<PAGE>
Exhibit 17(d)
<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:
$14.41 per BAC in CRITEF, Series I
$14.24 per BAC in CRITEF, Series II
$15.18 per BAC in CRITEF III
4) Proposed maximum aggregate value of transaction: $158,795,251
5) Total fee paid: $31,759
[X] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
1) Amount previously paid:
2) Form, Schedule or Registration Statement No.:
3) Filing parties:
4) Date filed:
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED PARTNERSHIP, 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 $14.28
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 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 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 $14.07
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 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 Merger, the General Partner may
have interests in conflict with those of the BAC Holders. See
<PAGE>
"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 $15.02 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 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 Merger, the General Partner may
have interests in conflict with those of the BAC Holders. See
<PAGE>
"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 Third Amended and Restated Agreement and
Plan of Merger, dated as of July 15, 1996 (the "Fund I-II Merger
Agreement"), among Fund I-II, CRITEF Associates Limited Partnership, a
Delaware limited partnership which is the general partner of Fund I-II
("Fund I-II GP"), Watermark Partners, L.P., a Delaware limited partnership
formed by Capital Apartment Properties, Inc., a Maryland corporation
("CAPREIT") for purposes of the Merger ("Merger Partnership"), et al.,
-- --
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 $14.28 per BAC net to the holder in cash, without
interest, in the case of Series I and $14.07 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 Third
Amended and Restated Agreement and Plan of Merger, dated as of July 15,
1996 (the "Fund III Merger Agreement" and, together with the Fund I-II
Merger Agreement, the "Merger Agreements"), among Fund III, CRITEF III
Associates Limited Partnership, a Delaware limited partnership which is the
general partner of Fund III ("Fund III GP" and, together with Fund I-II GP,
the "General Partners"), Watermark III Partners, L.P., a Delaware limited
partnership formed by CAPREIT for purposes of the Merger ("Merger
Partnership III," and together with Merger Partnership, the "Merger
Partnerships"), et al., 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 $15.02, 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 Merger and the Merger
Agreements and the transactions contemplated thereby. In each case, the
redemption price per BAC is subject to increase based upon the amount of
Available Cash (as defined in the Merger Agreements) at
<PAGE>
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 Funds 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 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; and
3. Such other business as may properly come before the Special
Meetings or any adjournments or postponements thereof (including any
adjournment of such Special Meetings to solicit additional votes for the
Transaction Proposals).
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
Funds BAC Holders voting together as a single class.
Whether or not you plan to attend the Special Meeting in person and
regardless of the number of BACs you own, please complete, sign and date the
enclosed Proxy and mail it as soon as possible in the enclosed stamped,
addressed return envelope to ensure that your BACs are voted at the Special
Meeting. You may vote in person if you wish to do so even though you have
previously sent in your Proxy.
By Order of the General Partners:
CRITEF ASSOCIATES LIMITED
PARTNERSHIP
CRITEF III ASSOCIATES LIMITED
<PAGE>
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................................................ 14
Purpose of the Special Meetings................................... 14
Record Date; Required Vote........................................ 17
Voting Procedures and Proxies..................................... 17
Adjournment of the Special Meetings and other Matters............. 18
Solicitation of Proxies........................................... 19
SPECIAL FACTORS.................................................... 19
Purpose of the Transaction Proposals.............................. 19
Background of the Mergers......................................... 20
Recommendations of the General Partners........................... 29
Fairness of the Transactions...................................... 30
Alternatives to the Mergers....................................... 36
Fairness Opinions of Oppenheimer & Co., Inc....................... 40
Interests of Certain Persons in the Transactions.................. 46
Certain Relationships and Related Transactions.................... 48
SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT............. 50
Principal BAC Holders............................................. 50
Management........................................................ 50
BACKGROUND OF THE FUNDS............................................ 51
THE TRANSACTION PROPOSALS.......................................... 53
The Merger Proposal............................................... 53
The Mergers..................................................... 53
The Merger Agreements........................................... 54
Conditions to Consummation of the Mergers..................... 54
Redemption Procedures......................................... 55
Conduct of Business Pending the Mergers....................... 55
Other Pre-Closing Covenants................................... 56
Post-Closing Covenants........................................ 56
No Solicitation............................................... 57
Indemnification............................................... 57
Termination................................................... 57
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Deposit....................................................... 58
Fees and Expenses............................................. 59
Amendments to the Partnership Agreements...................... 61
Tax Treatment................................................. 61
No Dissenters Rights.............................................. 60
New Partners Proposal............................................. 61
The Financing..................................................... 62
Credit Enhancement.............................................. 63
Collateral...................................................... 64
Events of Default............................................... 65
Proposed Amendments to Mortgage Revenue Bonds................... 65
Miscellaneous................................................... 66
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGERS AND
RELATED TRANSACTIONS............................................... 66
Introduction.................................................... 66
General Principles Of Partnership Taxation...................... 66
Certain Federal Income Tax Consequences of the Mergers.......... 67
Certain Federal Income Tax Consequences of the Financing........ 68
CERTAIN TAX MATTERS RELATING TO
TAX-EXEMPT BONDS................................................... 68
MARKET PRICE DATA FOR FUND I-II.................................... 69
MARKET PRICE DATA FOR FUND III..................................... 71
SELECTED FINANCIAL DATA OF FUND I-II............................... 72
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF FUND I-II............................. 78
Business.......................................................... 78
Financial Condition and Liquidity................................. 84
Results of Operations............................................. 91
SELECTED FINANCIAL DATA OF FUND III................................ 96
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF FUND III.................................. 100
Business.......................................................... 100
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Financial Condition and Liquidity................................. 105
Results of Operations............................................. 109
LITIGATION......................................................... 113
MANAGEMENT OF THE FUNDS............................................ 118
THE MERGER PARTNERSHIPS AND CAPREIT GP............................. 119
MANAGEMENT OF THE MERGER PARTNERSHIPS AND CAPREIT GP............... 120
CERTAIN LEGAL MATTERS.............................................. 123
ACCOUNTANTS........................................................ 123
AVAILABLE INFORMATION.............................................. 123
INDEX TO FINANCIAL STATEMENTS...................................... F-1
</TABLE>
Appendix A-1 Third 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 Third 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
<PAGE>
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>
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 Third Amended and Restated Agreement and Plan of Merger, dated
as of July 15, 1996 (as amended from time to time in accordance with its terms,
the "Merger Agreement"), among, inter alia, the Merger Partnership, the
Partnership and CRITEF Associates;
WHEREAS, in contemplation of the Merger and related matters, the
partners of the Partnership desire to set forth additional terms and conditions
with respect to the Partnership; and
NOW, THEREFORE, in consideration of the mutual promises made herein,
the parties, intending to be legally bound, agree as follows:
AMENDMENTS
----------
1. Removal and Admission. CRITEF Associates is hereby removed as
---------------------
general partner of the Partnership and 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>
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
Third Amended and Restated Agreement and Plan of Merger, dated as of July 15,
1996 (as amended from time to time in accordance with its terms, the "Merger
Agreement"), among, inter alia, the Merger Partnership, the Partnership and
CRITEF Associates;
WHEREAS, in contemplation of the Merger and related matters, the partners
of the Partnership desire to set forth additional terms and conditions with
respect to the Partnership; and
NOW, THEREFORE, in consideration of the mutual promises made herein, the
parties, intending to be legally bound, agree as follows:
AMENDMENTS
----------
1. Removal and Admission. CRITEF Associates is hereby removed as general
---------------------
partner of the Partnership and 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 Original Agreement
<PAGE>
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 17-211(b) of the Partnership Act and the Original
Agreement as amended by this Amendment or as
-2-
<PAGE>
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.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
date first set forth above.
CAPREIT GP:
CAPREIT GP, INC.
-3-
<PAGE>
By:______________________________
Name:
Title:
CAPREIT LIMITED PARTNER:
[NAME]
By:______________________________
Name:
Title:
ASSIGNOR LIMITED PARTNER:
CRITEF III, INC.
By:______________________________
Name:
Title:
CRITEF III ASSOCIATES LIMITED
PARTNERSHIP, merely to reflect its
agreement be bound by Section 2 of
this Amendment
By: C.R.I., Inc., its general partner
By:______________________________
Name:
Title:
-4-
<PAGE>
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 Third Amended and Restated Agreement and Plan of
Merger, dated as of July 15, 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"), 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 Third Amended and Restated Agreement
and Plan of Merger, dated as of July 15, 1996 (the "Fund III Merger Agreement,"
and together with the Fund I-II Merger Agreement, the "Merger Agreements"),
-1-
<PAGE>
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, each
a "Merger" and together the "Mergers") 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,
$14.28 per BAC, net to the holder in cash, without interest, in the case of
Series I and $14.07 per BAC, net to the holder in cash, without interest, in
the case of Series II and (ii) with respect to Fund III, $15.02 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, $457,183 (or $0.21 per BAC) in the case of Series I,
and $678,688 (or $0.21 per BAC) in the case of Series II, and, with respect to
Fund III, $1,039,129 (or $0.20 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."
-2-
<PAGE>
Under the Merger Agreements, CAPREIT has offered BAC Holders, in the
aggregate, $158.8 million, or $14.41 per BAC, in the case of Series I of Fund
I-II, $14.24 per BAC, in the case of Series II of Fund I-II, and $15.18 per
BAC, in the case of Fund III, in each case plus a maximum Adjustment Amount of
$472,950 or $0.21 per BAC, in the case of Series I of Fund I-II, $702,090, or
$0.21 per BAC in the case of Series II of Fund I-II, and $1,074,960, or $0.20
per BAC, in the case of Series III. 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 payable to
counsel for the plaintiffs in certain class action litigation relating to the
Mergers (see "SPECIAL FACTORS--Background of the Mergers" and "LITIGATION") of
up to, assuming both Funds consummate the Mergers, $1,700,000 in the aggregate
plus an amount equal to 20%, up to a maximum of $75,000, of the aggregate
Adjustment Amount at closing. As a result of the foregoing, the consideration
offered by CAPREIT in the Merger Agreements (assuming no Adjustment Amount)
was reduced $0.13 per BAC, in the case of Series I of Fund I-II, $0.17 per BAC,
in the case of Series II of Fund I-II, and $0.16 per BAC in the case of Fund
III in arriving at the respective Redemption Prices.
(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 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) Such other business as may properly come before the Special
Meetings or any adjournment or postponement thereof (including any adjournment
of such Special Meetings at the request at the General Partners to solicit
additional votes).
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 Meetings. 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.
-3-
<PAGE>
In the event that the BAC Holders in one Fund approve both of the
Transaction Proposals to be voted upon by them, but the BAC Holders in the
other Fund do not approve the Transaction Proposals to be voted upon by them,
the Merger Partnerships may elect, 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
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 were
created 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 July 1996 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 based in Rockville, Maryland. CAPREIT
currently owns 30 multi-family complexes located in 10 states. In addition to
managing the 7,512 apartments that CAPREIT owns, CAPREIT Residential
Corporation, an indirect subsidiary of CAPREIT ("CAPREIT Residential"), manages
another 9,073 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.
-4-
<PAGE>
See "SPECIAL FACTORS--Background of the Mergers" and "SPECIAL FACTORS--Certain
Relationships And Related Transactions." The Merger Partnerships are Delaware
limited partnerships with executive offices at 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
Merger Partnership and Merger Partnership III 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.
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.
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
-5-
<PAGE>
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 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.
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
RECOMMENDS THAT BAC HOLDERS VOTE "FOR" APPROVAL OF EACH OF THE TRANSACTION
PROPOSALS.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS
The Merger Agreements also provide that on the closing date of the Mergers
(the "Closing Date"), CAPREIT or its designee will purchase certain accounts
receivable consisting of the accrued mortgage servicing 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. The Accrued Fees are payable to CRI through June 30, 1995, and
to CRIIMI, the general partner of which is a subsidiary of CRIIMI MAE Inc., a
public company affiliated with the General Partners, from July 1, 1995 through
the Closing Date. The consideration payable to CRI for such Accrued Fees is,
with respect to Fund I-II, $511,680 in the case of Series I, and $770,835, in
the case of Series II, and, with respect to Fund III, $667,485, which amounts
represent, in the aggregate, approximately 42% of the Accrued Fees payable to
CRI. The consideration payable to CRIIMI for the Accrued Fees is, with respect
to Fund I-II, $288,132, in the case of Series I, and $423,904 in the case of
Series II, and with respect to Fund III, $613,899, representing all of the
Accrued Fees payable to CRIIMI through July 31, 1996. The amounts payable to
CRIIMI will increase by the
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amount of the estimated Accrued Fees for each month after June 30, 1996 through
the Closing Date.
The payment of the Accrued Fees is subordinated on a current basis, loan by
loan, to the payment of full base interest, plus any unpaid base interest and
interest thereon, on the mortgage loans. In the absence of the Mergers, the
Accrued Fees would not be payable until the earlier of (i) repayment of any
unpaid base interest and interest thereon from increased cash flow of a 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, 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 March 31, 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 Closing 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
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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 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 Partnerships 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 potentially
benefit the owners of any interests in the Owner Partnerships, which could
include the current owners or CAPREIT.
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 -- Certain Relationships and
Related Transactions."
FAIRNESS OPINIONS OF OPPENHEIMER & CO., INC.
Oppenheimer has rendered its fairness opinions, each dated March 14, 1996
[and updated on __________ 1996] (the "Fairness Opinions"), to the effect that,
as of such date and subject to the assumptions and limitations therein, the
Redemption Price offered to the BAC Holders of Series I and Series II of Fund
I-II and to the BAC Holders of Fund III in the Mergers is fair to such BAC
Holders from a financial point of view.
The discussion herein of the Fairness Opinions is qualified in its entirety
by reference to the text of such Fairness Opinions, copies of which are
attached hereto as Appendices B-1, B-2 and B-3, respectively, and which are
incorporated herein by reference. See "SPECIAL CONSIDERATIONS--Fairness
Opinions of Oppenheimer & Co., Inc."
CERTAIN EFFECTS OF THE MERGERS
As a result of the Mergers, BAC Holders of Series I, Fund I-II will receive
$14.28, net to the holder in cash, without interest, BAC Holders of Series II,
Fund I-II will receive $14.07, net to the holder in cash, without interest, and
BAC Holders of Fund III will receive $15.02, 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
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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.
CONDITIONS TO CONSUMMATION OF A MERGER
The obligation of a Fund and a Merger Partnership to consummate a Merger
and related transactions is subject to satisfaction or waiver (where
permissible), on or before the Closing Date (or such earlier time as specified
in the condition), of certain conditions, including, but not limited to, (i) the
performance, in all material respects, of the obligations of the other party or
parties contained in a Merger Agreement, (ii) the receipt of all approvals and
authorizations of any 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.
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, and (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, (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--
Condtions to Consummation of the Mergers."
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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 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 November 30,
1996 (the "Termination Date") (so long as the terminating party has complied
with all of its covenants and agreements contained in such Merger Agreement), or
(iii) the BAC Holders of such Fund do not approve and adopt such Merger and
related transactions.
