7 Access to Information; Confidentiality.......................................... 26
7.8 Public Announcements............................................................ 27
7.9 Agreement to Defend and Indemnify............................................... 27
7.10 Notification of Certain Matters................................................. 28
7.11 Cooperation..................................................................... 28
7.12 Acquisition..................................................................... 28
7.13 Treatment of Owner Partnerships................................................. 28
7.14 Partnership Interests........................................................... 29
7.15 Tax Returns..................................................................... 29
7.16 Notice of Failure to Satisfy Closing Conditions................................. 30
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
8. Conditions......................................................................... 30
8.1 Conditions to Obligation of Each Party to Effect the Transaction................ 30
8.2 Additional Conditions to the Obligation of the Partnership...................... 31
8.3 Additional Conditions to the Obligations of the Merger Partnership.............. 31
9. Termination, Amendment and Waiver.................................................. 33
9.1 Termination..................................................................... 33
9.2 Effect of Termination........................................................... 35
9.3 Amendment....................................................................... 35
9.4 Waiver.......................................................................... 35
10. General Provisions................................................................. 35
10.1 Notices......................................................................... 35
10.2 Certain Definitions............................................................. 36
10.3 Representations and Warranties; Etc............................................. 41
10.4 Validity........................................................................ 41
10.5 Descriptive Headings............................................................ 41
10.6 Parties in Interest............................................................. 41
10.7 Incorporation of Recitals....................................................... 41
10.8 Miscellaneous................................................................... 41
</TABLE>
-3-
<PAGE>
FOURTH AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
-------------------------------------------------------
FOURTH AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of
August 21, 1996, among WATERMARK PARTNERS, L.P., a Delaware limited partnership
(the "Merger Partnership"), CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED
PARTNERSHIP, a Delaware limited partnership (the "Partnership"), CRITEF
ASSOCIATES LIMITED PARTNERSHIP, a Delaware limited partnership (the "Partnership
GP"), and the other parties listed on the signature pages hereof.
The Merger Partnership was formed solely for the purpose of
being merged with and into the Partnership in accordance with the Revised
Uniform Limited Partnership Act of the State of Delaware (the "Partnership Act")
and the terms hereof in the merger (the "Merger") contemplated hereby. The
Merger Partnership has no assets other than the cash initially contributed by
Capital Apartment Properties, Inc., a Maryland corporation ("CAPREIT"), which is
its sole general partner (the "Merger Partnership GP"), and the cash initially
contributed by CAPREIT Limited Partnership, a Maryland limited partnership,
which is its sole limited partner (the "Merger Partnership LP"). In the Merger,
all partnership interests in the Partnership, other than those to be issued to
or acquired pursuant hereto by CAPREIT, or its Affiliates, will be redeemed in
cash as specified herein.
The general partners of each of the Partnership and the Merger
Partnership have approved the Merger in accordance with the Partnership Act and
the other transactions contemplated hereby and have recommended that their
respective limited partners approve and adopt the Merger and the other
transactions contemplated hereby.
The parties hereto entered into an Agreement and Plan of Merger, dated
as of September 11, 1995, as amended by Amendment No. 1 thereto on January 31,
1996, a First Amended and Restated Agreement and Plan of Merger, dated as of
March 14, 1996, a Second Amended and Restated Agreement and Plan of Merger,
dated as of May 18, 1996, and a Third Amended and Restated Agreement and Plan of
Merger, dated as of July 15, 1996, and they now desire to further amend certain
provisions of the Third Amended and Restated Agreement and Plan of Merger and
restate it in its entirety as provided herein.
Accordingly, in consideration of the premises and the mutual covenants
herein contained and intending to be legally bound hereby, the parties hereby
agree as follows:
Certain capitalized terms used herein are defined in Section 10.2
hereof.
1. The Merger.
----------
1.1 The Merger. At the Effective Time, and subject to the terms and
----------
conditions of this Agreement and the Partnership Act, the Merger Partnership
shall be merged with and into the Partnership in the Merger, the separate
existence of the Merger Partnership shall thereupon cease, and the Partnership
shall be the surviving partnership in the Merger (the "Surviving Partnership").
<PAGE>
1.2 Surviving Partnership. At the Effective Time, the Partnership
---------------------
shall continue in existence under the laws of the State of Delaware as the
Surviving Partnership and shall thereupon and thereafter, without further act or
deed, succeed to and possess all the rights, privileges and powers of the Merger
Partnership, and all property, real, personal and mixed, and all debts due to
the Merger Partnership, as well as all other things and causes of action
belonging to the Merger Partnership, shall be vested in the Surviving
Partnership, and shall thereafter be the property of the Surviving Partnership
as they were of the Merger Partnership, and the title to any real property
vested by deed or otherwise, under the laws of the State of Delaware, in the
Merger Partnership shall not revert or be in any way impaired by reason of the
Merger, but all rights of creditors and all liens upon any property of the
Merger Partnership shall be preserved unimpaired, and all debts, liabilities and
duties of the Merger Partnership shall thenceforth attach to the Surviving
Partnership and may be enforced against it to the same extent as if said debts,
liabilities and duties have been incurred or contracted by it.
1.3 Effective Time of the Merger. The Merger shall be effected as of
----------------------------
the date and time of filing of the certificate of merger (the "Certificate of
Merger") with the Secretary of State of the State of Delaware in accordance with
the Partnership Act (or at such later time specified as the effective time in
the Certificate of Merger) (the "Effective Time"), which filing the parties
hereto shall cause to occur as soon as practicable after the satisfaction or
waiver of the conditions hereinafter set forth.
1.4 Certificate of Limited Partnership. As a result of the Merger,
----------------------------------
the Certificate of Limited Partnership of the Partnership (the "Partnership
Certificate"), as in effect immediately prior to the Effective Time, shall be
the Certificate of Limited Partnership of the Surviving Partnership, as amended
and restated substantially in the form set forth as Exhibit A hereto, until
thereafter amended as provided therein and under the Partnership Act.
1.5 Partnership Agreement. The partnership agreement attached hereto
---------------------
as Exhibit B shall be the agreement of limited partnership of the Surviving
Partnership unless and until amended in accordance with its terms and applicable
law. The name of the Surviving Partnership shall be Watermark Partners, L.P.
2. Conversion of Partnership Interests.
-----------------------------------
2.1 Conversion of Partnership Interests. At the Effective Time, by
-----------------------------------
virtue of the Merger and without any action on the part of the Merger
Partnership, the Partnership or the holders of any of the following securities:
2.1.1 (a) Each Beneficial Assignee Certificate ("BAC") (other
than any BACs held by CAPREIT or its affiliates or the Partnership) which
represents the assignment of 1 unit of beneficial interest of the limited
partnership interest in the Partnership issued to the Assignor Limited Partner,
together with the underlying limited partner interest, shall be cancelled and
extinguished and converted into and represent the right to receive an amount per
BAC in cash equal to $15.00, in the case of Series I, and $14.68, in the case of
Series II, subject to adjustment, in each case, as set forth in subsection (b)
or (c) below (the "Merger Consideration").
-2-
<PAGE>
(b) The aggregate amount of Merger Consideration payable
with respect to the BACs, in the case of Series I, shall be increased by the
Series I Excess Amount (as defined below), if any, and the aggregate amount of
Merger Consideration payable with respect to the BACs, in the case of Series II,
shall be increased by the Series II Excess Amount, if any. In each case, the
amount of the increase, if any, shall be prorated among all of the issued and
outstanding BACs of such series and the price per BAC set forth in subsection
(a) above shall be increased accordingly.
(c) The amount by which the Partnership's Available Cash
(defined below) is greater than $2,606,482, in the case of Series I, shall be
the "Series I Excess Amount". The amount by which the Partnership's Available
Cash is greater than $3,869,290, in the case of Series II, shall be the "Series
II Excess Amount"; provided, however, that regardless of the actual amount of
-------- -------
Available Cash, the Series I Excess Amount shall not exceed $476,520, and the
Series II Excess Amount shall not exceed $679,901.
(d) For purposes of this calculation , "Available Cash"
means the amount of cash and cash equivalents held by or at the direction of the
Partnership after deducting any amounts then owed, accrued or reserved by the
Partnership for goods, services or liabilities of any nature or description
(which liabilities shall not include any liabilities of the Mortgaged
Properties, including accrued real estate taxes and insurance); provided, that
--------
all amounts held in tax and insurance escrows for all the Mortgaged Properties
and all amounts held in replacement reserves for the benefit of the Owner
Partnerships shall be deemed to be part of the Available Cash. For
clarification, but not for expansion, Available Cash shall also include any
additions to tax and insurance escrows for all the Mortgaged Properties and the
replacement reserves for the benefit of the Owner Partnerships, less any
withdrawals from such escrows and reserves, in each case, in the ordinary course
of business and consistent with past practice.
(e) The Partnership agrees not to incur any expenses, in
connection with the Merger, which are not reasonably necessary, customary and
appropriate.
2.1.2 The 1.01% general partner interest in the Partnership,
which will be held by the CAPREIT General Partner (as defined) as a result its
admission as the substitute general partner as contemplated by Section 2.3
below, shall be converted into and represent a 1.01% general partner interest in
the Surviving Partnership.
2.1.3 Any limited partner interests in the Partnership issued
to any designee of CAPREIT pursuant to Section 7.14, or BACs purchased by
CAPREIT or its Affiliates as contemplated by Section 2.4.1, and held by such
designee or purchaser immediately prior to the Effective Time, shall be
converted into a limited partner interest in the Surviving Partnership.
2.1.4 Any and all BACs that are owned by the Partnership shall
be cancelled and extinguished and no consideration shall be paid therefor.
2.1.5 The 21% general partner interest in the Merger Partner-
ship held by the Merger Partnership GP immediately prior to the Effective Time
shall be cancelled and the
-3-
<PAGE>
Merger Partnership GP shall receive the $21 initially contributed by it to the
Merger Partnership in exchange therefor.
2.1.6 The 79% limited partner interest in the Merger Partner-
ship held by Merger Partnership LP immediately prior to the Effective Time shall
be cancelled and the Merger Partnership LP shall receive the $79 initially
contributed by it to the Merger Partnership in exchange therefor.
2.1.7 The 98.99% limited partner interest of the Assignor
Limited Partner in the Partnership shall be cancelled and extinguished and no
consideration (other than the Merger Consideration paid to the holders of BACs
pursuant to Section 2.2.1 above) shall be paid therefor.
2.2 Redemption of BACs.
------------------
2.2.1 From and after the Effective Time, a bank or trust company
designated by the Merger Partnership and the Partnership prior to the Effective
Time (the "Redemption Agent") shall act as redemption agent in effecting the
redemption for cash of certificates which, prior to the Effective Time,
represented BACs entitled to payment pursuant to Section 2.1.1 hereof. Upon the
surrender of each such certificate the holder thereof shall be paid, without
interest thereon, the amount of cash to which such holder is entitled hereunder
(net of any required withholding) and such BAC shall forthwith be cancelled.
Until so surrendered and exchanged, each such certificate shall represent, for
all purposes, solely the right to receive cash pursuant to Section 2.1.1 hereof.
If any cash to be paid in the Merger is to be paid to a Person other than the
holder in whose name the certificate representing BACs surrendered in redemption
therefor is registered, it shall be a condition of such redemption that the
certificate so surrendered shall be properly endorsed or otherwise in proper
form for transfer and that the Person requesting such redemption shall pay to
the Redemption Agent any transfer or other taxes required by reason of the
payment of such cash to a Person other than the registered holder of the
certificate surrendered, or shall establish to the satisfaction of the
Redemption Agent that such tax has been paid or is not applicable.
Notwithstanding the foregoing, neither the Redemption Agent nor any party hereto
shall be liable to a holder of BACs for any cash delivered pursuant hereto to a
public official pursuant to applicable abandoned property laws.
2.2.2 At the Effective Time, the Surviving Partnership shall
deposit in trust with the Redemption Agent proceeds from the Financing in an
aggregate amount equal to the Merger Consideration (the "Redemption Fund"). The
Redemption Fund shall be invested by the Redemption Agent, as directed by the
Surviving Partnership, and any net earnings with respect thereto shall be paid
to the Surviving Partnership as and when requested by the Surviving Partnership.
2.2.3 The Redemption Agent shall, pursuant to irrevocable
instructions, make the payments referred to in Section 2.1.1 hereof out of the
Redemption Fund. The Redemption Fund shall not be used for any other purpose,
except as provided herein. Promptly following the date which is six months
after the Effective Time, the Redemption Agent shall return to the Surviving
Partnership all cash, certificates and other instruments in its possession
relating to the transactions described in this Agreement, and the Redemption
Agent's duties shall terminate.
-4-
<PAGE>
Thereafter, each holder of a BAC entitled to receive at the Effective Time cash
therefor may surrender such BAC to the Surviving Partnership and (subject to
applicable abandoned property, escheat and similar laws) receive in redemption
therefor the Merger Consideration, without interest, but shall have no greater
rights against the Surviving Partnership than may be accorded to general
creditors of the Surviving Partnership under applicable law.
2.2.4 Promptly after the Effective Time, the Redemption Agent
shall mail to each record holder of BACs a form of letter of transmittal and
instructions for use in surrendering such certificates and receiving payment
therefor.
2.2.5 After the Effective Time, no BACs shall be deemed to be
outstanding and holders of BACs shall cease to have any rights except as
provided in this Agreement or by law.
2.3 Purchase of the General Partner Interest. Concurrently with the
----------------------------------------
Effective Time, the Partnership GP shall sell, convey and transfer to a newly-
formed, wholly-owned subsidiary of CAPREIT (which shall thereupon be the
substitute general partner, with the Partnership GP withdrawing as general
partner), for the sum of $500,000 in cash, the 1.01% general partner interest in
the Partnership held by it. The parties acknowledge that the obligation of the
Partnership GP to transfer such general partner interest and the withdrawal and
substitution of the general partner pursuant to this Section 2.3 are subject to
the closing of the Merger, and shall not be effective if the Merger shall not
occur.
2.4 Additional Rights; Taking of Necessary Action; Further Action.
-------------------------------------------------------------
2.4.1 CAPREIT and its Affiliates reserve the right prior to the
Effective Time, and in accordance with applicable law, from time to time to make
open market or privately negotiated purchases of BACs. CAPREIT shall promptly
notify the Partnership of the occurrence of any such purchase.
2.4.2 The Merger Partnership and the Partnership shall each use
its best efforts to take all such action as may be necessary or appropriate in
order to effectuate the Merger under the Partnership Act as promptly as
possible, including, without limitation, the due execution and filing under the
Partnership Act of the Certificate of Merger consistent with the terms of this
Agreement. If at any time after the Effective Time, any further action is
necessary or desirable to carry out the purposes of this Agreement and to vest
the Surviving Partnership with full right, title and possession to all assets,
property, rights, privileges, powers, and franchises of either of the Merger
Partnership or the Partnership, the general partners of each of the Merger
Partnership and the Partnership are fully authorized in its name or otherwise to
take, and shall take, all such lawful and necessary action.
2.5 Federal Income Tax Considerations. (a) Notwithstanding any
---------------------------------
provision of this Agreement to the contrary, it is the intention of the parties
hereto that the payment of the Merger Consideration pursuant to Section 2.1.1
hereof shall constitute, for all income tax purposes, a redemption or
liquidation of the BAC holders' limited partnership interests in the Partnership
pursuant to Section 731(a) of the Code and that the consummation of the
transactions contemplated
-5-
<PAGE>
by this Agreement will not result in a termination of the Partnership pursuant
to Section 708(b)(1)(B) of the Code. The Partnership and the Partnership GP
hereby agree not to take any action inconsistent with the foregoing without the
prior written consent of CAPREIT.
(b) For state law purposes, the transaction contemplated
by this Agreement shall be treated as a merger.
2.6 Deposit. (a) On the business day immediately prior to the
-------
Mailing Date, CAPREIT shall pay into escrow the amount of $1,000,000 (the
"Deposit") to be held by an independent third party escrow agent pursuant to an
escrow agreement in the form of Exhibit C hereto.
(b) If the Closing shall occur, then the Deposit and any
interest earned thereon shall be paid on the Closing Date to CAPREIT or as
CAPREIT shall direct.
(c) If the Closing shall not occur on or prior to the
Termination Date and the failure of the Closing to occur shall be due to: (i)
the failure of any of the conditions to Closing set forth in Section 8.1 or 8.3
(other than Section 8.3.7); (ii) a termination of this Agreement pursuant to
Section 9.1 (other than Section 9.1.3 or 9.1.8); (iii) a breach of the
Commitment Letter by the party issuing such Commitment Letter; or (iv) a change
in any statute, law or regulation which affects the tax exempt status of the
Mortgage Revenue Bonds, then the Deposit and any interest earned thereon shall
be paid to CAPREIT or as CAPREIT shall direct on the earlier of the Termination
Date or the date of termination of this Agreement.
(d) If the Closing shall not occur on or prior to the
Termination Date and the failure of the Closing to occur shall be due to the
failure of the condition to Closing set forth in Section 8.3.7, which failure
occurred because of the failure of a condition to funding set forth in the
Commitment Letter, then one-half of the Deposit and any interest earned thereon
shall be paid to the Partnership and one-half of the Deposit and any interest
earned thereon shall be paid to CAPREIT or as CAPREIT shall direct on the
earlier of the Termination Date or the date on which the party issuing the
Commitment Letter notifies the Merger Partnership or CAPREIT that it will not
consummate the Financing.
(e) If the Deposit shall not be paid pursuant to
paragraph (b), (c) or (d), the Deposit and any interest earned thereon shall be
paid to the Partnership on the earlier of the Termination Date or the date of
termination of this Agreement. If such payment is made, such payment shall be
made to the Partnership as liquidated damages in full satisfaction of all of the
Merger Partnership's or CAPREIT's liabilities or obligations hereunder,
including, without limitation, any obligation to pay or reimburse the
Partnership's expenses pursuant to Section 7.3.2 below.
2.7 Disclosure Schedule. The parties acknowledge that this Agreement
-------------------
has been executed prior to delivery of the Disclosure Schedule by the
Partnership. The Partnership agrees that it will (a) deliver a preliminary
draft of the Disclosure Schedule to the Merger Partnership no later than 10 days
from the date hereof and (b) deliver a final Disclosure Schedule no later than
30 days from the date hereof; and that failure to do so shall constitute a
material breach hereof.
-6-
<PAGE>
Subject to the right of the Merger Partnership to invoke the condition to
Closing set forth in Section 8.3.11 below with respect to any information
obtained from the Disclosure Schedule, any information set forth in the
Disclosure Schedule shall be deemed incorporated into the relevant
representations and warranties set forth in Sections 4 and 5 below, and there
shall be no independent liability therefor pursuant to this Section 2.7.
3. Representations and Warranties of the Merger Partnership.
--------------------------------------------------------
Subject to Section 10.3 below, the Merger Partnership represents and
warrants to the Partnership as follows:
3.1 Formation and Qualification. The Merger Partnership is a limited
---------------------------
partnership duly formed, validly existing and in good standing under the laws of
the State of Delaware, and has the requisite power to carry on its business as
now conducted. The Merger Partnership is duly qualified, licensed and
authorized as a foreign limited partnership to do business, and is in good
standing, in each jurisdiction where the character of its properties owned or
leased or the nature of its activities makes such qualification necessary,
except for failures to be so qualified which would not, in the aggregate, have a
material adverse effect on the Condition of the Merger Partnership. Copies of
the Certificate of Limited Partnership of the Merger Partnership (the "MP
Certificate") and the Agreement of Limited Partnership of the Merger Partnership
(the "MP Agreement") heretofore delivered to the Partnership are accurate and
complete as of the date hereof. The Merger Partnership is not in default under
or in violation of any provision of the MP Agreement.
3.2 Authority Relative to this Agreement. The Merger Partnership has
------------------------------------
the requisite power and authority to enter into this Agreement and to perform
its obligations hereunder. The execution and delivery of this Agreement by the
Merger Partnership and the consummation by the Merger Partnership of the
transactions contemplated hereby have been duly authorized by all necessary
action on the part of the Merger Partnership and the Merger Partnership GP, and
no other action on the part of the Merger Partnership or the Merger Partnership
GP is necessary to authorize this Agreement, the Merger and the transactions
contemplated hereby. This Agreement has been duly executed and delivered by the
Merger Partnership and constitutes a valid and binding obligation of the Merger
Partnership, enforceable against the Merger Partnership in accordance with its
terms.
3.3 No Conflicts. Neither the execution and delivery of this
------------
Agreement by the Merger Partnership nor the consummation of the transactions
contemplated hereby nor compliance by the Merger Partnership with any of the
provisions hereof will (i) violate, conflict with, or result in a breach of any
provision of, or constitute a default (or an event which, with notice or lapse
of time or both, would constitute a default) under, or result in the termination
of, or accelerate the performance required by, or result in a right of
termination or acceleration under, or result in the creation of any Lien upon
any of the properties or assets of the Merger Partnership under, any of the
terms, conditions or provisions of (x) the MP Certificate or the MP Agreement or
(y) any note, bond, mortgage, indenture, deed of trust, license, lease,
agreement or other instrument or obligation to which the Merger Partnership is a
party, or to which it, or any of its properties or assets, may be
-7-
<PAGE>
subject, or (ii) subject to compliance with the statutes and regulations
referred to in Section 3.4, violate any Order, statute, rule or regulation
applicable to the Merger Partnership or any of its properties or assets, except,
in the case of each of clauses (i) and (ii) above, for such violations,
conflicts, breaches, defaults, terminations, accelerations or creations of Liens
which, in the aggregate, would not have any material adverse effect on the
Condition of the Merger Partnership.
3.4 Governmental Approvals. Other than in connection with or in
----------------------
compliance with the provisions of the Partnership Act, the Exchange Act, the
Securities Act, the "takeover" laws of various states, the Hart-Scott-Rodino
Act, and except for any notices, filings, authorizations, consents or approvals
which are required because of the regulatory status, if any, of the Partnership
or the Merger Partnership or facts specifically pertaining to it, no notice to,
filing with, or authorization, consent or approval of, any domestic or foreign
public body or authority is necessary for the consummation by the Merger
Partnership of the transactions contemplated by this Agreement.
3.5 No Prior Activities. The Merger Partnership has not incurred,
-------------------
directly or through any Subsidiary, any liabilities or obligations, except those
incurred in connection with its organization or with the negotiation of this
Agreement, the performance thereof and the consummation of the transactions
contemplated hereby, including the Merger and the Financing. Except as
contemplated by the foregoing sentence, the Merger Partnership has not engaged,
directly or through any Subsidiary, in any business activities of any type or
kind whatsoever, or entered into any agreements or arrangements with any Person,
or is subject to or bound by any obligation or undertaking.
3.6 Brokers. No broker, finder or investment banker is entitled to
-------
any brokerage, finder's or other fee or commission in connection with the
Transaction based upon arrangements made by or on behalf of the Merger
Partnership or the Merger Partnership GP.
4. Representations and Warranties of the Partnership. All
-------------------------------------------------
information within the Merger Partnership's Knowledge shall be deemed to have
been disclosed by the Partnership in connection with the representations and
warranties set forth below. Notwithstanding anything to the contrary in this
Agreement, the Partnership makes no representation or warranty, express or
implied, concerning the tax exempt status of the Mortgage Revenue Bonds and the
interest thereon, the ability of the Partnership or the Surviving Partnership to
consummate any modifications of the Mortgage Revenue Bonds and related
instruments, or the ability of the Partnership or the Surviving Partnership to
obtain any governmental or governmental agency consents in connection therewith.
Subject to Section 10.3 below, the Partnership represents and warrants
to the Merger Partnership as follows:
4.1 Formation and Qualification. Each of the Partnership and the
---------------------------
Partnership GP is a limited partnership duly formed, validly existing and in
good standing under the laws of the State of Delaware and has the requisite
power to carry on its business as now conducted. Each of the Partnership and
the Partnership GP is duly qualified, licensed and authorized as a foreign
limited partnership to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or leased or the nature
of its activities makes such qualification or licensing
-8-
<PAGE>
necessary, except for failures to be so qualified which would not, in the
aggregate, have a material adverse effect on the Condition of the Partnership or
the Partnership GP, as the case may be. Copies of the Partnership Certificate,
the Agreement of Limited Partnership of the Partnership (the "Partnership
Agreement"), the Certificate of Limited Partnership of the Partnership GP (the
"Partnership GP Certificate") and the Agreement of Limited Partnership of the
Partnership GP (the "Partnership GP Agreement") heretofore delivered or made
available to the Merger Partnership are accurate and complete as of the date
hereof. The Partnership is not in default under or in violation of any provision
of the Partnership Agreement, and the Partnership GP is not in default under or
in violation of any provision of the Partnership GP Agreement, except, in each
case, for such defaults or violations which would not have any material adverse
effect on the Condition of the Partnership or the Partnership GP.
4.2 No Subsidiaries. The Partnership has no Subsidiaries and no
---------------
equity or similar interest, whether voting or non-voting, in any Person.
4.3 Capitalization. As of the date hereof, the outstanding partner
--------------
interests of the Partnership consist of (i) a 1.01% general partner interest in
the profits, losses, distributions and credits of the Partnership held by the
Partnership GP, and (ii) a 98.99% limited partner interest in the profits,
losses, distributions and credits of the Partnership held by the Assignor
Limited Partner. The Assignor Limited Partner is authorized to issue up to
12,000,000 BACs, representing the assignments of units of beneficial interest of
the limited partner interest in the Partnership issued to the Assignor Limited
Partner, of which (x) 2,280,000 are outstanding, in the case of Series I, and
(y) 3,238,760 are outstanding, in the case of Series II. There are no
outstanding options, warrants, calls, subscriptions or other rights or other
agreements or commitments obligating the Partnership or any of its Affiliates to
issue, transfer or sell (a) any additional partnership interests of the
Partnership or (b) any BACs, except as contemplated herein. All issued and
outstanding BACs and partnership interests in the Partnership are validly
issued, and the purchase price therefor has been paid in full.
4.4 Authority Relative to this Agreement. Each of the Partnership
------------------------------------
and the Partnership GP has the requisite power and authority to enter into this
Agreement and to perform its obligations hereunder. The execution and delivery
of this Agreement by each of the Partnership and the Partnership GP and the
consummation by each of the Partnership and the Partnership GP of the
transactions contemplated hereby have been duly authorized by all necessary
action on the part of each of the Partnership and the Partnership GP and, except
for the BAC Holder Approval as set forth in Section 7.2 hereof, no other
proceedings on the part of the Partnership and the Partnership GP are necessary
to authorize this Agreement, the Merger and the transactions contemplated
hereby. This Agreement has been duly executed and delivered by each of the
Partnership and the Partnership GP and constitutes a valid and binding
obligation of each of the Partnership and the Partnership GP enforceable against
each of the Partnership and the Partnership GP in accordance with its terms.
4.5 No Conflicts. Except as set forth in the Disclosure Schedule,
------------
neither the execution and delivery of this Agreement by each of the Partnership
and the Partnership GP nor the consummation of the transactions contemplated
hereby (excluding the Financing and the Bond
-9-
<PAGE>
Refinancing) nor compliance by the Partnership and the Partnership GP with any
of the provisions hereof will (i) violate, conflict with, or result in a breach
of any provision of, or constitute a default (or an event which, with notice or
lapse of time or both, would constitute a default) under, or result in the
termination of, or accelerate the performance required by, or result in a right
of termination or acceleration under, or result in the creation of any Lien upon
any of the properties or assets of the Partnership or the Partnership GP under,
any of the terms, conditions or provisions of (x) the Partnership Certificate,
the Partnership Agreement, the Partnership GP Certificate or the Partnership GP
Agreement, as the case may be, or (y) any note, bond, mortgage, indenture, deed
of trust, license, lease, agreement or other instrument or obligation to which
the Partnership or the Partnership GP is a party or to which either of them or
either of their properties or assets may be subject, or (ii) subject to
compliance with the statutes and regulations referred to in Section 4.6, to the
Partnership's Knowledge, violate any Order, statute, rule or regulation
applicable to the Partnership or the Partnership GP or any of their properties
or assets, except, in the case of each of clauses (i) and (ii) above, for such
violations, conflicts, breaches, defaults, terminations, accelerations or
creations of Liens which would not, in the aggregate, have any material adverse
effect on the Condition of the Partnership or the Partnership GP.
4.6 Governmental Approvals. Except as set forth in the Disclosure
----------------------
Schedule, other than in connection with or in compliance with the provisions of
the Partnership Act, the Exchange Act, the Securities Act, the "takeover" laws
of various states, and the Hart-Scott-Rodino Act, and except for any notices,
filings, authorizations, consents or approvals which are required because of the
regulatory status, if any, of the Merger Partnership or facts specifically
pertaining to it, to the Partnership's Knowledge, no notice to, filing with, or
authorization, consent or approval of, any domestic or foreign public body or
authority is necessary for the consummation by each of the Partnership and the
Partnership GP of the transactions contemplated by this Agreement (excluding the
Financing and the Bond Refinancing).
4.7 Commission Filings; Financial Statements. The Partnership has
----------------------------------------
heretofore delivered or made available to the Merger Partnership its (i) Annual
Report on Form 10-K for the fiscal years ended December 31, 1994, 1993, 1992,
1991 and 1990, as filed with the Commission, (ii) Quarterly Reports on Form 10-Q
for the quarters ended March 31, 1995 and June 30, 1995, (iii) investor letters
or similar documents mailed to the holders of BACs (whether annual or special)
since January 1, 1990, (iv) all other reports (including any Form 8-K's) or
registration statements filed by the Partnership with the Commission since
January 1, 1990 (the documents described in clauses (i) through (iv) above,
including any exhibits and schedules thereto and documents incorporated by
reference therein, being the "SEC Filings"), and (v) the unaudited consolidated
interim financial statements of the Partnership for the six months ended June
30, 1995 (the "Interim Financial Statements"). As of their respective dates,
each SEC Filing complied in all material respects with the requirements of the
Exchange Act or the Securities Act, as applicable, and did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The audited
consolidated financial statements and unaudited consolidated interim financial
statements of the Partnership included or incorporated by reference in such
reports and the Interim Financial Statements (collectively, the "Partnership
Financial Statements") have been prepared in accordance with generally accepted
accounting principles
-10-
<PAGE>
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto), and fairly present the consolidated financial
position of the Partnership as of the dates thereof and the results of their
operations and changes in their financial position for the periods then ended.
The consolidated balance sheet of the Partnership as at March 31, 1995,
including the notes thereto, is referred to as the "Balance Sheet," and March
31, 1995, is referred to as the "Balance Sheet Date."
4.8 No Undisclosed Liabilities. At the Balance Sheet Date, the
--------------------------
Partnership did not have any direct or indirect liabilities, obligations,
indebtedness, claims, losses, damages, deficiencies or responsibilities, known
or unknown, fixed or unfixed, choate or inchoate, liquidated or unliquidated,
secured or unsecured, accrued, absolute or contingent, including, without
limitation, by way of setoffs or counterclaims ("Liabilities"), not reflected or
disclosed in the Balance Sheet which were required to be reflected or disclosed
therein in accordance with generally accepted accounting principles. Since the
Balance Sheet Date, except as disclosed in the Disclosure Schedule, the
Partnership has not incurred any such Liabilities.
4.9 Absence of Certain Changes or Events. Except as and to the
------------------------------------
extent set forth on the Balance Sheet, or as set forth on the Disclosure
Schedule, since the Balance Sheet Date, there has not been (a) any material
adverse change in the Condition of the Partnership; (b) any entry by the
Partnership into any commitment or transaction material to the Partnership,
which is not in the ordinary course of business and consistent with past
practices; (c) any material change by the Partnership in accounting principles
or methods except insofar as may be required by a change in generally accepted
accounting principles; (d) except as required by the American Stock Exchange,
any declaration, payment or setting aside for payment of any distributions
(whether in cash or property) in respect to the partnership interests of the
Partnership, or direct or indirect redemption, purchase or other acquisition of
any BACs or other securities of the Partnership; (e) any revaluation by the
Partnership of any of its assets, including without limitation, writing off of
notes or accounts receivable, except any revaluation required by generally
accepted accounting principles based on the value of the Merger Consideration ;
(f) any action taken by the Partnership of the type referred to in Section 6.1.4
or 6.1.5 hereof; (g) any agreement by the Partnership to take, whether in
writing or otherwise, any action which, if taken prior to the date of this
Agreement, would have made any representation or warranty in this Section 4
untrue or incorrect; (h) any damage, destruction or loss, whether covered by
insurance or not, having a material adverse effect upon the Condition of the
Partnership; (i) any issuance, grant, sale or pledge or agreement to issue,
grant, sell or pledge by the Partnership, with any Person other than an
Affiliate of the Merger Partnership, any BACs or other partnership interests or
securities convertible into or exchangeable or exercisable for, or otherwise
evidencing a right to acquire, BACs or other partnership interests; (j) any
acquisition of assets by the Partnership, other than personal property not
material to the Partnership acquired in the ordinary course of business and
consistent with past practices, or (k) any disposition, encumbrance or mortgage
of any assets or properties of the Partnership, other than personal property not
material to the Partnership disposed of in the ordinary course of business and
consistent with past practices.
