CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LTD PARTNERSHIP, 10-Q, 1996-08-08

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LTD PARTNERSHIP
10-Q, 1996-08-08
ASSET-BACKED SECURITIES

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<PAGE>
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the Quarter Ended June 30, 1996
----------------------

Commission file number 1-12034
----------------------

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

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

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

(301) 468-9200
- -------------------------------------------------------------------------
(Registrant's telephone number, including area code)

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

As of August 5, 1996, 5,258,268 Beneficial Assignee Certificates were
outstanding.
<PAGE>

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 1996

Page
----

PART I. Financial Information (Unaudited)

Item 1. Financial Statements

Balance Sheets - June 30, 1996 and
December 31, 1995 . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . 1

Statements of Income - for the three and six months
ended June 30, 1996 and 1995 . . . . . . . . . . . . 2

Statement of Changes in Partners' Capital
(Deficit) - for the six months ended
June 30, 1996 . . . . . . . . . . . . . . . . . . . 3

Statements of Cash Flows - for the six
months ended June 30, 1996 and 1995 . . . . . . . . 4

Notes to Financial Statements . . . . . . . . . . . . 5

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . 22

PART II. Other Information

Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . 32

Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 36

Signature . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . 38
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

BALANCE SHEETS

ASSETS

As of As of
June 30, December 31,
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
Investment in mortgage revenue bonds $ 70,951,947 $ 70,951,947

Cash and cash equivalents 54,677 187,747
Marketable securities 1,552,569 1,213,572
Working capital reserves invested in marketable securities 4,471,445 4,235,144
Interest reserves invested in marketable securities 298,750 298,750
Receivables and other assets 79,974 46,719
------------ ------------
Total assets $ 77,409,362 $ 76,933,879
============ ============

LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)

Distributions payable $ 1,593,575 $ 1,593,577
Accounts payable and accrued expenses 580,139 393,345
------------ ------------
Total liabilities 2,173,714 1,986,922
------------ ------------

Partners' capital (deficit):
General Partner (445,647) (448,563)
Beneficial Assignee Certificates (BACs) - 5,258,268 BACs
issued and outstanding 75,681,295 75,395,520
------------ ------------
Total partners' capital 75,235,648 74,946,957
------------ ------------
Total liabilities and partners' capital $ 77,409,362 $ 76,933,879
============ ============

</TABLE>

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

-1-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)
<TABLE>
<CAPTION>

For the three months ended For the six months ended
June 30, June 30,
------------------------------ ----------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>

Interest from mortgage revenue bonds and
working capital loan $ 2,082,586 $ 1,796,834 $ 4,012,400 $ 3,519,662
----------- ----------- ----------- -----------

Other income (expenses):
Other interest income 63,005 28,506 121,170 97,754
Merger-related expenses (315,741) -- (467,817) --
General and administrative (49,913) (72,987) (129,176) (186,896)
Professional fees (38,134) (16,005) (60,736) (37,624)
----------- ----------- ----------- -----------
(340,783) (60,486) (536,559) (126,766)
----------- ----------- ----------- -----------

Net income $ 1,741,803 $ 1,736,348 $ 3,475,841 $ 3,392,896
=========== =========== =========== ===========

Net income allocated to General
Partner (1.01%) $ 17,592 $ 17,537 $ 35,106 $ 34,268
=========== =========== =========== ===========

Net income allocated to BAC
Holders (98.99%) $ 1,724,211 $ 1,718,811 $ 3,440,735 $ 3,358,628
=========== =========== =========== ===========

Net income per BAC $ 0.33 $ 0.33 $ 0.65 $ 0.64
=========== =========== =========== ===========

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

</TABLE>

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

-2-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)

For the six months ended June 30, 1996

(Unaudited)

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

Balance, December 31, 1995 $ 75,395,520 $ (448,563) $ 74,946,957

Net income 3,440,735 35,106 3,475,841

Distributions paid or accrued of $.60 per BAC
(none of which was return on capital) (3,154,960) (32,190) (3,187,150)
------------ ---------- ------------
Balance, June 30, 1996 $ 75,681,295 $ (445,647) $ 75,235,648
============ ========== ============
</TABLE>