A Merger Agreement may also be terminated at any time prior to the
Effective Time, whether before or after the BAC Holders have approved and
adopted a Merger and the related transactions, by a Fund, if, among other
things, a Merger Partnership 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.
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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"), 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 $2,500,000.
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
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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.
See "THE TRANSACTION PROPOSALS--The Merger Proposal--The Mergers" for a
detailed discussion of the terms and conditions of the Merger Agreements.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the transfer of the Mortgage Revenue Bonds
in connection with the financing for the Mergers will result in the Funds
recognizing significant long term capital losses which will be allocated to BAC
Holders. The payment of the Redemption Price to the BAC Holders will
constitute, for federal income tax purposes, a redemption of the BAC Holders
interests in the Funds pursuant to Section 731(a) of the Internal Revenue Code
of 1986, as amended (the "Code"). Although there may be minor differences as a
result of the Mergers, the BAC Holders for federal income tax purposes will
essentially realize a capital gain or loss equal to the difference between
their tax basis in the BACs and the cash they receive as a result of the
Mergers.
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 Merger and
to pay related fees and expenses will be provided by CAPREIT and from the
proceeds of financing to be arranged by CAPREIT. In connection with the
financing, CAPREIT will cause to be sold certain beneficial ownership interests
in one or more trusts (the "Trusts") to be formed at the Effective Time to
which the Funds, following consummation of the Mergers, will cause the Mortgage
Revenue Bonds to be contributed and 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
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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. 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."
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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 Third Amended and Restated Agreement and Plan of
Merger, dated as of July 15, 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 Third Amended and Restated
Agreement and Plan of Merger, dated as of July 15, 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, each a "Merger" and together the "Mergers") 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.
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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,
$14.28 per BAC in the case of Series I and $14.07 per BAC in the case of Series
II and (ii) with respect to Fund III, $15.02 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, $457,183 (or $0.21 per BAC) in the case of Series I and $678,688 (or $0.21
per BAC) in the case of Series II, and, with respect to Fund III, $1,039,129 (or
$0.20 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 $158.8 million, or $14.41 per BAC, in the case of Series I of Fund
I-II, $14.24 per BAC, in the case of Series II of Fund I-II, and $15.18 per
BAC, in the case of Fund III, plus, in each case, a maximum Adjustment Amount
of $472,950, or $0.21 per BAC, in Series I of Fund I-II, $702,090, or $0.21 per
BAC, in Series II of Fund I-II, and $1,074,960, or $0.20 per BAC in Fund III.
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 payable to counsel for the plaintiffs in certain litigation
relating to the Mergers of up to, assuming both Funds consummate the Mergers,
$1,700,000 in the aggregate, plus an amount equal to 20% (up to a maximum of
$75,000) of the aggregate Adjustment Amount. As a result of the foregoing, the
consideration offered by CAPREIT in the Merger Agreements (assuming no
Adjustment Amount) was reduced $0.13 per BAC, in the case of Series I of Fund
I-II, $0.17 per BAC, in the case of Series II of Fund I-II, and $0.16 per BAC
in the case of Fund III in arriving at the respective Redemption Prices.
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For state law purposes, each Merger Partnership will merge with and into
the Fund into which it is merging, and all assets and obligations of such Merger
Partnership will be transferred by operation of law to the respective Fund as
the surviving entity. In connection with and as consideration for the Mergers,
each BAC Holder will have its BACs converted into the right to receive cash
equal to the applicable Redemption Price;
(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;" and
(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.
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 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 both of the
Transaction Proposals to be voted upon by them, but the BAC Holders in the
other Fund do not approve both 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.
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ACCORDINGLY, EACH OF THE GENERAL PARTNERS RECOMMEND THAT BAC HOLDERS VOTE "FOR"
EACH OF THE TRANSACTION PROPOSALS.
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
Meeting. Each BAC Holder is entitled to one vote for each BAC owned of record
by him or her. As of the Record Date, there were 2,280,000 Fund I-II, Series I
BACs outstanding held by ______ BAC Holders of record, 3,238,760 Fund I-II,
Series II BACs outstanding held by ______ BAC Holders of record, and 5,258,268
Fund III BACs outstanding held by _____ BAC Holders of record.
Pursuant to the Delaware Revised Uniform Limited Partnership Act (the
"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
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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 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.
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 in favor of a proposal
to adjourn a Special Meeting to solicit additional votes in favor of the
Transaction Proposals.
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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.
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 a fee of
$__________ 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 Transaction Proposals
The principal purpose and effect of the Transactions is to cause CAPREIT
and its affiliates to own the entire equity interest in each of the Funds. 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. 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, if any. 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.
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".
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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 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 1993 by CRI for 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. 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.
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<PAGE>
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, 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 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, although unrelated to the discussions regarding
CAPREIT's possible acquisition of the Funds, Messrs. Dockser and Willoughby also
had been discussing with representatives of AP CAPREIT the possible redemption
of CRI's minority interest in AP CAPREIT and CRI's right to reacquire the
property management businesses that CRI and certain of its affiliates had
contributed to CAPREIT upon the formation of CAPREIT, which right was to expire
on June 30, 1995. See -- "Certain Relationships and Related Transactions" below.
Messrs. Dockser and Willoughby insisted that these negotiations 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 the 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
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<PAGE>
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 "topping" fee to be payable to
CAPREIT. 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 this time, 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 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 a portion of the
Termination Refunds relating to properties that secure certain Mortgage Revenue
Bonds held by the Funds 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
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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 available cash 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.
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 "topping" fee and the amount of
available cash 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.
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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.
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. Oppenheimer's
initial observations did not constitute its fairness opinions 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
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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 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 reevaluation 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
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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 a First Amended and
Restated Merger Agreement which restated in its 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
On March 14, 1996 Oppenheimer delivered its fairness opinions (the
"Fairness Opinions") to the Funds. See "--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, 1995, 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.
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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
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. The
proposed settlement will be presented to the Court for final hearing and
approval on or about August 2, 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 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, 1995 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 13, 1996, in connection with a resolution of the disputes between
Mr. Schwartzberg, and the General Partners and certain of their respective
affiliates in the New York action and several other actions, the parties to the
New York action filed with the Court a Stipulation of Dismissal with Prejudice
providing, among other things, that the Court's Order of Dismissal vacate the
injunction.
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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, 1995, 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, the
General Partners 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 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 to 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. The
General Partners, 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 Funds and the Mortgage
Revenue Bonds and complete their due diligence. See "-- Alternatives to the
Mergers".
On July 8, 1996 representatives of the General Partners and representatives
of Dominium arranged for Dominium to visit the principal offices of the Funds
so that Dominium could continue its due diligence review. Representatives of
Dominium came to the General Partners' offices on July 11 and 12, 1996 to
conduct such review. 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 a purported financing
commitments, subject to payment of a fee and satisfactory results of a 21-day
due diligence period.
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<PAGE>
On July 15, 1996, in order to reflect certain agreements reached between
the parties since the date of execution of the Second Amended and Restated
Merger Agreements, CAPREIT and the General Partners executed the Fund I-II
Merger Agreement and the Fund III Merger Agreement which amended the Second
Amended and Restated Merger Agreements to, among other things, modify the
condition to the Merger Partnerships' obligation under the Merger Agreements
that there be at least $11,400,000 of Available Cash in the aggregate in the
event the Mergers are consummated prior to October 1, 1996 to provide that there
be at least $11,650,000 of Available Cash in the aggregate, and to make certain
technical changes to the agreement 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.
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 Merger is fair to and in
the best interests of the BAC Holders of each of Series I and Series II of Fund
I-II, 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 Merger is fair to and in the best
interests of the BAC Holders of Fund III, 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
procedural fairness discussed elsewhere and their belief that the Mergers are
fair to the BAC Holders, the General Partners believe that
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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 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 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 cash consideration payable to the BAC Holders in the Mergers represents a
substantial premium of approximately 21.5%, in the case of Fund I-II, Series I,
29.4%, in the case of Fund I-II, Series II, and 25.2%, in the case of Fund III,
over the market price of the BACs as of September 8, 1995, the last trading day
prior to the initial 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 General Partners noted that, as
indicated below under "--Fairness Opinions of Oppenheimer & Co., Inc.",
Oppenheimer utilized certain monthly operating reports for the properties
underlying the Mortgage Revenue Bonds, prepared by or with the approval of the
General Partners or their representatives, or by CAPREIT Residential, which
currently manages 14 of the 18 properties securing the Mortgage Revenue Bonds,
in developing its estimates of values. With respect to financial forecasts
utilized by Oppenheimer, the General Partners represented to Oppenheimer that
the assumptions utilized by Oppenheimer in connection with projections as to
future financial performance are reasonable. The General Partners also noted, as
indicated below, that Oppenheimer did not make an independent evaluation or
appraisal of the assets or liabilities (contingent of otherwise) of Fund I-II or
Fund III, nor was Oppenheimer furnished with any such evaluation or appraisal.
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<PAGE>
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 Price payable to the BAC Holders in the Mergers is 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 such discussion below, the Redemption Prices payable to the
BAC Holders in the Mergers are within the ranges 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 then to be reasonable and appropriate and considered
such valuation estimates as supporting the General Partners' determination that
the Redemption Prices being offered to the BAC Holders in the Mergers were fair.
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 price, 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. 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
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<PAGE>
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 many months ago,
no potential bidder has come forward with a superior proposal. See"--Background
of the Merger".
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 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 the 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 Mergers 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 portfolios, there are no material differences in
the factors to be considered in their fairness determinations for each Fund.
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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 $3.3 million as of July 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 order to address any conflict of interest, and to act in a manner
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 be determined to constitute such profits, the approval by
the BAC Holders of the Transaction Proposals should be deemed to provide the
requisite consent, negating any potential liability.
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. 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. One of the main purposes for establishing
the Owner Partnerships was to prevent the loss of tax-exempt
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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. 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 Closing
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 the heading "--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 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 the General Partners
did, however, require that the Mergers be conditioned upon the receipt of
favorable fairness opinions from an investment bank.
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
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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 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 by the fact that the Oppenheimer has issued its
Fairness Opinions in connection with the Mergers. 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 negotiated for the benefit of the BAC Holders an increase
in the cash consideration payable to the BAC Holders.
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 $2.5 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.
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CAPREIT has advised the General Partners that, in connection with the
Financing, it may wish to approach the issuers of the Mortgage Revenue Bonds to
seek their consent to certain modifications to the Mortgage Revenue Bonds prior
to the consummation of the Mergers, but that no such modifications will be
effective unless and until the Mergers have been consummated. See "THE
TRANSACTION PROPOSALS--The Financing--Proposed Amendments to Mortgage Revenue
Bonds". Any such approaches to issuers would be with the consent of and under
the supervision of the General Partners and, accordingly, the General Partners
do not believe that CAPREIT's approaches to any issuers concerning its proposed
modifications to the Mortgage Revenue Bonds would create any risk for the Funds,
and therefore the General Partners did not give any consideration to any such
risk.
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,
generally, be offset by a higher gain than such holder would otherwise receive,
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 merely sold his or her BACs for an amount of cash equal to the
Redemption Price.
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 to be voted upon by the BAC Holders because such proposal
is 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 Transaction 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. CAPREIT has reviewed the factors considered by the General
Partners in reaching their determination as to the fairness of the Mergers and
believes that these factors provide a reasonable basis for CAPREIT to conclude,
as CAPREIT does, that the Mergers are fair to the BAC Holders. This belief
should not, however, be considered as a recommendation by CAPREIT to the BAC
Holders to vote to approve and adopt the Transaction Proposals. CAPREIT has
not quantified or assigned specific relative weights to any of these factors.
CAPREIT has relied principally on, and has adopted as its own, the conclusions
of the General Partners that the Mergers are fair to the 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
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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.
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 L.L.P. ("Dominium") 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 significant additional time to complete due
diligence. 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 do
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 and 12, 1996 to
conduct such review.
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".
The General Partners have 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
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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. Based on
Oppenheimer's discounted cash flow analysis, the General Partners believe that
the Redemption Prices payable to the BAC Holders in the Mergers are within the
ranges of the net present values of the amounts BAC Holders would receive upon a
liquidation 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 price for which properties could be sold or the amount of
time necessary to complete those sales.
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 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 and
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 an attempt to extend 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
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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 could result in a write-off of most or all of
the accrued and unpaid interest and changes to the contingent interest feature
of the existing Mortgage Revenue Bonds.
The General Partners could seek to liquidate such properties now, prior to
the mortgage loan maturities, which would permit BAC Holders to continue to
receive tax-exempt distributions until the properties are foreclosed upon and
liquidated. As noted above, the General Partners do not believe, however,
that this alternative would provide BAC Holders with greater net present value
proceeds than they would receive in the Mergers. Also, 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.
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 could result in a write-off of most or all
accrued and unpaid past due interest and would probably change or eliminate the
contingent interest feature of 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
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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 PROPOSAL--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 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.
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.
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,
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private placements and valuations for corporate, estate and other purposes. The
General Partners issued requests for proposals concerning the fairness opinions
to four investment banks. The selection of Oppenheimer was based on several
factors, including price, experience and the presentation of its intended
analyses.
In rendering the Fairness Opinions which are dated March 14, 1996, and as
the basis therefor, Oppenheimer, among other things, reviewed: the Merger
Agreements, as amended; a draft of this proxy statement dated March 14, 1996;
phase I environmental reports prepared for each property by 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 and 1994; audited
financial statements for each of the properties which secure the Mortgage
Revenue Bonds for calendar years 1992, 1993 and 1994 (except Observatory II
whose unaudited financial statements for calendar years 1993 and 1994 were
reviewed); documents relating to the Mortgage Revenue Bonds; and certain
financial and other information relating to Fund I-II and Fund III that was
publicly available or furnished to Oppenheimer by the General Partners,
including 1995 property operating budgets, 1995 annual unaudited financial
operating statements, certain internal financial analyses, 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 year ended 1995 (the "Base
Year"). The actual financial results of the Base Year were then adjusted as
follows: (i) capital expenditures were assumed to be $262 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 year 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 beginning in
1996 (except with respect to utility expenses which were adjusted by increasing
the 1996 projection by 4% per year beginning 1997). However, 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
favorable than such estimates.
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.
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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 financial forecasts prepared by Oppenheimer, the
General Partners represented to Oppenheimer that the assumptions utilized by
Oppenheimer in arriving at projections as to future financial performance are
reasonable and that consequently there is a reasonable probability that the
projections would prove to be substantially correct. Oppenheimer did not make
an independent evaluation or appraisal of the assets or liabilities (contingent
or otherwise) of Fund I-II or Fund III, nor was Oppenheimer furnished with any
such evaluation or appraisal.