4.10 Litigation. There is no action or proceeding or investigation
----------
pending or, to the Partnership's Knowledge, threatened against or involving the
Partnership, any properties or rights of the Partnership or, to the
Partnership's Knowledge, any Mortgaged Property which if
-11-
<PAGE>
adversely determined would, individually or in the aggregate, have a material
adverse effect on the Condition of the Partnership nor is the Partnership, its
assets or, to the Partnership's Knowledge, any Mortgaged Property subject to any
Order which would have such an effect.
4.11 Taxes. To the Partnership's Knowledge, except as set forth on
-----
the Disclosure Schedule, the Partnership has duly filed all tax returns that it
was required to file, all such tax returns were correct and complete in all
material respects and all taxes shown on such returns as due, if any, have been
paid. The Partnership constitutes a partnership for all income tax purposes
rather than a corporation or association taxable as a corporation. The
Partnership does not have in effect an election pursuant to Section 754 of the
Code. The Partnership's tax basis in the Mortgage Revenue Bonds, including the
interest receivable, is $130,450,406 as of December 31, 1994.
4.12 Assets. The Partnership has no assets other than the Mortgage
------
Revenue Bonds, the Liens represented by the Mortgage Revenue Documents, cash on
hand (including operating cash and marketable securities) in the amount of
$5,827,513 as of June 30, 1995, and personal property not material to the
Partnership held in the ordinary course of business and consistent with past
practices. The Partnership GP has no assets other than its partnership interest
in the Partnership.
4.13 Transactions with Affiliates. Except as described in the
----------------------------
Disclosure Schedule or the SEC Filings, the Partnership has not entered into any
of the following transactions with any Affiliate or Individual Affiliate in
connection with which the Partnership has continuing obligations in effect as of
the date of this Agreement: the direct or indirect purchase, acquisition or
lease of any property from, or the sale, transfer or lease of any property to,
or the borrowing of any money from, or the guarantee of any obligation of, or
the acquisition of any stock, obligations or securities of, or the entering into
of any merger or consolidation agreement, or any management, consulting,
employment or similar fee arrangement or the entering into of any other
transaction or arrangement with, or the making of any payment to, an Individual
Affiliate, in the ordinary course of business or otherwise, which is not on
terms at least as favorable to the Partnership as would have been applicable if
such transaction had been entered into on an arm's-length basis with an
unaffiliated third party.
4.14 Disclosure. To the Partnership's Knowledge, no written
----------
statement, certificate, schedule, list or other written information furnished by
or on behalf of the Partnership to the Merger Partnership pursuant to this
Agreement contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact necessary in order to make the
statements herein or therein, in light of the circumstances under which they
were made, not misleading.
4.15 Brokers. No broker, finder or investment banker is entitled to
-------
any brokerage, finder's or other fee or commission in connection with the
Transaction based upon arrangements made by or on behalf of the Partnership or
the Partnership GP.
4.16 General Partner Recommendation. The Partnership GP has approved
------------------------------
and adopted the Transaction, has determined that the Transaction is fair to the
holders of BACs, and has
-12-
<PAGE>
recommended that the holders of BACs approve the Transaction; provided, that the
--------
Partnership GP's continued recommendation shall be subject to its receipt of a
favorable Fairness Opinion. The Partnership has no general partners or holders
of general partnership interests other than the Partnership GP.
4.17 Compliance with Law. The Partnership has conducted its business
-------------------
so as to comply with all applicable Requirements of Law relating to or affecting
the operations, conduct or ownership of the property or business of the
Partnership, the failure to comply with which would, individually or in the
aggregate, have a material adverse effect on the Condition of the Partnership,
provided, for purposes of this Section 4.17, the existence of any statute, law,
- --------
treaty, rule, regulation or ordinance referred to in clause (ii) of the
definition of Requirements of Law shall be subject to the Partnership's
Knowledge.
4.18 Mortgage Revenue Bonds and Mortgage Revenue Documents.
-----------------------------------------------------
4.18.1 The Partnership has herewith or heretofore delivered or
made available to the Merger Partnership a true, correct and complete set of all
of the files, documents and other written materials relating to the Mortgage
Revenue Bonds and the Mortgage Revenue Documents, and to each Mortgaged Property
(and, where relevant, to each Owner Partnership's obtaining title to its
Mortgaged Property), that are in the possession or control of the Partnership
and all documents related thereto that were executed by or on behalf of the
Partnership or any Owner Partnership, including, without limitation, copies of
the Mortgage Revenue Bonds, the Mortgage Revenue Documents, Environmental
Reports, any letters of credit or other credit enhancement instruments currently
in effect, title insurance policies, hazard insurance policies, flood insurance
policies and other insurance policies, all balance sheets, operating statements
and other financial statements, all existing engineering reports, soil studies
and reports, plans, specifications, architectural and engineering drawings,
completion bonds, arrangements, warranties, commitments and other similar
reports, studies and items, leases and contracts, property management and
leasing brokerage agreements and other writings whatsoever. Notwithstanding the
foregoing, with respect to such files, documents and other written materials
that were prepared, received or stored by C.R.I., Inc.'s former housing
acquisition department during the time that Richard L. Kadish was supervising
such department (the "Housing Acquisition Department Files"), the Partnership
represents and warrants only that it has herewith or heretofore delivered or
made available to the Merger Partnership a true, correct and, to the
Partnership's Knowledge, complete set of the Housing Acquisition Department
Files.
4.18.2 The Partnership is the sole legal and beneficial owner
and holder of the Mortgage Revenue Bonds and the Mortgage Revenue Documents,
free and clear of any Lien, and, at the Effective Time, the Surviving
Partnership will be the sole legal and beneficial owner and holder of the
Mortgage Revenue Bonds and the Mortgage Revenue Documents, free and clear of any
Lien (without taking into account the Financing or the Bond Refinancing or any
act of the Merger Partnership). The Partnership has not endorsed, granted,
assigned, transferred or otherwise pledged, encumbered or set over the Mortgage
Revenue Bonds and/or the Mortgage Revenue Documents to any Person.
-13-
<PAGE>
4.18.3 The amounts of unpaid principal balance of each of the
Mortgage Revenue Bonds and the amount of accrued and unpaid base interest
thereunder, specifying the amounts of deferred construction period base
interest, past due base interest and interest on such interest, are set forth in
the Disclosure Schedule.
5. Representations and Warranties of the Owner Partnerships.
--------------------------------------------------------
Subject to Section 10.3 below, each of the Owner Partnerships (or, as
specified below, the Designated Owner Partnership) represents and warrants, as
to itself only, to the Merger Partnership as follows:
5.1 Formation and Qualification. Such Owner Partnership is a
---------------------------
limited partnership duly formed, validly existing and in good standing under the
laws of the State set forth opposite its name on the Disclosure Schedule and has
the requisite power to carry on its business as now conducted. Such Owner
Partnership is duly qualified, licensed and authorized as a foreign limited
partnership to do business, and is in good standing, in each jurisdiction where
the character of its properties owned or leased or the nature of its activities
makes such qualification or licensing necessary, except for failures to be so
qualified which would not, in the aggregate, have a material adverse effect on
its Condition. Copies of the certificate of limited partnership and the
agreement of limited partnership for such Owner Partnership have heretofore been
delivered or made available to the Merger Partnership and are accurate and
complete as of the date hereof. Such Owner Partnership is not in default under
or in violation of any provision of its limited partnership agreement, except
for such defaults or violations which would not have any material adverse effect
on the Condition of such Owner Partnership.
5.2 No Subsidiaries. Such Owner Partnership does not have any
---------------
Subsidiaries or any equity or similar interest, whether voting or non-voting, in
any Person. The only real and personal property owned or leased by such Owner
Partnership is the applicable Mortgaged Property owned by it as set forth in the
Disclosure Schedule, other than personal property held in the ordinary course of
business and consistent with past practices. The sole business and purpose of
such Owner Partnership is to own, manage, operate and lease the applicable
Mortgaged Property owned by it.
5.3 Partners and Capitalization. Set forth on the Disclosure
---------------------------
Schedule is a list of all of the partners in such Owner Partnership and their
respective partnership interests therein, and all of the direct and indirect
beneficial owners in each such partner and their respective ownership interests
therein. There are no outstanding options, warrants, calls, subscriptions or
other rights or other agreements or commitments obligating such Owner
Partnership or any of its Affiliates to issue, transfer or sell any additional
partnership interests of such Owner Partnership. All issued and outstanding
partnership interests of such Owner Partnership are validly issued, and the
purchase price therefor has been paid in full.
5.4 Authority Relative to this Agreement. Such Owner Partnership
------------------------------------
has the requisite power and authority to enter into this Agreement and to
perform its obligations hereunder. The execution and delivery of this Agreement
by such Owner Partnership and the consummation by such Owner Partnership of the
transactions contemplated hereby have been duly authorized by
-14-
<PAGE>
all necessary action on the part of such Owner Partnership and no other
proceedings on the part of such Owner Partnership are necessary to authorize
this Agreement and the transactions contemplated hereby. This Agreement has been
duly executed and delivered by such Owner Partnership and constitutes a valid
and binding obligation of such Owner Partnership enforceable against such Owner
Partnership in accordance with its terms.
5.5 No Conflicts. With respect only to the Designated Owner
------------
Partnership, except as set forth in the Disclosure Schedule, neither the
execution and delivery of this Agreement by the Designated Owner Partnership nor
the consummation of the transactions contemplated hereby (excluding the
Financing and the Bond Refinancing) nor compliance by the Designated Owner
Partnership with any of the provisions hereof will (i) violate, conflict with,
or result in a breach of any provision of, or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a default) under,
or result in the termination of, or accelerate the performance required by, or
result in a right of termination or acceleration under, or result in the
creation of any Lien upon any of the properties or assets of the Designated
Owner Partnership under any of the terms, conditions or provisions of (x) the
certificate of limited partnership of the Designated Owner Partnership or the
agreement of limited partnership of the Designated Owner Partnership or (y) any
note, bond, mortgage, indenture, deed of trust, license, lease, material
agreement or other material instrument or obligation to which the Designated
Owner Partnership is a party or to which it or any of its properties or assets
may be subject, or (ii) subject to compliance with the statutes and regulations
referred to in Section 5.6 below, to the Designated Owner Partnership's
Knowledge, violate any Order, statute, rule or regulation applicable to the
Designated Owner Partnership or any of its properties or assets, except, in the
case of each of clauses (i) and (ii) above, for such violations, conflicts,
breaches, defaults, terminations, accelerations, or creations of Liens which
would not, in the aggregate, have any material adverse effect on the Condition
of the Designated Owner Partnership.
5.6 Governmental Approvals. With respect only to the Designated
----------------------
Owner Partnership, except as set forth in the Disclosure Schedule, other than in
connection with or in compliance with the provisions of the limited partnership
act of the state of its formation, the Exchange Act, the Securities Act, the
"takeover" laws of various states, and the Hart-Scott-Rodino Act, to the
Designated Owner Partnership's Knowledge no notice to, filing with, or
authorization, consent or approval of any domestic or foreign public body or
authority is necessary for the consummation by the Designated Owner Partnership
of the transactions contemplated by this Agreement (excluding the Financing and
the Bond Refinancing).
5.7 Financial Statements. With respect only to the Designated
--------------------
Owner Partnership, the Designated Owner Partnership has heretofore delivered or
made available to the Merger Partnership its annual financial statements, which
financial statements are listed on the Disclosure Schedule, all of which
financial statements have been prepared in accordance with the principles of the
income tax basis of accounting applied on a consistent basis during the periods
involved (except as may be indicated in the notes thereto), and fairly present
the financial position of the Designated Owner Partnership as of the date
thereof and the results of its operations and changes in its financial position
for the periods then ended.
-15-
<PAGE>
5.8 No Undisclosed Liabilities. With respect only to the Designated
--------------------------
Owner Partnership, the Designated Owner Partnership does not have any
Liabilities not reflected or disclosed in its financial statements referred to
in Section 5.7 above which were required to be reflected or disclosed therein in
accordance with the principles of the income tax basis of accounting. Since the
date of its financial statements referred to in Section 5.7 above, except as may
otherwise be disclosed in the Disclosure Schedule, the Designated Owner
Partnership has not incurred any such Liabilities.
5.9 Absence of Certain Changes or Events. With respect only to the
------------------------------------
Designated Owner Partnership, except as and to the extent set forth on its
applicable financial statements referred to in Section 5.7 above, or except as
described in the Disclosure Schedule, since the date of such financial
statements, there has not been (a) any material adverse change in its Condition;
(b) any entry by it into any commitment or transaction which is not in the
ordinary course of its business and consistent with past practices; (c) any
material change by it in accounting principles or methods except insofar as may
be required by a change in principles of the income tax basis of accounting; (d)
any declaration, payment or setting aside for payment of any distributions
(whether in cash or property) in respect to its partnership interests or any
other of its securities; (e) any revaluation by it of any of its assets,
including without limitation, writing off of notes or accounts receivable other
than in the ordinary course of business and consistent with past practices; (f)
any action taken by it of the type referred to in Section 6.2.4 or 6.2.5 hereof;
(g) any agreement by it to take, whether in writing or otherwise, any action
which, if taken prior to the date of this Agreement, would have made any
representation or warranty in this Section 5 untrue or incorrect; (h) any
damage, destruction or loss, whether covered by insurance or not, having an
adverse effect upon its Condition; (i) any issuance, grant, sale or pledge or
agreement to issue, grant, sell or pledge by it, with any Person other than an
Affiliate of the Merger Partnership, any partnership interests or securities
convertible into or exchangeable or exercisable for, or otherwise evidencing a
right to acquire, partnership interests; (j) any acquisition of assets by it
other than in the ordinary course of business and consistent with past
practices; or (k) any disposition, encumbrance or mortgage of any of its assets
or properties other than in the ordinary course of business and consistent with
past practices.
5.10 Mortgaged Properties.
--------------------
5.10.1 With respect only to the Designated Owner Partnership,
the Designated Owner Partnership has herewith or heretofore delivered or made
available to the Merger Partnership a true, correct and complete set of all the
files, documents and other written materials relating to the Mortgaged Property
owned by the Designated Owner Partnership (and to its obtaining title to such
Mortgaged Property), or the Mortgage Revenue Bonds and the Mortgage Revenue
Documents related thereto, that are in the possession or control of the
Designated Owner Partnership and all documents related thereto that were
executed by or on behalf of the Partnership or the Designated Owner Partnership,
including, without limitation, copies of such Mortgage Revenue Bonds, such
Mortgage Revenue Documents, Environmental Reports, any letters of credit or
other credit enhancement instruments, title insurance policies, hazard insurance
policies, flood insurance policies and other insurance policies, all balance
sheets, operating statements and other financial statements, all existing
engineering reports, soil studies and reports, plans, specifications,
-16-
<PAGE>
architectural and engineering drawings, completion bonds, arrangements,
warranties, commitments and other similar reports, studies and items, leases and
contracts, property management and leasing brokerage agreements and other
writings whatsoever. Notwithstanding the foregoing, with respect to the Housing
Acquisition Department Files, the Designated Owner Partnership represents and
warrants only that the Designated Owner Partnership has herewith or heretofore
delivered or made available to the Merger Partnership, a true, correct and, to
the Designated Owner Partnership's Knowledge, complete set of the Housing
Acquisition Department Files.
5.10.2 With respect only to each Designated Owner Partnership,
the Designated Owner Partnership has good and marketable title to the Mortgaged
Property owned by it. To the Designated Owner Partnership's Knowledge, neither
the Mortgaged Property nor other assets of the Designated Owner Partnership is
subject to any Lien except (a) Liens securing the Mortgage Revenue Bonds, (b)
Permitted Statutory Liens, (c) Liens for taxes not yet delinquent or the
validity of which are being contested in good faith by appropriate actions and
for which appropriate reserves have been made, and (d) Liens which do not in the
aggregate have an adverse effect on the Condition of the Designated Owner
Partnership.
5.11 No Action. With respect only to the Designated Owner
---------
Partnership, except for landlord/tenant collection and eviction actions or as
set forth on the Disclosure Schedule, there is no action or proceeding or
investigation pending or, to the Designated Owner Partnership's Knowledge,
threatened against or involving the Designated Owner Partnership, any properties
or rights of the Designated Owner Partnership or the Mortgaged Property owned by
it which if adversely determined would, individually or in the aggregate, have
an adverse effect on the Condition of the Designated Owner Partnership nor is
the Designated Owner Partnership, its assets or such Mortgaged Property subject
to any Order which would have such an effect. Without limiting the generality
of the foregoing, the Designated Owner Partnership is not a debtor in any state
or federal bankruptcy, insolvency, liquidation, reorganization, receivership or
arrangement proceeding, and no such proceeding is pending or has been threatened
in writing.
5.12 Taxes. Except as may otherwise be set forth on the Disclosure
-----
Schedule, to such Owner Partnership's Knowledge, such Owner Partnership has duly
filed all tax returns that it was required to file and all such tax returns were
correct and complete. Such Owner Partnership constitutes a partnership for all
income tax purposes rather than a corporation or association taxable as a
corporation.
5.13 Compliance with Law. With respect only to the Designated Owner
-------------------
Partnership, the Designated Owner Partnership has conducted its business so as
to comply with all applicable Requirements of Law relating to or affecting the
operations, conduct or ownership of the property or business of such Designated
Owner Partnership, failure to comply with which would, individually or in the
aggregate, have a material adverse effect on the Condition of the Designated
Owner Partnership, provided, for purposes of this Section 5.13, the existence of
--------
any statute, law, treaty, rule, regulation or ordinance referred to in clause
(ii) of the definition of Requirements of Law shall be subject to the Designated
Owner Partnership's Knowledge.
-17-
<PAGE>
5.14 Disclosure. With respect only to the Designated Owner
----------
Partnership, to the Designated Owner Partnership's Knowledge, no written
statement, certificate, schedule, list or other written information furnished by
or on behalf of the Designated Owner Partnership, or otherwise made available,
to the Merger Partnership pursuant to this Agreement contains or will contain
any untrue statement of a material fact or omits or will omit to state a
material fact necessary in order to make the statements herein or therein, in
light of the circumstances under which they were made, not misleading.
6. Conduct of Business Pending the Merger.
--------------------------------------
6.1 Conduct of Business by the Partnership Pending the Merger. The
---------------------------------------------------------
Partnership covenants and agrees that, from the date of this Agreement until the
Effective Time, unless the Merger Partnership shall otherwise agree in writing
or as otherwise expressly contemplated by this Agreement:
6.1.1 The business of the Partnership shall be conducted only
in, and the Partnership shall not take any action except in, the ordinary course
of business and consistent with past practices, and the Partnership shall use
all commercially reasonable efforts to maintain and preserve its business
organization, assets, prospects and advantageous business relationships.
6.1.2 Except as contemplated hereby, the Partnership shall not
directly or indirectly do any of the following: (i) sell, transfer, pledge,
dispose of or encumber, except in the ordinary course of business and consistent
with past practices, any properties or assets of the Partnership (including,
without limitation, any indebtedness owed to it, including any Mortgage Revenue
Bonds, or any claims held by it); (ii) whether or not in the ordinary course of
business, sell or dispose of any property or asset which is material to the
Partnership; (iii) whether or not in the ordinary course of business, permit any
property or assets to become subject to any material Lien, other than Permitted
Statutory Liens; (iv) amend or propose to amend the Partnership Agreement, the
Partnership Certificate or similar organizational documents, any tax returns or
any Mortgage Revenue Bonds or Mortgage Revenue Documents; (v) declare, set aside
or pay any distribution, payable in cash, securities, property or otherwise,
with respect to any of its partnership interests or BACs; provided, however,
-------- -------
that, subject to Sections 501, 502, 504, 503, 511, 512 and 513 of the American
Stock Exchange Guide, the Partnership may accrue, on a monthly basis, an amount
up to $.09417 per BAC for Series I, and $.09667 for Series II, in calendar year
1996, and pay, on a semi-annual basis, such accrued amount to the BAC holders;
(vi) redeem, purchase or otherwise acquire or offer to redeem, purchase or
otherwise acquire any partnership interests or BACs; or (vii) authorize or
propose any of the foregoing, or enter into any contract, agreement, commitment,
or arrangement to do any of the foregoing.
6.1.3 Except as contemplated hereby, the Partnership shall not,
directly or indirectly, (i) issue, sell, pledge or dispose of, or authorize,
propose or agree to the issuance, sale, pledge or disposition of, any BACs or
partnership interests, or any options, warrants or rights of any kind to acquire
any shares of, or any securities convertible into or exchangeable for any BACs
or partnership interests, or any other securities in respect of, in lieu of, or
in substitution for, BACs or partnership interests outstanding on the date
hereof; (ii) acquire (by merger, consolidation, or
-18-
<PAGE>
acquisition of stock or assets) any other Person, or make any investment either
by purchase of stock or securities, contributions to capital, property transfer,
or, except in the ordinary course of business and consistent with past
practices, purchase of any property or assets of any other Person; (iii) incur
any indebtedness for money borrowed or issue any debt securities or assume or
guarantee any of the foregoing, except short-term indebtedness incurred in the
ordinary course of business and consistent with past practices; (iv) endorse, or
otherwise as an accommodation become responsible for, the obligations of any
other Person, or make any loans or advances other than in the ordinary course of
business and consistent with past practices; (v) voluntarily incur any other
liability or obligation (absolute, accrued, contingent or otherwise), except in
the ordinary course of business and consistent with past practices; (vi) waive,
release, grant or transfer any rights of material value or modify or change in
any material respect any agreement with or arrangement relating to any existing
material license, lease, contract or other document, other than in the ordinary
course of business and consistent with past practices; (vii) authorize or effect
any material change in its capitalization; or (viii) authorize or commit to any
of the actions prohibited in this Section 6.1.3, or enter into or modify any
contract, agreement, commitment or arrangement to do any of the actions
prohibited in this Section 6.1.3.
6.1.4 The Partnership shall not make any tax election which
may have a material adverse effect on the Condition of the Partnership or the
Merger Partnership, change any material tax accounting method or settle or
compromise any material federal, state, local or foreign income tax liability.
The Partnership GP shall halt, suspend or limit trading of BACs to the extent
necessary to prevent a termination of the Partnership for income tax purposes as
a result of such trading or such trading in combination with the consummation of
the Transaction.
6.1.5 The Partnership shall not take any action or agree, in
writing or otherwise, to take any of the actions prohibited by this Section 6.1
or any action which would make any representation or warranty in Section 4
hereof untrue or incorrect in any material respect.
6.2 Conduct of Business by the Owner Partnerships Pending the
---------------------------------------------------------
Merger. Each of the Owner Partnerships covenants and agrees, for itself only,
- ------
that, from the date of this Agreement until the Effective Time, unless the
Merger Partnership shall otherwise agree in writing or as otherwise expressly
contemplated by this Agreement:
6.2.1 The business of such Owner Partnership shall be conducted
only in, and such Owner Partnership shall not take any action except in, the
ordinary course of business and consistent with past practices, and such Owner
Partnership shall use all commercially reasonable efforts to maintain and
preserve its business organization, assets, prospects and advantageous business
relationships.
6.2.2 Except as contemplated hereby, such Owner Partnership
shall not directly or indirectly do any of the following: (i) sell, transfer,
pledge, dispose of or encumber, any properties or assets of such Owner
Partnership (including, without limitation, any Mortgaged Property, any
indebtedness owed to it or any claims held by it), other than personal property
not material to such Owner Partnership which is sold or disposed of in the
ordinary course of business consistent with past practices; (ii) permit any
property or assets to become subject to any material
-19-
<PAGE>
Lien, other than Permitted Statutory Liens; (iii) amend or propose to amend the
agreement of limited partnership, the certificate of limited partnership or
similar organizational documents of such Owner Partnership, any tax returns or
any Mortgage Revenue Bonds or Mortgage Revenue Documents; (iv) declare, set
aside or pay any distribution, payable in cash, securities, property or
otherwise, with respect to any of its partnership interests; (v) redeem,
purchase or otherwise acquire or offer to redeem, purchase or otherwise acquire
any partnership interests; or (vi) authorize or propose any of the foregoing, or
enter into any contract, agreement, commitment, or arrangement to do any of the
foregoing.
6.2.3 Except as contemplated hereby, such Owner Partnership
shall not, directly or indirectly, (i) issue, sell, pledge or dispose of, or
authorize, propose or agree to the issuance, sale, pledge or disposition of, any
partnership interests, or any options, warrants or rights of any kind to acquire
any shares of, or any securities convertible into or exchangeable for any
partnership interests, or any other securities in respect of, in lieu of, or in
substitution for, partnership interests outstanding on the date hereof; (ii)
acquire (by merger, consolidation, or acquisition of stock or assets) any other
Person, or make any investment either by purchase of stock or securities,
contributions to capital, property transfer, or purchase of any property or
assets of any other Person (other than personal property with a fair market
value of $10,000 or less purchased in the ordinary course of business and
consistent with past practices); (iii) incur any indebtedness for money borrowed
or issue any debt securities or assume or guarantee any of the foregoing, except
short-term indebtedness incurred in the ordinary course of business and
consistent with past practices; (iv) endorse, or otherwise as an accommodation
become responsible for, the obligations of any other Person, or make any loans
or advances (other than loans and advances not material to such Owner
Partnership made in the ordinary course of business and consistent with past
practices); (v) voluntarily incur any other liability or obligation (absolute,
accrued, contingent or otherwise), except in the ordinary course of business and
consistent with past practices; (vi) waive, release, grant or transfer any
rights of material value or modify or change in any material respect any
agreement with or arrangement relating to any existing material license, lease,
contract or other document; (vii) authorize or effect any material change in its
capitalization; or (viii) authorize or commit to any of the actions prohibited
in this Section 6.2.3, or enter into or modify any contract, agreement,
commitment or arrangement to do any of the actions prohibited in this Section
6.2.3. Notwithstanding the foregoing, the parties hereby agree that each Owner
Partnership may make unbudgeted expenditures of up to $10,000 in the aggregate
without the consent of the Merger Partnership.
6.2.4 Such Owner Partnership shall not make any material tax
election, change any material tax accounting method or settle or compromise any
material federal, state, local or foreign income tax liability. Such Owner
Partnership shall be permitted to file and contest any pending real estate tax
assessment appeal in the ordinary course business and consistent with past
practices, provided, that if such Owner Partnership is a Designated Owner
--------
Partnership, it shall promptly notify the Merger Partnership of any proposed or
pending increases to the valuation of its real property or the amount or rate of
real estate taxes payable thereon.
-20-
<PAGE>
6.2.5 Such Owner Partnership shall not take any action or
agree, in writing or otherwise, to take any of the actions prohibited by this
Section 6.2 or any action which would make any representation or warranty in
Section 5 hereof untrue or incorrect in any material respect.
7. Additional Agreements.
---------------------
7.1 Proxy Statement; Other Filings. As promptly as practicable
------------------------------
after the date hereof, the Partnership and the Merger Partnership shall jointly
prepare and the Partnership shall file with the Commission under the Exchange
Act, and shall use all commercially reasonable efforts to have cleared by the
Commission, and promptly thereafter the Partnership shall mail to its limited
partners and holders of BACs, a proxy statement and form of proxy with respect
to the meeting of the partners of the Partnership referred to in Section 7.2
hereof, all the costs of which shall be advanced by the Merger Partnership. The
term "Proxy Statement" shall mean such proxy statement at the time it initially
is mailed to the limited partners of the Partnership and the holders of BACs and
all amendments or supplements thereto, if any, similarly filed and mailed. As
soon as practicable after the date of this Agreement, the Partnership and the
Merger Partnership shall promptly prepare and file any other filings required
under the Exchange Act, or any other federal or state securities laws relating
to the Merger and the transactions contemplated herein ("Other Filings"). The
Partnership shall notify the Merger Partnership promptly of the receipt of any
comments of the Commission and of any request by the Commission for amendments
or supplements to the Proxy Statement or by any other governmental official with
respect to any Other Filing or for additional information and will supply the
Merger Partnership with copies of all correspondence between the Partnership and
its representatives, on the one hand, and the Commission or the members of its
staff or any other appropriate government official on the other hand, with
respect to the Proxy Statement and any Other Filings. The Partnership and the
Merger Partnership each shall use all commercially reasonable efforts to obtain
and furnish the information required to be included in the Proxy Statement and
any Other Filing; and the Partnership, after consultation with the Merger
Partnership, shall use all commercially reasonable efforts to respond promptly
to any comments made by the Commission with respect to the Proxy Statement and
any Other Filing and any preliminary version thereof and cause the Proxy
Statement and related form of proxy to be mailed to the limited partners of the
partnership and holders of BACs at the earliest practicable time. The
Partnership shall notify the Merger Partnership of its intention to mail the
Proxy Statement to the limited partners of the Partnership and the holders of
BACs, both orally and in writing, at least 48 hours prior to the intended time
of such mailing. The information provided and to be provided by the Merger
Partnership, CAPREIT and the Partnership, respectively, for use in the Proxy
Statement and any Other Filings shall, on the date the Proxy Statement is first
mailed to the limited partners of the Partnership and the holders of BACs or any
Other Filing is filed with the appropriate governmental official and in each
case on the date of the meeting of the limited partners of the Partnership and
the holders of BACs referred to in Section 7.2 hereof, be true and correct in
all material respects and shall not omit to state any material fact required to
be stated therein or necessary in order to make such information not false or
misleading, and the Partnership, the Merger Partnership and CAPREIT each agree
to correct any such information provided by it for use in the Proxy Statement or
any Other Filing which shall have become false or misleading. The Proxy
Statement and any Other Filing, when filed with the Commission, shall comply as
to form in all material respects with all applicable requirements of law.
-21-
<PAGE>
7.2 Meeting of the Limited Partners. The Partnership shall take all
-------------------------------
action necessary, in accordance with the Partnership Act, the Partnership
Certificate and the Partnership Agreement to duly call, give notice of, convene
and hold a meeting of the limited partners of the Partnership as promptly as
practicable to consider and vote upon and obtain BAC Holder Approval of the
Transaction, including, without limitation, the Merger, this Agreement, the
sale of Partnership GP's general partner interest pursuant to Section 2.3, and
certain amendments to the Partnership Agreement (including, without limitation,
to expressly authorize the Merger, this Agreement and the transactions
contemplated hereby and the issuance of a limited partner interest in the
Partnership pursuant to Section 7.14 below) (the "Meeting"). The Proxy
Statement shall contain the determinations and recommendations of the
Partnership GP as to the Transaction as set forth in Section 4.16 hereof. The
Partnership shall use all commercially reasonable efforts to solicit from
holders of BACs proxies in favor of adoption and approval of the Transaction and
to take all other action necessary or, in the reasonable judgment of the Merger
Partnership, helpful to secure the BAC Holder Approval of the Transaction. At
any such Meeting, CAPREIT shall vote, or cause to be voted, all of the
partnership interests in the Partnership then owned by CAPREIT or any of its
Affiliates in favor of the Transaction.