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

-3-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------

CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

STATEMENTS OF CASH FLOWS

(Unaudited)
<TABLE>
<CAPTION>

For the six months ended
June 30,
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,475,841 $ 3,392,896
Adjustments to reconcile net income to net cash provided by operating
activities:
Decrease in receivables and other assets (33,255) (17,185)
Increase (decrease) in accounts payable and accrued expenses 186,794 (27,832)
------------ ------------
Net cash provided by operating activities 3,629,380 3,347,879
------------ ------------

Cash flows from investing activities:
Sale of marketable securities 5,219,546 6,748,576
Purchase of marketable securities (5,558,543) (6,214,779)
Deposits to working capital reserves invested in
marketable securities (236,301) (306,577)
Withdrawals from interest reserves invested in marketable securities -- 115,576
------------ ------------
Net cash (used in) provided by investing activities (575,298) 342,796
------------ ------------
Cash flows from financing activities:
Distributions paid to BAC Holders and General Partner (3,187,152) (3,771,461)
------------ ------------

Net decrease in cash and cash equivalents (133,070) (80,786)

Cash and cash equivalents, beginning of period 187,747 100,513
------------ ------------
Cash and cash equivalents, end of period $ 54,677 $ 19,727
============ ============

</TABLE>

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

-4-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

In the opinion of CRITEF III Associates Limited Partnership (the General
Partner), the accompanying unaudited financial statements of Capital Realty
Investors Tax Exempt Fund III Limited Partnership (the Partnership) contain all
adjustments of a normal recurring nature necessary to present fairly the
Partnership's financial position as of June 30, 1996 and December 31, 1995 and
the results of its operations for the three and six months ended June 30, 1996
and 1995 and its cash flows for the six months ended June 30, 1996 and 1995.

These unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC). Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles (GAAP) have
been condensed or omitted. While the General Partner believes that the
disclosures presented are adequate to make the information not misleading, it is
suggested that these financial statements be read in conjunction with the
amended and restated financial statements and notes included in the
Partnership's Annual Report filed on Form 10-K/A on May 17, 1996, for the year
ended December 31, 1995.

The financial statements for the three and six months ended June 30, 1995
have been restated to conform to 1996 presentation, as well as to conform with
the restated 1995 and 1994 financial statements as discussed in Note 3.

2. MERGER PROPOSAL

On September 11, 1995, the Partnership and its General Partner entered into
a merger agreement, subject to BAC Holder approval, with an affiliate of Capital
Apartment Properties, Inc. (CAPREIT), a private real estate investment trust.
On that date, another CAPREIT affiliate entered into a merger agreement with
Capital Realty Investors Tax Exempt Fund Limited Partnership (CRITEF), a similar
tax exempt bond fund sponsored by CRI. The two merger agreements are
independent of one another, but the closing of each merger is conditioned on
closing of the other, at CAPREIT's election. Another affiliate of CAPREIT is
the property manager for five of the eight properties securing the bonds held by
the Partnership. All five of the properties managed by the CAPREIT affiliate
had defaulted with respect to their mortgage loans held by the Partnership. If
the merger proposal is approved by a majority vote of BAC Holders, all of the
BACs in the Partnership will be redeemed for cash and the interests represented
by such BACs will be canceled. The agreement for the proposed merger has been
modified to improve the terms of the original proposal. Under the original
proposal, the redemption amount per BAC was to be $14.36. Under the most recent
modification, the Third Amended and Restated Agreement and Plan of Merger
(Restated Merger Agreement), all of the BACs will be redeemed for cash at a
redemption price of $15.02 per BAC, net to the holder, without interest, subject
to upward adjustment based on Available Cash (as defined in the Restated Merger
Agreement) to not greater than $15.22 per BAC. In arriving at the base
redemption price, the consideration to be paid to BAC holders in the merger has
been reduced by the fees and expenses payable to counsel for the plaintiffs in
certain class action litigation, as discussed in Note 6. If there is any upward
adjustment to the base redemption price based on Available Cash, plaintiffs'
counsel shall be entitled to an additional amount equal to 20% of the increased
amount, up to a maximum of $75,000.