In addition, Oppenheimer assumed, in accordance with estimates provided by
the General Partners, that the Redemption Prices will reflect a reduction for
fees and expenses awarded to plaintiffs' counsel in the Zakin and Wingard
----- --- -------
Actions of $0.13, $0.17 and $0.16 in the case of the Series I BAC Holders in
Fund I-II, the Series II BAC Holders in Fund I-II and the Fund III BAC Holders,
respectively, which was based on the assumption that the fees and expenses
awarded to plaintiffs' counsel would not exceed $1,700,000 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 $14.28, $14.07 and $15.02, respectively.
The following paragraphs summarize the significant quantitative and
qualitative analyses performed by Oppenheimer in arriving at the Fairness
Opinions. Oppenheimer considered all such quantitative and qualitative
analyses in connection with its valuation analysis, and no one method of
analysis was given particular emphasis.
Capitalization Rate Valuation Analysis. Oppenheimer assumed that each Fund
obtained direct ownership of those properties presently owned by the Owner
Partnerships which secure its Mortgage Revenue Bonds effective December 31,
1995 and commenced an orderly liquidation of the properties immediately
thereafter. Oppenheimer applied capitalization rates ranging from 9.0% to
10.25% to the net operating income after capital expenditures ("Cash Flow")
estimated for each such property for 1995 to determine a range of its
capitalized values. Oppenheimer believes that a 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 June 30, 1996, of the Funds' other assets
consisting of cash balances, marketable securities and minimum required reserve
balances less estimated accrued expenses and other liabilities, estimated
distributions payable to BAC Holders and the estimated value, as of June 30,
1996, of the Owner Partnerships' other assets (together, the "Other Assets"),
less a factor for cost of sale, to determine the total value of the Funds.
Under this methodology, the implied equity values of Fund I-II, Series I,
including the estimated value of its remaining Mortgage Revenue Bonds and the
estimated value of its Other Assets, was $ 13.455 to $ 14.741
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per BAC as compared to the estimated Redemption Price for Fund I-II, Series I of
$14.28, the implied equity value of Fund I-II, Series II, including the
estimated value of its Other Assets, was $ 13.826 to $ 15.220 per BAC as
compared to the estimated Redemption Price for Fund I-II, Series II of $14.07,
and the implied equity value of Fund III, including the estimated value of its
remaining performing Mortgage Revenue Bonds and the estimated value of its Other
Assets, was $ 14.238 to $ 15.436 per BAC as compared to the estimated Redemption
Price for Fund III of $15.02. Oppenheimer believes the capitalization rate
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 period 1996
to 2000 and applied discount rates of 11% to 12% to forecasted Cash Flow and to
forecasted residual value which was based upon capitalizing forecasted Cash Flow
for the year 2001 at 10% to 11.25%. 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 June 30, 1996, of the Funds' Other Assets.
Oppenheimer's analysis indicated a range of values for Fund I-II, Series I, of $
13.620 to $ 14.781 per BAC as compared to the estimated Redemption Price for
Fund I-II, Series I of $14.28, a range of values for Fund I-II, Series II, of $
14.053 to $15.314 per BAC as compared to the estimated Redemption Price for Fund
I-II, Series II of $14.07, and a range of values for Fund III, of $ 14.525 to $
15.629 per BAC as compared to the estimated Redemption Price for Fund III of
$15.02. Oppenheimer believes the discounted cash flow analysis supports its
fairness determination because the estimated Redemption Price for each Series or
Fund, as the case may be, was within the range of values indicated by such
analysis.
Valuation of the Funds on a Continuing Basis. Oppenheimer performed a
discounted cash flow analysis of the Funds assuming each Fund obtained
ownership of those properties presently owned by the Owner Partnerships upon
the date the individual loan was scheduled to mature and commenced an orderly
liquidation of such properties immediately thereafter. Using the methodology
described above (see "2. Discounted Cash Flow Analysis"), Oppenheimer estimated
the future value of such properties, which it discounted to present value
utilizing discount rates of 11% to 12%. To the resulting range of values,
Oppenheimer added the estimated present value of the Fund's remaining
performing Mortgage Revenue Bonds, if applicable, assuming the Mortgage Revenue
Bonds were repaid in full by the borrower upon the scheduled maturity of the
loan, and the present value of each Fund's Other Assets. Oppenheimer's
analysis, 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 $13.407 to
$14.495 per BAC as compared to the estimated Redemption Price for Fund I-II,
Series I of $14.28, a range of implied present equity values for Fund I-II,
Series II of $13.792 to $14.975 per BAC as compared to the
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estimated Redemption Price for Fund I-II, Series I of $14.28, a range of implied
present equity values for Fund I-II, Series II of $13.792 to $14.975 per BAC as
compared to the estimated Redemption Price for Fund I-II, Series II of $14.07,
and a range of implied present equity values for Fund III of $14.656 to $15.717
per BAC as compared to the estimated Redemption Price of Fund III of $15.02.
Oppenheimer believes this analysis supports its fairness determination because
the estimated Redemption Price for each Series or Fund, as the case may be, was
within or greater than the range of values indicated by such analysis.
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 January 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 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 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 $13.60
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to $14.52 per BAC as compared to the estimated Redemption Price for Fund I-II,
Series I of $14.28, a range of implied equity values for Fund I-II, Series II of
$13.79 to $14.81 per BAC as compared to the estimated Redemption Price for Fund
I-II, Series II of $14.07, and a range of implied equity values for Fund III of
$14.60 to $15.02 per BAC as compared to the estimated Redemption Price for Fund
III of $15.02. Oppenheimer believes application of this methodology supports its
fairness determination because the Redemption Price for each Series or Fund, as
the case may be, was within 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-appealable settlements. See "SPECIAL FACTORS--Background of the
Transactions" and "LITIGATION."
Oppenheimer's Fairness Opinions, each dated March 14, 1996, were based
solely upon the information available to it and the economic market and other
circumstances that existed as of the date of such Fairness Opinions. Events
occurring after such date could materially affect
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<PAGE>
the assumptions and conclusions contained in the Fairness Opinions. Oppenheimer
has not undertaken to reaffirm or revise the Fairness Opinions or otherwise
comment upon any events occurring after the date thereof.
As compensation for its Fairness Opinions with respect to the Mergers,
Oppenheimer will receive an aggregate fee of $500,000 ($250,000 per Fund),
consisting of a $83,333.33 retainer paid at the time of its engagement,
$250,000 paid upon delivery of its Fairness Opinions, and $166,666.67 payable
upon consummation of the Mergers. The Funds have also agreed to reimburse
Oppenheimer for its reasonable out-of-pocket expenses, including attorneys'
fees, and to indemnify Oppenheimer against certain liabilities incurred in
connection with its services, including certain liabilities under the federal
securities laws.
During late 1993, Oppenheimer and its affiliate, Oppenheimer International,
Ltd., served as co-managers and co-underwriters of an unsuccessful public
offering of CAPREIT, which at that time was an affiliate of the General
Partners. Since such date, Oppenheimer has rendered no investment banking
services to CAPREIT. The engagement terminated in January, 1994 prior to
acquisition of CAPREIT by AP CAPREIT, the owner of 99.83% of the outstanding
capital stock of CAPREIT. There is no active relationship between Oppenheimer
and the Funds other than the engagement to render fairness opinions with
respect to the Mergers.
Interests of Certain Persons in the Transactions
The Merger Agreements provide that on the closing date of the Mergers (the
"Closing Date"), CAPREIT or its designee will acquire the accrued mortgage
servicing and administrative fees (the "Accrued Fees") payable by the Owner
Partnerships to CRI, for fees accrued through June 30, 1995, and to CRIIMI Mae
Services Limited Partnership ("CRIIMI"), whose general partner is a subsidiary
of CRIIMI Mae Inc., a public company affiliated with the General Partners, for
fees accrued from July 1, 1995 through the Closing Date. The consideration
payable to CRI for such Accrued Fees is $511,680 in the case of Fund I-II,
Series I and $770,835 in the case of Fund I-II, Series II, and $667,485 in the
case of Fund III which represents, in the aggregate, approximately 42% of the
Accrued Fees payable to CRI. The consideration payable to CRIIMI for the
Accrued Fees is, with respect to Fund I-II, $265,968 in the case of Series I,
and $391,296 in the case of Series II, and, with respect to Fund III, $566,676,
representing the full amount of such fees and in each case, will be increased
to reflect the fees accrued for the account of CRIIMI beginning in July, 1996,
at the rate of, with respect to Fund I-II, $22,164 per month in the case of
Series I, and $32,608 per month in the case of Series II, and with respect to
Fund III, $47,223 per month, estimated to be the full amount of the fees which
will accrue after June 30, 1995.
The payment of the Accrued Fees is subordinated on a current basis, loan by
loan, to the payment of full base interest, plus any interest thereon, on the
mortgage loans. In the absence of the Mergers, the Accrued Fees would not be
payable until the earlier 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
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<PAGE>
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 March 31, 1996, the Fund I-II GP would have
received only a nominal amount and the Fund III GP would have received nothing.
Messrs. Dockser and Willoughby also own, through various corporations, all
of the interests in the Owner Partnerships. Each of the Owner Partnerships has
agreed to either (a) sell, assign and transfer the partnership interests in, or
the real property and other assets of, such Owner Partnerships to CAPREIT or
its designee for no additional consideration or (b) admit CAPREIT or its
designee as the managing general partner, whereupon the general partner
interests of the current general partners will be converted into limited
partner interests, and CAPREIT will have the option to acquire all of the
limited partner interests at any time within five years from the Closing Date
at the then fair market value (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.
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<PAGE>
The Owner Partnerships do not supply any services to the Funds or to any of
the properties collateralizing the mortgage loans. The Owner Partnerships do
not receive, and have never 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 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.
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 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. 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,
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<PAGE>
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 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 14 properties was $1,313,864 through June 30, 1996, which
amount decreased on June 30, 1996 to $1,149,631 through June 30, 1997 (and
which will continue to decrease annually on each June 30). 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 terminated earlier 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
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<PAGE>
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.
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 June 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.
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<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
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 BAC outstanding in each such Fund) in favor of each of the Transaction
Proposals 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
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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 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 most 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
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<PAGE>
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
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
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registration of transfers reflecting transfers occurring before the close of
business on the Effective Date.
The Merger Agreements
Below is a description of the key terms and provisions of the Merger
Agreements. The two Merger Agreements are similar in all material respects,
except for certain pricing related provisions. BAC Holders should note that
the consummation of the transactions contemplated in one Merger Agreement is
conditioned on the consummation of the transactions contemplated in the other
Merger Agreement. This condition may be waived by the Merger Partnerships in
their sole discretion.
Conditions to Consummation of the Mergers
The respective obligations of a Fund and a Merger Partnership to consummate
a Merger and the related transactions are subject to satisfaction or (where
permissible, and other than clause (v) below) waiver, on or before the Closing
Date (or such earlier time as specified in the condition), of certain
conditions, including, but not limited to, (i) the performance, in all material
respects, of the obligations of the other party or parties contained in a
Merger Agreement, (ii) the receipt of all approvals and authorizations of any
governmental authority required for the consummation of such Merger and related
transactions, (iii) the approval of such Merger and related transactions by the
BAC Holders of such Fund and (iv) the absence of any governmental action which
would have the effect of preventing the consummation of such Merger and related
transactions and (v) the final and non-appealable approval by a court of
competent jurisdiction of the settlement of the Zakin and Wingard Actions on
----- -------
the terms set forth in the Stipulation of Settlement, dated May 17, 1996.
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,
and (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; (ii) the absence of any action, suit
or proceeding seeking to materially restrain or delay the consummation of such
Merger and related transactions or seeking material damages in connection
therewith; (iii) the Financing (as defined) shall have been consummated in
accordance with the terms of the Commitment; (iv) the absence of a material
adverse change in the condition of such Fund or an applicable Owner
Partnership; and (v) both Mergers being closed concurrently.
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<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 Closing Date (the
"Pre-Closing Period"), each Fund and the applicable Owner Partnerships have
agreed to conduct their respective businesses only in 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 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
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returns, Mortgage Revenue Bonds or any notes, agreements, indentures or other
instruments relating to the Mortgage Revenue Bonds; declare, set aside or make
any distributions with respect to any partnership interests, except that Fund I-
II may accrue, on a monthly basis, $.09417 per BAC for Series I, and $.09667 per
BAC for Series II, and Fund III may accrue, on a monthly basis, $.10 per BAC for
calendar 1996, and pay, on a quarterly or semi-annual basis, as applicable, such
accrued amount to the holders of BACs; or redeem any BACs.
In addition, each Fund and each applicable Owner Partnership has agreed not
to issue, sell or dispose of any BACs; acquire other entities; incur debt for
money borrowed other than short-term debt incurred in the ordinary course of
business; materially change any agreement with or arrangement relating to any
material license, lease, contract or other document other than in the ordinary
course of business; or authorize or effect any change in their capitalization.
With respect to tax matters, each Fund and each applicable Owner
Partnership has agreed that pending consummation of a Merger it will not make
any material tax elections, change any material tax accounting method or settle
or compromise any material income tax liability.
Other Pre-Closing Covenants
The parties to a Merger Agreement have agreed, among other things, during
the pre-closing period, to use all commercially reasonable efforts to take all
actions and to do all things necessary to ensure that a Merger and the related
transactions are consummated. In that regard, each Fund and any applicable
Owner Partnerships have agreed to provide to each Merger Partnership and its
representatives reasonable access to its offices, facilities, personnel,
properties, books, records and contracts and, as soon as reasonably practicable
after they become available, additional financial statements.
In addition, each Fund has agreed to take all necessary action to convene a
meeting of its limited partners as soon as practicable to consider and vote on
and obtain the approval of such Fund's BAC Holders for the Merger and related
transactions. With respect to such meeting, each Fund and the applicable
Merger Partnership have agreed to jointly prepare and such Fund has agreed to
file a proxy statement and form of proxy, the costs of which shall be advanced
by such Merger Partnership.
Post-Closing Covenants
Each Merger Partnership and CAPREIT have agreed not to cause the
partnership surviving a Merger to amend any portions of any tax return of a Fund
for years ending prior to the Effective Time to the extent that such portion
relates to the accrual of interest on the Mortgage Revenue Bonds and to cause
the surviving partnership to not otherwise amend any tax returns of such Fund
for years ending prior to the Effective Time without the consent of such Fund's
General Partner or its designee, which consent shall not be unreasonably
withheld. In addition, the surviving partnership, CAPREIT and the General
Partners have agreed to cooperate in filing tax returns for the tax year
including the period ending on the Closing Date.
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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 November 30,
1996 (the "Termination Date") (so long as a terminating party has complied with
all of its covenants and agreements contained in such Merger Agreement), or
(iii) the BAC Holders do not approve and adopt such Merger and related
transactions.
A Merger Agreement may also be terminated at any time prior to the
Effective Time, whether before or after the BAC Holders have approved and
adopted a Merger and the related Transactions, by a Fund, if a Merger
Partnership fails to perform in all material respects its obligations under the
Merger Agreement.