7.3 Fees and Expenses.
-----------------
7.3.1 If this Agreement or the transactions contemplated hereby
are terminated or abandoned, and
(i) such termination or abandonment results from the
breach by the Partnership of the covenant set forth in Section 7.5,
from a Fiduciary Out Termination or from a willful and material breach
by the Partnership of any of its covenants or agreements set forth in
this Agreement (specifically excluding any representations and
warranties set forth in Section 4); or
(ii) after the date of this Agreement and prior to or
contemporaneously with such termination or abandonment, (A) the
Partnership or the Partnership GP enters into any letter of intent or
agreement with any Person (including the Partnership or any of its
Affiliates and excluding the Merger Partnership and its Affiliates) or
group (as defined in Section 13(d)(3) of the Exchange Act)
(collectively, the "Designated Persons") relating to a (x) tender
offer or exchange offer for any class of outstanding BACs at a per BAC
price in excess of the Merger Consideration for Series I or Series II,
as applicable or (y) a Business Combination with or involving the
Partnership or any of its Affiliates, or any transaction involving a
transfer of beneficial ownership of BACs representing at least 10% of
any class of outstanding BACs, (B) the Partnership or the Partnership
GP shall file with the Commission a Schedule 14D-9 or similar
document, or make any public announcement or communication, (x)
recommending, endorsing or supporting a proposal, plan or intention by
the Partnership or another Designated Person to effect any of the
foregoing transactions or (y) failing to recommend, endorse and
support the Transaction (unless the investment banking firm retained
by the Partnership does not deliver a Fairness Opinion), or (C) any
Designated Person
-22-
<PAGE>
shall have acquired beneficial ownership of at least 33 1/3% of any
class of outstanding BACs (the foregoing events are herein
collectively referred to as "Triggering Events"); or
(iii) Within 270 days from the date of termination or
abandonment of this Agreement, a Triggering Event shall have resulted
in the Partnership or holders of any class of outstanding BACs
receiving consideration (determined on a per BAC basis) in excess of
the Merger Consideration applicable to such class.
then the Partnership shall pay to the Merger Partnership, within seven business
days of written request therefor, a fee in the amount of $2.25 million in cash.
The parties intend that the payment of such fee and the payment of expenses as
provided in Section 7.3.2 shall be the sole remedy for breach of this Agreement
by the Partnership or any Owner Partnership and shall be made as liquidated
damages in full satisfaction of the Partnership's or any Owner Partnership's
liabilities or obligations hereunder.
7.3.2 (a) If the Transaction is terminated or abandoned due
to (w) a willful and material breach of the Merger Agreement by the Partnership
or any Owner Partnership (other than a breach consisting solely of a breach of
any representations or warranties set forth in Section 4 or 5), (x) the failure
to fulfill the conditions specified in Section 8.3.1 or 8.3.3 (solely as it
relates to Section 8.3.1) by the Partnership or any Owner Partnership, (y) a
Fiduciary Out Termination or (z) the election by the Merger Partnership to
terminate this Agreement pursuant to Section 9.1.9, the Partnership shall bear
all of its own expenses and, in addition, shall promptly reimburse the Merger
Partnership and its Affiliates for all reasonable out-of-pocket expenses
(including, without limitation, all fees and expenses of counsel, outside
accountants, investment banking firms, financing sources, third party experts
and third party consultants to the Merger Partnership and its Affiliates)
incurred by them or on their behalf in connection with the Transaction and the
Proxy Statement, provided, that if and only if a payment is due under this
--------
Section 7.3.2(a) and the closing under the Other Merger Agreement shall have
occurred, then the amount payable under this Section 7.3.2(a) shall not exceed a
maximum amount equal to the sum of (i) the amount of all such reasonable out-of-
pocket expenses directly allocable to the transactions contemplated by this
Agreement and (ii) 50% of the aggregate amount of any other such expenses
incurred in connection both with the transactions contemplated by this Agreement
and the transactions contemplated by the Other Merger Agreement and not directly
allocable to the transactions contemplated by the Other Merger Agreement.
Notwithstanding anything to the contrary herein, the aggregate amount payable by
the Partnership to the Merger Partnership and its Affiliates pursuant to this
Section 7.3.2(a) shall not exceed $2.6 million.
(b) Unless the Transaction is terminated or abandoned due
to (w) a willful and material breach by the Partnership or any Owner Partnership
of this Agreement, (x) the failure to fulfill the conditions specified in
Section 8.3.1, 8.3.3 (solely as it relates to Section 8.3.1), or 8.3.11 by the
Partnership or any Owner Partnership, (y) a Fiduciary Out Termination or (z) the
election by the Merger Partnership to terminate this Agreement pursuant to
Section 9.1.9 or 9.1.10, the fees and expenses listed below shall be paid as
follows:
-23-
<PAGE>
The Merger Partnership shall pay or reimburse the costs of (i)
preparing, filing, printing and distributing the Proxy Statement and reasonable
legal fees and expenses of counsel to the Merger Partnership and counsel to the
Partnership, including in its capacity as counsel for the Owner Partnerships,
and accounting fees and expenses of the Partnership's and the Owner
Partnerships' outside accountants (such fees and expenses of the Partnership's
counsel and accountants to be directly related to the Proxy Statement and the
Transaction only), (ii) any fees to lenders in connection with obtaining the
Commitment Letter or consummating the Financing or the Bond Refinancing, (iii)
any transfer taxes and/or other reasonable out-of-pocket costs payable in
connection with the Transaction, except as provided below, and (iv) the costs of
any due diligence performed by or on behalf of the Merger Partnership, including
any costs incurred by the Partnership in connection with such due diligence, but
only with the prior approval by the Merger Partnership of any such cost
incurrence. The Partnership shall pay the costs of (A) obtaining the Fairness
Opinion and related legal and accounting fees and expenses, (B) the legal and
accounting fees and expenses of the Partnership incurred in connection with the
negotiation of this Agreement and (C) reimbursement of staff time and other
internal costs of the Partnership GP and its Affiliates.
(c) The Partnership agrees that, without at least 14
days' prior notice to the Merger Partnership and the prior written consent of
the Merger Partnership, the Partnership shall not pay or incur in excess of
$75,000 for reimbursement of staff time or other internal costs of the
Partnership GP and its Affiliates through December 31, 1995. If the Closing Date
shall not occur on or prior to December 31, 1995, the Partnership shall prepare
new projections of such expenses by calendar quarter, subject to the review by
the Merger Partnership in its reasonable judgment, and shall not pay or incur
expenses except as consistent with past practice in terms of the method of
allocation.
(d) Any request for reimbursement under Section 7.3.2(a)
or (b) shall be made together with itemized invoices or other appropriate
expense documentation. CAPREIT or its representative shall have the right to
review and audit all third party payments made by the Partnership, including,
without limitation, the fees and expenses of legal counsel and accountants, and
the Partnership shall provide CAPREIT with any documentation that CAPREIT or its
representative shall reasonably request in connection with such review and
audit.
(e) Except as provided in this Section 7.3.2 or other-
wise in this Agreement, all costs and expenses incurred in connection with the
Transaction shall be paid by the party incurring such expenses, whether or not
the Transaction is consummated and, in any case, the Partnership GP shall pay
its own legal fees and other expenses.
7.4 Further Agreements.
------------------
7.4.1 Subject to the terms and conditions herein provided,
each of the parties hereto agrees to use all commercially reasonable efforts to
take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective as
promptly as practicable the transactions contemplated by this Agreement and to
cooperate with each other in connection with the foregoing, including (i) using
all commercially reasonable efforts to obtain all necessary waivers, consents
and approvals from other parties to loan
-24-
<PAGE>
agreements, leases and other contracts and instruments; (ii) using all
commercially reasonable efforts (a) to obtain all necessary consents, approvals
and authorizations as are required to be obtained under any federal, state or
foreign law or regulations, (b) to defend all lawsuits or other legal
proceedings challenging this Agreement or the consummation of the transactions
contemplated hereby (collectively, "Designated Actions"), (c) to lift or rescind
any injunction or restraining order or other order adversely affecting the
ability of the parties to consummate the transactions contemplated hereby, and
(d) to effect all necessary registrations and filings, including, but not
limited to, filings under the Hart-Scott-Rodino Act, if any, and submissions of
information requested by governmental authorities. For purposes of the foregoing
sentence, the obligations of the Partnership and the Merger Partnership to use
"all commercially reasonable efforts" to obtain waivers, consents and approvals
to loan agreements, leases and other contracts shall not include any obligation
to agree to an adverse modification of the terms of such documents or to pay or
incur additional obligations to such other parties.
7.4.2 In connection with any Designated Action, the Partnership
hereby agrees to: (i) promptly deliver to the Merger Partnership copies of all
complaints, pleadings and other filings relating to any Designated Action; (ii)
provide drafts of its reply, motions and other pleadings to the Merger
Partnership for review and comment prior to filing or serving any such reply,
motion or pleading and not to file any such reply, motion or pleading until the
earlier of (x) receipt of consent from the Merger Partnership or (y) the day of
the deadline for such motion, reply or pleading; and (iii) consult with the
Merger Partnership in a timely manner prior to taking any other action.
7.5 Shop Limitation.
---------------
7.5.1 Subject to Section 7.5.2 below, each of the Partnership
and the Partnership GP will not, directly or indirectly, through any general
partner, officer, director, agent, or Affiliate of any of the foregoing, or
otherwise (i) solicit, initiate or invite the submission of inquiries, proposals
or offers from any Person relating to any Business Combination, or (ii) enter
into or participate in any discussions or negotiations regarding any of the
foregoing, or furnish to any Person any information with respect to the
business, properties or assets of the Partnership or any of the foregoing, or
(iii) otherwise cooperate in any way with, or assist or participate in,
facilitate or encourage, any effort or attempt by any Person to do or seek any
of the foregoing. The Partnership shall immediately notify the Merger
Partnership if any such proposal or offer, or any inquiry or contact with any
Person with respect thereto, is made.
7.5.2 If the Partnership GP is required because of its
fiduciary obligations to the holders of BACs to respond to an unsolicited
inquiry, contact or proposal related to a Business Combination made by a third
party to the Partnership (an "Alternative Proposal"), nothing in this Agreement
shall prohibit the Partnership GP or the Partnership from responding to such
Alternative Proposal, making any required disclosures under federal securities
laws, providing information regarding the Partnership to the party making such
Alternative Proposal, negotiating with such party in good faith, terminating
this Agreement or taking any other action otherwise prohibited by Section 7.5.1
above because it is required to by fiduciary obligations to accept an
Alternative Proposal (a "Fiduciary Out Termination"); provided, however, that
-------- -------
the Partnership
-25-
<PAGE>
agrees to give the Merger Partnership reasonable notice of any such response,
negotiations or other matters, as well as a reasonable opportunity to respond,
taking into account in good faith the facts and circumstances prevailing at the
time of such response, negotiation or other matters.
7.6 Additional Financial Statements. (a) As soon as reasonably
-------------------------------
practicable after they become publicly available, the Partnership shall furnish
the Merger Partnership with (i) a consolidated balance sheet of the Partnership
and related consolidated statements of operations and cash flows for all
quarterly periods subsequent to the Balance Sheet Date and prior to the
Effective Time, accompanied by statements by the Partnership GP that, in the
opinion of the Partnership GP, such financial statements of the Partnership have
been prepared pursuant to the rules and regulations of the Commission and fairly
present (subject, in the case of unaudited financial statements, to changes
resulting from year-end audit adjustments and other adjustments of a normal and
recurring nature) the consolidated financial condition and results of operations
of the Partnership, as of the dates and for the periods covered by such
statements and (ii) any other financial statements that the Partnership shall
prepare for any interim period subsequent to the Balance Sheet Date and prior to
the Effective Time.
(b) As soon as reasonably practicable after they are
prepared, each Owner Partnership shall furnish the Merger Partnership with (i) a
balance sheet of such Owner Partnership and related statements of operations,
changes in partners' deficit and cash flows for all annual periods subsequent to
the date hereof and prior to the Effective Time, accompanied by statements by
its general partner that, in the opinion of such general partner, such financial
statements have been prepared in conformity with the income tax basis of
accounting applied on a consistent basis and fairly present (subject, in the
case of unaudited financial statements, to changes resulting from year-end audit
adjustments) the financial condition, results of operations and cash flows of
such Owner Partnership, as of the dates and for the periods covered by such
statements and (ii) any other financial statements that such Owner Partnership
shall prepare for any interim period subsequent to the date hereof and prior to
the Effective Time.
7.7 Access to Information; Confidentiality.
--------------------------------------
7.7.1 Each of the Partnership and the Owner Partnerships shall,
and shall cause its employees, consultants, accountants, counsel and agents to,
afford to the Merger Partnership and its representatives and to the banks,
lenders, financial institutions and others providing financing for the
Transaction and others, complete access at all reasonable times to, from the
date of this Agreement until the Effective Time, its offices, facilities,
personnel, properties, books, records and contracts, and shall furnish the
Merger Partnership and its representatives and such banks, lenders, financial
institutions and others all financial, operating and other data and information
as the Merger Partnership and its representatives and such banks, lenders,
financial institutions and others, through their respective officers, employees
or agents, may reasonably request.
7.7.2 The confidentiality agreement, dated February 10, 1995,
between CAPREIT and the Partnership shall remain in full force and effect in
accordance with its terms and shall apply to any information provided pursuant
to this Section 7.7 or otherwise under this
-26-
<PAGE>
Agreement. The Merger Partnership hereby adopts and agrees on behalf of itself
and its Affiliates to be bound by all of the terms and conditions of such
confidentiality agreement, as if restated in full herein.
7.7.3 No investigation pursuant to this Section 7.7 shall
affect any representations or warranties of the parties herein or the conditions
to the obligations of the parties hereto.
7.8 Public Announcements. No press release or announcement
--------------------
concerning this Agreement or the Transaction shall be issued without advance
approval of the form and substance thereof by the Partnership and the Merger
Partnership. Notwithstanding the foregoing, each of the Partnership and the
Merger Partnership will use all commercially reasonable efforts to consult with
each other before issuing any press release or otherwise making any public
statements with respect hereto, provided, such obligation to use all
--------
commercially reasonable efforts shall be deemed satisfied if a draft of a press
release or announcement is delivered for comment at least 24 hours prior to
public release.
7.9 Agreement to Defend and Indemnify. For a period of 3 years and
---------------------------------
6 months from and after the Effective Time, the Surviving Partnership will
continue in full force and effect for the benefit of the Partnership GP, the
Assignor Limited Partner and their Affiliates the provisions of the Partnership
Agreement, as currently in effect, related to indemnification of the Partnership
GP, the Assignor Limited Partner and their Affiliates as if the Partnership GP
and the Assignor Limited Partner continued to serve the Partnership as general
partner and assignor limited partner, respectively, after the Effective Time.
CAPREIT hereby guarantees the obligations of the Surviving Partnership under
this Section 7.9 as if it were the indemnifying party thereunder, except that
its obligations shall not be limited to the assets of the Surviving Partnership.
For purposes of this Section 7.9 only, the term Affiliates shall have the
meaning ascribed to such term in the Partnership Agreement.
7.10 Notification of Certain Matters. Each of the Partnership and
-------------------------------
the Owner Partnerships shall give prompt notice to the Merger Partnership, and
the Merger Partnership and its Affiliates shall give prompt notice to the
Partnership and the pertinent Owner Partnership, as the case may be, of (i) the
occurrence, or failure to occur, of any event which occurrence or failure would
be likely to cause any representation or warranty contained in this Agreement
and made by it to be untrue or inaccurate in any material respect at any time
from the date hereof to the Effective Time, and (ii) any material failure of the
Partnership, any Owner Partnership or the Merger Partnership, as the case may
be, or of any general partner, officer, director, employee or agent of any
thereof, to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder, provided, however, that no such
-------- -------
notifications shall affect the representations or warranties of the parties or
the conditions to the obligations of the parties hereunder.
7.11 Cooperation. Each of the Partnership and the Partnership GP
-----------
shall use all commercially reasonable efforts to assist, and cooperate with, the
Merger Partnership, CAPREIT and their respective Affiliates in consummating the
Financing, the Bond Refinancing and related
-27-
<PAGE>
transactions. In this regard, the Partnership and the Partnership GP consent to,
and shall use all commercially reasonable efforts to assist, and cooperate with,
the Merger Partnership, CAPREIT and their respective Affiliates with respect to,
contacts by representatives of the Merger Partnership, CAPREIT and their
Affiliates with issuers of the Mortgage Revenue Bonds and their representatives;
provided, that no Bond Refinancing shall close prior to the Effective Time. The
- --------
Partnership and the Partnership GP shall be reimbursed for all reasonable out-
of-pocket costs incurred by them in connection with such assistance and
cooperation.
7.12 Acquisition. (a) On the Closing Date, C.R.I., Inc. ("CRI")
-----------
shall sell, assign and transfer to a designee of CAPREIT its rights under the
agreement pursuant to which the mortgage servicing and administrative fees are
payable to CRI by the owners of the Mortgaged Properties, including the right to
all fees thereunder for a price of $511,680, in the case of Series I, and,
$770,835, in the case of Series II, in cash, payable to CRI for servicing and
administrative fees accrued through June 30, 1995.
(b) On the Closing Date and subject to the approval of
its board of directors and further subject to any necessary modification of the
Memorandum of Understanding (as defined in Section 8.1.4), CRIIMI Mae Services
Limited Partnership ("CRIIMI") shall sell, assign and transfer to a designee of
CAPREIT its rights under the agreement pursuant to which mortgage servicing and
administrative fees are payable to CRIIMI by the owners of the Mortgaged
Properties, including the right to all fees thereunder, whether accrued as of
the date hereof or that shall accrue or become payable from and after the date
hereof, for a price of $265,968, in the case of Series I, and $391,296, in the
case of Series II, in cash, payable to CRIIMI for servicing and administrative
fees accrued from July 1, 1995 through the Closing Date (the "Accrued Fee
Amount"), provided, that if the Closing shall occur after June 30, 1996, then
--------
the Accrued Fee Amount shall be increased at the rate of $22,164 per month for
Series I, and $32,608 per month for Series II, it being understood that any
partial month shall be pro rated according to the actual number of days elapsed.
7.13 Treatment of Owner Partnerships. At the sole discretion of
-------------------------------
CAPREIT, each of the Owner Partnerships shall be treated as provided in one or
more of the following subsections:
(a) On the Closing Date, each of the partners of the Owner
Partnerships shall sell, assign and transfer to CAPREIT or a designee thereof,
for no additional consideration, all of the partnership interests in such Owner
Partnership, all on terms and conditions to be determined by CAPREIT and the
Owner Partnership;
(b) On the Closing Date, each of the partners of each of the
Owner Partnerships shall admit CAPREIT or its designee as the managing general
partner of each of the Owner Partnerships, the partnership interests of each of
the other partners of each of the Owner Partnerships shall be converted into
limited partner interests in the applicable Owner Partnership, which limited
partner interests shall not be transferable, and CAPREIT shall have the option
to purchase such limited partner interests at any time during the five (5) year
period following the Closing Date for fair market value, which fair market value
shall be deemed for the purposes hereof to be the proportionate interest of such
limited partner in the value of the property as encumbered;
-28-
<PAGE>
as managing general partner, CAPREIT or its designee shall have exclusive power
and authority to consummate any Bond Refinancings without the consent of any of
the other partners; or
(c) On the Closing Date, each of the Owner Partnerships shall
sell, assign and transfer to CAPREIT or its designee, for no additional
consideration and at no additional cost to the Owner Partnerships, all of the
real property and other assets of such Owner Partnerships, all on terms and
conditions to be determined by CAPREIT and the Owner Partnerships.
7.14 Partnership Interests. On the Closing Date and concurrently
---------------------
with or immediately prior to the Merger, at the request of CAPREIT, the
Partnership shall issue to a designee of CAPREIT a limited partner interest in
the Partnership in exchange for a capital contribution of certain real
properties and/or other assets, all on terms and conditions to be determined by
CAPREIT and the Partnership; provided that such issuance of a limited
--------
partnership interest shall not be effective unless the Merger is consummated.
7.15 Tax Returns. (a) Neither the Merger Partnership nor CAPREIT
-----------
shall cause the Surviving Partnership to, and the Surviving Partnership shall
not, (x) amend any portion of any tax returns for years ending prior to the
Effective Time to the extent that such portion relates to the accrual of
interest on the Mortgage Revenue Bonds or (y) without the prior consent of the
Partnership GP or its designee, which consent shall not be unreasonably
withheld, otherwise amend, in any material respect, tax returns for years ending
prior to the Effective Time.
(b) The Surviving Partnership, CAPREIT and the Partnership GP
shall use all commercially reasonable efforts to cooperate with and assist each
other so that, after the Closing Date, all tax returns of the Partnership for
the period ending on the Closing Date shall be timely filed and that Schedules
K-1 shall be timely delivered to those Persons who were holders of BACs prior to
the Closing Date. The cost of such filing and delivery shall be borne by the
Surviving Partnership.
7.16 Notice of Failure to Satisfy Closing Conditions.
-----------------------------------------------
(a) In the event that the Merger Partnership determines, on or
after the date that the Partnership shall deliver a final Disclosure Schedule
pursuant to Section 2.7 above and on or prior to the Closing Date, that any
condition to the Merger Partnership's or the Partnership's obligation to close
pursuant to Section 8 will not be satisfied on or prior to the Closing Date, the
Merger Partnership shall give prompt notice to the Partnership and, in the case
of Sections 8.1 and 8.3, shall provide the Partnership a period of ten business
days for the Partnership to satisfy all such conditions.
(b) In the event that the Partnership determines on or prior to
the Closing Date that any condition to the Partnership's or the Merger
Partnership's obligation to close pursuant to Section 8 will not be satisfied on
or prior to the Closing Date, the Partnership shall give prompt notice to the
Merger Partnership and, in the case of Sections 8.1 and 8.2, shall provide the
Merger Partnership a period of ten business days for the Merger Partnership to
satisfy all such conditions.
-29-
<PAGE>
8. Conditions.
----------
8.1 Conditions to Obligation of Each Party to Effect the Transaction.
----------------------------------------------------------------
The respective obligations of each party to effect the Transaction shall be
subject to the fulfillment at or prior to the Effective Time of each of the
following conditions:
8.1.1 All approvals, notices, filings, registrations and
authorizations of any governmental authority required for consummation of the
Transaction, including, without limitation, under the Hart-Scott-Rodino Act,
shall have been obtained or made.
8.1.2 BAC Holder Approval for the Transaction shall have been
obtained in accordance with the Partnership Act and the Partnership Agreement.
8.1.3 No preliminary or permanent injunction or other order,
decree or ruling issued by a court of competent jurisdiction or by a
governmental, regulatory or administrative agency or commission, nor any
statute, rule, regulation or executive order promulgated or enacted by a
governmental authority shall be in effect which would prevent the consummation
of the Transaction.
8.1.4 A court of competent jurisdiction shall have approved of
the settlement of the cases captioned Zakin v. Dockser, et. al. and Wingard v.
------------------------- ----------
Dockser, et. al. (the "Suits") filed in connection with the transactions
- ----------------
contemplated hereunder, substantially as such settlement is set forth in the
Stipulation of Settlement, dated as of March 17, 1996, as amended by an
amendment thereto dated August 13, 1996 among the counsel to the
plaintiffs and the defendants named in the Suits, or as otherwise agreed to by
the parties, and such approval shall be final and non-appealable.
8.2 Additional Conditions to the Obligation of the Partnership.
----------------------------------------------------------
The obligation of the Partnership to effect the Transaction is also subject to
the fulfillment at or prior to the Effective Time of each of the following
conditions:
8.2.1 The Merger Partnership shall in all material respects
have performed each obligation to be performed by it hereunder on or prior to
the Effective Time.
8.2.2 The representations and warranties of the Merger Part-
nership set forth in this Agreement shall be true and correct in all material
respects at and as of the Effective Time as if made at and as of such time,
except to the extent that any such representation or warranty is made as of a
specified date, in which case such representation or warranty shall have been
true and correct as of such date.
8.2.3 The Partnership shall have received a certificate of the
Merger Partnership, dated the Closing Date, signed by the Merger Partnership GP,
to the effect that the conditions specified in Sections 8.2.1 and 8.2.2 have
been fulfilled.
8.2.4 A favorable opinion (the "Fairness Opinion") of an
investment banking firm reasonably acceptable to the Partnership as to the
fairness of the Merger
-30-
<PAGE>
Consideration to the holders of the BACs, from a financial point of view, shall
have been delivered to the Partnership.
8.3 Additional Conditions to the Obligations of the Merger
------------------------------------------------------
Partnership. The obligation of the Merger Partnership to effect the Transaction
- -----------
is also subject to the fulfillment at or prior to the Effective Time, or such
earlier date as specified therein, of each of the following conditions:
8.3.1 Each of the Partnership and the Owner Partnerships shall
in all material respects have performed each obligation to be performed by it
hereunder on or prior to the Effective Time.
8.3.2 [Intentionally Omitted.
8.3.3 The Merger Partnership shall have received certificates
of each of the Partnership and the Owner Partnerships, dated the Closing Date,
signed by the Partnership GP or the general partner of the Owner Partnerships,
as applicable, to the effect that the condition specified in Section 8.3.1. has
been fulfilled.
8.3.4 The Merger Partnership shall have received evidence, in
form and substance reasonably satisfactory to its counsel, that such licenses,
permits, consents, approvals, waivers, authorizations, qualifications and orders
of domestic governmental authorities and parties to contracts and leases with
the Partnership or any Owner Partnership as are necessary in connection with the
consummation of the transactions contemplated hereby (excluding (a) licenses,
permits, consents, approvals, authorizations, qualifications or orders, the
failure to obtain which after the consummation of the transactions contemplated
hereby, in the aggregate, will not have a material adverse effect on the
Condition of the Partnership or any Owner Partnership and (b) consents of
issuers with respect to modification of the Mortgage Revenue Bonds), have been
obtained, provided, that unless the Merger Partnership gives notice to the
Partnership prior to the Mailing Date that the Merger Partnership has no
obligation to effect the Transaction because of the failure of the condition set
forth in this Section 8.3.4, such condition shall be deemed waived.
8.3.5 No action, suit or proceeding before any court or
governmental authority shall have been commenced and be pending by any Person
against the Partnership or the Merger Partnership or any of their Affiliates,
partners, officers or directors seeking to restrain, prevent, change or delay in
any material respect any of the terms or provisions of the Transaction or
seeking material damages in connection therewith.
8.3.6 The Merger Partnership, CAPREIT and its lenders shall
have received the favorable legal opinion of Arent Fox Kintner Plotkin & Kahn
substantially to the effect set forth in Exhibit G.
8.3.7 The Financing shall have been consummated in accordance
with the terms of the Commitment Letter.
-31-
<PAGE>
8.3.8 Neither the Partnership nor any Owner Partnership shall
have undergone a material adverse change in its Condition or its ability to
perform its obligations under this Agreement. For purposes of this Section
8.3.8, the discovery after the Mailing Date of a fact which fact is materially
adverse to the Condition of the Partnership or any Owner Partnership and which
could not have been reasonably discovered by the Merger Partnership or its
Affiliates on or prior to the Mailing Date shall be deemed to be a material
adverse change to the Condition of the Partnership or such Owner Partnership or
such Mortgaged Property.
8.3.9 Partnership GP shall have transferred its 1.01% general
partnership interest in the Partnership to a newly-formed, wholly-owned
subsidiary of CAPREIT.
8.3.10 The closing of the merger under the Other Merger
Agreement shall be occurring concurrently with the Merger.
8.3.11 The Merger Partnership shall have determined that the
legal, accounting and business due diligence investigation of the Partnership
and the Owner Partnerships to be conducted by or on behalf of the Merger
Partnership, including, without limitation, any information obtained from the
Disclosure Schedule, has not revealed that proceeding with the Transaction would
be inadvisable or contrary to the Merger Partnership's best interests, provided,
--------
that, unless the Merger Partnership gives notice to the Partnership prior to the
Mailing Date that the Merger Partnership has no obligation to effect the
Transaction because of the failure of the condition set forth in this Section
8.3.11, such condition shall be deemed to be waived.
8.3.12 All of the partnership or other interests in each of
the Owner Partnerships shall be concurrently transferred to CAPREIT or a
designee thereof pursuant to Section 7.13 above, except as otherwise provided in
Section 7.13.
8.3.13 The amount of Available Cash shall not be less than, (i)
from the date hereof through September 30, 1996, $2,448,830, in the case of
Series I, and $3,634,800, in the case of Series II, (ii) from October 1, 1996
through October 31, 1996, $2,375,260, in the case of Series I, and $3,525,600,
in the case of Series II, (iii) from November 1, 1996 through November 30, 1996,
$2,354,240, in the case of Series I, and $3,494,400, in the case of Series II
and (iv) December 1, 1996 through December 31, 1996, $2,333,220, in the case of
Series I and $3,463,200 in the case of Series II.
9. Termination, Amendment and Waiver.
---------------------------------
9.1 Termination. This Agreement may be terminated and the
-----------
Transaction contemplated hereby may be abandoned, by written notice promptly
given to the other parties hereto, at any time prior to the Effective Time,
whether prior to or after BAC Holder Approval of the Transaction:
9.1.1 By mutual written consent of the Merger Partnership and
the Partnership;
9.1.2 By either the Merger Partnership or the Partnership, if
a court of competent jurisdiction or governmental, regulatory or administrative
agency or commission shall
-32-
<PAGE>
have issued an order, decree or ruling or taken any other action, in each case
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and nonappealable;
9.1.3 By either the Merger Partnership or the Partnership, if
the Effective Time shall not have occurred on or before the Termination Date,
unless the absence of such occurrence shall be due to the failure of the party
seeking to terminate this Agreement to perform in all material respects each of
its obligations under this Agreement required to be performed by it prior to the
Effective Time;
9.1.4 By either the Merger Partnership or the Partnership, if
at the Meeting (including any adjournment thereof) BAC Holder Approval of the
Transaction shall not be obtained;
9.1.5 By the Merger Partnership, if the Partnership or the
Partnership GP shall have (i) withdrawn, modified or amended in any respect its
approval or recommendation of the Transaction as set forth in Section 4.16
hereof, (ii) failed to include in the Proxy Statement such recommendation
(including the recommendation that the holders of each class of outstanding BACs
vote in favor of the Transaction), or (iii) taken any public position
inconsistent with such recommendation;
9.1.6 By the Merger Partnership, if the Partnership or any
Owner Partnership fails to perform in all material respects its obligations
under this Agreement;
9.1.7 By the Merger Partnership, if there shall have occurred
a material adverse change in the Condition of the Partnership or any Owner
Partnership since the date of this Agreement; or
9.1.8 By the Partnership, if the Merger Partnership fails to
perform in all material respects its obligations under this Agreement.
9.1.9 By the Merger Partnership, if the Partnership shall have
settled or compromised any Designated Action without the prior written consent
of the Merger Partnership, unless such settlement or compromise (i) requires the
payment of money by the Partnership in an amount which, when aggregated with the
amount of money paid or payable in connection with all other Designated Actions,
does not exceed $812,500 and (ii) does not include any other material term or
condition to which the Merger Partnership shall reasonably object.
9.1.10 By the Merger Partnership, if, prior to the Effective
Time, the representations and warranties of each of the Partnership and the
Owner Partnerships set forth in this Agreement shall not be true and correct in
all material respects at any time as if made as of such time, except to the
extent that any such representation or warranty is made as of a specific date,
in which case such representation or warranty shall have been true and correct
as of such date, provided, that for purposes of this Section 9.1.10, (x) the
--------
representations and warranties set forth in Sections 4.14 and 5.14 shall be
deemed to have been made irrespective of the qualification contained therein as
to the Knowledge of the Partnership or the Designated Owner Partnership, and
-33-
<PAGE>
(y) the representations and warranties set forth in Sections 5.5, 5.6, 5.9,
5.10, 5.11, 5.12 and 5.13 shall not be deemed to have been breached solely as
the result of any act or omission occurring after November 1, 1995.
9.1.11 By the Partnership, in accordance with Section 8.2.5,
if there shall have been a failure of the condition set forth therein.
9.2 Effect of Termination. In the event of the termination of this
---------------------
Agreement and abandonment of the Transaction as provided in Section 9.1 hereof,
this Agreement shall forthwith become void and there shall be no liability on
the part of the Merger Partnership or the Partnership, except as set forth in
Section 7.3 hereof and Section 7.7.2 hereof and except to the extent that such
termination results from the willful breach of a party hereto of any of its
covenants or agreements set forth in this Agreement.
9.3 Amendment. This Agreement may not be amended except by an
---------
instrument in writing signed on behalf of each of the parties hereto; provided,
however, that after the BAC Holder Approval of the Transaction has been
obtained, no amendment may be made which changes the amount of cash to be paid
for the BACs, or effects any change which would adversely affect the holders of
BACs without the further BAC Holder Approval.
9.4 Waiver. At any time prior to the Effective Time, whether before
------
or after the Meeting, any party hereto, by a writing executed by its general
partner, may (i) extend the time for the performance of any of the obligations
or other acts of any other party hereto or (ii) subject to the proviso contained
in Section 9.3 hereof, waive compliance with any of the agreements of any other
party or with any conditions to its own obligations, except that the Partnership
may not waive the condition set forth in Section 8.1.4.