-5-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)
2. MERGER PROPOSAL - Continued

The BAC Holders will also vote upon the sale of the Partnership's General
Partner's interest to an affiliate of CAPREIT immediately prior to consummation
of the proposed merger. CAPREIT has agreed to pay the General Partner $500,000
in consideration for its 1.01% general partner interest in the Partnership.

CAPREIT and/or its designee will also acquire accounts receivables held by
CRI and CRIIMI MAE Services Limited Partnership (CRIIMI), for the accrued
mortgage servicing and administration fees on certain property mortgage loans of
the Partnership. The general partner of CRIIMI is a subsidiary of CRIIMI MAE
Inc., a publicly-traded company affiliated with the General Partners. Under the
Restated Merger Agreement, CAPREIT will pay the discounted amount of $667,485 to
CRI for its fees accrued through June 30, 1995, which represents approximately
42% of the total accrued fees owed to CRI. Also, CAPREIT will pay $566,676 to
CRIIMI for its fees accrued from July 1, 1995 through June 30, 1996, which
represents 100% of the fees which are expected to be owed to CRIIMI. From July
1, 1996, to the closing of the proposed merger, the amounts to be paid by
CAPREIT to CRIIMI will increase, to reflect additional amounts currently being
accrued for mortgage servicing and administration fees, at a rate of $47,223 per
month.

Each of the affiliates of the Partnership formed to take title to
properties and assume the existing indebtedness when the original, unaffiliated
borrowers defaulted (Owner Partnerships) has agreed to either (a) sell, assign
and transfer the partnership interests in, or the real property and other assets
of, such Owner Partnerships to CAPREIT or its designee for no additional
consideration or (b) admit CAPREIT or its designee as the managing general
partner, whereupon the general partner interests of the current general partners
will be converted into limited partner interests, and CAPREIT will have the
option to acquire all of the limited partner interests at any time within five
years from the closing date of the merger at the then fair market value thereof
(based on the fair market value of the property as encumbered by the mortgage
loans). Although such interests currently have nominal value, if the fair
market value of the partnership properties increases substantially prior to the
time CAPREIT exercises its option, such increase in value may benefit the owners
of the Owner Partnerships. This feature was required by CAPREIT as a material
business term of the merger.

Consummation of the merger is contingent upon the approval of a majority of
BAC Holders. The proposed merger is also contingent upon receiving a favorable
opinion regarding the fairness of the redemption amount to BAC Holders from a
financial point of view. A favorable opinion from an independent investment
banking firm was issued on March 14, 1996. As of August 5, 1996, the
independent investment banking firm is updating their analysis regarding the
fairness of the redemption amount of BAC Holders from a financial point of view.
A proxy statement is expected to be issued to BAC Holders after it is filed with
and clearance is received from the SEC. A preliminary proxy statement has been
filed with the SEC, and the Partnership is awaiting the SEC's clearance. These
definitive proxy materials include a full description of the proposed merger and
the independent fairness opinions.

-6-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)
2. MERGER PROPOSAL - Continued

consummated with CAPREIT, the Partnership will be responsible for these costs,
as discussed above. As of August 5, 1996, the Partnership had incurred legal
costs of approximately $90,000 related to the proposed merger. There is no
reasonable estimate of remaining legal costs to be incurred by the Partnership
associated with the proposed merger.

In the event the Restated Merger Agreement is terminated or abandoned under
the specified circumstances, the Partnership may be liable for the payment of a
fee equal of $2,250,000 with respect to such terminated or abandoned Restated
Merger Agreement if there is a Fiduciary Out Termination (as defined in the
Restated Merger Agreement), a Triggering Event (as defined in the Restated
Merger Agreement) or the Partnership consummates an alternative transaction
within 270 days of the date of termination or abandonment of such Restated
Merger Agreement.