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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
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
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Agreement (other than where such Merger Agreement is terminated because the
Effective Time has not occurred by the Termination Date or such Merger
Partnership has not performed its obligations), (c) a breach of the Financing
Commitment (as defined in the Merger Agreements) by the party issuing such
Financing Commitment; or (d) a change in any statute, law or regulation which
affects the tax exempt status of the Mortgage Revenue Bonds, then the Escrow
Fund shall be paid to CAPREIT or as CAPREIT shall direct; (iii) if a Closing
under a Merger Agreement shall not occur on or prior to the Termination Date and
the failure of the Closing to occur shall be due to the failure of the Financing
to be consummated, which failure occurred because of a failure of a condition to
funding set forth in the Financing Commitment, then one-half of the Escrow Funds
shall be paid to the Fund and one-half of the Escrow Funds shall be paid to
CAPREIT or as 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
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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 $2,500,000 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
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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.
Amendments to the Partnership Agreements
As part of the Merger Proposal, BAC Holders are being asked to vote to
approve and adopt certain amendments to the respective Partnership Agreement of
each of the Funds to authorize expressly the actions contemplated by the Merger
Proposal. The full text of the proposed amendments as set forth in Appendices
C-1 and C-2 to this Proxy Statement.
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.
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 may be available in a merger which is the result of procedural
unfairness, including fraud, misrepresentation or other misconduct.
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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".
As part of the New Partners Proposal, BAC Holders are being asked to vote
to approve and adopt certain amendments to the respective Partnership Agreement
of each of the Funds to authorize expressly the actions contemplated in the New
Partners Proposal. The full text of the proposed amendments is set forth as
Appendices C-1 and C-2 to this Proxy Statement.
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 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
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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.
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, bond 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 & Poors and short term ratings of "A-1+" or better
by Standard & Poors, 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
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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 by Standard & Poors 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 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
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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. 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
Events of default under the Bank Reimbursement Agreement and the Surety
Reimbursement Agreement are expected to include, in addition to numerous other
customary events of defaults, the failure to refund an issue of Mortgage
Revenue Bonds by the time of its scheduled remarketing date. Upon the
occurrence and during the continuance of an event of default under the Surety
Reimbursement Agreement, either CentRe or the Surety may: (i) cause a mandatory
tender or mandatory redemption of some or all of the Floater Certificates or
any series of Mortgage Revenue Bonds or any combination thereof; (ii) declare
any indebtedness payable to CentRe or under the related documents to be
immediately due and payable; (iii) enter upon, and take possession and control
(including the management) of, and relieve CAPREIT of its management of the
Mortgage Revenue Bond Properties, the CAPREIT Bond Property and CAPREIT
Properties; (iv) draw upon any letter of credit constituting additional
collateral under the Surety Reimbursement Agreement and apply the proceeds to
reduce the amount of any indebtedness owed to CentRe or the Surety under the
Surety Reimbursement Agreement and related documents; (v) require the Owner
Partnerships to transfer security deposits to CentRe in its capacity as surety
servicer; and (vi) exercise any and all remedies against the collateral it may
have.
Proposed Amendments to Mortgage Revenue Bonds
It is currently contemplated that subsequent to the consummation of the
Mergers and the Financing, CAPREIT and the Owner Partnerships will attempt to
effect amendments to the relevant documents relating to the Mortgage Revenue
Bonds and the additional 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 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 the issuers consent, 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 fund timely payment of
the principal of and interest on the Mortgage Revenue Bonds and the additional
mortgage revenue bond issue.
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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 amount of Merger consideration 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 and tax-exempt entities. Also, the state and
local income tax consequences of the Mergers and related transactions, which
may vary among the BAC Holders based upon the jurisdiction in which they are
subject to tax, have not been discussed. Accordingly, each BAC Holder should
consult his 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 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.
-66-
<PAGE>
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 should not have an
adverse impact on the federal income tax consequences of the Mergers to the BAC
Holders. Pursuant to the Merger Agreement, the Funds and the General Partners
have agreed to treat the Mergers consistently with their characterization as
redemptions for income tax purposes.
Generally, pursuant to Section 731(a) of the Code, each BAC Holder will
recognize gain or loss upon receipt of cash in the Mergers in exchange for BACs.
The amount of gain or loss recognized by a BAC Holder will be equal to the
difference between (a) the amount of cash received in the Mergers and (b) such
BAC Holder's adjusted tax basis in his or her BACs. Generally, if a BAC Holder
holds his BACs as a capital asset, such gain or loss should be treated as
capital gain or capital loss, and will generally constitute long term capital
gain or loss if such BAC Holder has held his or her 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 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).
-67-
<PAGE>
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."
THE INCOME TAX TREATMENT OF THE MERGERS AS A REDEMPTION AND THE CONCURRENT
CONSUMMATION OF THE FINANCING TRANSACTION WITH THE RESULT THAT A SIGNIFICANT TAX
LOSS WILL BE 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 MERELY 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 TRANSACTION WILL REDUCE A BAC HOLDER'S
TAX BASIS IN HIS OR HER BAC, WHICH WILL RESULT IN THE BAC HOLDER RECOGNIZING A
LARGER GAIN (OR A SMALLER LOSS) ON THE REDEMPTION BY AN EQUIVALENT AMOUNT. ON AN
AGGREGATE BASIS, EACH BAC HOLDER'S NET GAIN OR LOSS WILL BE THE SAME; THERE
SHOULD BE NO INCOME TAX BENEFIT OR DETRIMENT TO A BAC HOLDER AS A RESULT OF THE
STRUCTURE OF THE MERGER AND FINANCING WHEN COMPARED TO THE INCOME TAX
CONSEQUENCES OF THAT BAC HOLDER'S DIRECT SALE OF HIS OR HER BACS FOR AN AMOUNT
OF CASH EQUAL TO THE REDEMPTION PRICE.
BAC HOLDERS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE
SPECIFIC TAX CONSEQUENCES TO THEM RESULTING FROM THE TRANSACTION, INCLUDING THE
CONSEQUENCES UNDER FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS.
-68-
<PAGE>
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 modifications 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 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 at present.
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 March 31, 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:
<TABLE>
<C> <S> <C>
SERIES I
--------
Sales Price Distribution
------------------------------
1996 Quarter Ended High Low per BAC
------------ ------------- --------------
March 31 $13 5/8 $12 7/8 $ 0.2825
June 30 14 13 1/8 0.2825
September 30
(through _______)
Sales Price Distribution
------------------------------
1995 Quarter Ended High Low per BAC
------------ ------------- --------------
March 31 $12 3/8 $ 10 $ 0.27
</TABLE>
-69-
<PAGE>
<TABLE>
<C> <S> <C>
June 30 12 3/8 11 1/2 0.27
September 30 13 1/8 11 1/4 0.27
December 31 13 1/2 12 5/8 0.27
--------
$ 1.08
========
Sales Price Distribution
------------------------------
1994 Quarter Ended High Low per BAC
------------ ------------- --------------
March 31 $12 3/4 $11 3/8 $ 0.25
June 30 12 1/2 11 1/4 0.25
September 30 12 10 7/8 0.25
December 31 11 1/4 9 3/8 0.25
--------
$ 1.00
========
Sales Price Distribution
------------------------------
1993 Quarter Ended High Low per BAC/(1)/
------------ ------------- --------------
March 31 $ N/A $ N/A $ 0.25
June 30 N/A N/A 0.25
September 30 13 1/4 11 0.25
December 31 13 1/4 11 5/8 0.25
--------
$ 1.00
========
SERIES II
---------
Sales Price Distribution
------------------------------
1996 Quarter Ended High Low per BAC
------------ ------------- --------------
March 31 $13 3/8 $12 1/4 $ 0.29
June 30 13 1/2 13 0.29
September 30
(through________)
Sales Price Distribution
------------------------------
1995 Quarter Ended High Low per BAC
------------ ------------- --------------
March 31 $11 3/8 $ 9 3/4 $ 0.27
June 30 11 1/2 11 0.27
September 30 13 10 7/8 0.27
December 31 12 7/8 12 1/8 0.27
--------
$ 1.08
========
Sales Price Distribution
------------------------------
1994 Quarter Ended High Low per BAC
------------ ------------- --------------
March 31 $12 3/8 $11 3/8 $ 0.25
June 30 12 1/8 11 0.25
September 30 11 1/2 10 0.25
December 31 10 3/8 9 1/8 0.25
--------
$ 1.00
========
</TABLE>
-70-
<PAGE>
<TABLE>
<C> <S> <C>
Sales Price Distribution
------------------------------
1993 Quarter Ended High Low per BAC/1/
------------ ------------- --------------
March 31 $ N/A $ N/A $ 0.25
June 30 N/A N/A 0.25
September 30 12 3/4 9 1/2 0.25
December 31 12 5/8 10 3/8 0.25
--------
$ 1.00
========
</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
__________ __, 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 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:
<TABLE>
<C> <S> <C>
Sales Price Distribution
------------------------------
1996 Quarter Ended High Low per BAC
------------ ------------- --------------
March 31 $14 3/8 $13 3/8 $ 0.30
June 30 0.30
September 30
(through July 15)
</TABLE>
-71-
<PAGE>
<TABLE>
<C> <S> <C>
Sales Price Distribution
------------------------------
1995 Quarter Ended High Low per BAC
------------ ------------- --------------
March 31 $12 1/4 $10 1/4 $ 0.30
June 30 12 3/4 11 3/4 0.30
September 30 14 11 5/8 0.30
December 31 13 3/4 13 1/8 0.30
--------
$ 1.20
========
Sales Price Distribution
------------------------------
1994 Quarter Ended High Low per BAC
------------ ------------- --------------
March 31 $13 3/8 $11 1/4 $ 0.40
June 30 12 3/4 11 3/4 0.41
September 30 12 3/8 10 5/8 0.41
December 31 10 7/8 9 1/4 0.41
--------
$ 1.63
========
Sales Price Distribution
------------------------------
1993 Quarter Ended High Low per BAC
------------ ------------- --------------
March 31 N/A N/A $ 0.40
June 30 N/A N/A 0.41
September 30 $15 $11 1/2 0.41
December 31 13 1/2 11 3/8 0.41
--------
$ 1.63
========
</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
__________ __, 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
-72-
<PAGE>
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 three months ended March 31, 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>
SERIES I
For the three months ended
March 31, 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 $ 831,102 $ 793,196 $ 3,103,783 $ 2,829,665 $ 128,000 $ 157,288 $ --
Net rental income (1) -- -- -- -- 512,569 326,545 595,498
Other expenses (110,747) (49,663) (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 $ 720,355 $ 743,533 $ 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) $ 720,355 $ 743,533 $ 2,812,716 $ 183,283 $ 451,381 $ 282,877 $ (178,860)
=========== =========== =========== =========== =========== =========== ===========
Net income (loss) allocated to BAC
Holders (98.99%) $ 713,079 $ 736,023 $ 2,784,308 $ 181,432 $ 446,822 $ 280,020 $ (177,054)
=========== =========== =========== =========== =========== =========== ===========
Net income (loss) per BAC outstanding $ 0.31 $ 0.32 $ 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 $ 0.2825 $ 0.27 $ 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 $ --
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
-73-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Investment in real estate, before
accumulated depreciation (1) $ -- $ -- $ -- $ -- $37,721,666 $37,721,666 $37,721,666
=========== =========== =========== =========== =========== =========== ===========
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 $32,909,699 $32,458,767 $33,421,019 $32,882,518 $37,124,695 $38,826,296 $40,943,991
=========== =========== =========== =========== =========== =========== ===========
Total assets per BAC outstanding $ 14.29 $ 14.09 $ 14.51 $ 14.28 $ 16.12 $ 16.86 $ 17.78
=========== =========== =========== =========== =========== =========== ===========
Net assets $32,048,527 $31,775,304 $31,978,844 $31,653,652 $33,773,632 $35,625,514 $38,011,429
=========== =========== =========== =========== =========== =========== ===========
Net assets per BAC outstanding $ 13.91 $ 13.80 $ 13.88 $ 13.74 $ 14.66 $ 15.47 $ 16.50
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
-74-
<PAGE>
<TABLE>
<CAPTION>
SERIES II
For the three months ended
March 31, 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 $ 1,269,063 $ 1,050,508 $ 4,276,936 $ 3,824,910 $ -- $ -- $ --
Net rental income (1) -- -- -- -- 1,511,870 428,325 737,795
Other expenses (104,491) (52,025) (292,014) (170,583) (281,593) (127,970) (186,200)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before extraordinary item and
cumulative effect of accounting change $ 1,164,572 $ 998,483 $ 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) $ 1,164,572 $ 998,483 $ 3,984,922 $ (946,393) $ 1,646,709 $ 300,355 $ 551,595
=========== =========== =========== =========== =========== =========== ===========
Net income (loss) allocated to
BAC Holders (98.99%) $ 1,152,810 $ 988,398 $ 3,944,674 $ (936,834) $ 1,630,077 $ 297,321 $ 546,024
=========== =========== =========== =========== =========== =========== ===========
Net income (loss) per BAC outstanding $ 0.36 $ 0.31 $ 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 $ 0.29 $ 0.27 $ 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>
-75-
<PAGE>
<TABLE>
<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 $47,147,060 $46,370,484 $47,738,900 $47,031,996 $53,638,123 $55,477,180 $57,453,236
=========== =========== =========== =========== =========== =========== ===========
Total assets per BAC outstanding $ 14.41 $ 14.17 $ 14.59 $ 14.37 $ 16.39 $ 16.96 $ 17.56
=========== =========== =========== =========== =========== =========== ===========
Net assets $45,963,738 $45,411,714 $45,747,989 $45,296,618 $49,514,816 $51,139,913 $54,111,366
=========== =========== =========== =========== =========== =========== ===========
Net assets per BAC outstanding $ 14.05 $ 13.88 $ 13.98 $ 13.84 $ 15.13 $ 15.63 $ 16.54
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
-76-
<PAGE>
(1) All properties collateralizing the Mortgage Revenue Bonds have been
transferred by foreclosure or deed in lieu of foreclosure to the Owner
Partnerships subject to 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 quarter ended March 31, 1995 and the
years ended December 31, 1995 and 1994 is $417,326, $1,648,217 and
$(830,356), respectively for Series I, and $572,941, $2,189,007 and
$(2,321,946), respectively for Series II. Income per BAC as previously
reported was $0.14, $0.51 and $0.44 for the quarter ended March 31, 1995
and the years ended December 31, 1995 and 1994, respectively, for Series I,
and $0.13, $0.55 and $0.42, respectively, for Series II. Income (loss) per
BAC as previously reported has been revised to $0.32, $1.22 and $0.08 per
BAC for the quarter ended March 31, 1995 and the years ended December 31,
1995 and 1994, respectively, for Series I and $0.31, $1.22 and $(0.29) per
BAC for the quarter ended March 31, 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, respec-
tively, 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."
-77-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF FUND I - II
Business
Fund I-II's Management 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
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<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 [most likely] result in the loss of the tax-exempt
status of the Mortgage Revenue Bonds.