10. General Provisions.
------------------
10.1 Notices. All notices and other communications hereunder shall
-------
be in writing and shall be deemed to have been duly given if delivered
personally or sent by telegram, telecopier or three business days after it is
sent by registered or certified mail, return receipt requested, postage prepaid,
to the parties at the following addresses or at such other addresses as shall be
specified by the parties by like notice:
(a) if to the Merger Partnership or CAPREIT:
Watermark Partners, L.P.
c/o Capital Apartment Properties, Inc.
11200 Rockville Pike
Rockville, Maryland 20852
Attention: Richard Kadish, President
Facsimile: (301) 231-0391
-34-
<PAGE>
with copies to:
Apollo Real Estate Advisors, L.P.
1301 Avenue of the Americas
38th Floor
New York, New York, 10019
Attention: Richard Mack
Facsimile: (212) 261-4060
and
Schulte Roth & Zabel
900 Third Avenue
New York, New York 10022
Attention: Burton Lehman, Esq.
Facsimile: (212) 593-5955
(b) if to the Partnership, the Partnership GP or any Owner
Partnership:
c/o C.R.I., Inc.
11200 Rockville Pike
Rockville, Maryland 20852
Attention: William B. Dockser, Chairman,
and H. William Willoughby, President
Facsimile: (301) 231-0396
with a copy to:
Melissa Lackey, General Counsel
Facsimile: (301) 468-3150
and
Arent Fox Kintner Plotkin & Kahn
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036-5339
Attention: Robert B. Hirsch, Esq.
Facsimile: (202) 857-6395
10.2 Certain Definitions. As used in this Agreement, the following
-------------------
terms shall have the meanings indicated below:
"Affiliate" means, with respect to any Person, any other Person
---------
controlling, controlled by or under common control with, or the parents, spouse,
lineal descendants or beneficiaries of, such Person, provided, that, in any
case, (i) the following Persons shall be deemed to be Affiliates of the
Partnership: CRITEF Associates Limited Partnership, C.R.I., Inc. and
-35-
<PAGE>
CRITEF, Inc. and (ii) the following Persons shall be deemed Affiliates of the
Merger Partnership: CAPREIT and CAPREIT Residential Corporation.
"Assignor Limited Partner" means CRITEF, Inc., a Delaware corporation
------------------------
and the sole limited partner of the Partnership.
"BAC Holder Approval" means the approval of the limited partners of
-------------------
the Partnership, with the Assignor Limited Partner, pursuant to the Partnership
Agreement, voting as instructed by the holders of the BACs.
"Bond Refinancing" means the transaction pursuant to which the
----------------
Mortgage Revenue Bonds will be sold, amended, refinanced, or reissued, the
closing of which shall not occur until after the Effective Time.
"Business Combination" means any acquisition or purchase of assets of,
--------------------
or any equity interest in, the Partnership or any tender offer (including a self
tender offer), exchange offer, merger, consolidation, business combination, sale
of substantial assets or of a substantial amount of assets, sale of securities,
recapitalization, reorganization, refinancing, refunding, liquidation,
dissolution or similar transactions involving the Partnership or other
transactions involving any vote or consent of the holders of any class of BACs.
"Closing Date" means the date upon which the Merger occurs.
------------
"Code" means the Internal Revenue Code of 1986, as amended from time
----
to time, and, unless the context otherwise requires, the rules and regulations
promulgated thereunder, from time to time.
"Commission" means the Securities and Exchange Commission or any
----------
successor agency.
"Commitment Letter" means one or more commitment letters or loan,
-----------------
securities purchase, financing or similar agreements providing a financial
commitment or obligation to provide debt financing for the Transaction.
"Condition" means, with respect to any Person, the business, assets,
---------
properties, results of operations, financial or other condition or prospects of
such Person and its Subsidiaries, taken as a whole.
"Designated Owner Partnership" means CRICO of Fountain Place Limited
----------------------------
Partnership.
"Disclosure Schedule" means the Disclosure Schedule setting forth
-------------------
certain information concerning the Partnership and its assets required to be
delivered by the Partnership to the Merger Partnership pursuant to Section 2.7
above.
"Environmental Laws" includes the Comprehensive Environmental
------------------
Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. 9601 et seq, as
amended; the Resource
-36-
<PAGE>
Conservation and Recovery Act ("RCRA), 42 U.S.C. 6901 et seq, as amended; the
Clean Air Act ("CAA"), 42 U.S.C. 7401 et seq, as amended; the Clean Water Act
("CWA"), 33 U.S.C. 1251 et seq., as amended; the Occupational Safety and Health
Act ("OSHA"), 29 U.S.C. 655 et seq., and any other federal, state, local or
municipal laws, statutes, regulations, rules or ordinances imposing liability or
establishing standards of conduct for protection of the environment.
"Environmental Reports" means all environmental site assessments,
---------------------
remedial investigations/feasibility studies, reports, studies, tests or other
documents relating to environmental compliance or the presence of Hazardous
Materials at any of properties presently or formerly owned or operated by the
Partnership or any predecessor in interest or any Mortgaged Property, at any
facility which may have received Hazardous Materials generated by any property
currently or formerly owned or operated by the Partnership or at any Mortgaged
Property.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
"Financing" means the debt financing of the Merger and the other
---------
transactions contemplated hereby.
"Hart-Scott-Rodino Act" means the Hart-Scott-Rodino Antitrust
---------------------
Improvements Act of 1976, as amended, and the rules and regulations thereunder.
"Individual Affiliate" means any Person who is now, or at any time
--------------------
since January 1, 1990 has been, (a) a Partner of the Partnership, (b) a director
or officer of the corporate general partner of the Partnership GP, (c) a
director, officer or shareholder of the Assignor Limited Partner or (d) any
"associate" (as defined in the rules pursuant to the Exchange Act) of any of the
above.
"Knowledge" means (i) with respect to the Partnership, the knowledge
---------
of (a) the Partnership GP, (b) the general partners of the Partnership GP and
(c) with respect to the entities referred to in the preceding clause (b) any of
such entities current officers and directors; (ii) with respect to each Owner
Partnership or the Designated Owner Partnership, the knowledge of (a) any
general partner of such Owner Partnership or the Designated Owner Partnership
and (b) any of such general partner's current officers or directors; and (iii)
with respect to the Merger Partnership, the knowledge of CAPREIT and its
Affiliates and their current officers and directors.
"Lien" means any lien, pledge, mortgage, security interest, claim,
----
lease, charge, option, right of first refusal, easement, servitude, encumbrance,
participation interest, assignment, or other restriction or limitation.
"Mailing Date" means the first day on which the Proxy Statement is
------------
mailed to the holders of BACs pursuant to Section 7.1 above.
"Mortgaged Property" means the land and the buildings thereon and
------------------
other assets securing the payment of the Mortgage Revenue Bonds.
"Mortgage Revenue Bonds" means the mortgage revenue bonds owned by the
----------------------
Partnership, as described on the Disclosure Schedule.
-37-
<PAGE>
"Mortgage Revenue Documents" means all notes, loan agreements,
--------------------------
indentures, land use restriction agreements, security agreements, mortgages and
other agreements, instruments or documents, including all amendments and
releases, evidencing, relating to or executed in connection with the Mortgage
Revenue Bonds or any security interest in the Mortgaged Properties.
"Order" means any judgment, ruling, order, writ, injunction, decree,
-----
determination or requirement of any arbitrator or court or of any governmental
or regulatory body, authority or agency, whether federal, state or local,
domestic or foreign.
"Other Merger Agreement" means the Agreement and Plan of Merger, dated
----------------------
as of the date hereof, among Watermark III Partners, L.P., Capital Realty
Investors Tax Exempt Fund III Limited Partnership and CRITEF III Associates
Limited Partnership.
"Owner Partnerships" means the Designated Owner Partnership, Ethans,
------------------
CRICO of Royal Oaks Limited Partnership, CRICO of Trailway Pond I Limited
Partnership, CRICO of Valley Creek I Limited Partnership, CRICO of White Bear
Woods I Limited Partnership, CRICO of James Street Crossing Limited Partnership,
and CRICO of Trailway Pond II Limited Partnership.
"Permitted Statutory Liens" means statutory Liens of landlords,
-------------------------
carriers, warehousemen, mechanics and materialmen and other similar Liens
imposed by law and incurred in the ordinary course of business for sums not yet
delinquent.
"Person" means any individual, corporation, partnership, limited
------
liability company, firm, joint venture, association, joint-stock company, trust,
unincorporated organization, governmental body or other entity.
"Requirements of Law" means (i) the certificate of limited partnership
-------------------
of each of the Partnership and the Owner Partnerships, the agreements of limited
partnership or other organizational or governing documents of each of the
Partnership and the Owner Partnerships, (ii) any statute, law, treaty, rule,
regulation or ordinance applicable to the Partnership or the Owner Partnerships,
their respective assets or any Mortgaged Property (including, without
limitation, Environmental Laws and occupational health and safety and food and
drug regulations) or (iii) any judgment, decree, injunction, order or
determination of any arbitrator or of any court or other governmental or
regulatory authority or agency, whether federal, state or local, domestic or
foreign, applicable to the Partnership or the Owner Partnerships, their
respective assets or any Mortgaged Property.
"Securities Act" means the Securities Act of 1933, as amended.
--------------
"Subsidiary" means, with respect to any Person, any corporation at
----------
least a majority of whose outstanding voting securities, or any other Person at
least a majority of whose total equity interest, is owned by such Person.
"Termination Date" means December 31, 1996.
----------------
-38-
<PAGE>
"Transaction" means (i) the sale of the Partnership GP's general
-----------
partnership interest pursuant to Section 2.3, (ii) the issuance of a limited
partnership interest in the Partnership pursuant to Section 7.14, (iii) the
Merger, (iv) the actions with respect to the Owner Partnerships pursuant to
Section 7.13 and (v) certain amendments to the Partnership Agreement necessary
to consummate the Merger (including, without limitation, providing for the
redemption of partnership interests). The term "Transaction" does not include
the Bond Refinancing.
The following terms are defined in the corresponding Sections listed
below:
<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
Accrued Fee Amount.................... 7.12
Alternative Proposal.................. 7.5.2
Available cash........................ 2.2.1(f)
BAC................................... 2.2.1
Balance Sheet......................... 4.7
Balance Sheet Date.................... 4.7
CAPREIT............................... Recitals
Certificate of Merger................ 1.3
Commitment Date....................... 8.2.5
CRI................................... 7.12(a)
CRIIMI................................ 7.12
Deposit............................... 2.6(a)
Designated Actions.................... 7.4.1
Designated Persons.................... 7.3.1(ii)
Effective Time........................ 1.3
Ethans................................ 5.3
Fairness Opinion...................... 8.2.4
Fiduciary Out Termination............. 7.5.2
Housing Acquisition Department Files.. 4.18.1
Interim Financial Statements.......... 4.7
Liabilities........................... 4.8
Meeting............................... 7.2
Merger................................ Recitals
Merger Consideration.................. 2.2.1
Merger Partnership GP................. Recitals
Merger Partnership LP................. Recitals
MP Agreement.......................... 3.1
MP Certificate........................ 3.1
Other Filings......................... 7.1
Partnership Act....................... Recitals
Partnership Agreement................. 4.1
Partnership Certificate............... 1.4
Partnership Financial Statements...... 4.7
Partnership GP........................ Recitals
</TABLE>
-39-
<PAGE>
<TABLE>
<S> <C>
Partnership GP Agreement.............. 4.1
Partnership GP Certificate............ 4.1
Proxy Statement....................... 7.1
Redemption Agent...................... 2.3.1
Redemption Fund....................... 2.3.2
SEC Filings........................... 4.7
Series I Excess Amount................ 2.2.1(d)
Series II Excess Amount............... 2.2.1(d)
Suits................................. 8.14
Surviving Partnership................. 1.1
Triggering Events..................... 7.3.1(ii)
</TABLE>
10.3 Representations and Warranties; Etc. (a) The respective
------------------------------------
representations and warranties of the Partnership, each Owner Partnership and
the Merger Partnership contained herein shall expire with, and be terminated and
extinguished upon, consummation of the Merger, and thereafter none of the
Partnership, any Owner Partnership or the Merger Partnership, or any general
partner or principal of any thereof, shall be under any liability whatsoever
with respect to any such representation or warranty. This Section 10.3 shall
have no effect upon any other obligation of the parties hereto, whether to be
performed before or after the consummation of the Merger.
(b) Notwithstanding anything to the contrary herein, there
shall be no liability whatsoever for breach of any of the representations and
warranties set forth in Section 4 or 5.
10.4 Validity. The invalidity or unenforceability of any provision
--------
of this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
10.5 Descriptive Headings. The descriptive headings herein are
--------------------
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.
10.6 Parties in Interest. This Agreement shall be binding upon and
-------------------
inure solely to the benefit of each party hereto, and nothing in this Agreement,
express or implied, is intended to confer upon any other Person any rights or
remedies of any nature whatsoever under or by reason of this Agreement except
the right of the holders of BACs to receive cash as provided in Section 2.2.1
hereof (subject in each case to the consummation of the Transaction pursuant to
this Agreement).
10.7 Incorporation of Recitals. The recitals hereto are
-------------------------
incorporated into this Agreement as if fully restated herein.
10.8 Miscellaneous. This Agreement (i) constitutes the entire
-------------
agreement and supersedes all other prior agreements and undertakings, both
written and oral, between the parties with respect to the subject matter hereof;
(ii) may not be assigned, except that the Merger Partnership may assign its
rights hereunder in whole or in part to one or more of its direct or indirect
Subsidiaries or Affiliates, each of which, in written instruments reasonably
satisfactory to
-40-
<PAGE>
the Partnership, shall agree to assume all of the Merger Partnership's
obligations hereunder so assigned to it and be bound by all of the terms and
conditions of this Agreement; and (iii) shall be governed in all respects,
including validity, interpretation and effect, by the laws of the State of New
York applicable to agreements made and to be performed entirely within such
State. This Agreement may be executed in one or more counterparts which together
shall constitute a single agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first above written.
WATERMARK PARTNERS, L.P.
By: Capital Apartment Properties, Inc.,
its general partner
By: /s/ Richard L. Kadish
--------------------------------------
Name:
Title:
CAPITAL REALTY INVESTORS TAX EXEMPT
FUND LIMITED PARTNERSHIP
By: CRITEF Associates Limited Partnership,
its general partner
By: /s/ William B. Dockser
--------------------------------------
Name:
Title:
CRITEF ASSOCIATES LIMITED PARTNERSHIP
By: C.R.I., Inc., its general partner
By: /s/ William B. Dockser
--------------------------------------
Name:
Title:
WILLIAM B. DOCKSER
/s/ William B. Dockser
-------------------------------------------
H. WILLIAM WILLOUGHBY
/s/ H. William Willoughby
-------------------------------------------
-41-
<PAGE>
CAPITAL APARTMENT PROPERTIES, INC.
By: /s/ Richard L. Kadish
--------------------------------------
Name:
Title:
CRICO OF FOUNTAIN PLACE LIMITED PARTNERSHIP
By: CRICO of Fountain Place, Inc., its general partner
By: /s/ William B. Dockser
--------------------------------------
Name:
Title:
CRICO OF ROYAL OAKS LIMITED PARTNERSHIP
By: CRICO of Royal Oaks, Inc., its general partner
By: /s/ William B. Dockser
--------------------------------------
Name:
Title:
CRICO OF TRAILWAY POND I LIMITED PARTNERSHIP
By: CRICO of Trailway Pond I, Inc., its general
partner
By: /s/ William B. Dockser
--------------------------------------
Name:
Title:
CRICO OF VALLEY CREEK I LIMITED PARTNERSHIP
By: CRICO of Valley Creek I, Inc., its general partner
By: /s/ William B. Dockser
--------------------------------------
Name:
Title:
-42-
<PAGE>
CRICO OF WHITE BEAR WOODS I LIMITED PARTNERSHIP
By: CRICO of White Bear Woods I, Inc., its general
partner
By: /s/ William B. Dockser
--------------------------------------
Name:
Title:
CRICO OF ETHAN'S I LIMITED PARTNERSHIP
By: CRICO of Ethan's I, Inc., its general partner
By: /s/ William B. Dockser >
--------------------------------------
Name:
Title:
CRICO OF JAMES STREET CROSSING LIMITED PARTNERSHIP
By: CRICO of James Steet, Inc., its general partner
By: /s/ William B. Dockser
--------------------------------------
Name:
Title:
CRICO OF TRAILWAY POND II LIMITED PARTNERSHIP
By: CRICO of Trailway Pond II, Inc., its general
partner
By: /s/ William B. Dockser
--------------------------------------
Name:
Title:
-43-
<PAGE>
Appendix A-2
FOURTH AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
among
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III
LIMITED PARTNERSHIP,
CRITEF III ASSOCIATES LIMITED PARTNERSHIP
and
WATERMARK III PARTNERS, L.P.
<PAGE>
================================================================================
FOURTH AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
among
WATERMARK III PARTNERS, L.P.,
CAPITAL REALTY INVESTORS TAX EXEMPT FUND
III LIMITED PARTNERSHIP
and
CRITEF III ASSOCIATES LIMITED PARTNERSHIP, et al.
____________________________
Dated: as of August 21, 1996
____________________________
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<C> <S> <C>
1. The Merger.............................................................2
1.1 The Merger.....................................................2
1.2 Surviving Partnership..........................................3
1.3 Effective Time of the Merger...................................3
1.4 Certificate of Limited Partnership.............................3
1.5 Partnership Agreement..........................................3
2. Conversion of Partnership Interests....................................3
2.1 Conversion of Partnership Interests............................3
2.2 Redemption of BACs.............................................5
2.3 Purchase of the General Partner Interest.......................6
2.4 Additional Rights; Taking of Necessary Action; Further Action..6
2.5 Federal Income Tax Considerations..............................7
2.6 Deposit........................................................7
2.7 Disclosure Schedule............................................8
3. Representations and Warranties of the Merger Partnership...............8
3.1 Formation and Qualification....................................8
3.2 Authority Relative to this Agreement...........................8
3.3 No Conflicts...................................................9
3.4 Governmental Approvals.........................................9
3.5 No Prior Activities............................................9
3.6 Brokers........................................................9
4. Representations and Warranties of the Partnership......................10
4.1 Formation and Qualification....................................10
4.2 No Subsidiaries................................................10
4.3 Capitalization.................................................10
4.4 Authority Relative to this Agreement...........................11
4.5 No Conflicts...................................................11
4.6 Governmental Approvals.........................................11
4.7 Commission Filings; Financial Statements.......................12
4.8 No Undisclosed Liabilities.....................................12
4.9 Absence of Certain Changes or Events...........................12
4.10 Litigation....................................................13
4.11 Taxes.........................................................13
4.12 Assets........................................................13
4.13 Transactions with Affiliates..................................13
4.14 Disclosure....................................................14
4.15 Brokers.......................................................14
4.16 General Partner Recommendation................................14
4.17 Compliance with Law...........................................14
4.18 Mortgage Revenue Bonds and Mortgage Revenue Documents.........14
5. Representations and Warranties of the Owner Partnerships...............15
5.1 Formation and Qualification....................................15
5.2 No Subsidiaries................................................16
</TABLE>
-i-
<PAGE>
<TABLE>
<C> <S> <C>
5.3 Partners and Capitalization....................................16
5.4 Authority Relative to this Agreement...........................16
5.5 No Conflicts...................................................16
5.6 Governmental Approvals.........................................17
5.7 Financial Statements...........................................17
5.8 No Undisclosed Liabilities.....................................17
5.9 Absence of Certain Changes or Events...........................17
5.10 Mortgaged Properties..........................................18
5.11 No Action.....................................................18
5.12 Taxes.........................................................19
5.13 Compliance with Law...........................................19
5.14 Disclosure....................................................19
6. Conduct of Business Pending the Merger.................................19
6.1 Conduct of Business by the Partnership Pending the Merger......19
6.2 Conduct of Business by the Owner Partnerships Pending
the Merger....................................................21
7. Additional Agreements..................................................22
7.1 Proxy Statement; Other Filings.................................22
7.2 Meeting of the Limited Partners................................23
7.3 Fees and Expenses..............................................24
7.4 Further Agreements.............................................26
7.5 Shop Limitation................................................27
7.6 Additional Financial Statements................................27
7.7 Access to Information; Confidentiality.........................28
7.8 Public Announcements...........................................28
7.9 Agreement to Defend and Indemnify..............................29
7.10 Notification of Certain Matters...............................29
7.11 Cooperation...................................................29
7.12 Acquisition...................................................29
7.13 Treatment of Owner Partnerships...............................30
7.14 Partnership Interests.........................................30
7.15 Tax Returns...................................................30
7.16 Notice of Failure to Satisfy Closing Conditions...............31
8. Conditions.............................................................31
8.1 Conditions to Obligation of Each Party to Effect
the Transaction...............................................31
8.2 Additional Conditions to the Obligation of the Partnership.....32
8.3 Additional Conditions to the Obligations of the Merger
Partnership...................................................32
9. Termination, Amendment and Waiver......................................34
9.1 Termination....................................................34
9.2 Effect of Termination..........................................35
9.3 Amendment......................................................35
9.4 Waiver.........................................................36
10. General Provisions....................................................36
10.1 Notices.......................................................36
10.2 Certain Definitions...........................................37
10.3 Representations and Warranties; Etc...........................42
10.4 Validity......................................................42
10.5 Descriptive Headings..........................................42
10.6 Parties in Interest...........................................42
-ii-
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
10.7 Incorporation of Recitals.....................................42
10.8 Miscellaneous.................................................42
-iii-
</TABLE>
<PAGE>
FOURTH AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
--------------------------------------------------------
FOURTH AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of
August 21, 1996, among WATERMARK III PARTNERS, L.P., a Delaware limited
partnership (the "Merger Partnership"), CAPITAL REALTY INVESTORS TAX EXEMPT FUND
III LIMITED PARTNERSHIP, a Delaware limited partnership (the "Partnership"),
CRITEF III ASSOCIATES LIMITED PARTNERSHIP, a Delaware limited partnership (the
"Partnership GP"), and the other parties listed on the signature pages
hereof.
The Merger Partnership was formed solely for the purpose of being
merged with and into the Partnership in accordance with the Revised Uniform
Limited Partnership Act of the State of Delaware (the "Partnership Act") and the
terms hereof in the merger (the "Merger") contemplated hereby. The Merger
Partnership has no assets other than the cash initially contributed by Capital
Apartment Properties, Inc., a Maryland corporation ("CAPREIT"), which is its
sole general partner (the "Merger Partnership GP"), and the cash initially
contributed by CAPREIT Limited Partnership, a Maryland limited partnership,
which is its sole limited partner (the "Merger Partnership LP"). In the Merger,
all partnership interests in the Partnership, other than those to be issued to
or acquired pursuant hereto by CAPREIT, or its Affiliates, will be redeemed in
cash as specified herein.
The general partners of each of the Partnership and the Merger
Partnership have approved the Merger in accordance with the Partnership Act and
the other transactions contemplated hereby and have recommended that their
respective limited partners approve and adopt the Merger and the other
transactions contemplated hereby.
The parties hereto entered into an Agreement and Plan of Merger, dated
as of September 11, 1995, as amended by Amendment No. 1 thereto on January 31,
1996, entered into a First Amended and Restated Agreement and Plan of Merger,
dated as of March 14, 1996, and a Second Amended and Restated Agreement and Plan
of Merger, dated as of May 18, 1996, and a Third Amended and Restated Agreement
and Plan of Merger, dated as of July 15, 1996 and they now desire to further
amend certain provisions of the Third Amended and Restated Agreement and Plan of
Merger and restate it in its entirety as provided herein.
Accordingly, in consideration of the premises and the mutual covenants
herein contained and intending to be legally bound hereby, the parties hereby
agree as follows:
Certain capitalized terms used herein are defined in Section 10.2
hereof.
1. The Merger
----------
1.1 The Merger. At the Effective Time, and subject to the terms
----------
and conditions of this Agreement and the Partnership Act, the Merger Partnership
shall be merged with and into the Partnership in the Merger, the separate
existence of the Merger Partnership shall thereupon cease, and the Partnership
shall be the surviving partnership in the Merger (the "Surviving Partnership").
<PAGE>
1.2 Surviving Partnership. At the Effective Time, the Partnership
---------------------
shall continue in existence under the laws of the State of Delaware as the
Surviving Partnership and shall thereupon and thereafter, without further act or
deed, succeed to and possess all the rights, privileges, and powers of the
Merger Partnership, and all property, real personal and mixed, and all debts due
to the Merger Partnership, as well as all other things and causes of action
belonging to the Merger Partnership, shall be vested in the Surviving
Partnership, and shall thereafter be the property of the Surviving Partnership
as they were of the Merger Partnership, and the title to any real property
vested by deed or otherwise, under the laws the State of Delaware, in the Merger
Partnership shall not revert or be in any way impaired by reason of the Merger,
but all rights of creditors and all liens upon any property of the Merger
Partnership shall be preserved unimpaired, and all debts, liabilities and duties
of the Merger Partnership shall thenceforth attach to the Surviving Partnership
and may be enforced against it to the same extent as if said debts, liabilities
and duties have been incurred or contracted by it.
1.3 Effective Time of the Merger. The Merger shall be effected as of
----------------------------
the date and time of filing of the certificate of merger (the "Certificate of
Merger") with the Secretary of State of the State of Delaware in accordance with
the Partnership Act (or at such later time specified as the effective time in
the Certificate of Merger) (the "Effective Time"), which filing the parties
hereto shall cause to occur as soon as practicable after the satisfaction or
waiver of the conditions hereinafter set forth.
1.4 Certificate of Limited Partnership. As a result of the Merger,
----------------------------------
the Certificate of Limited Partnership of the Partnership (the "Partnership
Certificate"), as in effect immediately prior to the Effective Time, shall be
the Certificate of Limited Partnership of the Surviving Partnership, as amended
and restated substantially in the form set forth as Exhibit A hereto, until
thereafter amended as provided therein and under the Partnership Act.
1.5 Partnership Agreement hereto as Exhibit B shall be the agreement
---------------------
of limited partnership of the Surviving Partnership unless and until amended in
accordance with its terms and applicable law. The name of the Surviving
Partnership shall be Watermark Partners, L.P.
2. Conversion of Partnership Interests.
-----------------------------------
2.1 Conversion of Partnership Interests. At the Effective Time, by
-----------------------------------
virtue of the Merger and without any action on the part of the Merger
Partnership, the Partnership or the holders of any of the following securities:
2.1.1 (a) Each Beneficial Assignee Certificate ("BAC") (other
than any BACs owned by CAPREIT or its affiliates or the Partnership) which
represents the assignment of 1 unit of beneficial interest of the limited
partnership interest in the Partnership issued to the Assignor Limited Partner,
together with the underlying limited partner interest, shall be cancelled and
extinguished and converted into and represent the right to receive an amount per
BAC in cash equal to $15.32, subject to adjustment, in each case, as set forth
in subsection (b) or (c) below (the "Merger Consideration").
-2-
<PAGE>
(b) The aggregate amount of Merger Consideration payable with
respect to the BACs shall be increased by the Excess Amount (as defined below),
if any. The amount of the increase, if any, shall be prorated among all of the
issued and outstanding BACs and the price per BAC set forth in subsection (a)
above shall be increased accordingly.
(c) The amount by which the Partnership's Available Cash
(defined below) is greater than $5,924,228 shall be the "Excess Amount";
provided, however, that regardless of the actual amount of Available Cash, the
- -------- -------
Excess Amount shall not exceed $1,098,978.
(d) For purposes of this calculation, "Available Cash" means
the amount of cash and cash equivalents held by or at the direction of the
Partnership after deducting any amounts then owed, accrued or reserved by the
Partnership for goods, services or liabilities of any nature or description
(which liabilities shall not include any liabilities of the Mortgaged
Properties, including accrued real estate taxes and insurance); provided, that
--------
all amounts held in tax and insurance escrows for all the Mortgaged Properties
and all amounts held in replacement reserves for the benefit of the Owner
Partnerships shall be deemed to be part of the Available Cash. For
clarification, but not for expansion, Available Cash shall also include any
additions to tax and insurance escrows for all the Mortgaged Properties and the
replacement reserves for the benefit of the Owner Partnerships, less any
withdrawals from such escrows and reserves, in each case in the ordinary course
of business and consistent with past practice.
(e) The Partnership agrees not to incur any expenses, in
connection with the Merger, which are not reasonably necessary, customary and
appropriate.
2.1.2 The 1.01% general partner interest in the Partnership,
which will be held by the CAPREIT General Partner (as defined) as the result of
its admission as the substitute general partner as contemplated by Section 2.3
below, shall be converted into and represent a 1.01% general partner interest in
the Surviving Partnership.
2.1.3 Any limited partner interests in the Partnership issued to
any designee of CAPREIT pursuant to Section 7.14, or BACs purchased by CAPREIT
or its Affiliates as contemplated by Section 2.4.1, and held by such designee or
purchaser immediately prior to the Effective Time, shall be converted into a
limited partner interest in the Surviving Partnership.
2.1.4 Any and all BACs that are owned by the Partnership shall
be cancelled and extinguished and no consideration shall be paid therefor.
2.1.5 The 21% general partner interest in the Merger Partnership
held by the Merger Partnership GP immediately prior to the Effective Time shall
be cancelled and the Merger Partnership GP shall receive the $21 initially
contributed by it to the Merger Partnership in exchange therefor.
2.1.6 The 79% limited partner interest in the Merger Partnership
held by Merger Partnership LP immediately prior to the Effective Time shall be
cancelled and the
-3-
<PAGE>
Merger Partnership LP shall receive the $79 initially contributed by it to the
Merger Partnership in exchange therefor.
2.1.7 The 98.99% limited partner interest of the Assignor
Limited Partner in the Partnership shall be cancelled and extinguished and no
consideration (other than the Merger Consideration paid to the holders of BACs
pursuant to Section 2.2.1 above) shall be paid therefor.
2.2 Redemption of BACs
------------------
2.2.1 From and after the Effective Time, a bank or trust company
designated by the Merger Partnership and the Partnership prior to the Effective
Time (the "Redemption Agent") shall act as redemption agent in effecting the
redemption for cash of certificates which, prior to the Effective Time,
represented BACs entitled to payment pursuant to Section 2.1.1 hereof. Upon the
surrender of each such certificate the holder thereof shall be paid, without
interest thereon, the amount of cash to which such holder is entitled hereunder
(net of any required withholding) and such BAC shall forthwith be cancelled.
Until so surrendered and exchanged, each such certificate shall represent, for
all purposes, solely the right to receive cash pursuant to Section 2.1.1 hereof.
If any cash to be paid in the Merger is to be paid to a Person other than the
holder in whose name the certificate representing BACs surrendered in redemption
therefor is registered, it shall be a condition of such redemption that the
certificate so surrendered shall be properly endorsed or otherwise in proper
form for transfer and that the Person requesting such redemption shall pay to
the Redemption Agent any transfer or other taxes required by reason of the
payment of such cash to a Person other than the registered holder of the
certificate surrendered, or shall establish to the satisfaction of the
Redemption Agent that such tax has been paid or is not applicable.
Notwithstanding the foregoing, neither the Redemption Agent nor any party hereto
shall be liable to a holder of BACs for any cash delivered pursuant hereto to a
public official pursuant to applicable abandoned property laws.
2.2.2 At the Effective Time, the Surviving Partnership shall
deposit in trust with the Redemption Agent proceeds from the Financing in an
aggregate amount equal to the Merger Consideration (the "Redemption Fund"). The
Redemption Fund shall be invested by the Redemption Agent, as directed by the
Surviving Partnership, and any net earnings with respect thereto shall be paid
to the Surviving Partnership as and when requested by the Surviving Partnership.
2.2.3 The Redemption Agent shall, pursuant to irrevocable
instructions, make the payments referred to in Section 2.1.1 hereof out of the
Redemption Fund. The Redemption Fund shall not be used for any other purpose,
except as provided herein. Promptly following the date which is six months after
the Effective Time, the Redemption Agent shall return to the Surviving
Partnership all cash, certificates and other instruments in its possession
relating to the transactions described in this Agreement, and the Redemption
Agent's duties shall terminate. Thereafter, each holder of a BAC entitled to
receive at the Effective Time cash therefor may surrender such BAC to the
Surviving Partnership and (subject to applicable abandoned property, escheat and
similar laws) receive in redemption therefor the Merger
-4-
<PAGE>
Consideration, without interest, but shall have no greater rights against the
Surviving Partnership than may be accorded to general creditors of the Surviving
Partnership under applicable law.