In addition, if the Restated Merger Agreement is terminated or abandoned
due to (1) a Fiduciary Out Termination, (ii) a willful and material breach by
the Partnership or any applicable Owner Partnership (other than a breach of the
representations and warranties), (iii) the failure by the Partnership or any of
such Owner Partnerships to perform in all material respects its obligations and
duties thereunder, or (iv) a termination of such Restated Merger Agreement by
such CAPREIT affiliate because the Partnership shall have settled designated
actions for an amount in excess of an agreed upon amount or such settlement or
compromise contains terms to which such CAPREIT affiliate reasonably objects,
then the Partnership shall bear all of its own expenses, as mentioned above, and
reimburse such CAPREIT affiliate and its affiliates for reasonable out-of-pocket
expenses (including, without limitation, all fees and expenses of counsel, and
its financing sources and consultants to the CAPREIT affiliate and its
affiliates) in connection with such merger and related transactions and the
proxy statement. In no event, however, shall the amount paid to reimburse
expenses under the Restated Merger Agreement exceed $2,500,000.

During February 1996, the General Partner received an inquiry concerning
the possible acquisition of the funds from a group of investors led by Mr. Terry
McNellis and Mr. Gary Petrucci, of Piper Jaffrey Inc., and Mr. David Brierton
and Mr. Jack Safar, of Dominium Management Services Inc. (collectively, the
Dominium Group). The Dominium Group executed confidentiality and non-
circumvention agreements, and by the beginning of April 1996, the Partnership
had provided the Dominium Group with all of the due diligence materials they had
requested. Thereafter, the General Partner did not hear from any representative
of the Dominium Group again until June 28, 1996, just days prior to the
initially scheduled date for the fairness hearing to be held on the Stipulation
of Settlement in the Zakin and Wingard putative class actions (the Zakin and
Wingard Actions), as discussed in Note 6.

On June 28, 1996, counsel to the plaintiffs in the Zakin and Wingard
Actions and the Partnership received a letter from Dominium Tax Exempt Fund
L.L.P. (Dominium), which was signed by Mr. Safar of the Dominium Group,
indicating an interest in entering into merger agreement with the Partnership
having similar terms as the merger agreement and purportedly offering the BAC
Holders of the Partnership and CRITEF an aggregate merger consideration of
approximately $168,230,000. After reviewing the Dominium letter, the General
Partner determined that Dominium had not demonstrated any firm financing
ability. Notwithstanding such determination, the General Partner, in a letter
dated July 3, 1996, notified Dominium that they would make documents available

-7-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)
2. MERGER PROPOSAL - Continued

to Dominium for its due diligence. The General Partner, however, also cautioned
Dominium that they would not jeopardize the merger agreements with CAPREIT by an
unwarranted delay while Dominium and its potential lenders continued to study
the Partnership and the mortgage revenue bonds and complete their due diligence.

On July 12, 1996, the Partnership received copies of correspondence from
Dominium to counsel for the plaintiffs in the Zakin and Wingard Actions,
indicating that Dominium had received a purported financing commitment, subject
to payment of a fee and satisfactory results of a 21 business day due diligence
period. Representatives of Dominium came to the General Partners' offices on
July 11, 12, 26, 29 and 30, 1996 to conduct such review.

3. INVESTMENTS

In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115). This statement requires
that most investments in securities be classified into one of the following
investment categories based upon circumstances under which securities might be
sold: held to maturity, available for sale, and trading. Generally,
investments in securities for which an enterprise has both the ability and the
intent to hold to maturity should be accounted for using the amortized cost
method and all other securities must be recorded at their fair values. The
Partnership implemented SFAS 115 in 1994 for its marketable securities.
Following such adoption, the Partnership (as did others in the industry)
continued to account for its investments in mortgage revenue bonds as
investments in real estate based on acquisition, development or construction
(ADC)determination or consolidation of the Owner Partnerships in accordance with
SEC rules.

In conjunction with the review of the Partnership's 1995 financial
statements by the SEC staff, the Partnership agreed to account for all of its
investments in mortgage revenue bonds as debt securities under the provisions of
SFAS 115 effective January 1, 1994, and restate its 1995 and 1994 financial
statements to reflect this change. Accordingly, effective January 1, 1994, all
investments in mortgage revenue bonds are classified and accounted for as held
to maturity securities and carried at amortized cost because of the
Partnership's ability and intent to hold these investments to maturity. In
accordance with SFAS 115's provisions for held to maturity securities, the
Partnership evaluates the fair value of its mortgage revenue bonds to determine
if impairment exists. If a decline in fair value is determined to be other-
than-temporary, the security is written down to its fair value. The Partnership
did not recognize any impairment losses during the three and six months ended
June 30, 1996 or 1995. Since all of the underlying mortgage loans that secure
the bonds are either in default or have been previously written down due to
impairment, base interest and contingent interest on the mortgage revenue bonds
is recognized as revenue when collected.