Base interest income on the mortgage loans is funded from property
operations and reserves, if any, established at the time of closing on the
acquisition of the Mortgage Revenue Bonds. Since base interest could not be paid
in full, Fund I-II GP evaluated various courses of action, including sale,
recapitalization, loan modification, deed in lieu of foreclosure, or
foreclosure.
Fund I-II GP pursued the option of conversion of certain Minnesota
properties to cooperatives owned by the existing residents of the properties in
order to qualify for favorable homestead property tax treatment. 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.
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<PAGE>
A description of the Mortgage Revenue Bonds held by Fund I-II is as follows:
<TABLE>
<CAPTION>
Series I
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 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
======= ========= =========
<CAPTION>
Series II
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>
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<PAGE>
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
"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
quarter ended March 31, 1995 and the years ended December 31, 1995 and 1994 is
$417,326, $1,648,217 and $(830,356), respectively for Series I and $572,941,
$2,189,007 and $(2,321,946), respectively for Series II. Income per BAC as
previously reported was $0.14, $0.51 and $0.44 for the quarter ended March 31,
1995 and the years ended December 31, 1995 and 1994, respectively, for Series I
and $0.13, $0.55 and $0.42 for 1995 and 1994,
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<PAGE>
respectively, for Series II. Income (loss) per BAC as previously reported has
been revised to $0.32, $1.22 and $0.08 per BAC for the quarter ended March 31,
1995 and the years ended December 31, 1995 and 1994, respectively, for Series I
and $0.31, $1.22 and $(0.29) per BAC for the quarter ended March 31, 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 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
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<PAGE>
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. On June
25, 1996, the IRS issued 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 September 24, 1996. Fund I-II 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
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 in December 1992 the IRS issued Proposed
Regulation Section 1.1001-3 which specifically address the tax consequences of
modifications of debt instruments. These regulations were finalized, with some
revisions, on June 25, 1996. 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 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
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<PAGE>
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 with issuer consent a reissuance could
result in a write-off of all accrued and unpaid past due interest and changes to
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.
Final Regulation 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
been made to mortgage loans which secure the Mortgage Revenue Bonds. Fund I-II
GP 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,
there can be no assurance as to the tax-exempt status of the Mortgage Revenue
Bonds.
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, 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 I-II GP may recommend for investor approval 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.
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
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<PAGE>
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 quarters ended March 31, 1996 and 1995 and the years ended
December 31, 1995, 1994 and 1993:
<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
=========== ========== =========== ==========
</TABLE>
<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 quarters ended March 31, 1996 and
1995 and the years ended December 31, 1995, 1994 and 1993 were funded as
follows:
<TABLE>
<CAPTION>
For the three months ended
March 31,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flow (1) $ 684,282 $ 737,412
Net deposits to working capital reserves (33,610) (115,531)
------------ ------------
Total cash available for distribution $ 650,672 $ 621,881
============ ============
Distribution to:
General Partner (1.01%) $ 6,572 $ 6,281
============ ============
BAC Holders (98.99%) $ 644,100 $ 615,600
============ ============
</TABLE>
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<PAGE>
<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 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 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. Distributions to BAC Holders totalling $1,288,200 or
$0.565 per BAC were declared payable for the six months ending June 30, 1996 to
BAC Holders of record as of the last day of each month.
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 $1,318,280 and $1,284,670 as of March 31, 1996 and December 31,
1995, respectively. None of the distributions made to BAC Holders during the
first quarter of 1996 or 1995 and the years ended December 31, 1995, 1994 and
1993 was funded from the working capital reserves. During the three months ended
March 31, 1996 and 1995 and the years ended December 31, 1995, 1994 and 1993
working capital reserves were increased by $33,610 and $115,531 and $362,741,
$351,266 and $79,643, respectively, from surplus operating cash.
As of March 31, 1996, Series I had cash and cash equivalents of $453,646
and unrestricted marketable securities of $381,572 and working capital reserves
invested in marketable securities of $1,318,280. 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 three months
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<PAGE>
ended March 31, 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>
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
marketable securities 1,285 1,285
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 three months ended March 31, 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.
-87-
<PAGE>
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 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 quarters ended March 31, 1996 and 1995 and the
years ended December 31, 1995, 1994 and 1993:
<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
============ ============ ============ ============
</TABLE>
<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 quarters ended March 31,
1996 and 1995 and years ended December 31, 1995, 1994 and 1993 were funded as
follows:
<TABLE>
<CAPTION>
For the three months ended
March 31,
------------------------------------
1996 1995
--------------- ---------------
<S> <C> <C>
Cash flow (1) $ 915,349 $ 915,996
Net withdrawals from (deposits to)
working capital reserves 33,474 (32,609)
--------------- ---------------
Total cash available for distribution $ 948,823 $ 883,387
</TABLE> =============== ===============
-88-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Distribution to:
General Partner (1.01%) $ 9,583 $ 8,922
=============== ===============
BAC Holders (98.99%) $ 939,240 $ 874,465
</TABLE> =============== ===============
<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. Distributions to BAC Holders totalling $1,874,481 or
$0.58 per BAC were declared payable for the six months ending June 30, 1996 to
BAC Holders of record as of the last day of each month.
Working capital reserves for Series II were $2,273,911 and $2,307,385 as
of March 31, 1996 and December 31, 1995, respectively. Of the total
distributions made to BAC Holders during the first quarter of 1996, $33,474 was
funded from the working capital reserves. None of the distributions to BAC
Holders during the first quarter of 1995 or the years ended December 31, 1995,
1994 and 1993 was funded from working capital reserves. During the three months
ended March 31, 1995, and the years ended December 31, 1995, 1994 and 1993
working capital reserves were increased by $32,609 and $660,639, $459,714 and
$38,920, respectively from surplus operating cash.
-89-
<PAGE>
As of March 31, 1996, Series II had cash and cash equivalents of
$125,544, unrestricted marketable securities of $929,015, and working capital
reserves invested in marketable securities of $2,273,911. 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 three months ended March 31, 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:
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
==============
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, which consists primarily of receipt of base interest on
mortgage loans, for the three months ended March 31, 1996 and the years ended
December 31, 1995 and 1994 was adequate to support operating, investing and
financing
-90-
<PAGE>
requirements and the payment of declared distributions to BAC Holders and Fund
I-II GP. Cash and cash equivalents decreased in 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 three months ended March 31,
1996 decreased approximately $23,000 or 3% from the corresponding period in 1995
primarily due to Merger-related expenses incurred in the first quarter of 1996
of approximately $76,000. Partially offsetting the decrease in net income was an
increase in interest from Mortgage Revenue Bonds of approximately $38,000
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.
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 three months ended March 31,
1996 increased approximately $166,000 or 17% from the corresponding period in
1995 primarily due to an increase in interest from Mortgage Revenue Bonds of
approximately $219,000 resulting principally from the release of $140,500 in
excess tax and insurance reserves relating to three of the underlying
-91-
<PAGE>
properties. Contributing to the increase in interest from Mortgage Revenue Bonds
was an increase in rental rates and occupancy at all of the underlying
properties. Partially offsetting the increase in net income were Merger-related
expenses incurred in the first quarter of 1996 of approximately $76,000. There
were no material increases or decreases in Series II's remaining income or
expenses.
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 three
months ended March 31, 1996 and 1995 and years ended December 31, 1995, 1994 and
1993 that are due to Fund I-II from the borrowers.
-92-
<PAGE>
Series I
<TABLE>
<CAPTION>
For the three months ended March 31, 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 $ 32,000 $ 32,000 $ -- $ --
Royal Oaks 267,324 239,962 27,362 1,620,606
Trailway Pond I 115,122 59,856 55,266 907,738
Valley Creek I 331,588 252,078 79,510 2,830,691
White Bear Woods 327,731 247,206 80,525 2,081,276
---------- ---------- --------- ----------
$1,073,765 $ 831,102 $ 242,663 $7,440,311
========== ========== ========= ==========
<CAPTION>
For the three months ended March 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 $ 32,000 $ 32,000 $ -- $ --
Royal Oaks 267,324 213,415 53,909 1,416,382
Trailway Pond I 115,122 63,194 51,928 688,760
Valley Creek I 331,588 237,721 93,867 2,463,174
White Bear Woods 327,731 246,866 80,865 1,718,622
---------- ---------- --------- ----------
$1,073,765 $ 793,196 $ 280,569 $6,286,938
========== ========== ========= ==========
<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
========== ========== ========== ==========
<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>
-93-
<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
totalled $225,483 and $176,696 for the three months ended March 31, 1996
and 1995, respectively, and $783,685, $584,856 and $370,558 for the years
ended December 31, 1995, 1994 and 1993, respectively.
-94-
<PAGE>
Series II
<TABLE>
<CAPTION>
For the three months ended March 31, 1996
----------------------------------------------------------------------------------
Base Interest Paid Current Base Cumulative
Current Base From Properties' Interest Unpaid Full
Interest Due(1) Operations(2)(3) Not Paid Base Interest
--------------- ------------------ ------------ -------------
<S> <C> <C> <C> <C>
Ethan's Ridge and Ethan's
Glen IIB $ 379,688 $ 452,083 $ - $ 1,929,798
Fountain Place I 496,375 440,262 56,113 5,119,611
James Street Crossing 333,939 224,664 109,275 1,804,446
Trailway Pond II 250,750 152,054 98,696 2,667,402
----------- ----------- ---------- -----------
$ 1,460,752 $ 1,269,063 $ 264,084 $11,521,257
=========== =========== ========== ===========
<CAPTION>
For the three months ended March 31, 1995
----------------------------------------------------------------------------------
Base Interest Paid Current Base Cumulative
Current Base From Properties' Interest Unpaid Full
Interest Due(1) Operations(2) Not Paid Base Interest
--------------- ------------------ ------------ -------------
<S> <C> <C> <C> <C>
Ethan's Ridge and Ethan's
Glen IIB $ 379,688 $ 310,916 $ 68,772 $ 1,767,296
Fountain Place I 496,375 330,846 165,529 4,659,896
James Street Crossing 333,939 261,980 71,959 1,501,688
Trailway Pond II 250,750 146,766 103,984 2,244,860
----------- ----------- ---------- -----------
$ 1,460,752 $ 1,050,508 $ 410,244 $10,173,740
=========== =========== ========== ===========
<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>
-95-
<PAGE>
<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
========== ========== ============ ========== ===========
<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, totalled $336,025 and $274,821
for the three months ended March 31, 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 three months ended
March 31, 1996. 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.
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 three months ended March 31, 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.
-96-
<PAGE>
//
<TABLE>
<CAPTION>
For the three months ended
March 31, 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) $1,929,814 $1,722,828 $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) (195,776) (66,280) (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 1,734,038 1,656,548 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) $1,734,038 $1,656,548 $6,523,536 $(3,422,361) $2,591,762 $2,248,736 $2,432,750
========== ========== ========== =========== ========== ========== ==========
Net income (loss)
allocated to BAC
Holders (98.99%) $1,716,524 $1,639,817 $6,457,648 $(3,387,795) $2,565,585 $2,226,024 $2,408,179
========== ========== ========== =========== ========== ========== ==========
Net income (loss)
per BAC outstanding $0.33 $0.31 $1.23 $(0.64) $0.49 $0.42 $0.46
========== ========== ========== =========== ========== ========== ==========
Cumulative effect of
change in accounting
for mortgage revenue
bonds per BAC
outstanding $ -- $ -- $ -- $(1.91) $ -- $ -- $ --
========== ========== ========== =========== ========== ========== ==========
Total cash
distribution per
BAC outstanding $0.30 $0.30 $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 $ -- $ -- $ --
=========== =========== =========== =========== ========== ========== ==========
</TABLE>
-97-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
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 $77,091,985 $76,566,493 $76,933,879 $77,121,563 $92,296,205 $97,929,180 $102,798,278
=========== =========== =========== ============ =========== =========== ===========
Total assets per
BAC outstanding $14.51 $14.41 $ 14.48 $ 14.52 $ 17.38 $ 18.44 $ 19.35
=========== =========== =========== =========== =========== =========== ===========
Net assets $75,087,420 $74,860,696 $74,946,957 $74,797,723 $86,878,511 $92,918,617 $99,301,738
=========== =========== =========== ============ =========== =========== ===========
Net assets per
BAC outstanding $14.14 $ 14.09 $ 14.11 $ 14.08 $ 16.36 $ 17.49 $ 18.69
=========== =========== =========== =========== =========== =========== ===========
//
</TABLE>
-98-
<PAGE>
(1) Certain properties collateralizing the Mortgage Revenue Bonds have been
transferred by deed in lieu of foreclosure to the Owner Partnerships,
subject to 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.
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 quarter ended March 31, 1995 and
the years ended December 31, 1995 and 1994 is $637,770, $2,795,175 and
$(6,678,675), respectively. Income per BAC as previously reported was
$0.19, $0.70 and $0.61 for the quarter ended March 31, 1995 and the
years ended December 31, 1995 and 1994, respectively. Income (loss) per
BAC as previously reported has been revised to $0.31, $1.23 and $(0.64)
per BAC for the quarter ended March 31, 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.
-99-
<PAGE>
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.
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 March 31, 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
-100-
<PAGE>
of the borrower (in the case of Geary Courtyard), with the Owner Partnership
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 most
likely result in the loss of the tax-exempt status of the Mortgage Revenue
Bonds.
Base interest income on the mortgage loans is funded from property
operations, certain borrowers' operating deficit guarantees, and reserves, if
any, established at the time of closing on the acquisition of the Mortgage
Revenue Bonds. If base interest payments cannot be fully satisfied, Fund III GP
evaluates various courses of action, including sale, recapitalization, loan
modification, deed in lieu of foreclosure or foreclosure.
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:
<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>
-101-
<PAGE>
(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 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
-102-
<PAGE>
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 quarter ended March
31, 1995 and the years ended December 31, 1995 and 1994 is $637,770, $2,795,175
and $(6,678,675), respectively. Income per BAC as previously reported was
$0.19, $0.70 and $0.61 for the quarter ended March 31, 1995 and the years ended
December 31, 1995 and 1994, respectively. Income (loss) per BAC as previously
reported has been revised to $0.31, $1.23 and $(0.64) per BAC for the quarter
ended March 31, 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 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 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.
-103-
<PAGE>
As of March 31, 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, assuming 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, 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. These regulations were finalized, with some
revisions, on June 26, 1996. 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 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 with issuer consent, a reissuance could result in a
write-off of all accrued and unpaid past due interest and changes to 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.
Final Regulation 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
been made to mortgage loans which secure the Mortgage Revenue Bonds. Fund III
GP 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.
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
-104-
<PAGE>
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, for investor approval of the exten-
sion 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 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.