2.2.4 Promptly after the Effective Time, the Redemption Agent
shall mail to each record holder of BACs a form of letter of transmittal and
instructions for use in surrendering such certificates and receiving payment
therefor.
2.2.5 After the Effective Time, no BACs shall be deemed to be
outstanding and holders of BACs shall cease to have any rights except as
provided in this Agreement or by law.
2.3 Purchase of the General Partner Interest. Concurrently with the
----------------------------------------
Effective Time, the Partnership GP shall sell, convey and transfer to a newly-
formed, wholly-owned subsidiary of CAPREIT (which shall thereupon be the
substitute general partner, with the Partnership GP withdrawing as general
partner), for the sum of $500,000 in cash, the 1.01% general partner interest in
the Partnership held by it. The parties acknowledge that the obligation of the
Partnership GP to transfer such general partner interest and the withdrawal and
substitution of the general partner pursuant to this Section 2.3 are subject to
the closing of the Merger, and shall not be effective if the Merger shall not
occur.
2.4 Additional Rights; Taking of Necessary Action; Further Action.
-------------------------------------------------------------
2.4.1 CAPREIT and its Affiliates reserve the right prior to the
Effective Time, and in accordance with applicable law, from time to time to make
open market or privately negotiated purchases of BACs. CAPREIT shall promptly
notify the Partnership of the occurrence of any such purchase.
-5-
<PAGE>
2.4.2 The Merger Partnership and the Partnership shall each use
its best efforts to take all such action as may be necessary or appropriate in
order to effectuate the Merger under the Partnership Act as promptly as
possible, including, without limitation, the due execution and filing under the
Partnership Act of the Certificate of Merger consistent with the terms of this
Agreement. If at any time after the Effective Time, any further action is
necessary or desirable to carry out the purposes of this Agreement and to vest
the Surviving Partnership with full right, title and possession to all assets,
property, rights, privileges, powers, and franchises of either of the Merger
Partnership or the Partnership, the general partners of each of the Merger
Partnership and the Partnership are fully authorized in its name or otherwise to
take, and shall take, all such lawful and necessary action.
2.5 Federal Income Tax Considerations. Notwithstanding any
---------------------------------
provision of this Agreement to the contrary, it is the intention of the parties
hereto that the payment of the Merger Consideration pursuant to Section 2.1.1
hereof shall constitute, for all income tax purposes, a redemption or
liquidation of the BAC holders' limited partnership interests in the Partnership
pursuant to Section 731(a) of the Code and that the consummation of the
transactions contemplated by this Agreement will not result in a termination of
the Partnership pursuant to Section 708(b)(1)(B) of the Code. The Partnership
and the Partnership GP hereby agree not to take any action inconsistent with the
foregoing without the prior written consent of CAPREIT.
(b) For state law purposes, the transactions contemplated by
this Agreement shall be treated as a merger.
2.6 Deposit. (a) On the business day immediately prior to the
-------
Mailing Date, CAPREIT shall pay into escrow the amount of $1,000,000 (the
"Deposit") to be held by an independent third party escrow agent pursuant to an
escrow agreement in the form of Exhibit C hereto.
(b) If the Closing shall occur, then the Deposit and any
interest earned thereon shall be paid on the Closing Date to CAPREIT or as
CAPREIT shall direct.
(c) If the Closing shall not occur on or prior to the
Termination Date and the failure of the Closing to occur shall be due to: (i)
the failure of any of the conditions to Closing set forth in Section 8.1 or 8.3
(other than Section 8.3.7); (ii) a termination of this Agreement pursuant to
Section 9.1 (other than Section 9.1.3 or 9.1.8); (iii) a breach of the
Commitment Letter by the party issuing such Commitment Letter; or (iv) a change
in any statute, law or regulation which affects the tax exempt status of the
Mortgage Revenue Bonds, then the Deposit and any interest earned thereon shall
be paid to CAPREIT or as CAPREIT shall d of this Agreement.
(d) If the Closing shall not occur on or prior to the
Termination Date and the failure of the Closing to occur shall be due to the
failure of the condition to Closing set forth in Section 8.3.7, which failure
occurred because of the failure of a condition to funding set forth in the
Commitment Letter, then one-half of the Deposit and any interest earned thereon
shall be paid to the Partnership and one-half of the Deposit and any interest
earned thereon shall be paid to CAPREIT or as CAPREIT shall direct on the
earlier of the Termination Date or the
-6-
<PAGE>
date on which the party issuing the Commitment Letter notifies the Merger
Partnership or CAPREIT that it will not consummate the Financing.
(e) If the Deposit shall not be paid pursuant to paragraph (b),
(c) or (d), the Deposit and any interest earned thereon shall be paid to the
Partnership on the earlier of the Termination Date or the date of termination of
this Agreement. If such payment is made, such payment shall be made to the
Partnership as liquidated damages in full satisfaction of all of the Merger
Partnership's or CAPREIT's liabilities or obligations hereunder, including,
without limitation, any obligation to pay or reimburse the Partnership's
expenses pursuant to Section 7.3.2 below.
2.7 Disclosure Schedule. Agreement has been executed prior to
-------------------
delivery of the Disclosure Schedule by the Partnership. The Partnership agrees
that it will (a) deliver a preliminary draft of the Disclosure Schedule to the
Merger Partnership no later than 10 days from the date hereof and (b) deliver a
final Disclosure Schedule no later than 30 days from the date hereof; and that
failure to do so shall constitute a material breach hereof. Subject to the
right of the Merger Partnership to invoke the condition to Closing set forth in
Section 8.3.11 below with respect to any information obtained from the
Disclosure Schedule, any information set forth in the Disclosure Schedule shall
be deemed incorporated into the relevant representations and warranties set
forth in Sections 4 and 5 below, and there shall be no independent liability
therefor pursuant to this Section 2.7.
3. Representations and Warranties of the Merger Partnership.
--------------------------------------------------------
Subject to Section 10.3 below, the Merger Partnership represents and
warrants to the Partnership as follows:
3.1 Formation and Qualification. The Merger Partnership is a limited
---------------------------
partnership duly formed, validly existing and in good standing under the laws of
the State of Delaware, and has the requisite power to carry on its business as
now conducted. The Merger Partnership is duly qualified, licensed and
authorized as a foreign limited partnership to do business, and is in good
standing, in each jurisdiction where the character of its properties owned or
leased or the nature of its activities makes such qualification necessary,
except for failures to be so qualified which would not, in the aggregate, have a
material adverse effect on the Condition of the Merger Partnership. Copies of
the Certificate of Limited Partnership of the Merger Partnership (the "MP
Certificate") and the Agreement of Limited Partnership of the Merger Partnership
(the "MP Agreement") heretofore delivered to the Partnership are accurate and
complete as of the date hereof. The Merger Partnership is not in default under
or in violation of any provision of the MP Agreement.
3.2 Authority Relative to this Agreement. The Merger Partnership has
------------------------------------
the requisite power and authority to enter into this Agreement and to perform
its obligations hereunder. The execution and delivery of this Agreement by the
Merger Partnership and the consummation by the Merger Partnership of the
transactions contemplated hereby have been duly authorized by all necessary
action on the part of the Merger Partnership and the Merger Partnership GP, and
no other action on the part of the Merger Partnership or the Merger
-7-
<PAGE>
Partnership GP is necessary to authorize this Agreement, the Merger and the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by the Merger Partnership and constitutes a valid and binding
obligation of the Merger Partnership, enforceable against the Merger Partnership
in accordance with its terms.
3.3 No Conflicts. Neither the execution and delivery of this
------------
Agreement by the Merger Partnership nor the consummation of the transactions
contemplated hereby nor compliance by the Merger Partnership with any of the
provisions hereof will (i) violate, conflict with, or result in a breach of any
provision of, or constitute a default (or an event which, with notice or lapse
of time or both, would constitute a default) under, or result in the termination
of, or accelerate the performance required by, or result in a right of
termination or acceleration under, or result in the creation of any Lien upon
any of the properties or assets of the Merger Partnership under, any of the
terms, conditions or provisions of (x) the MP Certificate or the MP Agreement or
(y) any note, bond, mortgage, indenture, deed of trust, license, lease,
agreement or other instrument or obligation to which the Merger Partnership is a
party, or to which it, or any of its properties or assets, may be subject, or
(ii) subject to compliance with the statutes and regulations referred to in
Section 3.4, violate any Order, statute, rule or regulation applicable to the
Merger Partnership or any of its properties or assets, except, in the case of
each of clauses (i) and (ii) above, for such violations, conflicts, breaches,
defaults terminations, accelerations or creations of Liens which, in the
aggregate, would not have any material adverse effect on the Condition of the
Merger Partnership.
3.4 Governmental Approvals. Other than in connection with or in
----------------------
compliance with the provisions of the Partnership Act, the Exchange Act, the
Securities Act, the "takeover" laws of various states, the Hart-Scott-Rodino
Act, and except for any notices, filings, authorizations, consents or approvals
which are required because of the regulatory status, if any, of the Partnership
or the Merger Partnership or facts specifically pertaining to it, no notice to,
filing with, or authorization, consent or approval of, any domestic or foreign
public body or authority is necessary for the consummation by the Merger
Partnership of the transactions contemplated by this Agreement.
3.5 No Prior Activities. The Merger Partnership has not incurred,
-------------------
directly or through any Subsidiary, any liabilities or obligations, except those
incurred in connection with its organization or with the negotiation of this
Agreement, the performance thereof and the consummation of the transactions
contemplated hereby, including the Merger and the Financing. Except as
contemplated by the foregoing sentence, the Merger Partnership has not engaged,
directly or through any Subsidiary, in any business activities of any type or
kind whatsoever, or entered into any agreements or arrangements with any Person,
or is subject to or bound by any obligation or undertaking.
3.6 Brokers. No broker, finder or investment banker is entitled to
-------
any brokerage, finder's or other fee or commission in connection with the
Transaction based upon arrangements made by or on behalf of the Merger
Partnership or the Merger Partnership GP.
-8-
<PAGE>
4. Representations and Warranties of the Partnership. All
-------------------------------------------------
information within the Merger Partnership's Knowledge shall be deemed to have
been disclosed by the Partnership in connection with the representations and
warranties set forth below. Notwithstanding anything to the contrary in this
Agreement, the Partnership makes no representation or warranty, express or
implied, concerning the tax exempt status of the Mortgage Revenue Bonds and the
interest thereon, the ability of the Partnership or the Surviving Partnership to
consummate any modifications of the Mortgage Revenue Bonds and related
instruments, or the ability of the Partnership or the Surviving Partnership to
obtain any governmental or governmental agency consents in connection therewith.
Subject to Section 10.3 below, the Partnership represents and warrants
to the Merger Partnership as follows:
4.1 Formation and Qualification. Each of the Partnership and the
---------------------------
Partnership GP is a limited partnership duly formed, validly existing and in
good standing under the laws of the State of Delaware and has the requisite
power to carry on its business as now conducted. Each of the Partnership and
the Partnership GP is duly qualified, licensed and authorized as a foreign
limited partnership to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or leased or the nature
of its activities makes such qualification or licensing necessary, except for
failures to be so qualified which would not, in the aggregate, have a material
adverse effect on the Condition of the Partnership or the Partnership GP, as the
case may be. Copies of the Partnership Certificate, the Agreement of Limited
Partnership of the Partnership (the "Partnership Agreement"), the Certificate of
Limited Partnership of the Partnership GP (the "Partnership GP Certificate") and
the Agreement of Limited Partnership of the Partnership GP (the "Partnership GP
Agreement") heretofore delivered or made available to the Merger Partnership are
accurate and complete as of the date hereof. The Partnership is not in default
under or in violation of any provision of the Partnership Agreement, and the
Partnership GP is not in default under or in violation of any provision of the
Partnership GP Agreement, except, in each case, for such defaults or violations
which would not have any material adverse effect on the Condition of the
Partnership or the Partnership GP.
4.2 No Subsidiaries. The Partnership has no Subsidiaries and no
---------------
equity or similar interest, whether voting or non-voting, in any Person.
4.3 Capitalization. As of the date hereof, the outstanding partner
--------------
interests of the Partnership consist of (i) a 1.01% general partner interest in
the profits, losses, distributions and credits of the Partnership held by the
Partnership GP, and (ii) a 98.99% limited partner interest in the profits,
losses, distributions and credits of the Partnership held by the Assignor
Limited Partner. The Assignor Limited Partner is authorized to issue up to
10,000,000 BACs, representing the assignments of units of beneficial interest of
the limited partner interest in the Partnership issued to the Assignor Limited
Partner, of which 5,258,268 are outstanding. There are no outstanding options,
warrants, calls, subscriptions or other rights or other agreements or
commitments obligating the Partnership or any of its Affiliates to issue,
transfer or sell (a) any additional partnership interests of the Partnership or
(b) any BACs, except as contemplated
-9-
<PAGE>
herein. All issued and outstanding BACs and partnership interests in the
Partnership are validly issued, and the purchase price therefor has been paid in
full.
4.4 Authority Relative to this Agreement. Each of the Partnership
------------------------------------
and the Partnership GP has the requisite power and authority to enter into this
Agreement and to perform its obligations hereunder. The execution and delivery
of this Agreement by each of the Partnership and the Partnership GP and the
consummation by each of the Partnership and the Partnership GP of the
transactions contemplated hereby have been duly authorized by all necessary
action on the part of each of the Partnership and the Partnership GP and, except
for the BAC Holder Approval as set forth in Section 7.2 hereof, no other
proceedings on the part of the Partnership and the Partnership GP are necessary
to authorize this Agreement, the Merger and the transactions contemplated
hereby. This Agreement has been duly executed and delivered by each of the
Partnership and the Partnership GP and constitutes a valid and binding
obligation of each of the Partnership and the Partnership GP enforceable against
each of the Partnership and the Partnership GP in accordance with its terms.
4.5 No Conflicts. Except as set forth in the Disclosure Schedule,
------------
neither the execution and delivery of this Agreement by each of the Partnership
and the Partnership GP nor the consummation of the transactions contemplated
hereby (excluding the Financing and the Bond Refinancing) nor compliance by the
Partnership and the Partnership GP with any of the provisions hereof will (i)
violate, conflict with, or result in a breach of any provision of, or constitute
a default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or acceleration
under, or result in the creation of any Lien upon any of the properties or
assets of the Partnership or the Partnership GP under, any of the terms,
conditions or provisions of (x) the Partnership Certificate, the Partnership
Agreement, the Partnership GP Certificate or the Partnership GP Agreement, as
the case may be, or (y) any note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument or obligation to which the
Partnership or the Partnership GP is a party or to which either of them or
either of their properties or assets may be subject, or (ii) subject to
compliance with the statutes and regulations referred to in Section 4.6, to the
Partnership's Knowledge, violate any Order, statute, rule or regulation
applicable to the Partnership or the Partnership GP or any of their properties
or assets, except, in the case of each of clauses (i) and (ii) above, for such
violations, conflicts, breaches, defaults, terminations, accelerations or
creations of Liens which would not, in the aggregate, have any material adverse
effect on the Condition of the Partnership or the Partnership GP.
4.6 Governmental Approvals. Except as set forth in the Disclosure
----------------------
Schedule, other than in connection with or in compliance with the provisions of
the Partnership Act, the Exchange Act, the Securities Act, the "takeover" laws
of various states, and the Hart-Scott-Rodino Act, and except for any notices,
filings, authorizations, consents or approvals which are required because of the
regulatory status, if any, of the Merger Partnership or facts specifically
pertaining to it, to the Partnership's Knowledge, no notice to, filing with, or
authorization, consent or approval of, any domestic or foreign public body or
authority is necessary for the
-10-
<PAGE>
consummation by each of the Partnership and the Partnership GP of the
transactions contemplated by this Agreement (excluding the Financing and the
Bond Refinancing).
4.7 Commission Filings; Financial Statements. The Partnership has
----------------------------------------
heretofore delivered or made available to the Merger Partnership its (i) Annual
Report on Form 10-K for the fiscal years ended December 31, 1994, 1993, 1992,
1991 and 1990, as filed with the Commission, (ii) Quarterly Reports on Form 10-Q
for the quarters ended March 31, 1995 and June 30, 1995, (iii) investor letters
or similar documents mailed to the holders of BACs (whether annual or special)
since January 1, 1990, (iv) all other reports (including any Form 8-K's) or
registration statements filed by the Partnership with the Commission since
January 1, 1990 (the documents described in clauses (i) through (iv) above,
including any exhibits and schedules thereto and documents incorporated by
reference therein, being the "SEC Filings"), and (v) the unaudited consolidated
interim financial statements of the Partnership for the six months ended June
30, 1995 (the "Interim Financial Statements"). As of their respective dates,
each SEC Filing complied in all material respects with the requirements of the
Exchange Act or the Securities Act, as applicable, and did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The audited
consolidated financial statements and unaudited consolidated interim financial
statements of the Partnership included or incorporated by reference in such
reports and the Interim Financial Statements (collectively, the "Partnership
Financial Statements") have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto), and fairly present the
consolidated financial position of the Partnership as of the dates thereof and
the results of their operations and changes in their financial position for the
periods then ended. The consolidated balance sheet of the Partnership as at
March 31, 1995, including the notes thereto, is referred to as the "Balance
Sheet," and March 31, 1995, is referred to as the "Balance Sheet Date."
4.8 No Undisclosed Liabilities. At the Balance Sheet Date, the
--------------------------
Partnership did not have any direct or indirect liabilities, obligations,
indebtedness, claims, losses, damages, deficiencies or responsibilities, known
or unknown, fixed or unfixed, choate or inchoate, liquidated or unliquidated,
secured or unsecured, accrued, absolute or contingent, including, without
limitation, by way of setoffs or counterclaims ("Liabilities"), not reflected or
disclosed in the Balance Sheet which were required to be reflected or disclosed
therein in accordance with generally accepted accounting principles. Since the
Balance Sheet Date, except as disclosed in the Disclosure Schedule, the
Partnership has not incurred any such Liabilities.
4.9 Absence of Certain Changes or Events. Except as and to the
------------------------------------
extent set forth on the Balance Sheet, or as set forth on the Disclosure
Schedule, since the Balance Sheet Date, there has not been (a) any material
adverse change in the Condition of the Partnership; (b) any entry by the
Partnership into any commitment or transaction material to the Partnership,
which is not in the ordinary course of business and consistent with past
practices; (c) any material change by the Partnership in accounting principles
or methods except insofar as may be required by a change in generally accepted
accounting principles; (d) except as required by the American Stock Exchange,
any declaration, payment or setting aside for payment of any
-11-
<PAGE>
distributions (whether in cash or property) in respect to the partnership
interests of the Partnership, or direct or indirect redemption, purchase or
other acquisition of any BACs or other securities of the Partnership; (e) any
revaluation by the Partnership of any of its assets, including without
limitation, writing off of notes or accounts receivable, except any revaluation
required by generally accepted accounting principles based on the value of the
Merger Consideration; (f) any action taken by the Partnership of the type
referred to in Section 6.1.4 or 6.1.5 hereof; (g) any agreement by the
Partnership to take, whether in writing or otherwise, any action which, if
taken prior to the date of this Agreement, would have made any representation or
warranty in this Section 4 untrue or incorrect; (h) any damage, destruction or
loss, whether covered by insurance or not, having a material adverse effect upon
the Condition of the Partnership; (i) any issuance, grant, sale or pledge or
agreement to issue, grant, sell or pledge by the Partnership, with any Person
other than an Affiliate of the Merger Partnership, any BACs or other partnership
interests or securities convertible into or exchangeable or exercisable for, or
otherwise evidencing a right to acquire, BACs or other partnership interests;
(j) any acquisition of assets by the Partnership, other than personal property
not material to the Partnership acquired in the ordinary course of business and
consistent with past practices, or (k) any disposition, encumbrance or mortgage
of any assets or properties of the Partnership, other than personal property not
material to the Partnership disposed of in the ordinary course of business and
consistent with past practices.
4.10 Litigation. There is no action or proceeding or investigation
----------
pending or, to the Partnership's Knowledge, threatened against or involving the
Partnership, any properties or rights of the Partnership or, to the
Partnership's Knowledge, any Mortgaged Property which if adversely determined
would, individually or in the aggregate, have a material adverse effect on the
Condition of the Partnership nor is the Partnership, its assets or, to the
Partnership's Knowledge, any Mortgaged Property subject to any Order which would
have such an effect.
4.11 Taxes. To the Partnership's Knowledge, except as set forth on
-----
the Disclosure Schedule, the Partnership has duly filed all tax returns that it
was required to file, all such tax returns were correct and complete in all
material respects and all taxes shown on such returns as due, if any, have been
paid. The Partnership constitutes a partnership for all income tax purposes
rather than a corporation or association taxable as a corporation. The
Partnership does not have in effect an election pursuant to Section 754 of the
Code. The Partnership's tax basis in the Mortgage Revenue Bonds and the working
capital loans, including the interest receivable, is $112,625,954 as of December
31, 1994.
4.12 Assets. The Partnership has no assets other than the Mortgage
------
Revenue Bonds, the Liens represented by the Mortgage Revenue Documents, working
capital loans (not including accrued interest) made to Owner Partnerships in the
aggregate outstanding amount of $3,409,604 as of June 30, 1995 cash on hand
(including operating cash and marketable securities) in the amount of $5,622,136
as of June 30, 1995, and personal property not material to the Partnership held
in the ordinary course of business and consistent with past practices. The
Partnership GP has no assets other than its partnership interest in the
Partnership.
4.13 Transactions with Affiliates. Schedule or the SEC Filings, the
----------------------------
Partnership has not entered into any of the following transactions with any
Affiliate or Individual Affiliate in
-12-
<PAGE>
connection with which the Partnership has continuing obligations in effect as of
the date of this Agreement: the direct or indirect purchase, acquisition or
lease of any property from, or the sale, transfer or lease of any property to,
or the borrowing of any money from, or the guarantee of any obligation of, or
the acquisition of any stock, obligations or securities of, or the entering into
of any merger or consolidation agreement, or any management, consulting,
employment or similar fee arrangement or the entering into of any other
transaction or arrangement with, or the making of any payment to, an Individual
Affiliate, in the ordinary course of business or otherwise, which is not on
terms at least as favorable to the Partnership as would have been applicable if
such transaction had been entered into on an arm's-length basis with an
unaffiliated third party.
4.14 Disclosure. To the Partnership's Knowledge, no written
----------
statement, certificate, schedule, list or other written information furnished by
or on behalf of the Partnership to the Merger Partnership pursuant to this
Agreement contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact necessary in order to make the
statements herein or therein, in light of the circumstances under which they
were made, not misleading.
4.15 Brokers. No broker, finder or investment banker is entitled to
-------
any brokerage, finder's or other fee or commission in connection with the
Transaction based upon arrangements made by or on behalf of the Partnership or
the Partnership GP.
4.16 General Partner Recommendation. The Partnership GP has approved
------------------------------
and adopted the Transaction, has determined that the Transaction is fair to the
holders of BACs, and has recommended that the holders of BACs approve the
Transaction; provided, that the Partnership GP's continued recommendation shall
--------
be subject to its receipt of a favorable Fairness Opinion. The Partnership has
no general partners or holders of general partnership interests other than the
Partnership GP.
4.17 Compliance with Law business so as to comply with all applicable
-------------------
Requirements of Law relating to or affecting the operations, conduct or
ownership of the property or business of the Partnership, the failure to comply
with which would, individually or in the aggregate, have a material adverse
effect on the Condition of the Partnership, provided, for purposes of this
--------
Section 4.17, the existence of any statute, law, treaty, rule, regulation or
ordinance referred to in clause (ii) of the definition of Requirements of Law
shall be subject to the Partnership's Knowledge.
4.18 Mortgage Revenue Bonds and Mortgage Revenue Documents
-----------------------------------------------------
4.18.1 The Partnership has herewith or heretofore delivered or
made available to the Merger Partnership a true, correct and complete set of all
of the files, documents and other written materials relating to the Mortgage
Revenue Bonds and the Mortgage Revenue Documents, and to each Mortgaged Property
(and, where relevant, to each Owner Partnership's obtaining title to its
Mortgaged Property), that are in the possession or control of the Partnership
and all documents related thereto that were executed by or on behalf of the
Partnership or any Owner Partnership, including, without limitation, copies of
the Mortgage Revenue Bonds, the Mortgage Revenue Documents, Environmental
Reports, any letters of credit or other credit
-13-
<PAGE>
enhancement instruments currently in effect, title insurance policies, hazard
insurance policies, flood insurance policies and other insurance policies, all
balance sheets, operating statements and other financial statements, all
existing engineering reports, soil studies and reports, plans, specifications,
architectural and engineering drawings, completion bonds, arrangements,
warranties, commitments and other similar reports, studies and items, leases and
contracts, property management and leasing brokerage agreements and other
writings whatsoever. Notwithstanding the foregoing, with respect to such files,
documents and other written materials that were prepared, received or stored by
C.R.I., Inc.'s former housing acquisition department during the time that
Richard L. Kadish was supervising such department (the "Housing Acquisition
Department Files"), the Partnership represents and warrants only that it has
herewith or heretofore delivered or made available to the Merger Partnership a
true, correct and, to the Partnership's Knowledge, complete set of the Housing
Acquisition Department Files.
4.18.2 The Partnership is the sole legal and beneficial owner
and holder of the Mortgage Revenue Bonds and the Mortgage Revenue Documents,
free and clear of any Lien, and, at the Effective Time, the Surviving
Partnership will be the sole legal and beneficial owner and holder of the
Mortgage Revenue Bonds and the Mortgage Revenue Documents, free and clear of any
Lien (without taking into account the Financing or the Bond Refinancing or any
act of the Merger Partnership). The Partnership has not endorsed, granted,
assigned, transferred or otherwise pledged, encumbered or set over the Mortgage
Revenue Bonds and/or the Mortgage Revenue Documents to any Person.
4.18.3 The amounts of unpaid principal balance of each of the
Mortgage Revenue Bonds and the amount of accrued and unpaid base interest
thereunder, specifying the amounts of deferred construction period base
interest, past due base interest and interest on such interest, are set forth in
the Disclosure Schedule.
5. Representations and Warranties of the Owner Partnerships
--------------------------------------------------------
Subject to Section 10.3 below, each of the Owner Partnerships (or, as
specified below, the Designated Owner Partnership) represents and warrants, as
to itself only, to the Merger Partnership as follows:
5.1 Formation and Qualification. Such Owner Partnership is a limited
---------------------------
partnership duly formed, validly existing and in good standing under the laws of
the State set forth opposite its name on the Disclosure Schedule and has the
requisite power to carry on its business as now conducted. Such Owner
Partnership is duly qualified, licensed and authorized as a foreign limited
partnership to do business, and is in good standing, in each jurisdiction where
the character of its properties owned or leased or the nature of its activities
makes such qualification or licensing necessary, except for failures to be so
qualified which would not, in the aggregate, have a material adverse effect on
its Condition. Copies of the certificate of limited partnership and the
agreement of limited partnership for such Owner Partnership have heretofore been
delivered or made available to the Merger Partnership and are accurate and
complete as of the date hereof. Such Owner Partnership is not in default under
or in violation of any provision
-14-
<PAGE>
of its limited partnership agreement, except for such defaults or violations
which would not have any material adverse effect on the Condition of such Owner
Partnership.
5.2 No Subsidiaries. Such Owner Partnership does not have any
---------------
Subsidiaries or any equity or similar interest, whether voting or non-voting, in
any Person. The only real and personal property owned or leased by such Owner
Partnership is the applicable Mortgaged Property owned by it as set forth in the
Disclosure Schedule, other than personal property held in the ordinary course of
business and consistent with past practices. The sole business and purpose of
such Owner Partnership is to own, manage, operate and lease the applicable
Mortgaged Property owned by it.
5.3 Partners and Capitalization. Set forth on the Disclosure
---------------------------
Schedule is a list of all of the partners in such Owner Partnership and their
respective partnership interests therein, and all of the direct and indirect
beneficial owners in each such partner and their respective ownership interests
therein. There are no outstanding options, warrants, calls, subscriptions or
other rights or other agreements or commitments obligating such Owner
Partnership or any of its Affiliates to issue, transfer or sell any additional
partnership interests of such Owner Partnership. All issued and outstanding
partner interests of such Owner Partnership are validly issued, and the purchase
price therefor has been paid in full.
5.4 Authority Relative to this Agreement. Such Owner Partnership has
------------------------------------
the requisite power and authority to enter into this Agreement and to perform
its obligations hereunder. The execution and delivery of this Agreement by such
Owner Partnership and the consummation by such Owner Partnership of the
transactions contemplated hereby have been duly authorized by all necessary
action on the part of such Owner Partnership and no other proceedings on the
part of such Owner Partnership are necessary to authorize this Agreement and the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by such Owner Partnership and constitutes a valid and binding
obligation of such Owner Partnership enforceable against such Owner Partnership
in accordance with its terms.
5.5 No Conflicts. With respect only to the Designated Owner
------------
Partnership, except as set forth in the Disclosure Schedule, neither the
execution and delivery of this Agreement by the Designated Owner Partnership nor
the consummation of the transactions contemplated hereby (excluding the
Financing and the Bond Refinancing) nor compliance by the Designated Owner
Partnership with any of the provisions hereof will (i) violate, conflict with,
or result in a breach of any provision of, or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a default) under,
or result in the termination of, or accelerate the performance required by, or
result in a right of termination or acceleration under, or result in the
creation of any Lien upon any of the properties or assets of the Designated
Owner Partnership under any of the terms, conditions or provisions of (x) the
certificate of limited partnership of the Designated Owner Partnership or the
agreement of limited partnership of the Designated Owner Partnership or (y) any
note, bond, mortgage, indenture, deed of trust, license, lease, material
agreement or other material instrument or obligation to which the Designated
Owner Partnership is a party or to which it or any of its properties or assets
may be subject, or (ii) subject to compliance with the statutes and regulations
referred to in Section 5.6 below, to the
-15-
<PAGE>
Designated Owner Partnership's Knowledge, violate any Order, statute, rule or
regulation applicable to the Designated Owner Partnership or any of its
properties or assets, except, in the case of each of clauses (i) and (ii) above,
for such violations, conflicts, breaches, defaults, terminations, accelerations,
or creations of Liens which would not, in the aggregate, have any material
adverse effect on the Condition of the Designated Owner Partnership.
5.6 Governmental Approvals. With respect only to the Designated
----------------------
Owner Partnership, except as set forth in the Disclosure Schedule, other than in
connection with or in compliance with the provisions of the limited partnership
act of the state of its formation, the Exchange Act, the Securities Act, the
"takeover" laws of various states, and the Hart-Scott-Rodino Act, to the
Designated Owner Partnership's Knowledge no notice to, filing with, or
authorization, consent or approval of any domestic or foreign public body or
authority is necessary for the consummation by the Designated Owner Partnership
of the transactions contemplated by this Agreement (excluding the Financing and
the Bond Refinancing).
5.7 Financial Statements. With respect only to the Designated Owner
--------------------
Partnership, the Designated Owner Partnership has heretofore delivered or made
available to the Merger Partnership its annual financial statements, which
financial statements are listed on the Disclosure Schedule, all of which
financial statements have been prepared in accordance with the principles of the
income tax basis of accounting applied on a consistent basis during the periods
involved (except as may be indicated in the notes thereto), and fairly present
the financial position of the Designated Owner Partnership as of the date
thereof and the results of its operations and changes in its financial position
for the periods then ended.
5.8 No Undisclosed Liabilities. With respect only to the Designated
--------------------------
Owner Partnership, the Designated Owner Partnership does not have any
Liabilities not reflected or disclosed in its financial statements referred to
in Section 5.7 above which were required to be reflected or disclosed therein in
accordance with the principles of the income tax basis of accounting. Since the
date of its financial statements referred to in Section 5.7 above, except as may
otherwise be disclosed in the Disclosure Schedule, the Designated Owner
Partnership has not incurred any such Liabilities.