The restatement of the 1995 financial statements resulted in increases of
$817,483 and $1,455,253 in the Partnership's previously reported net income for
the three and six months ended June 30, 1995, respectively, and increases of
$0.16 and $0.28 in the Partnership's net income per BAC for the three and six
months ended June 30, 1995, respectively. Net income per BAC as previously
reported was $0.17 and $0.36 for the three and six months ended June 30, 1995,
respectively.

-8-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

3. INVESTMENTS - Continued

The Partnership invested in eight Federally tax-exempt mortgage revenue
bonds with aggregate principal and carrying amounts of $97,101,000 and
$70,951,947, respectively, and made three working capital loans with aggregate
principal and carrying amounts of $3,409,604 and $0, respectively. As of June
30, 1996, six properties collateralizing certain of the mortgage revenue bonds
have been transferred by deed in lieu of foreclosure (or by transfer of
partnership interests in the borrower entity) to Owner Partnerships which
assumed the existing indebtedness. In connection with the transfers of
properties to Owner Partnerships, the Partnership obtained an opinion from its
former independent accounting firm in July of 1991 that the reduction in pay
rate and compounding of unpaid base interest at the original base interest rate
would not cause a reissuance of the bonds under Section 103 of the Internal
Revenue Code of 1986, as amended (the Code) (which would cause the bonds to lose
their tax-exempt status). The Partnership also obtained opinions from certain
bond counsel that certain transfers of the properties to Owner Partnerships
would not cause the Partnership to become a substantial user of the projects or
a related party to a substantial user pursuant to Section 103 of the Code (which
also could have caused the bonds to lose their tax-exempt status). The bond
counsel opinions were obtained in connection with the Ethan's Glen IIA and Ocean
Walk transfers.

In April 1991, the U.S. Supreme Court decided a case, Cottage Savings
Association V. Commissioner (Cottage Savings) that could be interpreted to
impact then existing authority addressing the modification of debt instruments.
In response to this decision, on June 26, 1996, the IRS issued Final Regulations
Section 1.1001-3 which specifically address the tax consequences of
modifications of debt instruments. Among other things, these regulations
provide that certain modifications of the current interest payments or maturity
date of a debt instrument will be treated as a taxable exchange of the original
instrument for the modified debt instrument. As a result, certain future
modifications of the mortgage loans which secure the mortgage revenue bonds
could be treated as a deemed reissuance of the mortgage revenue bonds for
federal income tax purposes. Any reissuance without the cooperation of the
mortgage revenue bond issuers would result in the loss of the tax-exempt status
of the mortgage revenue bonds. Such issuers might cooperate and consent to the
reissuance; however, there can be no assurance that such issuers would do so or
would not impose additional requirements that could have an adverse impact on
the mortgage revenue bonds. Even if issuer consent were obtained, all accrued
and unpaid interest would have to be written off. The write-off of accrued and
unpaid interest would not be recoverable upon ultimate disposition or payoff of
the mortgage revenue bond and would instead accrue to the benefit of the Owner
Partnership to the extent realized.

Final Regulations Section 1.1001-3 will become effective only with respect
to modifications made on or after September 24, 1996. It is unclear at this
time what effect the Cottage Savings decision may have on modifications that
have already been made to mortgage loans which secure the mortgage revenue
bonds. The General Partner believes that the modifications which have already
been made were consistent with the relevant tax authority that existed at the
time of those modifications and have not jeopardized the tax-exempt status of
the mortgage revenue bonds. However, there can be no assurance as to the tax-
exempt status of the mortgage revenue bonds at present.