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 quarters ended March 31, 1996 and 1995 and the years ended
December 31, 1995, 1994 and 1993:
-105-
<PAGE>
<TABLE>
<CAPTION>
1996 1995
Distributions to Distributions to
BAC Holders BAC Holders
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Quarter Ended Total Per BAC Total Per BAC
- ---------------------------------------------------------- ------------ ----------- ----------- ------------
March 31 $ 1,577,480 $0.30 $ 1,577,480 $0.30
============ =========== =========== ============
<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 three months ended March 31, 1996 and
1995 and the years ended December 31, 1995, 1994 and 1993 were funded as
follows:
<TABLE>
<CAPTION>
For the three months ended
March 31,
---------------------------------------------
1996 1995
------------------- -------------------
<S> <C> <C>
Cash flow (1)
$ 1,573,304 $ 1,595,292
Withdrawals from (deposits to) working capital/interests reserves
20,271 (1,717)
------------------- -------------------
Total cash available for distribution $ 1,593,575 $ 1,593,575
=================== ===================
Distribution to:
General Partner (1.01%) $ 16,095 $ 16,095
------------------- -------------------
BAC Holders (98.99%) $ 1,577,480 $ 1,577,480
=================== ===================
<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/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:
General Partner (1.01%) $ 64,380 $ 87,450 $ 87,182
=================== =================== =================
BAC Holders (98.99%) $ 6,309,922 $ 8,570,977 $ 8,544,686
=================== =================== =================
</TABLE>
-106-
<PAGE>
(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. Distributions to BAC Holders totalling $1,577,480 or $0.30 per BAC
were declared for the quarter ending June 30, 1996, payable to BAC Holders of
record as of the last day of each month.
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 March 31, 1996 and December
31, 1995, the working capital reserves were $4,214,873 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 $497,000 as
of March 31, 1996 may be used to supplement distributions to BAC Holders. Of the
total distributions made during the three months ended March 31, 1996 and 1995,
$20,271 and $0, respectively, were funded from the surplus working capital
reserves. Of the total distributions made during the years ended December 31,
1995, 1994 and 1993, $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 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, $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.
-107-
<PAGE>
Interest reserves relating to Washington Ridge were $298,750 as of March
31, 1996 and December 31, 1995. During the three months ended March 31, 1996 and
1995, amounts of $0 and $96,090, respectively, were transferred to working
capital reserves to fund distributions to BAC Holders from the interest
reserves.
As of March 31, 1996, Fund III had cash and cash equivalents of $73,762,
and unrestricted marketable securities of $1,505,994 and working capital and
interest reserves invested in marketable securities of $4,513,623. 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 three months ended
March 31, 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:
<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>
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.
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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 for the three months ended March 31, 1996 and the years ended
December 31, 1995 and 1994, which consisted primarily of receipt of base
interest on mortgage loans, was adequate to support operating requirements and
the payment of declared distributions to BAC Holders and Fund III GP. Fund III
estimates that future cash flows from receipt of base interest on mortgage
loans, in the aggregate, will be sufficient to pay operating expenses 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.
Results of Operations
Fund III's net income for the three months ended March 31, 1996 increased
approximately $77,500 or 5% from the corresponding period in 1995 primarily due
to an increase in interest from Mortgage Revenue Bonds of approximately $207,000
resulting principally from the release of $105,000 in excess tax and insurance
reserves relating to three of the underlying properties during the first quarter
of 1996, as well as an increase in rental rates and occupancy at all of the
underlying properties. Partially offsetting the increase in net income were
Merger-related expenses incurred in the first quarter of 1996 of approximately
$152,000. There were no material increases or decreases in Fund III's remaining
income or expenses.
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
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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.
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
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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 $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 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. 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 three months
ended March 31, 1996 and 1995 and the years ended December 31, 1995, 1994 and
1993 that are due to Fund III from the borrowers.
<TABLE>
<CAPTION>
For the three months ended March 31, 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 $ 230,234 $ 288,581 $ -- $ -- $ 262,915
Geary Courtyard 435,150 175,000 -- 260,150 5,982,653
Ocean Walk 443,607 363,106 -- 80,501 1,546,917
Paces River 2 192,256 218,733 -- -- 170,882
Regency Woods 173,365 129,800 -- 43,565 313,615
Valley Creek II 229,775 200,090 -- 29,685 737,028
Washington Ridge 218,750 218,750 -- -- 72,917
Woodlane Place 351,750 335,754 -- 15,996 2,678,404
-------------- --------------- -------------- -------------- -------------
$ 2,274,887 $ 1,929,814 $ -- $ 429,897 $11,765,331
============== =============== ============== ============== =============
<CAPTION>
For the three months ended March 31, 1995
---------------------------------------------------------------------------------------
Base Interest Base Interest
Current Base Paid From Paid From Current Base Cumulative
Interest Properties' Non-Operating Interest Unpaid Base
Due (1) Operations (3)(4) Sources (2) Not Paid Interest
-------------- ------------------ -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Ethan's Glen IIA $ 230,234 $ 192,548 $ -- $ 37,686 $ 192,911
Geary Courtyard 435,150 155,000 -- 280,150 5,024,053
Ocean Walk 443,607 439,435 -- 4,172 1,345,001
Paces River 2 192,256 232,460 -- -- 183,652
Regency Woods 173,365 77,313 17,834 78,218 136,006
Valley Creek II 229,775 180,660 -- 49,115 559,721
Washington Ridge 218,750 218,750 -- -- 72,917
Woodlane Place 351,750 180,897 -- 170,853 2,380,739
-------------- --------------- -------------- -------------- -------------
$ 2,274,887 $ 1,677,063 $ 17,834 $ 620,194 $ 9,895,000
============== =============== ============== ============== =============
</TABLE>
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
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<PAGE>
interest due as of March 31, 1996 and December 31, 1995 amounted to $39,351,070
and $37,635,033, respectively. Fund III received contingent interest of $0 and
$27,931 from Washington Ridge during the three months ended March 31, 1996 and
1995, respectively.
<TABLE>
<CAPTION>
For the year ended December 31, 1995
--------------------------------------------------------------------------------------------
Base Interest Base Interest
Current Base Paid From Paid from Current Cumulative
Interest Properties' Non-Operating Base Interest Unpaid Base
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
============== ============== ============== ============== ==============
<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
============== ============== ============== ============== ==============
<CAPTION>
For the year ended December 31, 1993
--------------------------------------------------------------------------------------------
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 $ 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>
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<PAGE>
(1) Fund III charges the borrowers interest on unpaid base interest, which,
totalled $300,848 and $237,589 for the three months ended March 31, 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 three months ended
March 31, 1996. 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 $27,931 and $70,549 received by Fund III
from Washington Ridge during the first quarter of 1996 and the year
ended December 31, 1995.
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
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<PAGE>
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 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. It is expected that a hearing to determine whether
the Settlement is fair, reasonable and in the best interests of the Class will
be held on or about August 2, 1996.
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, 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
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<PAGE>
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. 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 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
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<PAGE>
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.
On June 13, 1996, pursuant to a resolution of disputes with Mr.
Schwartzberg, the parties to the actions in the United States District Court for
the Southern District of New York filed with the Court a Stipulation of
Dismissal with Prejudice.
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.
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<PAGE>
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.
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 of.
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.
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<PAGE>
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' business.
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.
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
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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.
THE MERGER PARTNERSHIPS AND CAPREIT GP
The Merger Partnerships were created during August 1995 solely for the
purpose of effecting the Mergers. CAPREIT GP was formed during July 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 based in
Rockville, Maryland and is a self-managed, self-administered private real
estate investment trust. It currently owns 30 multi-family complexes located
in 10 states. In addition to managing the 7,512 apartments that it owns,
CAPREIT manages another 9,073
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<PAGE>
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 holds 99.83% of the outstanding capital stock of CAPREIT.
CAPREIT Limited Partnership, a Maryland limited partnership, is the initial
limited partner of each of the Merger Partnerships.
The Merger Partnerships are Delaware limited partnerships and CAPREIT GP
is a Delaware corporation, with executive offices c/o CAPREIT, 11200 Rockville
Pike, Rockville, Maryland 20852.
CAPREIT, a self-managed real estate investment trust, 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
CAPREIT's affiliates under management contracts with the Owner Partnerships,
CAPREIT is seeking to guarantee its continued management of the properties,
achieve operational synergies as the properties are integrated with its current
housing portfolio which is located, for the most part, in the same geographic
areas as those 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 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.
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
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<PAGE>
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. 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. 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.
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,
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<PAGE>
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.
Ronald Kravit, 39, a Director of CAPREIT. Mr. Kravit became a Director
of CAPREIT in January, 1995. Mr. Kravit joined Apollo in 1994. Immediately prior
to joining Apollo, Mr. Kravit was a Senior Vice President of G. Soros Realty
Advisors/Reichmann International, managers of the Quantum Realty Fund. From 1991
to 1993, Mr. Kravit was with Maxxam Property Company, and from 1984 to 1991, he
was a Vice President with Miller-Klutznick-Davis-Gray Co. and Miller/Davis Co.,
real estate investment, development and management firms affiliated with
investors Marvin Davis and Myron Miller. Mr. Kravit graduated cum laude from
Georgetown University with a B.S. in Business Administration and from the
University of Pennsylvania's Wharton School of Business with an M.B.A. in
Finance and Real Estate. Mr. Kravit is also a director of various subsidiaries
of Winthrop Financial Corp. Mr. Kravit's business address is c/o 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
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<PAGE>
department of the First Boston Corporation and the commodity and derivatives
trading area of Goldman Sachs & Co. Mr. Sugarman graduated summa cum laude from
Princeton University, where he was nominated for valedictorian and received the
Paul Volcker Award in Economics. He is also a graduate of the Harvard Business
School, receiving Baker Scholar Honors. Mr. Sugarman's business address is 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 BACs are listed for
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<PAGE>
trading on the American 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.
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<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
<S> <C>
Report of Independent Public Accountants............................ F-2
Capital Realty Investors Tax Exempt Fund Limited Partnership
Balance Sheet.................................................. F-3
Statements of Operations....................................... F-4
Statements of Changes in Partners' Capital (Deficit)........... F-5
Statements of Cash Flows....................................... F-8
Notes to Financial Statements.................................. F-10
Report of Independent Public Accountants............................ F-48
Capital Realty Investors Tax Exempt Fund III Limited Partnership
Balance Sheet.................................................. F-49
Statements of Operations....................................... F-50
Statements of Changes in Partners' Capital (Deficit)........... F-51
Statements of Cash Flows....................................... F-52
Notes to Financial Statements.................................. F-53
</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>
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-48
<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-49
<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-50
<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-51
<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-52
<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-53
<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-54
<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-55
<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-56
<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-57
<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-58
<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-59
<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-60
<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-61
<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-62
<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-63
<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-64
<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-65
<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-66
<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-67
<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-68
<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-69
<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-70
<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-71
<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-72
<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-73
<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-74
<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-75
<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-76
<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-77
<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-78
<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-79
<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-80
<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-81
<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-82
<PAGE>
Appendix A-1
THIRD 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>
================================================================================
THIRD AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
among
WATERMARK PARTNERS, L.P.,
CAPITAL REALTY INVESTORS TAX EXEMPT
FUND LIMITED PARTNERSHIP
and
CRITEF ASSOCIATES LIMITED PARTNERSHIP
--------------------------------------
Dated: July 15, 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............................................... 5
2.6 Deposit......................................................................... 6
2.7 Disclosure Schedule............................................................. 6
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.................................................................... 7
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..................................................... 8
4.2 No Subsidiaries................................................................. 9
4.3 Capitalization.................................................................. 9
4.4 Authority Relative to this Agreement............................................ 9
4.5 No Conflicts.................................................................... 9
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...................................................................... 11
4.11 Taxes........................................................................... 12
4.12 Assets.......................................................................... 12
4.13 Transactions with Affiliates.................................................... 12
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
4.14 Disclosure..................................................................... 12
4.15 Brokers........................................................................ 12
4.16 General Partner Recommendation................................................. 12
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................................................................. 14
5.3 Partners and Capitalization..................................................... 14
5.4 Authority Relative to this Agreement............................................ 14
5.5 No Conflicts.................................................................... 15
5.6 Governmental Approvals.......................................................... 15
5.7 Financial Statements............................................................ 15
5.8 No Undisclosed Liabilities...................................................... 16
5.9 Absence of Certain Changes or Events............................................ 16
5.10 Mortgaged Properties............................................................ 16
5.11 No Action....................................................................... 17
5.12 Taxes........................................................................... 17
5.13 Compliance with Law............................................................. 17
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................ 19
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.............................................................. 24
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................................................. 27
7.11 Cooperation..................................................................... 27
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................................. 29
</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...................... 30
8.3 Additional Conditions to the Obligations of the Merger Partnership.............. 31
9. Termination, Amendment and Waiver.................................................. 32
9.1 Termination..................................................................... 32
9.2 Effect of Termination........................................................... 34
9.3 Amendment....................................................................... 34
9.4 Waiver.......................................................................... 34
10. General Provisions................................................................. 34
10.1 Notices......................................................................... 34
10.2 Certain Definitions............................................................. 35
10.3 Representations and Warranties; Etc............................................. 40
10.4 Validity........................................................................ 40
10.5 Descriptive Headings............................................................ 40
10.6 Parties in Interest............................................................. 40
10.7 Incorporation of Recitals....................................................... 40
10.8 Miscellaneous................................................................... 40
</TABLE>
-3-
<PAGE>
THIRD AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
-------------------------------------------------------
THIRD AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of
July 15, 1996, among WATERMARK PARTNERS, L.P., a Delaware limited partnership
(the "Merger Partnership"), CAPITAL REALTY INVESTORS TAX EXEMPT FUND LIMITED
PARTNERSHIP, a Delaware limited partnership (the "Partnership"), CRITEF
ASSOCIATES LIMITED PARTNERSHIP, a Delaware limited partnership (the "Partnership
GP"), and the other parties listed on the signature pages hereof.
The Merger Partnership was recently formed solely for the purpose of
being merged with and into the Partnership in accordance with the Revised
Uniform Limited Partnership Act of the State of Delaware (the "Partnership Act")
and the terms hereof in the merger (the "Merger") contemplated hereby. The
Merger Partnership has no assets other than the cash initially contributed by
Capital Apartment Properties, Inc., a Maryland corporation ("CAPREIT"), which is
its sole general partner (the "Merger Partnership GP"), and the cash initially
contributed by CAPREIT Limited Partnership, a Maryland limited partnership,
which is its sole limited partner (the "Merger Partnership LP"). In the Merger,
all partnership interests in the Partnership, other than those to be issued to
or acquired pursuant hereto by CAPREIT, or its Affiliates, will be redeemed in
cash as specified herein.
The general partners of each of the Partnership and the Merger
Partnership have approved the Merger in accordance with the Partnership Act and
the other transactions contemplated hereby and have recommended that their
respective limited partners approve and adopt the Merger and the other
transactions contemplated hereby.