5.9 Absence of Certain Changes or Events. With respect only to the
------------------------------------
Designated Owner Partnership, except as and to the extent set forth on its
applicable financial statements referred to in Section 5.7 above, or except as
described in the Disclosure Schedule, since the date of such financial
statements, there has not been (a) any material adverse change in its Condition;
(b) any entry by it into any commitment or transaction which is not in the
ordinary course of its business and consistent with past practices; (c) any
material change by it in accounting principles or methods except insofar as may
be required by a change in principles of the income tax basis of accounting; (d)
any declaration, payment or setting aside for payment of any distributions
(whether in cash or property) in respect to its partnership interests or any
other of its securities; (e) any revaluation by it of any of its assets,
including without limitation, writing off of notes or accounts receivable other
than in the ordinary course of business and consistent with past practices; (f)
any action taken by it of the type referred to in Section 6.2.4 or 6.2.5 hereof;
(g) any agreement by it to take, whether in writing or otherwise, any action
which, if
-16-
<PAGE>
taken prior to the date of this Agreement, would have made any representation or
warranty in this Section 5 untrue or incorrect; (h) any damage, destruction or
loss, whether covered by insurance or not, having an adverse effect upon its
Condition; (i) any issuance, grant, sale or pledge or agreement to issue, grant,
sell or pledge by it, with any Person other than an Affiliate of the Merger
Partnership, any partnership interests or securities convertible into or
exchangeable or exercisable for, or otherwise evidencing a right to acquire,
partnership interests; (j) any acquisition of assets by it other than in the
ordinary course of business and consistent with past practices; or (k) any
disposition, encumbrance or mortgage of any of its assets or properties other
than in the ordinary course of business and consistent with past practices.
5.10 Mortgaged Properties.
---------------------
5.10.1 With respect only to the Designated Owner Partnership,
the Designated Owner Partnership has herewith or heretofore delivered or made
available to the Merger Partnership a true, correct and complete set of all the
files, documents and other written materials relating to the Mortgaged Property
owned by the Designated Owner Partnership (and to its obtaining title to such
Mortgaged Property), or the Mortgage Revenue Bonds and the Mortgage Revenue
Documents related thereto, that are in the possession or control of the
Designated Owner Partnership and all documents related thereto that were
executed by or on behalf of the Partnership or the Designated Owner Partnership,
including, without limitation, copies of such Mortgage Revenue Bonds, such
Mortgage Revenue Documents, Environmental Reports, any letters of credit or
other credit enhancement instruments, title insurance policies, hazard insurance
policies, flood insurance policies and other insurance policies, all balance
sheets, operating statements and other financial statements, all existing
engineering reports, soil studies and reports, plans, specifications,
architectural and engineering drawings, completion bonds, arrangements,
warranties, commitments and other similar reports, studies and items, leases and
contracts, property management and leasing brokerage agreements and other
writings whatsoever. Notwithstanding the foregoing, with respect to the Housing
Acquisition Department Files, the Designated Owner Partnership represents and
warrants only that the Designated Owner Partnership has herewith or heretofore
delivered or made available to the Merger Partnership, a true, correct and, to
the Designated Owner Partnership's Knowledge, complete set of the Housing
Acquisition Department Files.
5.10.2 With respect only to each Designated Owner Partnership,
the Designated Owner Partnership has good and marketable title to the Mortgaged
Property owned by it. To the Designated Owner Partnership's Knowledge, neither
the Mortgaged Property nor other assets of the Designated Owner Partnership is
subject to any Lien except (a) Liens securing the Mortgage Revenue Bonds, (b)
Permitted Statutory Liens, (c) Liens for taxes not yet delinquent or the
validity of which are being contested in good faith by appropriate actions and
for which appropriate reserves have been made, and (d) Liens which do not in the
aggregate have an adverse effect on the Condition of the Designated Owner
Partnership.
5.11 No Action. With respect only to the Designated Owner
---------
Partnership, except for landlord/tenant collection and eviction actions or as
set forth on the Disclosure Schedule, there is no action or proceeding or
investigation pending or, to the Designated Owner
-17-
<PAGE>
Partnership's Knowledge, threatened against or involving the Designated Owner
Partnership, any properties or rights of the Designated Owner Partnership or the
Mortgaged Property owned by it which if adversely determined would, individually
or in the aggregate, have an adverse effect on the Condition of the Designated
Owner Partnership nor is the Designated Owner Partnership, its assets or such
Mortgaged Property subject to any Order which would have such an effect. Without
limiting the generality of the foregoing, the Designated Owner Partnership is
not a debtor in any state or federal bankruptcy, insolvency, liquidation,
reorganization, receivership or arrangement proceeding, and no such proceeding
is pending or has been threatened in writing.
5.12 Taxes. Except as may otherwise be set forth on the Disclosure
-----
Schedule, to such Owner Partnership's Knowledge, such Owner Partnership has duly
filed all tax returns that it was required to file and all such tax returns were
correct and complete. Such Owner Partnership constitutes a partnership for all
income tax purposes rather than a corporation or association taxable as a
corporation.
5.13 Compliance with Law. With respect only to the Designated Owner
-------------------
Partnership, the Designated Owner Partnership has conducted its business so as
to comply with all applicable Requirements of Law relating to or affecting the
operations, conduct or ownership of the property or business of such Designated
Owner Partnership, failure to comply with which would, individually or in the
aggregate, have a material adverse effect on the Condition of the Designated
Owner Partnership, provided, for purposes of this Section 5.13, the existence of
--------
any statute, law, treaty, rule, regulation or ordinance referred to in clause
(ii) of the definition of Requirements of Law shall be subject to the Designated
Owner Partnership's Knowledge.
5.14 Disclosure. With respect only to the Designated Owner
----------
Partnership, to the Designated Owner Partnership's Knowledge, no written
statement, certificate, schedule, list or other written information furnished by
or on behalf of the Designated Owner Partnership, or otherwise made available,
to the Merger Partnership pursuant to this Agreement contains or will contain
any untrue statement of a material fact or omits or will omit to state a
material fact necessary in order to make the statements herein or therein, in
light of the circumstances under which they were made, not misleading.
6. Conduct of Business Pending the Merger
--------------------------------------
6.1 Conduct of Business by the Partnership Pending the Merger. The
---------------------------------------------------------
Partnership covenants and agrees that, from the date of this Agreement until the
Effective Time, unless the Merger Partnership shall otherwise agree in writing
or as otherwise expressly contemplated by this Agreement:
6.1.1 The business of the Partnership shall be conducted only
in, and the Partnership shall not take any action except in, the ordinary course
of business and consistent with past practices, and the Partnership shall use
all commercially reasonable efforts to maintain and preserve its business
organization, assets, prospects and advantageous business relationships.
6.1.2 Except as contemplated hereby, the Partnership shall not
directly or indirectly do any of the following: (i) sell, transfer, pledge,
dispose of or encumber, except in the
-18-
<PAGE>
the ordinary course of business and consistent with past practices, any
properties or assets of the Partnership (including, without limitation, any
indebtedness owed to it, including any Mortgage Revenue Bonds, or any claims
held by it); (ii) whether or not in the ordinary course of business, sell or
dispose of any property or asset which is material to the Partnership; (iii)
whether or not in the ordinary course of business, permit any property or assets
to become subject to any material Lien, other than Permitted Statutory Liens;
(iv) amend or propose to amend the Partnership Agreement, the Partnership
Certificate or similar organizational documents, any tax returns or any Mortgage
Revenue Bonds or Mortgage Revenue Documents; (v) declare, set aside or pay any
distribution, payable in cash, securities, property or otherwise, with respect
to any of its partnership interests or BACs; provided, however, that, subject to
-------- -------
Sections 501, 502, 503, 504, 511, 512 and 513 of the American Stock Exchange
Guide, the Partnership may accrue, on a monthly basis, an amount up to $.10 per
BAC, in calendar year 1996, and pay, on a quarterly basis, such accrued amount
to the holders of BACs; (vi) redeem, purchase or otherwise acquire or offer to
redeem, purchase or otherwise acquire any partnership interests or BACs; or
(vii) authorize or propose any of the foregoing, or enter into any contract,
agreement, commitment, or arrangement to do any of the foregoing.
6.1.3 Except as contemplated hereby, the Partnership shall
not, directly or indirectly, (i) issue, sell, pledge or dispose of, or
authorize, propose or agree to the issuance, sale, pledge or disposition of, any
BACs or partnership interests, or any options, warrants or rights of any kind to
acquire any shares of, or any securities convertible into or exchangeable for
any BACs or partnership interests, or any other securities in respect of, in
lieu of, or in substitution for, BACs or partnership interests outstanding on
the date hereof; (ii) acquire (by merger, consolidation, or acquisition of stock
or assets) any other Person, or make any investment either by purchase of stock
or securities, contributions to capital, property transfer, or, except in the
ordinary course of business and consistent with past practices, purchase of any
property or assets of any other Person; (iii) incur any indebtedness for money
borrowed or issue any debt securities or assume or guarantee any of the
foregoing, except short-term indebtedness incurred in the ordinary course of
business and consistent with past practices; (iv) endorse, or otherwise as an
accommodation become responsible for, the obligations of any other Person, or
make any loans or advances other than in the ordinary course of business and
consistent with past practices; (v) voluntarily incur any other liability or
obligation (absolute, accrued, contingent or otherwise), except in the ordinary
course of business and consistent with past practices; (vi) waive, release,
grant or transfer any rights of material value or modify or change in any
material respect any agreement with or arrangement relating to any existing
material license, lease, contract or other document, other than in the ordinary
course of business and consistent with past practices; (vii) authorize or effect
any material change in its capitalization; or (viii) authorize or commit to any
of the actions prohibited in this Section 6.1.3, or enter into or modify any
contract, agreement, commitment or arrangement to do any of the actions
prohibited in this Section 6.1.3.
6.1.4. The Partnership shall not make any tax election which
may have a material adverse effect on the Condition of the Partnership or the
Merger Partnership, change any material tax accounting method or settle or
compromise any material federal, state, local or foreign income tax liability.
The Partnership GP shall halt, suspend or limit trading of BACs
-19-
<PAGE>
to the extent necessary to prevent a termination of the Partnership for income
tax purposes as a result of such trading or such trading in combination with the
consummation of the Transaction.
6.1.5 The Partnership shall not take any action or agree, in
writing or otherwise, to take any of the actions prohibited by this Section 6.1
or any action which would make any representation or warranty in Section 4
hereof untrue or incorrect in any material respect.
6.2 Conduct of Business by the Owner Partnerships Pending the Merger.
----------------------------------------------------------------
Each of the Owner Partnerships covenants and agrees, for itself only, that, from
the date of this Agreement until the Effective Time, unless the Merger
Partnership shall otherwise agree in writing or as otherwise expressly
contemplated by this Agreement:
6.2.1 The business of such Owner Partnership shall be conducted
only in, and such Owner Partnership shall not take any action except in, the
ordinary course of business and consistent with past practices, and such Owner
Partnership shall use all commercially reasonable efforts to maintain and
preserve its business organization, assets, prospects and advantageous business
relationships.
6.2.2 Except as contemplated hereby, such Owner Partnership
shall not directly or indirectly do any of the following: (i) sell, transfer,
pledge, dispose of or encumber, any properties or assets of such Owner
Partnership (including, without limitation, any Mortgaged Property, any
indebtedness owed to it or any claims held by it), other than personal property
not material to such Owner Partnership which is sold or disposed of in the
ordinary course of business consistent with past practices; (ii) permit any
property or assets to become subject to any material Lien, other than Permitted
Statutory Liens; (iii) amend or propose to amend the agreement of limited
partnership, the certificate of limited partnership or similar organizational
documents of such Owner Partnership, any tax returns or any Mortgage Revenue
Bonds or Mortgage Revenue Documents; (iv) declare, set aside or pay any
distribution, payable in cash, securities, property or otherwise, with respect
to any of its partnership interests; (v) redeem, purchase or otherwise acquire
or offer to redeem, purchase or otherwise acquire any partnership interests; or
(vi) authorize or propose any of the foregoing, or enter into any contract,
agreement, commitment, or arrangement to do any of the foregoing.
6.2.3. Except as contemplated hereby, such Owner Partnership
shall not, directly or indirectly, (i) issue, sell, pledge or dispose of, or
authorize, propose or agree to the issuance, sale, pledge or disposition of, any
partnership interests, or any options, warrants or rights of any kind to acquire
any shares of, or any securities convertible into or exchangeable for any
partnership interests, or any other securities in respect of, in lieu of, or in
substitution for, partnership interests outstanding on the date hereof; (ii)
acquire (by merger, consolidation, or acquisition of stock or assets) any other
Person, or make any investment either by purchase of stock or securities,
contributions to capital, property transfer, or purchase of any property or
assets of any other Person (other than personal property with a fair market
value of $10,000 or less purchased in the ordinary course of business and
consistent with past practices); (iii) incur any indebtedness for money borrowed
or issue any debt securities or assume or guarantee any of
-20-
<PAGE>
the foregoing, except short-term indebtedness incurred in the ordinary course of
business and consistent with past practices; (iv) endorse, or otherwise as an
accommodation become responsible for, the obligations of any other Person, or
make any loans or advances (other than loans and advances not material to such
Owner Partnership made in the ordinary course of business and consistent with
past practices); (v) voluntarily incur any other liability or obligation
(absolute, accrued, contingent or otherwise), except in the ordinary course of
business and consistent with past practices; (vi) waive, release, grant or
transfer any rights of material value or modify or change in any material
respect any agreement with or arrangement relating to any existing material
license, lease, contract or other document; (vii) authorize or effect any
material change in its capitalization; or (viii) authorize or commit to any of
the actions prohibited in this Section 6.2.3, or enter into or modify any
contract, agreement, commitment or arrangement to do any of the actions
prohibited in this Section 6.2.3. Notwithstanding the foregoing, the parties
hereby agree that each Owner Partnership may make unbudgeted expenditures of up
to $10,000 in the aggregate without the consent of the Merger Partnership.
6.2.4 Such Owner Partnership shall not make any material tax
election, change any material tax accounting method or settle or compromise any
material federal, state, local or foreign income tax liability. Such Owner
Partnership shall be permitted to file and contest any pending real estate tax
assessment appeal in the ordinary course business and consistent with past
practices, provided, that if such Owner Partnership is a Designated Owner
--------
Partnership, it shall promptly notify the Merger Partnership of any proposed or
pending increases to the valuation of its real property or the amount or rate of
real estate taxes payable thereon.
6.2.5 Such Owner Partnership shall not take any action or agree,
in writing or otherwise, to take any of the actions prohibited by this Section
6.2 or any action which would make any representation or warranty in Section 5
hereof untrue or incorrect in any material respect.
7. Additional Agreements.
---------------------
7.1 Proxy Statement; Other Filings. As promptly as practicable after
------------------------------
the date hereof, the Partnership and the Merger Partnership shall jointly
prepare and the Partnership shall file with the Commission under the Exchange
Act, and shall use all commercially reasonable efforts to have cleared by the
Commission, and promptly thereafter the Partnership shall mail to its limited
partners and holders of BACs, a proxy statement and form of proxy with respect
to the meeting of the partners of the Partnership referred to in Section 7.2
hereof, all the costs of which shall be advanced by the Merger Partnership. The
term "Proxy Statement" shall mean such proxy statement at the time it initially
is mailed to the limited partners of the Partnership and the holders of BACs and
all amendments or supplements thereto, if any, similarly filed and mailed. As
soon as practicable after the date of this Agreement, the Partnership and the
Merger Partnership shall promptly prepare and file any other filings required
under the Exchange Act, or any other federal or state securities laws relating
to the Merger and the transactions contemplated herein ("Other Filings"). The
Partnership shall notify the Merger Partnership promptly of the receipt of any
comments of the Commission and of any request by the Commission for amendments
or supplements to the Proxy Statement or by any other governmental official with
-21-
<PAGE>
respect to any Other Filing or for additional information and will supply the
Merger Partnership with copies of all correspondence between the Partnership and
its representatives, on the one hand, and the Commission or the members of its
staff or any other appropriate government official on the other hand, with
respect to the Proxy Statement and any Other Filings. The Partnership and the
Merger Partnership each shall use all commercially reasonable efforts to obtain
and furnish the information required to be included in the Proxy Statement and
any Other Filing; and the Partnership, after consultation with the Merger
Partnership, shall use all commercially reasonable efforts to respond promptly
to any comments made by the Commission with respect to the Proxy Statement and
any Other Filing and any preliminary version thereof and cause the Proxy
Statement and related form of proxy to be mailed to the limited partners of the
partnership and holders of BACs at the earliest practicable time. The
Partnership shall notify the Merger Partnership of its intention to mail the
Proxy Statement to the limited partners of the Partnership and the holders of
BACs, both orally and in writing, at least 48 hours prior to the intended time
of such mailing. The information provided and to be provided by the Merger
Partnership, CAPREIT and the Partnership, respectively, for use in the Proxy
Statement and any Other Filings shall, on the date the Proxy Statement is first
mailed to the limited partners of the Partnership and the holders of BACs or any
Other Filing is filed with the appropriate governmental official and in each
case on the date of the meeting of the limited partners of the Partnership and
the holders of BACs referred to in Section 7.2 hereof, be true and correct in
all material respects and shall not omit to state any material fact required to
be stated therein or necessary in order to make such information not false or
misleading, and the Partnership, the Merger Partnership and CAPREIT each agree
to correct any such information provided by it for use in the Proxy Statement or
any Other Filing which shall have become false or misleading. The Proxy
Statement and any Other Filing, when filed with the Commission, shall comply as
to form in all material respects with all applicable requirements of law.
7.2 Meeting of the Limited Partners. The Partnership shall take all
-------------------------------
action necessary, in accordance with the Partnership Act, the Partnership
Certificate and the Partnership Agreement to duly call, give notice of, convene
and hold a meeting of the limited partners of the Partnership as promptly as
practicable to consider and vote upon and obtain BAC Holder Approval of the
Transaction, including, without limitation, the Merger, this Agreement, sale of
Partnership GP's general partner interest pursuant to Section 2.3, and certain
amendments to the Partnership Agreement (including, without limitation, to
expressly authorize the Merger, this Agreement and the transactions contemplated
hereby and the issuance of a limited partner interest in the Partnership
pursuant to Section 7.14 below) (the "Meeting"). The Proxy Statement shall
contain the determinations and recommendations of the Partnership GP as to the
Transaction as set forth in Section 4.16 hereof. The Partnership shall use all
commercially reasonable efforts to solicit from holders of BACs proxies in favor
of adoption and approval of the Transaction and to take all other action
necessary or, in the reasonable judgment of the Merger Partnership, helpful to
secure the BAC Holder Approval of the Transaction. At any such Meeting, CAPREIT
shall vote, or cause to be voted, all of the partnership interests in the
Partnership then owned by CAPREIT or any of its Affiliates in favor of the
Transaction.
-22-
<PAGE>
7.3 Fees and Expenses.
------------------
7.3.1 If this Agreement or the transactions contemplated hereby
are terminated or abandoned, and
(i) such termination or abandonment results from the
breach by the Partnership of the covenant set forth in Section 7.5, from a
Fiduciary Out Termination or from a willful and material breach by the
Partnership of any of its covenants or agreements set forth in this
Agreement (specifically excluding any representations and warranties set
forth in Section 4); or
(ii) after the date of this Agreement and prior to or
contemporaneously with such termination or abandonment, (A) the Partnership
or the Partnership GP enters into any letter of intent or agreement with
any Person (including the Partnership or any of its Affiliates and
excluding the Merger Partnership and its Affiliates) or group (as defined
in Section 13(d)(3) of the Exchange Act) (collectively, the "Designated
Persons") relating to a (x) tender offer or exchange offer for any
outstanding BACs at a per BAC price in excess of the Merger Consideration
or (y) a Business Combination with or involving the Partnership or any of
its Affiliates, or any transaction involving a transfer of beneficial
ownership of BACs representing at least 10% of the outstanding BACs, (B)
the Partnership or the Partnership GP shall file with the Commission a
Schedule 14D-9 or similar document, or make any public announcement or
communication, (x) recommending, endorsing or supporting a proposal, plan
or intention by the Partnership or another Designated Person to effect any
of the foregoing transactions or (y) failing to recommend, endorse and
support the Transaction (unless the investment banking firm retained by the
Partnership does not deliver a Fairness Opinion), or (C) any Designated
Person shall have acquired beneficial ownership of at least 33 1/3% of the
outstanding BACs (the foregoing events are herein collectively referred to
as "Triggering Events"); or
(iii) Within 270 days from the date of termination or
abandonment of this Agreement, a Triggering Event shall have resulted in
the Partnership or any holders of outstanding BACs receiving consideration
(determined on a per BAC basis) in excess of the Merger Consideration.
then the Partnership shall pay to the Merger Partnership, within seven business
days of written request therefor, a fee in the amount of $2.25 million cash. The
parties intend that the payment of such fee and the payment of expenses as
provided in Section 7.3.2 shall be the sole remedy for breach of this Agreement
by the Partnership or any Owner Partnership and shall be made as liquidated
damages in full satisfaction of the Partnership's or any Owner Partnership's
liabilities or obligations hereunder.
7.3.2 (a) If the Transaction is terminated or abandoned due to (w) a
willful and material breach of the Merger Agreement by the Partnership or any
Owner Partnership (other than a breach consisting solely of a breach of any
representations or warranties set forth in Section 4 or 5), (x) the failure to
fulfill the conditions specified in Section 8.3.1 or
-23-
<PAGE>
8.3.3 (solely as it relates to Section 8.3.1) by the Partnership or any Owner
Partnership, (y) a Fiduciary Out Termination or (z) the election by the Merger
Partnership to terminate this Agreement pursuant to Section 9.1.9, the
Partnership shall bear all of its own expenses and, in addition, shall promptly
reimburse the Merger Partnership and its Affiliates for all reasonable out-of-
pocket expenses (including, without limitation, all fees and expenses of
counsel, outside accountants, investment banking firms, financing sources, third
party experts and third party consultants to the Merger Partnership and its
Affiliates) incurred by them or on their behalf in connection with the
Transaction and the Proxy Statement, provided, that if and only if a payment is
--------
due under this Section 7.3.2(a) and the closing under the Other Merger Agreement
shall have occurred, then the amount payable under this Section 7.3.2(a) shall
not exceed a maximum amount equal to the sum of (i) the amount of all such
reasonable out-of-pocket expenses directly allocable to the transactions
contemplated by this Agreement and (ii) 50% of the aggregate amount of any other
such expenses incurred in connection both with the transactions contemplated by
this Agreement and the transactions contemplated by the Other Merger Agreement
and not directly allocable to the transactions contemplated by the Other Merger
Agreement. Notwithstanding anything to the contrary herein, the aggregate amount
payable by the Partnership to the Merger Partnership and its Affiliates pursuant
to this Section 7.3.2(a) shall not exceed $2.6 million.
(b) Unless the Transaction is terminated or abandoned due to (w)
a willful and material breach by the Partnership or any Owner Partnership of
this Agreement, (x) the failure to fulfill the conditions specified in Section
8.3.1, 8.3.3 (solely as it relates to Section 8.3.1), or 8.3.11 by the
Partnership or any Owner Partnership, (y) a Fiduciary Out Termination or (z) the
election by the Merger Partnership to terminate this Agreement pursuant to
Section 9.1.9 or 9.1.10, the fees and expenses listed below shall be paid as
follows:
The Merger Partnership shall pay or reimburse the costs of (i)
preparing, filing, printing and distributing the Proxy Statement and reasonable
legal fees and expenses of counsel to the Merger Partnership and counsel to the
Partnership, including in its capacity as counsel for the Owner Partnerships,
and accounting fees and expenses of the Partnership's and the Owner
Partnerships' outside accountants (such fees and expenses of the Partnership's
counsel and accountants to be directly related to the Proxy Statement and the
Transaction only), (ii) any fees to lenders in connection with obtaining the
Commitment Letter or consummating the Financing or the Bond Refinancing, (iii)
any transfer taxes and/or other reasonable out-of-pocket costs payable in
connection with the Transaction, except as provided below, and (iv) the costs of
any due diligence performed by or on behalf of the Merger Partnership, including
any costs incurred by the Partnership in connection with such due diligence, but
only with the prior approval by the Merger Partnership of any such cost
incurrence. The Partnership shall pay the costs of (A) obtaining the Fairness
Opinion and related legal and accounting fees and expenses, (B) the legal and
accounting fees and expenses of the Partnership incurred in connection with the
negotiation of this Agreement and (C) reimbursement of staff time and other
internal costs of the Partnership GP and its Affiliates.
(c) The Partnership agrees that, without at least 14 days' prior
notice to the Merger Partnership and the prior written consent of the Merger
Partnership, the Partnership
-24-
<PAGE>
shall not pay or incur in excess of $75,000 for reimbursement of staff time or
other internal costs of the Partnership GP and its Affiliates through December
31, 1995. If the Closing Date shall not occur on or prior to December 31, 1995,
the Partnership shall prepare new projections of such expenses by calendar
quarter, subject to the review by the Merger Partnership in its reasonable
judgment, and shall not pay or incur expenses except as consistent with past
practice in terms of the method of allocation.
(d) Any request for reimbursement under Section 7.3.2(a) or (b)
shall be made together with itemized invoices or other appropriate expense
documentation. CAPREIT and its representatives shall have the right to review
and audit all third party payments made by the Partnership, including, without
limitation, the fees and expenses of legal counsel and accountants, and the
Partnership shall provide CAPREIT with any documentation that CAPREIT or its
representatives shall reasonably request in connection with such review and
audit.
(e) Except as provided in this Section 7.3.2 or otherwise in
this Agreement, all costs and expenses incurred in connection with the
Transaction shall be paid by the party incurring such expenses, whether or not
the Transaction is consummated and, in any case, the Partnership GP shall pay
its own legal fees and other expenses.
7.4 Further Agreements
------------------
7.4.1 Subject to the terms and conditions herein provided, each
of the parties hereto agrees to use all commercially reasonable efforts to take,
or cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable to consummate and make effective as promptly as
practicable the transactions contemplated by this Agreement and to cooperate
with each other in connection with the foregoing, including (i) using all
commercially reasonable efforts to obtain all necessary waivers, consents and
approvals from other parties to loan agreements, leases and other contracts and
instruments; (ii) using all commercially reasonable efforts (a) to obtain all
necessary consents, approvals and authorizations as are required to be obtained
under any federal, state or foreign law or regulations, (b) to defend all
lawsuits or other legal proceedings challenging this Agreement or the
consummation of the transactions contemplated hereby (collectively, "Designated
Actions"), (c) to lift or rescind any injunction or restraining order or other
order adversely affecting the ability of the parties to consummate the
transactions contemplated hereby, and (d) to effect all necessary registrations
and filings, including, but not limited to, filings under the Hart-Scott-Rodino
Act, if any, and submissions of information requested by governmental
authorities. For purposes of the foregoing sentence, the obligations of the
Partnership and the Merger Partnership to use "all commercially reasonable
efforts" to obtain waivers, consents and approvals to loan agreements, leases
and other contracts shall not include any obligation to agree to an adverse
modification of the terms of such documents or to pay or incur additional
obligations to such other parties.
7.4.2 In connection with any Designated Action, the Partnership
hereby agrees to: (i) promptly deliver to the Merger Partnership copies of all
complaints, pleadings and other filings relating to any Designated Action; (ii)
provide drafts of its reply, motions and other
-25-
<PAGE>
pleadings to the Merger Partnership for review and comment prior to filing or
serving any such reply, motion or pleading and not to file any such reply,
motion or pleading until the earlier of (x) receipt of consent from the Merger
Partnership or (y) the day of the deadline for such motion, reply or pleading;
and (iii) consult with the Merger Partnership in a timely manner prior to taking
any other action.
7.5 Shop Limitation.
----------------
7.5.1 Subject to Section 7.5.2 below, each of the Partnership
and the Partnership GP will not, directly or indirectly, through any general
partner, officer, director, agent, or Affiliate of any of the foregoing, or
otherwise (i) solicit, initiate or invite the submission of inquiries, proposals
or offers from any Person relating to any Business Combination, or (ii) enter
into or participate in any discussions or negotiations regarding any of the
foregoing, or furnish to any Person any information with respect to the
business, properties or assets of the Partnership or any of the foregoing, or
(iii) otherwise cooperate in any way with, or assist or participate in,
facilitate or encourage, any effort or attempt by any Person to do or seek any
of the foregoing. The Partnership shall immediately notify the Merger
Partnership if any such proposal or offer, or any inquiry or contact with any
Person with respect thereto, is made.
7.5.2 If the Partnership GP is required because of its fiduciary
obligations to the holders of BACs to respond to an unsolicited inquiry, contact
or proposal related to a Business Combination made by a third party to the
Partnership (an "Alternative Proposal"), nothing in this Agreement shall
prohibit the Partnership GP or the Partnership from responding to such
Alternative Proposal, making any required disclosures under federal securities
laws, providing information regarding the Partnership to the party making such
Alternative Proposal, negotiating with such party in good faith, terminating
this Agreement or taking any other action otherwise prohibited by Section 7.5.1
above because it is required to by fiduciary obligations to accept an
Alternative Proposal (a "Fiduciary Out Termination"); provided, however, that
-------- -------
the Partnership agrees to give the Merger Partnership reasonable notice of any
such response, negotiations or other matters, as well as a reasonable
opportunity to respond, taking into account in good faith the facts and
circumstances prevailing at the time of such response, negotiation or other
matters.
7.6 Additional Financial Statements. (a) As soon as reasonably
-------------------------------
practicable after they become publicly available, the Partnership shall furnish
the Merger Partnership with (i) a consolidated balance sheet of the Partnership
and related consolidated statements of operations and cash flows for all
quarterly periods subsequent to the Balance Sheet Date and prior to the
Effective Time, accompanied by statements by the Partnership GP that, in the
opinion of the Partnership GP, such financial statements of the Partnership have
been prepared pursuant to the rules and regulations of the Commission and fairly
present (subject, in the case of unaudited financial statements, to changes
resulting from year-end audit adjustments and other adjustments of a normal and
recurring nature) the consolidated financial condition and results of operations
of the Partnership, as of the dates and for the periods covered by such
statements and (ii) any other financial statements that the Partnership shall
prepare for any interim period subsequent to the Balance Sheet Date and prior to
the Effective Time.
-26-
<PAGE>
(b) As soon as reasonably practicable after they are prepared,
each Owner Partnership shall furnish the Merger Partnership with (i) a balance
sheet of such Owner Partnership and related statements of operations, changes in
partners' deficit and cash flows for all annual periods subsequent to the date
hereof and prior to the Effective Time, accompanied by statements by its general
partner that, in the opinion of such general partner, such financial statements
have been prepared in conformity with the income tax basis of accounting applied
on a consistent basis and fairly present (subject, in the case of unaudited
financial statements, to changes resulting from year-end audit adjustments) the
financial condition, results of operations and cash flows of such Owner
Partnership, as of the dates and for the periods covered by such statements and
(ii) any other financial statements that such Owner Partnership shall prepare
for any interim period subsequent to the date hereof and prior to the Effective
Time.
7.7 Access to Information; Confidentiality
--------------------------------------
7.7.1 Each of the Partnership and the Owner Partnerships shall,
and shall cause its employees, consultants, accountants, counsel and agents to,
afford to the Merger Partnership and its representatives and to the banks,
lenders, financial institutions and others providing financing for the
Transaction and others, complete access at all reasonable times to, from the
date of this Agreement until the Effective Time, its offices, facilities,
personnel, properties, books, records and contracts, and shall furnish the
Merger Partnership and its representatives and such banks, lenders, financial
institutions and others all financial, operating and other data and information
as the Merger Partnership and its representatives and such banks, lenders,
financial institutions and others, through their respective officers, employees
or agents, may reasonably request.
7.7.2 The confidentiality agreement, dated February 10, 1995,
between CAPREIT and the Partnership shall remain in full force and effect in
accordance with its terms and shall apply to any information provided pursuant
to this Section 7.7 or otherwise under this Agreement. The Merger Partnership
hereby adopts and agrees on behalf of itself and its Affiliates to be bound by
all of the terms and conditions of such confidentiality agreement, as if
restated in full herein.
7.7.3 No investigation pursuant to this Section 7.7 shall affect
any representations or warranties of the parties herein or the conditions to the
obligations of the parties hereto.
7.8 Public Announcements concerning this Agreement or the Transaction
--------------------
shall be issued without advance approval of the form and substance thereof by
the Partnership and the Merger Partnership. Notwithstanding the foregoing, each
of the Partnership and the Merger Partnership will use all commercially
reasonable efforts to consult with each other before issuing any press release
or otherwise making any public statements with respect hereto, provided, such
--------
obligation to use all commercially reasonable efforts shall be deemed satisfied
if a draft of a press release or announcement is delivered for comment at least
24 hours prior to public release.
-27-
<PAGE>
7.9 Agreement to Defend and Indemnify. For a period of 3 years and 6
---------------------------------
months from and after the Effective Time, the Surviving Partnership will
continue in full force and effect for the benefit of the Partnership GP, the
Assignor Limited Partner and their Affiliates the provisions of the Partnership
Agreement, as currently in effect, related to indemnification of the Partnership
GP, the Assignor Limited Partner and their Affiliates as if the Partnership GP
and the Assignor Limited Partner continued to serve the Partnership as general
partner and assignor limited partner, respectively, after the Effective Time.