-9-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

3. INVESTMENTS - Continued

The General Partner's ongoing strategy had been to continue holding the
mortgage revenue bonds until the loan maturity dates. If the merger proposal,
as discussed in Note 2, is approved, the interests of the BAC Holders will be
redeemed for cash. If the merger proposal is not approved, in order to maximize
the overall yield the General Partner may recommend, subject to satisfactory
resolution of any issues relating to the tax-exempt status of the mortgage
revenue bonds, for investor approval extension of certain loan maturity dates
and, if approved, arrange any necessary related amendments to the pertinent
mortgage revenue bonds.

In March 1994, the Partnership was notified by the management agent of
Woodlane Place that certain buildings at the property experienced damage due to
frost heaving. The Owner Partnership hired an engineer to analyze the
underlying problem of inadequate drainage at the property and to determine the
number of affected buildings and the severity of the drainage problem. Based on
this analysis, the costs associated with the correction of the drainage problem
are expected to be approximately $600,000, and will not be covered by the
property's insurance carrier. Due to the nature of the drainage problem,
occupancy levels at the property are not expected to decrease as a result of the
ongoing capital improvements. Funding for these capital improvements may be
provided from the borrower's existing replacement reserves, future property cash
flow, and/or a loan to the borrower from the working capital reserves of the
Partnership. The Partnership has joined with the borrower's insurance carrier
in a lawsuit against the original architect and general contractor of Woodlane
Place. The Partnership has joined on a contingent basis, with no legal fees
being incurred unless the Partnership receives a settlement or judgment, and
with other legal expenses estimated to be less than $20,000. All depositions
have been taken, and the lawsuit is currently in discovery mode. There is no
assurance that the Partnership will receive any funds as a result of this
lawsuit.

Presented below is a summary of base interest payments for the six months
ended June 30, 1996 and 1995 that are due to the Partnership from the borrowers:

-10-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

3. INVESTMENTS - Continued

For the six months ended June 30, 1996
----------------------------------------------------------------------------------
Base Interest Base Interest Cumulative
Paid From Paid From Current Base Unpaid
Current Base Properties' Non-Operating Interest Base
Interest Due(1) Operations(3) Sources(2) Not Paid Interest
--------------- ------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Ethan's Glen IIA $ 460,469 $ 507,164 $ -- $ -- $ 274,567
Geary Courtyard 870,300 452,000 -- 418,300 6,140,803
Ocean Walk 887,214 882,120 -- 5,094 1,471,510
Paces River 2 384,513 472,876 -- -- 108,996
Regency Woods 346,730 259,600 -- 87,130 357,080
Valley Creek II 459,550 378,598 -- 80,952 788,295
Washington Ridge 437,500 437,500 -- -- 72,917
Woodlane Place 703,500 622,542 -- 80,958 2,743,366
---------- ---------- ---------- ---------- -----------
$4,549,776 $4,012,400 $ -- $ 672,434 $11,957,534
========== ========== ========== ========== ===========
</TABLE>

<TABLE>
<CAPTION>
For the six months ended June 30, 1995
---------------------------------------------------------------------------------
Base Interest Base Interest Cumulative
Paid From Paid From Current Base Unpaid
Current Base Properties' Non-Operating Interest Base
Interest Due(1) Operations(4) Sources(2) Not Paid Interest
--------------- ------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Ethan's Glen IIA $ 460,469 $ 391,352 $ -- $ 69,117 $ 224,342
Geary Courtyard 870,300 347,000 -- 523,300 5,267,203
Ocean Walk 887,214 871,546 -- 15,668 1,356,497
Paces River 2 384,513 420,147 -- -- 188,222
Regency Woods 346,730 203,762 17,834 125,134 182,922
Valley Creek II 459,550 340,940 -- 118,610 629,216
Washington Ridge 437,500 437,500 -- -- 72,917
Woodlane Place 703,500 442,834 -- 260,666 2,470,552
---------- ---------- ---------- ---------- -----------
$4,549,776 $3,455,081 $ 17,834 $1,112,495 $10,391,871
========== ========== ========== ========== ===========
</TABLE>

(1) The Partnership charges the borrowers interest on unpaid base interest
which totaled $616,961 and $492,361 for the six months ended June 30, 1996
and 1995, respectively.
(2) Amounts were funded from reserves provided for from the mortgage loan
proceeds and/or funds from the general partners of the borrowers.
(3) Includes amounts received by the Partnership in January 1996 from the
release of excess tax and insurance reserves relating to 1995. Such

-11-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

3. INVESTMENTS - Continued

amounts received from Ethan's Glen IIA, Paces River 2 and Woodlane Place
totaled $70,000, $12,000 and $23,000, respectively.
(4) Excludes contingent interest of $18,816 and $46,747 received by the
Partnership from Washington Ridge during the three and six months ended
June 30, 1995, respectively.