The parties hereto entered into an Agreement and Plan of Merger, dated
as of September 11, 1995, executed Amendment No. 1 to such Agreement and Plan of
Merger on January 31, 1996, 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 they now
desire to further amend certain provisions of the Second Amended and Restated
Agreement and Plan of Merger 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 $14.41, in the case of Series I, and $14.24, in the case of
Series II, subject to adjustment, in each case, as set forth in subsection (b)
or (c) below (the "Merger Consideration").
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<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 $472,950, and the
Series II Excess Amount shall not exceed $702,090.
(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
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<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.
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<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
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<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
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<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.
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<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
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<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.
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<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.
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<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
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<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
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<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.
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<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 and the Partnership, respectively, for use in the Proxy Statement
and any Other Filings shall, on the date the Proxy Statement is first mailed to
the limited partners of the Partnership and the holders of BACs or any Other
Filing is filed with the appropriate governmental official and in each case on
the date of the meeting of the limited partners of the Partnership and the
holders of BACs referred to in Section 7.2 hereof, be true and correct in all
material respects and shall not omit to state any material fact required to be
stated therein or necessary in order to make such information not false or
misleading, and the Partnership and the Merger Partnership each agree to correct
any such information provided by it for use in the Proxy Statement or any Other
Filing which shall have become false or misleading. The Proxy Statement and any
Other Filing, when filed with the Commission, shall comply as to form in all
material respects with all applicable requirements of law.
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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
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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 $2.5 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:
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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
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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
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the Partnership
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<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
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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
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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;
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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.
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<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, 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
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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, and (iii) thereafter through November 30, 1996,
$2,354,240, in the case of Series I, and $3,494,400, 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
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<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
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<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
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<PAGE>
with copies to:
Apollo Real Estate Advisors, L.P.
1301 Avenue of the Americas
38th Floor
New York, New York, 10019
Attention: Ronald Kravit
Facsimile: (212) 261-4060
and
Schulte Roth & Zabel
900 Third Avenue
New York, New York 10022
Attention: Burton Lehman, Esq.
Facsimile: (212) 593-5955
(b) if to the Partnership, the Partnership GP or any Owner
Partnership:
c/o C.R.I., Inc.
11200 Rockville Pike
Rockville, Maryland 20852
Attention: William B. Dockser, Chairman,
and H. William Willoughby, President
Facsimile: (301) 231-0396
with a copy to:
Melissa Lackey, General Counsel
Facsimile: (301) 468-3150
and
Arent Fox Kintner Plotkin & Kahn
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036-5339
Attention: Robert B. Hirsch, Esq.
Facsimile: (202) 857-6395
10.2 Certain Definitions. As used in this Agreement, the following
-------------------
terms shall have the meanings indicated below:
"Affiliate" means, with respect to any Person, any other Person
---------
controlling, controlled by or under common control with, or the parents, spouse,
lineal descendants or beneficiaries of, such Person, provided, that, in any
case, (i) the following Persons shall be deemed to be Affiliates of the
Partnership: CRITEF 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 November 30, 1996.
----------------
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<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
-------------------------------------------
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<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
THIRD 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>
================================================================================
THIRD AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
among
WATERMARK III PARTNERS, L.P.,
CAPITAL REALTY INVESTORS TAX EXEMPT FUND
III LIMITED PARTNERSHIP
and
CRITEF III ASSOCIATES LIMITED PARTNERSHIP
_____________________
Dated: July 15, 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>
THIRD AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
-------------------------------------------------------
THIRD AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of
July 15, 1996, among WATERMARK III PARTNERS, L.P., a Delaware limited
partnership (the "Merger Partnership"), CAPITAL REALTY INVESTORS TAX EXEMPT FUND
III LIMITED PARTNERSHIP, a Delaware limited partnership (the "Partnership"),
CRITEF III ASSOCIATES LIMITED PARTNERSHIP, a Delaware limited partnership (the
"Partnership GP"), and the other parties listed on the signature pages
hereof.
The Merger Partnership was formed solely for the purpose of being
merged with and into the Partnership in accordance with the Revised Uniform
Limited Partnership Act of the State of Delaware (the "Partnership Act") and the
terms hereof in the merger (the "Merger") contemplated hereby. The Merger
Partnership has no assets other than the cash initially contributed by Capital
Apartment Properties, Inc., a Maryland corporation ("CAPREIT"), which is its
sole general partner (the "Merger Partnership GP"), and the cash initially
contributed by CAPREIT Limited Partnership, a Maryland limited partnership,
which is its sole limited partner (the "Merger Partnership LP"). In the Merger,
all partnership interests in the Partnership, other than those to be issued to
or acquired pursuant hereto by CAPREIT, or its Affiliates, will be redeemed in
cash as specified herein.
The general partners of each of the Partnership and the Merger
Partnership have approved the Merger in accordance with the Partnership Act and
the other transactions contemplated hereby and have recommended that their
respective limited partners approve and adopt the Merger and the other
transactions contemplated hereby.
The parties hereto entered into an Agreement and Plan of Merger, dated
as of September 11, 1995, executed Amendment No. 1 to such Agreement and Plan of
Merger on January 31, 1996, 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 they now
desire to further amend certain provisions of the Second 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").
-2-
<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 $15.18, subject to adjustment, in each case, as set forth
in subsection (b) or (c) below (the "Merger Consideration").
-3-
<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 $1,074,960.
(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
-4-
<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
-5-
<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.
2.3.1. Immediately prior to the Effective Time, pursuant to
Section 6.04 of the Agreement of Limited Partnership of the Partnership (the
"Partnership Agreement"), conditional upon prior BAC Holder Approval, the
Partnership GP shall be removed as general partner of the Partnership and a
designee of CAPREIT (the "CAPREIT General Partner") shall be simultaneously
admitted as a replacement general partner of the Partnership.
2.3.2 The CAPREIT General Partner shall file an amendment to the
Partnership Certificate that reflects the fact that the CAPREIT General Partner
who shall continue the business of the Partnership as the remaining general
partner, is the sole general partner of the Partnership upon consummation of the
Merger.
2.3.3. On the Closing Date, CAPREIT shall pay $500,000 to the
Partnership GP as consideration for its general partner interest in the
Partnership.
2.3.4. The parties acknowledge that the provisions of this
Section 2.3 shall not be effective if the Merger is not consummated,
notwithstanding the BAC Holder Approval to remove and replace the Partnership
GP.
2.4 Additional Rights; Taking of Necessary Action; Further Action.
-------------------------------------------------------------
2.4.1 CAPREIT and its Affiliates reserve the right prior to the
Effective Time, and in accordance with applicable law, from time to time to make
open market or privately negotiated purchases of BACs. CAPREIT shall promptly
notify the Partnership of the occurrence of any such purchase.
-6-
<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
-7-
<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
-8-
<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.
-9-
<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
-10-
<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
-11-
<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
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<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
-13-
<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
-14-
<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
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<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
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<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
-17-
<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
-18-
<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
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<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
-20-
<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
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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
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respect to any Other Filing or for additional information and will supply the
Merger Partnership with copies of all correspondence between the Partnership and
its representatives, on the one hand, and the Commission or the members of its
staff or any other appropriate government official on the other hand, with
respect to the Proxy Statement and any Other Filings. The Partnership and the
Merger Partnership each shall use all commercially reasonable efforts to obtain
and furnish the information required to be included in the Proxy Statement and
any Other Filing; and the Partnership, after consultation with the Merger
Partnership, shall use all commercially reasonable efforts to respond promptly
to any comments made by the Commission with respect to the Proxy Statement and
any Other Filing and any preliminary version thereof and cause the Proxy
Statement and related form of proxy to be mailed to the limited partners of the
partnership and holders of BACs at the earliest practicable time. The
Partnership shall notify the Merger Partnership of its intention to mail the
Proxy Statement to the limited partners of the Partnership and the holders of
BACs, both orally and in writing, at least 48 hours prior to the intended time
of such mailing. The information provided and to be provided by the Merger
Partnership and the Partnership, respectively, for use in the Proxy Statement
and any Other Filings shall, on the date the Proxy Statement is first mailed to
the limited partners of the Partnership and the holders of BACs or any Other
Filing is filed with the appropriate governmental official and in each case on
the date of the meeting of the limited partners of the Partnership and the
holders of BACs referred to in Section 7.2 hereof, be true and correct in all
material respects and shall not omit to state any material fact required to be
stated therein or necessary in order to make such information not false or
misleading, and the Partnership and the Merger Partnership each agree to correct
any such information provided by it for use in the Proxy Statement or any Other
Filing which shall have become false or misleading. The Proxy Statement and any
Other Filing, when filed with the Commission, shall comply as to form in all
material respects with all applicable requirements of law.
7.2 Meeting of the Limited Partners. The Partnership shall take all
-------------------------------
action necessary, in accordance with the Partnership Act, the Partnership
Certificate and the Partnership Agreement to duly call, give notice of, convene
and hold a meeting of the limited partners of the Partnership as promptly as
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.
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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
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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 $2.5 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
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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
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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
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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.
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(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.
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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
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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
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("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
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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
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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, 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
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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.
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<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, and (iii) thereafter through
November 30, 1996, $5,351,360.
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
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<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
- -------
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<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: Ronald Kravit
Facsimile: (212) 261-4060
and
Schulte Roth & Zabel
900 Third Avenue
New York, New York 10022
Attention: Burton Lehman, Esq.
Facsimile: (212) 593-5955
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<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
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<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.
------------
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<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.
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<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 November 30, 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.
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<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
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<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.
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<PAGE>
This Agreement may be executed in one or more counterparts which together shall
constitute a single agreement.
-43-
<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
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<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:
-45-
<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:
-46-
<PAGE>
APPENDIX B-1
OPINION OF OPPENHEIMER & CO., INC.
DELIVERED TO
CAPITAL REALTY INVESTORS TAX EXEMPT FUND
LIMITED PARTNERSHIP, SERIES I
<PAGE>
[LETTEREHAD OF OPPENHEIMER & CO., INC.]
March 14, 1996
Capital Realty Investors Tax Exempt
Fund Limited Partnership
c/o The CRI Building
11200 Rockville Pike
Rockville, MD 20852
Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, of the redemption price to the holders (the "BAC Holders") of
Beneficial Assignee Certificates in Series I issued by Capital Realty Investors
Tax Exempt Fund Limited Partnership ("Fund I-II") with regard to the
acquisition of Fund I-II by Capital Apartment Properties, Inc. ("CAPREIT")
pursuant to the mergers (the "Mergers") of an affiliate of CAPREIT with and into
each of Fund I-II and Capital Realty Investors Tax Exempt Fund III Limited
Partnership. Unless otherwise defined in this Fairness Opinion, all capitalized
terms used herein which are not otherwise defined herein shall have the
respective meanings ascribed to them in the definitive proxy statement to be
used in connection with the Mergers (the "Proxy Statement").
Oppenheimer & Co., Inc. ("Oppenheimer"), as part of its investment banking
business, is regularly engaged in the valuation of businesses and securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for corporate, estate and other purposes. We have been
retained by Fund I-II for the purpose of, and will receive a fee for, rendering
this Fairness Opinion.
In connection with our Fairness Opinion, we have: reviewed the Fund I-II
Merger Agreement; reviewed documents relating to the issuance of Fund I-II's
mortgage revenue bonds ("Mortgage Revenue Bonds"); held discussions with CRITEF
Associates Limited Partnership (the "General Partner") or its representatives,
including employees of C.R.I., Inc. ("CRI"); inspected each of the properties
owned by the Partnership which secure the Mortgage Revenue Bonds and the multi-
family rental housing market in the geographic areas where the properties
securing the Mortgage Revenue Bonds are located; reviewed independent
engineering reports and phase I environmental reports for each property prepared
for CAPREIT by Law Engineering and Environmental Services; reviewed independent
engineering reports for each property prepared for CAPREIT by ValCon
Construction Consultants, Inc.; reviewed construction and site inspection
reports for each property prepared by The Related Companies; reviewed audited
financial statements of Fund I-II for the calendar years 1992, 1993, and 1994,
and unaudited financial statements of Fund I-II for the nine months ended
September 30, 1995; reviewed audited financial statements for each of the
properties which secure the Mortgage Revenue Bonds for the calendar years 1992,
1993 and 1994 (except Observatory II whose unaudited financial statements for
<PAGE>
calendar years 1993 and 1994 were reviewed), 1995 unaudited operating statements
for each property, and certain financial and other information relating to Fund
I-II that was publicly available or furnished to Oppenheimer by the General
Partner, including 1995 property operating budgets, certain internal financial
analyses, forecasts, and reports and other information prepared by or with the
approval of the General Partner or its representatives, or by CAPREIT
Residential, an affiliate of CAPREIT; reviewed the March 14, 1996 draft of the
Proxy Statement; reviewed a written analysis prepared by counsel to the General
Partner relating to those portions of the limited partnership agreement for Fund
I-II which govern the distribution of proceeds of Fund I-II upon a liquidation
or sale of all or substantially all of its assets; held discussions with the
General Partner and its representatives, including employees of CRI; and
conducted such other investigation, financial analysis and studies Oppenheimer
deemed appropriate for the purposes of its Fairness Opinion. Oppenheimer's
Fairness Opinion is based upon analyses of the foregoing factors in light of our
assessment of general economic, financial and market conditions as they exist on
the date hereof. Events occurring after such date could materially affect the
assumptions and conclusions contained in the Fairness Opinion. We have not been
requested or engaged and did not undertake to reaffirm or revise our Fairness
Opinion or otherwise comment upon any events occurring after the date thereof.
We have relied, without assuming responsibility for independent
verification or investigation, on the accuracy and completeness of all financial
and operating data, financial analysis, financial and operating forecasts,
reports and other information that were publicly available, compiled or approved
by or otherwise furnished or communicated to Oppenheimer by or on behalf of the
General Partner of Fund I-II. With respect to financial forecasts utilized by
Oppenheimer, the General Partner represented to Oppenheimer that they are
reasonable projections as to future financial performance, and that there is a
reasonable probability that the projections would prove to be substantially
correct. Oppenheimer did not make an independent evaluation or appraisal of the
assets or liabilities (contingent or otherwise) of Fund I-II nor was
Oppenheimer furnished with any such evaluations or appraisals.
In connection with the preparation of this Fairness Opinion, Oppenheimer
assumed that upon closing of the Mergers the actual Adjustment Amount for Series
I of Fund I-II does not exceed the maximum Adjustment Amount for such Series.
In addition, Oppenheimer also assumed that, prior to the closing of the Mergers,
the Zakin and Wingard Actions shall be subject to final and non-appealable
settlements.
Oppenheimer was not requested to serve as financial advisor to the General
Partner or Fund I-II or to assist the General Partner in the merger negotiations
or in the negotiations of the related transactions involving the General Partner
and its affiliates and CAPREIT. Oppenheimer was not requested to and does not
make any recommendation to the BAC Holders regarding the Mergers. Further,
Oppenheimer was not requested to and did not make any evaluation regarding any
other proposal submitted to the General Partner by third parties with regard to
any alternative transactions and Oppenheimer expresses no opinion on any such
proposed transaction, including whether such alternative transaction may be
superior for the BAC Holders to the Mergers. Also, Oppenheimer did not analyze
the impact of any federal, state or local income taxes to the BAC Holders
arising out of the Mergers. Additionally, Oppenheimer has not taken into
account any consideration paid to or other benefits to be received by the
General Partner and its affiliates, including CRI, or CRIIMI
<PAGE>
MAE Services Limited Partnership in connection with the Mergers and Oppenheimer
expresses no opinion thereon.