CAPREIT hereby guarantees the obligations of the Surviving Partnership under
this Section 7.9 as if it were the indemnifying party thereunder, except that
its obligations shall not be limited to the assets of the Surviving Partnership.
For purposes of this Section 7.9 only, the term Affiliates shall have the
meaning ascribed to such term in Section 5.08 of the Partnership Agreement.
7.10 Notification of Certain Matters. Each of the Partnership and
-------------------------------
the Owner Partnerships shall give prompt notice to the Merger Partnership, and
the Merger Partnership and its Affiliates shall give prompt notice to the
Partnership and the pertinent Owner Partnership, as the case may be, of (i) the
occurrence, or failure to occur, of any event which occurrence or failure would
be likely to cause any representation or warranty contained in this Agreement
and made by it to be untrue or inaccurate in any material respect at any time
from the date hereof to the Effective Time, and (ii) any material failure of the
Partnership, any Owner Partnership or the Merger Partnership, as the case may
be, or of any general partner, officer, director, employee or agent of any
thereof, to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder, provided, however, that no such
-------- -------
notifications shall affect the representations or warranties of the parties or
the conditions to the obligations of the parties hereunder.
7.11 Cooperation. Each of the Partnership and the Partnership GP
-----------
shall use all commercially reasonable efforts to assist, and cooperate with, the
Merger Partnership, CAPREIT and their respective Affiliates in consummating the
Financing, the Bond Refinancing and related transactions. In this regard, the
Partnership and the Partnership GP consent to, and shall use all commercially
reasonable efforts to assist, and cooperate with, the Merger Partnership,
CAPREIT and their respective Affiliates with respect to, contacts by
representatives of the Merger Partnership, CAPREIT and their Affiliates with
issuers of the Mortgage Revenue Bonds and their representatives; provided, that
--------
no Bond Refinancing shall close prior to the Effective Time. The Partnership
and the Partnership GP shall be reimbursed for all reasonable out-of-pocket
costs incurred by them in connection with such assistance and cooperation.
7.12 Acquisition. (a) On the Closing Date, C.R.I., Inc. ("CRI")
-----------
shall sell, assign and transfer to a designee of CAPREIT its rights under the
agreement pursuant to which the mortgage servicing and administrative fees are
payable to CRI by the owners of the Mortgaged Properties, including the right to
all fees thereunder for a price of $667,485 in cash, payable to CRI for
servicing and administrative fees accrued through June 30, 1995.
(b) On the Closing Date and subject to the approval of its board
of directors and further subject to any necessary modification of the Memorandum
of Understanding (as defined in Section 8.1.4), CRIIMI Mae Services Limited
Partnership
-28-
<PAGE>
("CRIIMI") shall sell, assign and transfer to a designee of CAPREIT its rights
under the agreement pursuant to which mortgage servicing and administrative fees
are payable to CRIIMI by the owners of the Mortgaged Properties, including the
right to all fees thereunder, whether accrued as of the date hereof or that
shall accrue or become payable from and after the date hereof, for a price of
$566,676 in cash, payable to CRIIMI for servicing and administrative fees
accrued from July 1, 1995 through the Closing Date (the "Accrued Fee Amount"),
provided, that if the Closing shall occur after June 30, 1996, then the Accrued
- --------
Fee Amount shall be increased at the rate of $47,223 per month, it being
understood that any partial month shall be pro rated according to the actual
number of days elapsed.
7.13 Treatment of Owner Partnerships. At the sole discretion of
-------------------------------
CAPREIT, each of the Owner Partnerships shall be treated as provided in one or
more of the following subsections:
(a) On the Closing Date, each of the partners of the Owner
Partnerships shall sell, assign and transfer to CAPREIT or a designee thereof,
for no additional consideration, all of the partnership interests in such Owner
Partnership, all on terms and conditions to be determined by CAPREIT and the
Owner Partnership;
(b) On the Closing Date, each of the partners of each of the
Owner Partnerships shall admit CAPREIT or its designee as the managing general
partner of each of the Owner Partnerships, the partnership interests of each of
the other partners of each of the Owner Partnerships shall be converted into
limited partner interests in the applicable Owner Partnership, which limited
partner interests shall not be transferable, and CAPREIT shall have the option
to purchase such limited partner interests at any time during the five (5) year
period following the Closing Date for fair market value, which fair market value
shall be deemed for the purposes hereof to be the proportionate interest of such
limited partner in the value of the property as encumbered; as managing general
partner, CAPREIT or its designee shall have exclusive power and authority to
consummate any Bond Refinancings without the consent of any of the partners; or
(c) On the Closing Date, each of the Owner Partnerships shall
sell, assign and transfer to CAPREIT or its designee, for no additional
consideration and at no additional cost to the Owner Partnerships, all of the
real property and other assets of such Owner Partnerships, all on terms and
conditions to be determined by CAPREIT and the Owner Partnerships.
7.14 Partnership Interests. On the Closing Date and concurrently
---------------------
with or immediately prior to the Merger, at the request of CAPREIT, the
Partnership shall issue to a designee of CAPREIT a limited partner interest in
the Partnership in exchange for a capital contribution of certain real
properties and/or other assets, all on terms and conditions to be determined by
CAPREIT and the Partnership; provided that such issuance of a limited
--------
partnership interest shall not be effective unless the Merger is consummated.
7.15 Tax Returns. (a) Neither the Merger Partnership nor CAPREIT
-----------
shall cause the Surviving Partnership to, and the Surviving Partnership shall
not, (x) amend any
-29-
<PAGE>
portion of any tax returns for years ending prior to the Effective Time to the
extent that such portion relates to the accrual of interest on the Mortgage
Revenue Bonds or (y) without the prior consent of the Partnership GP or its
designee, which consent shall not be unreasonably withheld, otherwise amend, in
any material respect, tax returns for years ending prior to the Effective Time.
(b) The Surviving Partnership, CAPREIT and the Partnership GP
shall use all commercially reasonable efforts to cooperate with and assist each
other so that, after the Closing Date, all tax returns of the Partnership for
the period ending on the Closing Date shall be timely filed and that Schedules
K-1 shall be timely delivered to those Persons who were holders of BACs prior to
the Closing Date. The cost of such filing and delivery shall be borne by the
Surviving Partnership.
7.16 Notice of Failure to Satisfy Closing Conditions.
-----------------------------------------------
(a) In the event that the Merger Partnership determines, on or
after the date that the Partnership shall deliver a final Disclosure Schedule
pursuant to Section 2.7 above and on or prior to the Closing Date, that any
condition to the Merger Partnership's or the Partnership's obligation to close
pursuant to Section 8 will not be satisfied on or prior to the Closing Date, the
Merger Partnership shall give prompt notice to the Partnership and, in the case
of Sections 8.1 and 8.3, shall provide the Partnership a period of ten business
days for the Partnership to satisfy all such conditions.
(b) In the event that the Partnership determines on or prior to
the Closing Date that any condition to the Partnership's or the Merger
Partnership's obligation to close pursuant to Section 8 will not be satisfied on
or prior to the Closing Date, the Partnership shall give prompt notice to the
Merger Partnership and, in the case of Sections 8.1 and 8.2, shall provide the
Merger Partnership a period of ten business days for the Merger Partnership to
satisfy all such conditions.
8. Conditions.
----------
8.1 Conditions to Obligation of Each Party to Effect the
----------------------------------------------------
Transaction. The respective obligations of each party to effect the Transaction
- -----------
shall be subject to the fulfillment at or prior to the Effective Time of each of
the following conditions:
8.1.1 All approvals, notices, filings, registrations and
authorizations of any governmental authority required for consummation of the
Transaction, including, without limitation, under the Hart-Scott-Rodino Act,
shall have been obtained or made.
8.1.2 BAC Holder Approval for the Transaction shall have been
obtained in accordance with the Partnership Act and the Partnership Agreement.
8.1.3 No preliminary or permanent injunction or other order,
decree or ruling issued by a court of competent jurisdiction or by a
governmental, regulatory or administrative agency or commission, nor any
statute, rule, regulation or executive order
-30-
<PAGE>
promulgated or enacted by a governmental authority shall be in effect which
would prevent the consummation of the Transaction.
8.1.4 A court of competent jurisdiction shall have approved of
the settlement of the cases captioned Zakin v. Dockser, et. al. and Wingard v.
------------------------- ----------
Dockser, et. al. (the "Suits") filed in connection with the transactions
- ----------------
contemplated hereunder, substantially as such settlement is set forth in the
Stipulation of Settlement, dated as of March 17, 1996, as amended by an
Amendment thereto dated August 13, 1996 among the counsel to the plaintiffs and
the defendants named in the Suits, or as otherwise agreed by the parties, and
such approval shall be final and non-appealable.
8.2 Additional Conditions to the Obligation of the Partnership. The
----------------------------------------------------------
obligation of the Partnership to effect the Transaction is also subject to the
fulfillment at or prior to the Effective Time of each of the following
conditions:
8.2.1 The Merger Partnership shall in all material respects
have performed each obligation to be performed by it hereunder on or prior to
the Effective Time.
8.2.2 The representations and warranties of the Merger
Partnership set forth in this Agreement shall be true and correct in all
material respects at and as of the Effective Time as if made at and as of such
time, except to the extent that any such representation or warranty is made as
of a specified date, in which case such representation or warranty shall have
been true and correct as of such date.
8.2.3 The Partnership shall have received a certificate of the
Merger Partnership, dated the Closing Date, signed by the Merger Partnership GP,
to the effect that the conditions specified in Sections 8.2.1 and 8.2.2 have
been fulfilled.
8.2.4 A favorable opinion (the "Fairness Opinion") of an
investment banking firm reasonably acceptable to the Partnership as to the
fairness of the Merger Consideration to the holders of the BACs, from a
financial point of view, shall have been delivered to the Partnership.
8.3 Additional Conditions to the Obligations of the Merger
------------------------------------------------------
Partnership. The obligation of the Merger Partnership to effect the Transaction
- -----------
is also subject to the fulfillment at or prior to the Effective Time, or such
earlier date as specified therein, of each of the following conditions:
8.3.1 Each of the Partnership and the Owner Partnerships shall
in all material respects have performed each obligation to be performed by it
hereunder on or prior to the Effective Time.
8.3.2 [Intentionally Omitted.]
8.3.3 The Merger Partnership shall have received certificates
of each of the Partnership and the Owner Partnerships, dated the Closing Date,
signed by the Partnership
-31-
<PAGE>
GP or the general partner of the Owner Partnerships, as applicable, to the
effect that the condition specified in Section 8.3.1 has been fulfilled.
8.3.4 The Merger Partnership shall have received evidence, in
form and substance reasonably satisfactory to its counsel, that such licenses,
permits, consents, approvals, waivers, authorizations, qualifications and orders
of domestic governmental authorities and parties to contracts and leases with
the Partnership or any Owner Partnership as are necessary in connection with the
consummation of the transactions contemplated hereby (excluding (a) licenses,
permits, consents, approvals, authorizations, qualifications or orders, the
failure to obtain which after the consummation of the transactions contemplated
hereby, in the aggregate, will not have a material adverse effect on the
Condition of the Partnership or any Owner Partnership and (b) consents of
issuers with respect to modification of the Mortgage Revenue Bonds), have been
obtained, provided, that unless the Merger Partnership gives notice to the
--------
Partnership prior to the Mailing Date that the Merger Partnership has no
obligation to effect the Transaction because of the failure of the condition set
forth in this Section 8.3.4, such condition shall be deemed waived.
8.3.5 No action, suit or proceeding before any court or
governmental authority shall have been commenced and be pending by any Person
against the Partnership or the Merger Partnership or any of their Affiliates,
partners, officers or directors seeking to restrain, prevent, change or delay in
any material respect any of the terms or provisions of the Transaction or
seeking material damages in connection therewith.
8.3.6 The Merger Partnership, CAPREIT and its lenders shall
have received the favorable legal opinion of Arent Fox Kintner Plotkin & Kahn
substantially to the effect set forth in Exhibit G.
8.3.7 The Financing shall have been consummated in accordance
with the terms of the Commitment Letter.
8.3.8 Neither the Partnership nor any Owner Partnership shall
have undergone a material adverse change in its Condition or its ability to
perform its obligations under this Agreement. For purposes of this Section
8.3.8, the discovery after the Mailing Date of a fact which fact is materially
adverse to the Condition of the Partnership or any Owner Partnership and which
could not have been reasonably discovered by the Merger Partnership or its
Affiliates on or prior to the Mailing Date shall be deemed to be a material
adverse change to the Condition of the Partnership or such Owner Partnership or
such Mortgaged Property.
8.3.9 Partnership GP shall have transferred its 1.01% general
partnership interest in the Partnership to a newly-formed, wholly-owned
subsidiary of CAPREIT.
8.3.10 The closing of the merger under the Other Merger
Agreement shall be occurring concurrently with the Merger.
-32-
<PAGE>
8.3.11 The Merger Partnership shall have determined that the
legal, accounting and business due diligence investigation of the Partnership
and the Owner Partnerships to be conducted by or on behalf of the Merger
Partnership, including, without limitation, any information obtained from the
Disclosure Schedule, has not revealed that proceeding with the Transaction would
be inadvisable or contrary to the Merger Partnership's best interests, provided,
--------
that, unless the Merger Partnership gives notice to the Partnership prior to the
Mailing Date that the Merger Partnership has no obligation to effect the
Transaction because of the failure of the condition set forth in this Section
8.3.11, such condition shall be deemed to be waived.
8.3.12 All of the partnership or other interests in each of
the Owner Partnerships shall be concurrently transferred to CAPREIT or a
designee thereof pursuant to Section 7.13 above, except as otherwise provided in
Section 7.13.
8.3.13 The amount of Available Cash shall not be less than,
(i) from the date hereof through September 30, 1996, $5,566,370, (ii) from
October 1 through October 31, 1996, $5,399,140, (iii) from November 1, 1996
through November 30, 1996, $5,351,360, and (iv) from December 1, 1995 through
December 31, 1996, $5,303,580.
9. Termination, Amendment and Waiver.
----------------------------------
9.1 Termination. This Agreement may be terminated and the
-----------
Transaction contemplated hereby may be abandoned, by written notice promptly
given to the other parties hereto, at any time prior to the Effective Time,
whether prior to or after BAC Holder Approval of the Transaction:
9.1.1 By mutual written consent of the Merger Partnership
and the Partnership;
9.1.2 By either the Merger Partnership or the Partnership,
if a court of competent jurisdiction or governmental, regulatory or
administrative agency or commission shall have issued an order, decree or ruling
or taken any other action, in each case permanently restraining, enjoining or
otherwise prohibiting the transactions contemplated by this Agreement and such
order, decree, ruling or other action shall have become final and nonappealable;
9.1.3 By either the Merger Partnership or the Partnership,
if the Effective Time shall not have occurred on or before the Termination Date,
unless the absence of such occurrence shall be due to the failure of the party
seeking to terminate this Agreement to perform in all material respects each of
its obligations under this Agreement required to be performed by it prior to the
Effective Time;
9.1.4 By either the Merger Partnership or the Partnership,
if at the Meeting (including any adjournment thereof) BAC Holder Approval of the
Transaction shall not be obtained;
9.1.5 By the Merger Partnership, if the Partnership or the
Partnership GP shall have (i) withdrawn, modified or amended in any respect its
approval or recommendation of
-33-
<PAGE>
the Transaction as set forth in Section 4.16 hereof, (ii) failed to include in
the Proxy Statement such recommendation (including the recommendation that the
holders of each class of outstanding BACs vote in favor of the Transaction), or
(iii) taken any public position inconsistent with such recommendation;
9.1.6 By the Merger Partnership, if the Partnership or any
Owner Partnership fails to perform in all material respects its obligations
under this Agreement;
9.1.7 By the Merger Partnership, if there shall have
occurred a material adverse change in the Condition of the Partnership or any
Owner Partnership since the date of this Agreement; or
9.1.8 By the Partnership, if the Merger Partnership fails
to perform in all material respects its obligations under this Agreement.
9.1.9 By the Merger Partnership, if the Partnership shall
have settled or compromised any Designated Action without the prior written
consent of the Merger Partnership, unless such settlement or compromise (i)
requires the payment of money by the Partnership in an amount which, when
aggregated with the amount of money paid or payable in connection with all other
Designated Actions, does not exceed $812,500 and (ii) does not include any other
material term or condition to which the Merger Partnership shall reasonably
object.
9.1.10 By the Merger Partnership, if, prior to the
Effective Time, the representations and warranties of each of the Partnership
and the Owner Partnerships set forth in this Agreement shall not be true and
correct in all material respects at any time as if made as of such time, except
to the extent that any such representation or warranty is made as of a specific
date, in which case such representation or warranty shall have been true and
correct as of such date, provided, that for purposes of this Section 9.1.10, (x)
--------
the representations and warranties set forth in Sections 4.14 and 5.14 shall be
deemed to have been made irrespective of the qualification contained therein as
to the Knowledge of the Partnership or the Designated Owner Partnership, and (y)
the representations and warranties set forth in Sections 5.5, 5.6, 5.9, 5.10,
5.11, 5.12 and 5.13 shall not be deemed to have been breached solely as the
result of any act or omission occurring after November 1, 1995.
9.1.11 By the Partnership, in accordance with Section
8.2.5, if there shall have been a failure of the condition set forth therein.
9.2 Effect of Termination. In the event of the termination of this
---------------------
Agreement and abandonment of the Transaction as provided in Section 9.1 hereof,
this Agreement shall forthwith become void and there shall be no liability on
the part of the Merger Partnership or the Partnership, except as set forth in
Section 7.3 hereof and Section 7.7.2 hereof and except to the extent that such
termination results from the wilful breach of a party hereto of any of its
covenants or agreements set forth in this Agreement.
9.3 Amendment. This Agreement may not be amended except by an
---------
instrument in writing signed on behalf of each of the parties hereto; provided,
--------
however, that after
- -------
-34-
<PAGE>
the BAC Holder Approval of the Transaction has been obtained, no amendment may
be made which changes the amount of cash to be paid for the BACs, or effects any
change which would adversely affect the holders of BACs without the further BAC
Holder Approval.
9.4 Waiver. At any time prior to the Effective Time, whether before
------
or after the Meeting, any party hereto, by a writing executed by its general
partner, may (i) extend the time for the performance of any of the obligations
or other acts of any other party hereto or (ii) subject to the proviso contained
in Section 9.3 hereof, waive compliance with any of the agreements of any other
party or with any conditions to its own obligations, except that the Partnership
may not waive the condition set forth in Section 8.1.4.
10. General Provisions
------------------
10.1 Notices. All notices and other communications hereunder shall
-------
be in writing and shall be deemed to have been duly given if delivered
personally or sent by telegram, telecopier or three business days after it is
sent by registered or certified mail, return receipt requested, postage prepaid,
to the parties at the following addresses or at such other addresses as shall be
specified by the parties by like notice:
(a) if to the Merger Partnership or CAPREIT:
Watermark III Partners, L.P.
c/o Capital Apartment Properties, Inc.
11200 Rockville Pike
Rockville, Maryland 20852
Attention: Richard Kadish, President
Facsimile: (301) 231-0391
(b) with copies to:
Apollo Real Estate Advisors, L.P.
1301 Avenue of the Americas
38th Floor
New York, New York, 10019
Attention: Richard Mack
Facsimile: (212) 261-4060
and
Schulte Roth & Zabel
900 Third Avenue
New York, New York 10022
Attention: Burton Lehman, Esq.
Facsimile: (212) 593-5955
-35-
<PAGE>
(b) if to the Partnership, the Partnership GP or any Owner Partnership:
c/o C.R.I., Inc.
11200 Rockville Pike
Rockville, Maryland 20852
Attention: William B. Dockser, Chairman, and H. William
Willoughby, President
Facsimile: (301) 231-0396
with a copy to:
Melissa Lackey, General Counsel
Facsimile: (301) 468-3150
and
Arent Fox Kintner Plotkin & Kahn
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036-5339
Attention: Robert B. Hirsch, Esq.
Facsimile: (202) 857-6395
10.2 Certain Definitions As used in this Agreement, the following
-------------------
terms shall have the meanings indicated below:
"Affiliate" means, with respect to any Person, any other Person
---------
controlling, controlled by or under common control with, or the parents, spouse,
lineal descendants or beneficiaries of, such Person, provided, that, in any
case, (i) the following Persons shall be deemed to be Affiliates of the
Partnership: CRITEF III Associates Limited Partnership, C.R.I., Inc. and CRITEF
III, Inc. and (ii) the following Persons shall be deemed Affiliates of the
Merger Partnership: CAPREIT and CAPREIT Residential Corporation.
"Assignor Limited Partner" means CRITEF III, Inc., a Delaware
------------------------
corporation and the sole limited partner of the Partnership.
"BAC Holder Approval" means the approval of the limited partners of
-------------------
the Partnership, with the Assignor Limited Partner, pursuant to the Partnership
Agreement, voting as instructed by the holders of the BACs.
"Bond Refinancing" means the transaction pursuant to which the
----------------
Mortgage Revenue Bonds will be sold, amended, refinanced, or reissued, the
closing of which shall not occur until after the Effective Time.
"Business Combination" means any acquisition or purchase of assets of,
--------------------
or any equity interest in, the Partnership or any tender offer (including a self
tender offer), exchange
-36-
<PAGE>
offer, merger, consolidation, business combination, sale of substantial assets
or of a substantial amount of assets, sale of securities, recapitalization,
reorganization, refinancing, refunding, liquidation, dissolution or similar
transactions involving the Partnership or other transactions involving any vote
or consent of the holders of any class of BACs.
"Closing Date" means the date upon which the Merger occurs.
------------
"Code" means the Internal Revenue Code of 1986, as amended from time
----
to time, and, unless the context otherwise requires, the rules and regulations
promulgated thereunder, from time to time.
"Commission" means the Securities and Exchange Commission or any
----------
successor agency.
"Commitment Letter" means one or more commitment letters or loan,
-----------------
securities purchase, financing or similar agreements providing a financial
commitment or obligation to provide debt financing for the Transaction.
"Condition" means, with respect to any Person, the business, assets,
---------
properties, results of operations, financial or other condition or prospects of
such Person and its Subsidiaries, taken as a whole.
"Designated Owner Partnership" means Geary Courtyard Associates.
----------------------------
"Disclosure Schedule" means the Disclosure Schedule setting forth
-------------------
certain information concerning the Partnership and its assets required to be
delivered by the Partnership to the Merger Partnership pursuant to Section 2.7
above.
"Environmental Laws" includes the Comprehensive Environmental
------------------
Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. 9601 et seq, as
amended; the Resource Conservation and Recovery Act ("RCRA), 42 U.S.C. 6901 et
seq, as amended; the Clean Air Act ("CAA"), 42 U.S.C. 7401 et seq, as amended;
the Clean Water Act ("CWA"), 33 U.S.C. 1251 et seq., as amended; the
Occupational Safety and Health Act ("OSHA"), 29 U.S.C. 655 et seq., and any
other federal, state, local or municipal laws, statutes, regulations, rules or
ordinances imposing liability or establishing standards of conduct for
protection of the environment.
"Environmental Reports" means all environmental site assessments,
---------------------
remedial investigations/feasibility studies, reports, studies, tests or other
documents relating to environmental compliance or the presence of Hazardous
Materials at any of properties presently or formerly owned or operated by the
Partnership or any predecessor in interest or any Mortgaged Property, at any
facility which may have received Hazardous Materials generated by any property
currently or formerly owned or operated by the Partnership or at any Mortgaged
Property.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
-32-
<PAGE>
"Financing" means the debt financing of the Merger and the other
---------
transactions contemplated hereby.
"Hart-Scott-Rodino Act" means the Hart-Scott-Rodino Antitrust
---------------------
Improvements Act of 1976, as amended, and the rules and regulations thereunder.
"Individual Affiliate" means any Person who is now, or at any time
--------------------
since January 1, 1990 has been, (a) a Partner of the Partnership, (b) a director
or officer of the corporate general partner of the Partnership GP, (c) a
director, officer or shareholder of the Assignor Limited Partner or (d) any
"associate" (as defined in the rules pursuant to the Exchange Act) of any of the
above.
"Knowledge" means (i) with respect to the Partnership, the knowledge
---------
of (a) the Partnership GP, (b) the general partners of the Partnership GP and
(c) with respect to the entities referred to in the preceding clause (b) any of
such entities current officers and directors; (ii) with respect to each Owner
Partnership or the Designated Owner Partnership, the knowledge of (a) any
general partner of such Owner Partnership or the Designated Owner Partnership
and (b) any of such general partner's current officers or directors; and (iii)
with respect to the Merger Partnership, the knowledge of CAPREIT and its
Affiliates and their current officers and directors.
"Lien" means any lien, pledge, mortgage, security interest, claim,
----
lease, charge, option, right of first refusal, easement, servitude, encumbrance,
participation interest, assignment, or other restriction or limitation.
"Mailing Date" means the first day on which the Proxy Statement is
------------
mailed to the holders of BACs pursuant to Section 7.1 above.
"Mortgaged Property" means the land and the buildings thereon and
------------------
other assets securing the payment of the Mortgage Revenue Bonds.
"Mortgage Revenue Bonds" means the mortgage revenue bonds owned by the
----------------------
Partnership, as described on the Disclosure Schedule.
"Mortgage Revenue Documents" means all notes, loan agreements,
--------------------------
indentures, land use restriction agreements, security agreements, mortgages and
other agreements, instruments or documents, including all amendments and
releases, evidencing, relating to or executed in connection with the Mortgage
Revenue Bonds or any security interest in the Mortgaged Properties.
"Order" means any judgement, ruling, order, writ, injunction, decree,
-----
determination or requirement of any arbitrator or court or of any governmental
or regulatory body, authority or agency, whether federal, state or local,
domestic or foreign.
-38-
<PAGE>
"Other Merger Agreement" means the Agreement and Plan of Merger, dated
----------------------
as of the date hereof, among Watermark Partners, L.P., Capital Realty Investors
Tax Exempt Fund Limited Partnership and CRITEF Associates Limited Partnership.
"Owner Partnerships" means the Designated Owner Partnership, Ethans,
------------------
CRICO of Regency Woods Limited Partnership, CRICO of Ocean Walk Limited
Partnership, CRICO of Valley Creek II Limited Partnership, and CRICO of Woodlane
Place Limited Partnership.
"Permitted Statutory Liens" means statutory Liens of landlords,
-------------------------
carriers, warehousemen, mechanics and materialmen and other similar Liens
imposed by law and incurred in the ordinary course of business for sums not yet
delinquent.
"Person" means any individual, corporation, partnership, limited
------
liability company, firm, joint venture, association, joint-stock company, trust,
unincorporated organization, governmental body or other entity.
"Requirements of Law" means (i) the certificate of limited partnership
-------------------
of each of the Partnership and the Owner Partnerships, the agreements of limited
partnership or other organizational or governing documents of each of the
Partnership and the Owner Partnerships, (ii) any statute, law, treaty, rule,
regulation or ordinance applicable to the Partnership or the Owner Partnerships,
their respective assets or any Mortgaged Property (including, without
limitation, Environmental Laws and occupational health and safety and food and
drug regulations) or (iii) any judgment, decree, injunction, order or
determination of any arbitrator or of any court or other governmental or
regulatory authority or agency, whether federal, state or local, domestic or
foreign, applicable to the Partnership or the Owner Partnerships, their
respective assets or any Mortgaged Property.
"Securities Act" means the Securities Act of 1933, as amended.
--------------
"Subsidiary" means, with respect to any Person, any corporation at
----------
least a majority of whose outstanding voting securities, or any other Person at
least a majority of whose total equity interest, is owned by such Person.
"Termination Date" means December 31, 1996.
----------------
"Transaction" means (i) the sale of the Partnership GP's general
-----------
partnership interest pursuant to Section 2.3, (ii) the issuance of a limited
partnership interest in the Partnership pursuant to Section 7.14, (iii) the
Merger, (iv) the actions taken with respect to the Owner Partnerships pursuant
to Section 7.13 and (v) certain amendments to the Partnership Agreement
necessary to consummate the Merger (including, without limitation, providing for
the redemption of partnership interests). The term "Transaction" does not
include the Bond Refinancing.
-39-
<PAGE>
The following terms are defined in the corresponding Sections listed below:
Term Section
- ---- -------
Accrued Fee Amount.................... 7.12
Alternative Proposal.................. 7.5.2
Available Cash........................ 2.2.1(f)
BAC................................... 2.2.1
Balance Sheet......................... 4.7
Balance Sheet Date.................... 4.7
CAPREIT............................... Recitals
Certificate of Merger................. 1.3
Commitment Date....................... 8.2.5
CRIIMI................................ 7.12
Deposit............................... 2.6(a)
Designated Actions.................... 7.4.1
Designated Persons.................... 7.3.1(ii)
Effective Time........................ 1.3
Ethans................................ 5.3
Excess Amount......................... 2.2.1(d)
Fairness Opinion...................... 8.2.4
Fiduciary Out Termination............. 7.5.2
Housing Acquisition Department Files.. 4.18.1
Interim Financial Statements.......... 4.7
Liabilities........................... 4.8
Meeting............................... 7.2
Merger................................ Recitals
Merger Consideration.................. 2.2.1
Merger Partnership GP................. Recitals
Merger Partnership LP................. Recitals
MP Agreement.......................... 3.1
MP Certificate........................ 3.1
Other Filings......................... 7.1
Partnership Act....................... Recitals
Partnership Agreement................. 4.1
Partnership Certificate............... 1.4
Partnership Financial Statements...... 4.7
Partnership GP........................ Recitals
Partnership GP Agreement.............. 4.1
Partnership GP Certificate............ 4.1
Proxy Statement....................... 7.1
Redemption Agent...................... 2.3.1
Redemption Fund....................... 2.3.2
SEC Filings........................... 4.7
Suits................................. 8.1.4
-40-
<PAGE>
Surviving Partnership................. 1.1
Triggering Events..................... 7.3.1(ii)
10.3 Representations and Warranties; Etc. (a) The respective
------------------------------------
representations and warranties of the Partnership, each Owner Partnership and
the Merger Partnership contained herein shall expire with, and be terminated and
extinguished upon, consummation of the Merger, and thereafter none of the
Partnership, any Owner Partnership or the Merger Partnership, or any general
partner or principal of any thereof, shall be under any liability whatsoever
with respect to any such representation or warranty. This Section 10.3 shall
have no effect upon any other obligation of the parties hereto, whether to be
performed before or after the consummation of the Merger.
(b) Notwithstanding anything to the contrary herein, there shall
be no liability whatsoever for breach of any of the representations and
warranties set forth in Section 4 or 5.
10.4 Validity. The invalidity or unenforceability of any provision
--------
of this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
10.5 Descriptive Headings. The descriptive headings herein are
--------------------
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.
10.6 Parties in Interest. This Agreement shall be binding upon and
-------------------
inure solely to the benefit of each party hereto, and nothing in this Agreement,
express or implied, is intended to confer upon any other Person any rights or
remedies of any nature whatsoever under or by reason of this Agreement except
the right of the holders of BACs to receive cash as provided in Section 2.2.1
hereof (subject in each case to the consummation of the Transaction pursuant to
this Agreement).
10.7 Incorporation of Recitals. The recitals hereto are incorporated
-------------------------
into this Agreement as if fully restated herein.
10.8 Miscellaneous. This Agreement (i) constitutes the entire
-------------
agreement and supersedes all other prior agreements and undertakings, both
written and oral, between the parties with respect to the subject matter hereof;
(ii) may not be assigned, except that the Merger Partnership may assign its
rights hereunder in whole or in part to one or more of its direct or indirect
Subsidiaries or Affiliates, each of which, in written instruments reasonably
satisfactory to the Partnership, shall agree to assume all of the Merger
Partnership's obligations hereunder so assigned to it and be bound by all of the
terms and conditions of this Agreement; and (iii) shall be governed in all
respects, including validity, interpretation and effect, by the laws of the
State of New York applicable to agreements made and to be performed entirely
within such State.
-41-
<PAGE>
This Agreement may be executed in one or more counterparts which together shall
constitute a single agreement.
-42-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first above written.
WATERMARK III PARTNERS, L.P.