It is understood that this Fairness Opinion is not to be quoted, referred
to, excerpted or summarized in whole or in part, or used for any purpose,
without our written consent. We have been engaged by Fund I-II for the purpose
of rendering this Fairness Opinion, in connection with which we will receive a
fee payable in installments (i) upon engagement, (ii) the rendering of the
Fairness Opinion, and (iii) upon the consummation of, and contingent as to, the
Mergers.
Based upon and subject to the foregoing and based upon such other matters
as we consider relevant, it is our opinion that, as of the date hereof, the
Redemption Price offered is fair, from a financial point of view, to the BAC
Holders.
Very truly yours,
/s/ Oppenheimer & Co., Inc.
Oppenheimer & Co., Inc.
<PAGE>
APPENDIX B-2
OPINION OF OPPENHEIMER & CO., INC.
DELIVERED TO
CAPITAL REALTY INVESTORS TAX EXEMPT FUND
LIMITED PARTNERSHIP, SERIES II
<PAGE>
[LETTERHEAD OF OPPENHEIMER & CO., INC.]
March 14, 1996
Capital Realty Investors Tax Exempt
Fund Limited Partnership
c/o The CRI Building
11200 Rockville Pike
Rockville, MD 20852
Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, of the redemption price to the holders (the "BAC Holders") of
Beneficial Assignee Certificates in Series II issued by Capital Realty Investors
Tax Exempt Fund Limited Partnership ("Fund I-II") with regard to the
acquisition of Fund I-II by Capital Apartment Properties, Inc. ("CAPREIT")
pursuant to the mergers (the "Mergers") of an affiliate of CAPREIT with and into
each of Fund I-II and Capital Realty Investors Tax Exempt Fund III Limited
Partnership. Unless otherwise defined in this Fairness Opinion, all capitalized
terms used herein which are not otherwise defined herein shall have the
respective meanings ascribed to them in the definitive proxy statement to be
used in connection with the Mergers (the "Proxy Statement").
Oppenheimer & Co., Inc. ("Oppenheimer"), as part of its investment banking
business, is regularly engaged in the valuation of businesses and securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for corporate, estate and other purposes. We have been
retained by Fund I-II for the purpose of, and will receive a fee for, rendering
this Fairness Opinion.
In connection with our Fairness Opinion, we have: reviewed the Fund I-II
Merger Agreement; reviewed documents relating to the issuance of Fund I-II's
mortgage revenue bonds ("Mortgage Revenue Bonds"); held discussions with CRITEF
Associates Limited Partnership (the "General Partner") or its representatives,
including employees of C.R.I., Inc. ("CRI"); inspected each of the properties
owned by the Partnership which secure the Mortgage Revenue Bonds and the multi-
family rental housing market in the geographic areas where the properties
securing the Mortgage Revenue Bonds are located; reviewed independent
engineering reports and phase I environmental reports for each property prepared
for CAPREIT by Law Engineering and Environmental Services; reviewed independent
engineering reports for each property prepared for CAPREIT by ValCon
Construction Consultants, Inc.; reviewed construction and site inspection
reports for each property prepared by The Related Companies; reviewed audited
financial statements of Fund I-II for the calendar years 1992, 1993, and 1994,
and unaudited financial
<PAGE>
statements of Fund I-II for the nine months ended September 30, 1995; reviewed
audited financial statements for each of the properties which secure the
Mortgage Revenue Bonds for the calendar years 1992, 1993 and 1994, 1995
unaudited operating statements for each property, and certain financial and
other information relating to Fund I-II that was publicly available or furnished
to Oppenheimer by the General Partner, including 1995 property operating
budgets, certain internal financial analyses, forecasts, and reports and other
information prepared by or with the approval of the General Partner or its
representatives, or by CAPREIT Residential; reviewed the March 14, 1996 draft of
the Proxy Statement; reviewed a written analysis prepared by counsel to the
General Partner relating to those portions of the limited partnership agreement
for Fund I-II which govern the distribution of proceeds of Fund I-II upon a
liquidation or sale of all or substantially all of its assets; held discussions
with the General Partner and its representatives, including employees of CRI;
and conducted such other investigation, financial analysis and studies
Oppenheimer deemed appropriate for the purposes of its Fairness Opinion.
Oppenheimer's Fairness Opinion is based upon analyses of the foregoing factors
in light of our assessment of general economic, financial and market conditions
as they exist on the date hereof. Events occurring after such date could
materially affect the assumptions and conclusions contained in the Fairness
Opinion. We have not been requested or engaged and did not undertake to
reaffirm or revise our Fairness Opinion or otherwise comment upon any events
occurring after the date thereof.
We have relied, without assuming responsibility for independent
verification or investigation, on the accuracy and completeness of all financial
and operating data, financial analysis, financial and operating forecasts,
reports and other information that were publicly available, compiled or approved
by or otherwise furnished or communicated to Oppenheimer by or on behalf of the
General Partner of the Fund I-II. With respect to financial forecasts utilized
by Oppenheimer, the General Partner represented to Oppenheimer that they are
reasonable projections as to future financial performance, and that there is a
reasonable probability that the projections would prove to be substantially
correct. Oppenheimer did not make an independent evaluation or appraisal of the
assets or liabilities (contingent or otherwise) of Fund I-II nor was
Oppenheimer furnished with any such evaluations or appraisals.
In connection with the preparation of this Fairness Opinion, Oppenheimer
assumed that upon closing of the Mergers the actual Adjustment Amount for Series
II of Fund I-II does not exceed the maximum Adjustment Amount for such Series.
In addition, Oppenheimer also assumed that, prior to the closing of the Mergers,
the Zakin and Wingard Actions shall be subject to final and non-appealable
settlements.
Oppenheimer was not requested to serve as financial advisor to the General
Partner or Fund I-II or to assist the General Partner in the merger negotiations
or in the negotiations of the related transactions involving the General Partner
and its affiliates and CAPREIT. Oppenheimer was not requested to and does not
make any recommendation to the BAC Holders regarding the Mergers. Further,
Oppenheimer was not requested to and did not make any evaluation regarding any
other proposal submitted to the General Partner by third parties with regard to
any alternative transactions and Oppenheimer expresses no opinion on any such
proposed transaction, including whether such alternative transaction may be
superior for the BAC Holders to the Mergers. Also, Oppenheimer did not analyze
the impact of any federal, state or local income taxes to the BAC Holders
arising out of the Mergers. Additionally, Oppenheimer has not taken into
account any consideration paid to or
<PAGE>
other benefits to be received by the General Partner and its affiliates,
including CRI, or CRIIMI MAE Services Limited Partnership in connection with the
Mergers and Oppenheimer expresses no opinion thereon.
It is understood that this Fairness Opinion is not to be quoted, referred
to, excerpted or summarized in whole or in part, or used for any purpose,
without our written consent. We have been engaged by Fund I-II for the purpose
of rendering this Fairness Opinion, in connection with which we will receive a
fee payable in installments (i) upon engagement, (ii) the rendering of the
Fairness Opinion, and (iii) upon the consummation of, and contingent as to, the
Mergers.
Based upon and subject to the foregoing and based upon such other matters
as we consider relevant, it is our opinion that, as of the date hereof, the
Redemption Price offered is fair, from a financial point of view, to the BAC
Holders.
Very truly yours,
/s/ Oppenheimer & Co., Inc.
Oppenheimer & Co., Inc.
<PAGE>
APPENDIX B-3
OPINION OF OPPENHEIMER & CO., INC.
DELIVERED TO
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III
LIMITED PARTNERSHIP
<PAGE>
[LETTERHEAD OF OPPENHEIMER & CO., INC.]
March 14, 1996
Capital Realty Investors Tax Exempt
Fund III Limited Partnership
c/o The CRI Building
11200 Rockville Pike
Rockville, MD 20852
Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, of the redemption price to the holders (the "BAC Holders") of
Beneficial Assignee Certificates issued by Capital Realty Investors Tax Exempt
Fund III Limited Partnership ("Fund III") with regard to the acquisition of
Fund III by Capital Apartment Properties, Inc. ("CAPREIT") pursuant to the
mergers (the "Mergers") of an affiliate of CAPREIT with and into each of Fund
III and Capital Realty Investors Tax Exempt Fund Limited Partnership. Unless
otherwise defined in this Fairness Opinion, all capitalized terms used herein
which are not otherwise defined herein shall have the respective meanings
ascribed to them in the definitive proxy statement to be used in connection with
the Mergers (the "Proxy Statement").
Oppenheimer & Co., Inc. ("Oppenheimer"), as part of its investment banking
business, is regularly engaged in the valuation of businesses and securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for corporate, estate and other purposes. We have been
retained by Fund III for the purpose of, and will receive a fee for, rendering
this Fairness Opinion.
In connection with our Fairness Opinion, we have: reviewed the Fund III
Merger Agreement; reviewed documents relating to the issuance of Fund III's
mortgage revenue bonds ("Mortgage Revenue Bonds"); held discussions with CRITEF
III Associates Limited Partnership (the "General Partner") or its
representatives, including employees of C.R.I., Inc. ("CRI"); inspected each of
the properties owned by the Partnership which secure the Mortgage Revenue Bonds
and the multi-family rental housing market in the geographic areas where the
properties securing the Mortgage Revenue Bonds are located; reviewed independent
engineering reports and phase I environmental reports for each property prepared
for CAPREIT by Law Engineering and Environmental Services; reviewed independent
engineering reports for each property prepared for CAPREIT by ValCon
Construction Consultants, Inc.; reviewed construction and site inspection
reports for each property prepared by The Related Companies; reviewed audited
financial statements of Fund III for the calendar years 1992, 1993, and 1994,
and unaudited financial statements of Fund III for the nine months ended
September 30, 1995; reviewed audited financial statements for each of the
properties
<PAGE>
which secure the Mortgage Revenue Bonds for the calendar years 1992, 1993 and
1994, 1995 unaudited financial statements for each property, and certain
financial and other information relating to Fund III that was publicly available
or furnished to Oppenheimer by the General Partner, including 1995 property
operating budgets, certain internal financial analyses, forecasts, and reports
and other information prepared by or with the approval of the General Partner or
its representatives, or by CAPREIT Residential; reviewed the March 14, 1996
draft of the Proxy Statement; reviewed a written analysis prepared by counsel to
the General Partner relating to those portions of the limited partnership
agreement for Fund III which govern the distribution of proceeds of Fund III
upon a liquidation or sale of all or substantially all of its assets; held
discussions with the General Partner and its representatives, including
employees of CRI; and conducted such other investigation, financial analysis
and studies Oppenheimer deemed appropriate for the purposes of its Fairness
Opinion. Oppenheimer's Fairness Opinion is based upon analyses of the foregoing
factors in light of our assessment of general economic, financial and market
conditions as they exist on the date hereof. Events occurring after such date
could materially affect the assumptions and conclusions contained in the
Fairness Opinion. We have not been requested or engaged and did not undertake
to reaffirm or revise our Fairness Opinion or otherwise comment upon any events
occurring after the date thereof.
We have relied, without assuming responsibility for independent
verification or investigation, on the accuracy and completeness of all financial
and operating data, financial analysis, financial and operating forecasts,
reports and other information that were publicly available, compiled or approved
by or otherwise furnished or communicated to Oppenheimer by or on behalf of the
General Partner of the Fund III. With respect to financial forecasts utilized
by Oppenheimer, the General Partner represented to Oppenheimer that they are
reasonable projections as to future financial performance, and that there is a
reasonable probability that the projections would prove to be substantially
correct. Oppenheimer did not make an independent evaluation or appraisal of the
assets or liabilities (contingent or otherwise) of Fund III nor was Oppenheimer
furnished with any such evaluations or appraisals.
In connection with the preparation of this Fairness Opinion, Oppenheimer
assumed that upon closing of the Mergers the actual Adjustment Amount for Fund
III does not exceed the maximum Adjustment Amount for such Series. In addition,
Oppenheimer also assumed that, prior to the closing of the Mergers, the Zakin
and Wingard Actions shall be subject to final and non-appealable settlements.
Oppenheimer was not requested to serve as financial advisor to the General
Partner or Fund III or to assist the General Partner in the merger negotiations
or in the negotiations of the related transactions involving the General Partner
and its affiliates and CAPREIT. Oppenheimer was not requested to and does not
make any recommendation to the BAC Holders regarding the Mergers. Further,
Oppenheimer was not requested to and did not make any evaluation regarding any
other proposal submitted to the General Partner by third parties with regard to
any alternative transactions and Oppenheimer expresses no opinion on any such
proposed transaction, including whether such alternative transaction may be
superior for the BAC Holders to the Mergers. Also, Oppenheimer did not analyze
the impact of any federal, state or local income taxes to the BAC Holders
arising out of the Mergers. Additionally, Oppenheimer has not taken into
account any consideration paid to or other benefits to be received by the
General Partner and its affiliates, including CRI, or CRIIMI
<PAGE>
MAE Services Limited Partnership in connection with the Mergers and Oppenheimer
expresses no opinion thereon.
It is understood that this Fairness Opinion is not to be quoted, referred
to, excerpted or summarized in whole or in part, or used for any purpose,
without our written consent. We have been engaged by Fund III for the purpose
of rendering this Fairness Opinion, in connection with which we will receive a
fee payable in installments (i) upon engagement, (ii) the rendering of the
Fairness Opinion, and (iii) upon the consummation of, and contingent as to, the
Mergers.
Based upon and subject to the foregoing and based upon such other matters
as we consider relevant, it is our opinion that, as of the date hereof, the
Redemption Price offered is fair, from a financial point of view, to the BAC
Holders.
Very truly yours,
Oppenheimer & Co., Inc.
<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 Third Amended and Restated Agreement and Plan of Merger, dated
as of July 15, 1996 (as amended from time to time in accordance with its terms,
the "Merger Agreement"), among, inter alia, the Merger Partnership, the
----------------
Partnership and CRITEF Associates;
WHEREAS, in contemplation of the Merger and related matters, the
partners of the Partnership desire to set forth additional terms and conditions
with respect to the Partnership; and
NOW, THEREFORE, in consideration of the mutual promises made herein,
the parties, intending to be legally bound, agree as follows:
AMENDMENTS
----------
1. Removal and Admission. CRITEF Associates is hereby 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 General Partner 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>
- --------------------------------------------------------------------------------
[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 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 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 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 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>
Draft
07/03/96
- --------------------------------------------------------------------------------
[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 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>
DRAFT
07/03/96
- --------------------------------------------------------------------------------
[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 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 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 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 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.
- --------------------------------------------------------------------------------