By: Capital Apartment Properties, Inc., its general partner
By: /s/ Richard L. Kadish
------------------------------------
Name:
Title:
CAPITAL REALTY INVESTORS TAX EXEMPT
III LIMITED PARTNERSHIP
By: CRITEF III Associates Limited Partnership, its general partner
By: C.R.I., Inc., its general partner
By: /s/ William B. Dockser
------------------------------------
Name:
Title:
WILLIAM B. DOCKSER
/s/ William B. Dockser
---------------------------------------
H. WILLIAM WILLOUGHBY
/s/ H. William Willoughby
---------------------------------------
CAPITAL APARTMENT PROPERTIES, INC.
By: /s/ Richard L. Kadish
------------------------------------
Name:
Title:
GEARY COURTYARD ASSOCIATES
By: CRICO of Geary Courtyard, Inc.,
its general partner
-43-
<PAGE>
By: /s/ William B. Dockser
-----------------------------
Name:
Title:
CRICO OF ETHAN'S II LIMITED PARTNERSHIP
By: CRICO of Ethan's II, Inc.,
its general partner
By: /s/ William B. Dockser
-----------------------------
Name:
Title:
CRICO OF REGENCY WOODS LIMITED PARTNERSHIP
By: CRICO of Regency Woods, Inc.,
its general partner
By: /s/ William B. Dockser
-----------------------------
Name:
Title:
CRICO OF OCEAN WALK LIMITED PARTNERSHIP
By: CRICO of Ocean Walk, Inc.
its general partner
By: /s/ William B. Dockser
-----------------------------
Name:
Title:
CRICO OF OCEAN WALK LIMITED PARTNERSHIP
By: CRICO of Ocean Walk, Inc.
its general partner
By: /s/ William B. Dockser
-----------------------------
Name:
Title:
-44-
<PAGE>
CRICO OF VALLEY CREEK II LIMITED PARTNERSHIP
By: CRICO of Valley Creek II, Inc.,
its general partner
By: /s/ William B. Dockser
------------------------------------
Name:
Title:
CRICO OF WOODLANE PLACE LIMITED PARTNERSHIP
By: CRICO of Woodlane Place, Inc.,
its general partner
By: /s/ William B. Dockser
------------------------------------
Name:
Title:
-45-
<PAGE>
Appendix B-1
OPINION OF OPPENHEIMER & CO., INC.
DELIVERED TO
CAPITAL REALTY INVESTORS TAX EXEMPT FUND
LIMITED PARTNERSHIP, SERIES I
<PAGE>
Appendix B-2
OPINION OF OPPENHEIMER & CO., INC.
DELIVERED TO
CAPITAL REALTY INVESTORS TAX EXEMPT FUND
LIMITED PARTNERSHIP, SERIES II
<PAGE>
Appendix B-3
OPINION OF OPPENHEIMER & CO., INC.
DELIVERED TO
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III
LIMITED PARTNERSHIP
<PAGE>
Appendix C-1
PROPOSED
AMENDMENTS
TO THE
AGREEMENT
OF
LIMITED PARTNERSHIP
OF
CAPITAL REALTY INVESTORS TAX EXEMPT FUND
LIMITED PARTNERSHIP
<PAGE>
AMENDMENT TO AGREEMENT
OF LIMITED PARTNERSHIP
OF CAPITAL REALTY INVESTORS
TAX EXEMPT FUND LIMITED PARTNERSHIP
This Amendment to Agreement of Limited Partnership of Capital Realty
Investors Tax Exempt Fund Limited Partnership (the "Partnership"), dated as of
-----------
__________ __, 199__ (this "Amendment"), is made and entered into by and between
---------
CAPREIT GP, Inc. ("CAPREIT GP"), CRITEF, Inc. (the "Assignor Limited Partner")
------------------------
and [Capital Apartment Properties, Inc. or its designee] (the "CAPREIT Limited
---------------
Partner").
- -------
WITNESSETH
----------
WHEREAS, as of August 1, 1986, CRITEF Associates Limited Partnership
("CRITEF Associates"), as general partner of the Partnership, executed a
-----------------
Certificate of Limited Partnership of the Partnership (the "Certificate")
-----------
forming the Partnership under the Delaware Revised Uniform Limited Partnership
Act (6 Del. C. (S) 17-101, et seq.) (as amended from time to time, the
------- ------
"Partnership Act"), which Certificate was filed with the Delaware Secretary of
---------------
State on August 19, 1986;
WHEREAS, the partners of the Partnership entered into an Agreement of
Limited Partnership of the Partnership, dated as of August 1, 1986 (as it may
have been amended from time to time, the "Original Agreement");
------------------
WHEREAS, it is contemplated that the Partnership will merge with
Watermark Partners, L.P., a Delaware limited partnership (the "Merger
------
Partnership"), with the Partnership being the surviving entity (the "Merger"),
- ----------- ------
pursuant to the Fourth Amended and Restated Agreement and Plan of Merger, dated
as of August 21, 1996 (as amended from time to time in accordance with its
terms, the "Merger Agreement"), among, inter alia, the Merger Partnership, the
----------------
Partnership and CRITEF Associates;
WHEREAS, in contemplation of the Merger and related matters, the
partners of the Partnership desire to set forth additional terms and conditions
with respect to the Partnership; and
NOW, THEREFORE, in consideration of the mutual promises made herein,
the parties, intending to be legally bound, agree as follows:
AMENDMENTS
----------
1. Withdrawel and Admission. CRITEF Associates hereby withdraws as
------------------------
general partner of the Partnership and CAPREIT GP is hereby simultaneously
admitted to
<PAGE>
the Partnership as a substitute general partner of the Partnership. Execution by
CAPREIT GP of this Amendment shall constitute execution of a counterpart
signature page to the Original Agreement and CAPREIT GP's acceptance and
agreement to be bound by the terms and provisions of the Original Agreement.
Under the Original Agreement, CAPREIT GP shall be the sole "General Partner" and
the sole "Managing General Partner." CAPREIT GP is hereby authorized to and
shall continue the business of the Partnership as a remaining General Partner
without dissolution. CAPREIT GP shall file an amendment to the Certificate that
reflects the fact that the CAPREIT GP is the sole general partner of the
Partnership.
2. Assignment of General Partner Interest. Notwithstanding any
--------------------------------------
provision in the Original Agreement to the contrary, in accordance with Sections
6.05(b) and 10.02(b) of the Original Agreement, for value received, the receipt
and sufficiency of which is hereby acknowledged, upon execution of this
Amendment by the parties hereto, CRITEF Associates assigns, transfers and
conveys all of its general partner interest in the Partnership (i.e., its 1.01%
Interest) to CAPREIT GP.
3. Issuance of Limited Partner Interest. Notwithstanding anything to
------------------------------------
the contrary in the Original Agreement, including, without limitation, Section
5.04(o) of the Original Agreement, a limited partner interest in the Partnership
is hereby issued by the Partnership to the CAPREIT Limited Partner in exchange
for real property and/or other assets. Without the need for any consent, action
or approval by any Person, the CAPREIT Limited Partner is hereby admitted to the
Partnership as a limited partner of the Partnership. Execution by the CAPREIT
Limited Partner of this Amendment shall constitute execution of a counterpart
signature page to the Original Agreement and the CAPREIT Limited Partner's
acceptance and agreement to be bound by the terms and provisions of the Original
Agreement. The parties hereto hereby agree that upon such admission, CAPREIT
GP's Interest shall be reduced to 1.00% of the Interests and the CAPREIT Limited
Partner's Interest shall be 0.01% of the Interests. For purposes of the
Original Agreement, any reference in the Original Agreement to 1.01% as it
relates to the Interest of the General Partner shall be deemed to be a reference
to the 1.00% Interest of CAPREIT GP and the 0.01% Interest of the CAPREIT
Limited Partner. The term "Assignees" as used in the Original Agreement does
not include the CAPREIT Limited Partner as a limited partner of the Partnership.
<PAGE>
4. Merger or Consolidation.
-----------------------
(a) Merger or Consolidation. Notwithstanding anything in the
Original Agreement to the contrary, upon the affirmative vote (either in person,
by proxy or by written consent) of the holders of a majority of the outstanding
BACs (voting through the Assignor Limited Partner in accordance with the
Original Agreement), which vote may or may not be the same vote taken with
respect to the adoption of this Amendment, the Partnership shall be authorized
to consummate the transactions contemplated by the Merger and the Merger
Agreement.
(b) New Partnership Agreement. In accordance with Section 17-211(g)
-------------------------
of the Partnership Act, notwithstanding anything to the contrary contained in
the Original Agreement, an agreement of merger or consolidation approved in
accordance with Section 17-211(b) of the Partnership Act and the Original
Agreement as amended by this Amendment or as otherwise amended from time to time
(as so amended, the "Partnership Agreement") may (A) effect any amendment to the
Partnership Agreement, or (B) effect the adoption of a new partnership agreement
for the Partnership if it is the surviving or resulting limited partnership in
the merger or consolidation. Any amendment to the Partnership Agreement or the
adoption of a new partnership agreement made pursuant to the foregoing sentence
shall be effective at the effective time or date of the merger or consolidation.
(c) General Partner Authorization. In connection with the Merger,
-----------------------------
notwithstanding anything to the contrary in the Original Agreement, CAPREIT GP
shall be authorized, at such time in its sole discretion as it deems
appropriate, to execute, acknowledge, verify, deliver, file and record, for and
in the name of the Partnership and, to the extent necessary, CAPREIT GP, any
former general partner of the Partnership, the limited partners of the
Partnership and the BAC Holders, any and all documents and instruments,
including, without limitation, a certificate of merger and a partnership
agreement for the surviving or resulting entity in the Merger, and shall do and
perform any and all acts required by applicable law or which CAPREIT GP, in
its sole discretion, deems necessary, convenient or advisable, in order to
effectuate the Merger.
MISCELLANEOUS
-------------
1. Capitalized Terms. Initially capitalized terms used herein and
-----------------
not otherwise defined are used as defined in the Original Agreement.
2. Successors and Assigns. This Amendment shall be binding upon, and
----------------------
shall inure to the benefit of, the parties hereto and their respective
successors and assigns.
3. Full Force and Effect. Except to the extent modified hereby, the
---------------------
Original Agreement shall remain in full force and effect.
<PAGE>
4. Counterparts. This Amendment may be executed in counterparts, all
------------
of which together shall constitute one agreement binding on all parties hereto,
notwithstanding that all such parties are not signatories to the original or
same counterpart, provided, however, that no such counterpart shall be binding
unless signed by CAPREIT GP as Managing General Partner.
5. Governing Law. This Amendment shall be interpreted in accordance
-------------
with the laws of the State of Delaware (without regard to conflict of laws
principles), all rights and remedies being governed by such laws.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the date first set forth above.
CAPREIT GP:
CAPREIT GP, INC.
By:-------------------------------------
Name:
Title:
CAPREIT LIMITED PARTNER:
[NAME]
By:-------------------------------------
Name:
Title:
ASSIGNOR LIMITED PARTNER:
CRITEF, INC.
By:-------------------------------------
Name:
Title:
CRITEF ASSOCIATES LIMITED
PARTNERSHIP, merely to reflect its
agreement be bound by Section 2 of this
Amendment
By: C.R.I., Inc., its general partner
By:--------------------------
Name:
Title:
<PAGE>
Appendix C-2
PROPOSED
AMENDMENTS
TO THE
AGREEMENT
OF
LIMITED PARTNERSHIP
OF
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III
LIMITED PARTNERSHIP
<PAGE>
AMENDMENT TO AGREEMENT
OF LIMITED PARTNERSHIP
OF CAPITAL REALTY INVESTORS
TAX EXEMPT FUND III LIMITED PARTNERSHIP
This Amendment to Agreement of Limited Partnership of Capital Realty
Investors Tax Exempt Fund III Limited Partnership (the "Partnership"), dated as
of _________, 199__ (this "Amendment"), is made and entered into by and between
CAPREIT GP, Inc. ("CAPREIT GP"), CRITEF, Inc. (the "Assignor Limited Partner")
and [Capital Apartment Properties, Inc. or its designee] (the "CAPREIT Limited
Partner").
WITNESSETH
----------
WHEREAS, as of September 1, 1987, CRITEF III Associates Limited
Partnership ("CRITEF Associates"), as general partner of the Partnership,
executed a Certificate of Limited Partnership of the Partnership (the
"Certificate") forming the Partnership under the Delaware Revised Uniform
Limited Partnership Act (6 Del. C. (S) 17-101, et seq.) (as amended from time to
------- -------
time, the "Partnership Act"), which Certificate was filed with the Delaware
Secretary of State on September 18, 1987;
WHEREAS, the partners of the Partnership entered into an Agreement of
Limited Partnership of the Partnership, dated as of September 1, 1987 (as it may
have been amended from time to time, the "Original Agreement");
WHEREAS, it is contemplated that the Partnership will merge with
Watermark III Partners, L.P., a Delaware limited partnership (the "Merger
Partnership"), with the Partnership being the surviving entity (the "Merger"),
pursuant to the Fourth Amended and Restated Agreement and Plan of Merger, dated
as of August 21, 1996 (as amended from time to time in accordance with its
terms, the "Merger Agreement"), among, inter alia, the Merger Partnership, the
Partnership and CRITEF Associates;
WHEREAS, in contemplation of the Merger and related matters, the
partners of the Partnership desire to set forth additional terms and conditions
with respect to the Partnership; and
NOW, THEREFORE, in consideration of the mutual promises made herein,
the parties, intending to be legally bound, agree as follows:
AMENDMENTS
----------
1. Withdrawal and Admission. CRITEF Associates hereby withdraws as
------------------------
general partner of the Partnership and CAPREIT GP is hereby simultaneously
admitted to the Partnership as a substitute general partner of the Partnership.
Execution by CAPREIT GP of this Amendment shall constitute execution of a
counterpart signature page to the
<PAGE>
Original Agreement and CAPREIT GP's acceptance and agreement to be bound by the
terms and provisions of the Original Agreement. Under the Original Agreement,
CAPREIT GP shall be the sole "General Partner" and the sole "Managing General
Partner." CAPREIT GP is hereby authorized to and shall continue the business of
the Partnership as a remaining General Partner without dissolution. CAPREIT GP
shall file an amendment to the Certificate that reflects the fact that CAPREIT
GP is the sole general partner of the Partnership.
2. Assignment of General Partner Interest. Notwithstanding any
--------------------------------------
provision in the Original Agreement to the contrary, in accordance with Sections
6.05(b) and 10.02(b) of the Original Agreement, for value received, the receipt
and sufficiency of which is hereby acknowledged, upon execution of this
Amendment by the parties hereto, CRITEF Associates assigns, transfers and
conveys all of its general partner interest in the Partnership (i.e., its 1.01%
Interest) to CAPREIT GP.
3. Issuance of Limited Partner Interest. Notwithstanding anything to
------------------------------------
the contrary in the Original Agreement, including, without limitation, Section
5.04(o) of the Original Agreement, a limited partner interest in the Partnership
is hereby issued by the Partnership to the CAPREIT Limited Partner in exchange
for real property and/or other assets. Without the need for any consent, action
or approval by any Person, the CAPREIT Limited Partner is hereby admitted to the
Partnership as a limited partner of the Partnership. Execution by the CAPREIT
Limited Partner of this Amendment shall constitute execution of a counterpart
signature page to the Original Agreement and the CAPREIT Limited Partner's
acceptance and agreement to be bound by the terms and provisions of the Original
Agreement. The parties hereto hereby agree that upon such admission, CAPREIT
GP's Interest shall be reduced to 1.00% of the Interests and the CAPREIT Limited
Partner's Interest shall be 0.01% of the Interests. For purposes of the
Original Agreement, any reference in the Original Agreement to 1.01% as it
relates to the Interest of the General Partner shall be deemed to be a reference
to the 1.00% Interest of CAPREIT GP and the 0.01% Interest of the CAPREIT
Limited Partner. The term "Assignees" as used in the Original Agreement does
not include the CAPREIT Limited Partner as a limited partner of the Partnership.
4. Merger or Consolidation.
------------------------
(a) Merger or Consolidation. Notwithstanding anything in
-----------------------
the Original Agreement to the contrary, upon the affirmative vote (either in
person, by proxy or by written Consent) of the holders of a majority of the
outstanding BACs (voting through the Assignor Limited Partner in accordance with
the Original Agreement), which vote may or may not be the same vote taken with
respect to the adoption of this Amendment, the Partnership shall be authorized
to consummate the transactions contemplated by the Merger and the Merger
Agreement.
(b) New Partnership Agreement. In accordance with Section
-------------------------
17-211(g) of the Partnership Act, notwithstanding anything to the contrary
contained in the Original Agreement, an agreement of merger or consolidation
approved in accordance with Section 17-
<PAGE>
211(b) of the Partnership Act and the Original Agreement as amended by this
Amendment or as otherwise amended from time to time (as so amended, the
"Partnership Agreement") may (A) effect any amendment to the Partnership
Agreement, or (B) effect the adoption of a new partnership agreement for the
Partnership if it is the surviving or resulting limited partnership in the
merger or consolidation. Any amendment to the Partnership Agreement or the
adoption of a new partnership agreement made pursuant to the foregoing sentence
shall be effective at the effective time or date of the merger or consolidation.
(c) General Partner Authorization. In connection with the
-----------------------------
Merger, notwithstanding anything to the contrary in the Original Agreement,
CAPREIT GP shall be authorized, at such time in its sole discretion as it deemed
appropriate, to execute, acknowledge, verify, deliver, file and record, for and
in the name of the Partnership and, to the extent necessary, CAPREIT GP, any
former general partner of the Partnership, the limited partners of the
Partnership and the BAC Holders, any and all documents and instruments,
including, without limitation, a certificate of merger and a partnership
agreement for the surviving or resulting entity in the Merger, and shall do and
perform any and all acts required by applicable law or which CAPREIT GP, in its
sole discretion, deems necessary, convenient or advisable, in order to
effectuate the Merger.
MISCELLANEOUS
-------------
1. Capitalized Terms. Initially capitalized terms used herein and
-----------------
not otherwise defined are used as defined in the Original Agreement.
2. Successors and Assigns. This Amendment shall be binding upon, and
----------------------
shall inure to the benefit of, the parties hereto and their respective
successors and assigns.
3. Full Force and Effect. Except to the extent modified hereby, the
---------------------
Original Agreement shall remain in full force and effect.
4. Counterparts. This Amendment may be executed in counterparts, all
------------
of which together shall constitute one agreement binding on all parties hereto,
notwithstanding that all such parties are not signatories to the original or
same counterpart, provided, however, that no such counterpart shall be binding
unless signed by CAPREIT GP as Managing General Partner.
5. Governing Law. This Amendment shall be interpreted in accordance
-------------
with the laws of the State of Delaware (without regard to conflict of laws
principles), all rights and remedies being governed by such laws.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the date first set forth above.
CAPREIT GP:
CAPREIT GP, INC.
By:
-----------------------
Name:
Title:
CAPREIT LIMITED PARTNER:
[NAME]
By:
-----------------------
Name:
Title:
ASSIGNOR LIMITED PARTNER:
CRITEF, INC.
By:
-----------------------
Name:
Title:
CRITEF ASSOCIATES LIMITED
PARTNERSHIP, merely to reflect its
agreement be bound by Section 2 of this
Amendment
By: C.R.I., Inc., its general partner
By:
-----------------------------------
Name:
Title:
<PAGE>
- --------------------------------------------------------------------------------
[GOLD] CAPITAL REALTY INVESTORS TAX EXEMPT FUND
LIMITED PARTNERSHIP, SERIES I
PROXY
The undersigned hereby appoints William B. Dockser and
H. William Willoughby, each with the power to act alone and with full
power of substitution and revocation, to represent and vote, as
specified on the other side of this Proxy, all Beneficial Assignee
Certificates ("BACs") of Capital Realty Investors Tax Exempt Fund
Limited Partnership, Series I, which the undersigned is entitled to vote
at the Special Meeting of BAC Holders to be held at 9:00 A.M., local
time, on ________ __, 1996, at [location] and all adjournments and
postponements thereof. The undersigned revokes any previous proxies
with respect to the matters covered by this Proxy.
The BACs represented by this Proxy will be voted as specified
on the other side. If no choice is specified, this Proxy will be voted
FOR Proposals 1,2 and 3. The proxies are authorized, in their
discretion, to vote such BACs upon any other business that may properly
come before the Special Meeting.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE JOINT
PROXY STATEMENT OF CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED
PARTNERSHIP, SERIES I AND II AND CAPITAL REALTY INVESTORS TAX EXEMPT
FUND III LIMITED PARTNERSHIP.
(Continued and to be signed on the other side.)
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
The General Partner Recommends a Vote FOR Proposals 1,2 & 3
The approval of Proposal 1 is conditioned upon the approval of Proposal 2 and the [X] Please mark your
approval of Proposal 2 is conditioned upon the approval of Proposal 1. vote as this
</TABLE>
----------------------------------------------------------------------------
Proposal 1. Approval of the Merger FOR AGAINST ABSTAIN
Proposal. Approve and adopt the
Fourth Amended and Restated Agreement [_] [_] [_]
and Plan of Merger, dated as of August
21, 1996 (the "Merger Agreement"),
among Capital Realty Investors Tax
Exempt Fund Limited Partnership, CRITEF
Associates Limited Partnership,
Watermark Partners, L.P. and others,
and any amendments to the Agreement of
Limited Partnership of the Fund
necessary to authorize expressly the
foregoing.
Proposal 2. Approval of the New FOR AGAINST ABSTAIN
Partners Proposal. Approve (a) the
sale by the current general partner [_] [_] [_]
of Fund I-II of the general partner
interest in Fund I-II to a CAPREIT
GP, Inc., a wholly-owned subsidiary
of Capital Apartment Properties, Inc.,
and (b) the issuance as a limited
partner interest in Fund I-II to CAPREIT
or its designee in exchange for a
contribution to the Fund of real
property or other assets, and in each
case, any amendments to the Agreement of
Limited Partnership of the Fund necessary
to expressly authorize the foregoing.
Proposal 3. Approval of the FOR AGAINST ABSTAIN
Adjournment of the Special Meeting to
solicit additional votes. Approve [_] [_] [_]
the adjournment of the Special Meeting
to solicit additional votes.
[_] Change of address?
THE GENERAL PARTNER RECOMMENDS THAT YOU Check this box and insert
SIGN, DATE AND MAIL THIS PROXY TODAY. new address below:
----------------------------------------------------------------------------
------ ---------------------
---------------------
Signature(s): Dated:
-------------------------------------- --------------------
Note: Please sign as name appears herein. Joint owners should each sign.
When signing as attorney, executor, administrator, trustee or guardians,
please give full title as such. If a corporation, please sign in full
corporate name by authorized officer. If a partnership, please sign in
partnership name by authorized person.
If the BAC Holders in a Fund approve both the Merger Proposal and the New
Partners Proposal to be voted upon by them, but the BAC Holders in the other
Fund do not approve the similar proposals to be voted upon by them, CAPREIT,
in its sole discretion, may elect to consummate the Merger with the Fund whose
BAC Holders have approved the proposals.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
[GOLD] CAPITAL REALTY INVESTORS TAX EXEMPT FUND
LIMITED PARTNERSHIP, SERIES II
PROXY
The undersigned hereby appoints William B. Dockser and H.
William Willoughby, each with the power to act alone and with full
power of substitution and revocation, to represent and vote, as
specified on the other side of this Proxy, all Beneficial Assignee
Certificates ("BACs") of Capital Realty Investors Tax Exempt Fund
Limited Partnership, Series II, which the undersigned is entitled to
vote at the Special Meeting of BAC Holders to be held at 9:00A.M.,
local time, on _____________ __, 1996, at [location] and all
adjournments and postponements thereof. The undersigned revokes any
previous proxies with respect to the matters covered by this Proxy.
The BACs represented by this Proxy will be voted as
specified on the other side. If no choice is specified, this Proxy
will be voted FOR Proposals 1, 2 and 3. The proxies are authorized, in
their discretion, to vote such BACs upon any other business that may
properly come before the Special Meeting.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE JOINT
PROXY STATEMENT OF CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED
PARTNERSHIP, SERIES I AND II AND CAPITAL REALTY INVESTORS TAX EXEMPT
FUND III LIMITED PARTNERSHIP.
(Continued and to be signed on the other side.)
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
The General Partner Recommends a Vote FOR Proposals 1,2 & 3
The approval of Proposal 1 is conditioned upon the approval of Proposal 2 and the [X] Please mark your
approval of Proposal 2 is conditioned upon the approval of Proposal 1. vote as this
</TABLE>
----------------------------------------------------------------------------
Proposal 1. Approval of the Merger FOR AGAINST ABSTAIN
Proposal. Approve and adopt the
Fourth Amended and Restated Agreement [_] [_] [_]
and Plan of Merger, dated as of August
21, 1996 (the "Merger Agreement"), among
Capital Realty Investors Tax Exempt
Fund Limited Partnership, CRITEF
Associates Limited Partnership,
Watermark Partners, L.P. and others,
and any amendments to the Agreement of
Limited Partnership of the Fund
necessary to authorize expressly the
foregoing.
Proposal 2. Approval of the New FOR AGAINST ABSTAIN
Partners Proposal. Approve (a) the
sale by the current general partner [_] [_] [_]
of Fund I-II of the general partner
interest in Fund I-II to a newly-
formed, wholly-owned subsidiary of
Capital Apartment Properties, Inc.
("CAPREIT"), and (b) the issuance of
a limited partner interest in Fund I-II
to CARPREIT or its designee in exchange
for a contribution to the Fund of real
property or other assets, and in each
case, any amendments to the Agreement
of Limited Partnership of the Fund
necessary to expressly authorize the
foregoing.
Proposal 3. Approval of the FOR AGAINST ABSTAIN
Adjournment of the Special Meeting to
solicit additional votes. Approve [_] [_] [_]
the adjournment of the Special Meeting
to solicit additional votes.
[_] Change of address?
THE GENERAL PARTNER RECOMMENDS THAT YOU Check this box and insert
SIGN, DATE AND MAIL THIS PROXY TODAY. new address below:
----------------------------------------------------------------------------
------ ---------------------
---------------------
Signature(s): Dated:
-------------------------------------- --------------------
Note: Please sign as name appears herein. Joint owners should each sign.
When signing as attorney, executor, administrator, trustee or guardians,
please give full title as such. If a corporation, please sign in full
corporate name by authorized officer. If a partnership, please sign in
partnership name by authorized person.
If the BAC Holders in a Fund approve both the Merger Proposal and the New
Partners Proposal to be voted upon by them, but the BAC Holders in the other
Fund do not approve the proposals to be voted upon by them, CAPREIT, in its
sole discretion, may elect to consummate the Merger with the Fund whose BAC
Holders have approved the proposals.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
The General Partners Recommend a Vote FOR Proposals 1,2 & 3
The approval of Proposal 1 is conditioned upon the approval of Proposal 2 and the [X] Please mark your
approval of Proposal 2 is conditioned upon the approval of Proposal 1. vote as this
</TABLE>
----------------------------------------------------------------------------
Proposal 1. Approval of the Merger FOR AGAINST ABSTAIN
Proposal. Approve and adopt the
Third Amended and Restated Agreement [_] [_] [_]
and Plan of Merger, dated July 8,
1996 (the "Merger Agreement"), among
Capital Realty Investors Tax Exempt
Fund III Limited Partnership, CRITEF
Associates Limited Partnership,
Watermark Partners, L.P. et al, and
any amendments to the Agreement of
Limited Partnership of the Fund
necessary to expressly authorize the
foregoing.
Proposal 2. Approval of the New FOR AGAINST ABSTAIN
Partners Proposal. Approve the
sale by the current general partner [_] [_] [_]
of Fund III of the general partner
interest in Fund III to a newly-
formed, wholly-owned subsidiary of
Capital Apartment Properties, Inc.
("CAPREIT"), and any amendments to
the Agreement of Limited Partnership
of the Fund necessary to expressly
authorize the foregoing.
Proposal 3. Approval of the FOR AGAINST ABSTAIN
Adjournment of the Special Meeting to
solicit additional votes. Approve [_] [_] [_]
the adjournment of the Special Meeting
if the General Partner moves to
adjourn to solicit additional votes.
[_] Change of address?
THE GENERAL PARTNERS RECOMMEND THAT YOU Check this box and insert
SIGN, DATE AND MAIL THIS PROXY TODAY. new address below:
----------------------------------------------------------------------------
------ ---------------------
---------------------
Signature(s): Dated:
-------------------------------------- --------------------
Note: Please sign as name appears herein. Joint owners should each sign.
When signing as attorney, executor, administrator, trustee or guardians,
please give full title as such. If a corporation, please sign in full
corporate name by authorized officer. If a partnership, please sign in
partnership name by authorized person.
If the BAC Holders in a Fund approve each of the proposals to be voted upon
by them, but the BAC Holders in the other Fund do not approve the proposals
to be voted upon by them, CAPREIT, in its sole discretion, may elect to
consummate the Merger with the Fund whose BAC Holders have approved the
proposals.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
[GOLD] CAPITAL REALTY INVESTORS TAX EXEMPT FUND III
LIMITED PARTNERSHIP
PROXY
The undersigned hereby appoints William B. Dockser and H. William
Willoughby, each with the power to act alone and with full power of
substitution and revocation, to represent and vote, as specified on the
other side of this Proxy, all Beneficial Assignee Certificates ("BACs") of
Capital Realty Investors Tax Exempt Fund III Limited Partnership, which the
undersigned is entitled to vote at the Special Meeting of BAC Holders to be
held at 10:00A.M., local time, on ___________, 1996, at [location] and all
adjournments and postponements thereof. The undersigned revokes any
previous proxies with respect to the matters covered by this Proxy.
The BACs represented by this Proxy will be voted as specified on the
other side. If no choice is specified, this Proxy will be voted FOR
Proposals 1, 2 and 3. The proxies are authorized, in their discretion, to
vote such BACs upon any other business that may properly come before the
Special Meeting.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE JOINT PROXY
STATEMENT OF CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP,
SERIES I AND II AND CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED
PARTNERSHIP.
(Continued and to be signed on the other side.)
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
The General Partner Recommends a Vote FOR Proposals 1,2 & 3
The approval of Proposal 1 is conditioned upon the approval of Proposal [X] Please mark your
2 and the approval of Proposal 2 is conditioned upon the approval of vote as this
Proposal 1.
</TABLE>
----------------------------------------------------------------------------
Proposal 1. Approval of the Merger FOR AGAINST ABSTAIN
Proposal. Approve and adopt the
Fourth Amended and Restated Agreement [_] [_] [_]
and Plan of Merger, dated as of August
21, 1996 (the "Merger Agreement"),
among Capital Realty Investors Tax
Exempt Fund Limited Partnership, CRITEF
Associates Limited Partnership,
Watermark Partners, L.P. and others, and
any amendments to the Agreement of
Limited Partnership of the Fund
necessary to authorize expressly the
foregoing.
Proposal 2. Approval of the New FOR AGAINST ABSTAIN
Partners Proposal. Approve (a)the
sale by the current general partner [_] [_] [_]
of Fund III of the general partner
interest in Fund III to a CAPREIT
GP,Inc., a wholly-owned subsidiary of
Capital Apartment Properties, Inc.
("CAPREIT"), and (b) the issuance of
a limited partner interest in Fund III
to CAPREIT or its designee in exchange
for a contributor to the Fund of real
property or other assets, and in each
case, any amendments to the Agreement
of Limited Partnership of the Fund
necessary to expressly authorize the
foregoing.
Proposal 3. Approval of the Adjourn- FOR AGAINST ABSTAIN
ment of the Special Meeting to solicit
additional votes. Approve the [_] [_] [_]
the adjournment of the Special Meeting
to solicit additional votes.
[_] Change of address?
THE GENERAL PARTNER RECOMMENDS THAT YOU Check this box and insert
SIGN, DATE AND MAIL THIS PROXY TODAY. new address below:
----------------------------------------------------------------------------
------ ---------------------
---------------------
Signature(s): Dated:
-------------------------------------- --------------------
Note: Please sign as name appears herein. Joint owners should each sign.
When signing as attorney, executor, administrator, trustee or guardians,
please give full title as such. If a corporation, please sign in full
corporate name by authorized officer. If a partnership, please sign in
partnership name by authorized person.
If the BAC Holders in a Fund approve both the Merger Proposal and the New
Partners Proposal to be voted upon by them, but the BAC Holders in the
other Fund do not approve the similar proposals to be voted upon by them,
CAPREIT, in its sole discretion, may elect to consummate the Merger with
the Fund whose BAC Holders have approved the proposals.
- --------------------------------------------------------------------------------