Contingent interest is payable quarterly on an estimated basis, in arrears
but only to the extent of available net cash flow, if any. Contingent interest
is recognized as revenue when collected. Contingent interest due as of June 30,
1996 and December 31, 1995, amounted to $41,067,106 and $37,635,033,
respectively. The Partnership received contingent interest of $18,816 and
$46,747 from Washington Ridge during the three and six months ended June 30,
1995, respectively. No contingent interest was received for the three or six
months ended June 30, 1996.

As of June 30, 1996, the Partnership had cash and cash equivalents of
$54,677, unrestricted marketable securities of $1,552,569, working capital
reserves invested in marketable securities of $4,471,445 and interest reserves
invested in marketable securities of $298,750. Marketable securities consist of
tax-exempt municipal bonds which generally contain a seven-day put option with
established banks or brokerage houses. The Partnership has classified its
investments in marketable securities into the available for sale category under
SFAS 115. Realized gains and losses on the sale of marketable securities were
determined on a specific identification basis. There were no net unrealized
holding gains or losses recognized during the three or six months ended June 30,
1996 or 1995 as the cost for the tax-exempt municipal bonds approximated fair
value throughout the respective periods.

4. DISTRIBUTIONS TO BAC HOLDERS

The Partnership expects to continue to make distributions to BAC Holders on
a quarterly basis. The Restated Merger Agreement stipulates that 1996
distributions cannot exceed ten cents per BAC per month. There are no other
legal restrictions on the Partnership's present or future ability to make cash
distributions other than as set forth in the Restated Merger Agreement. The
distributions to BAC Holders have been funded from three primary sources: cash
flow from the underlying properties' operations, surplus working capital
reserves of the Partnership, and funds from property reserves/borrower
guarantees. However, because the surplus working capital reserves are almost
depleted and property reserves/borrower guarantees were depleted during the
first quarter of 1995, it is expected that distributions will be based primarily
on cash flow from the Partnership's operations. Cash flow from the
Partnership's operations consists of cash flow from six of the properties, plus
specified interest payments from two properties and contingent interest from one
property, supplemented by any available property reserves/borrower guarantees,
less Partnership expenses. The General Partner seeks to optimize cash flow from
the properties owned by Owner Partnerships. Despite these efforts, the amounts
paid to the Partnership from the borrowers may be expected to fluctuate from
period to period due to changes in occupancy rates, rental rates, operating
expenses and other variables.

The following distributions were paid or accrued to BAC Holders of record
for the first two quarters of 1996 and 1995:

-12-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

4. DISTRIBUTIONS TO BAC HOLDERS - Continued

1996 1995
Distributions to Distributions to
BAC Holders BAC Holders
----------------------------- ----------------------------
Quarter Ended Total Per BAC Total Per BAC
- ------------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C>
March 31, $ 1,577,480 $ 0.30 $ 1,577,480 $ 0.30
June 30, 1,577,480 0.30 1,577,480 0.30
----------- ------- ----------- -------
$ 3,154,960 $ 0.60 $ 3,154,960 $ 0.60
=========== ======= =========== =======
</TABLE>

Distributions to BAC Holders for the three and six months ended June 30,
1996 and 1995 were funded as follows:

<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
--------------------------------- ---------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flow (1) $ 1,850,147 $ 1,782,859 $ 3,423,451 $ 3,378,151
Deposits to working capital/interest
reserves (256,572) (189,284) (236,301)
(191,001)
------------ ------------ ------------ ------------
Total cash available for
distribution $ 1,593,575 $ 1,593,575 $ 3,187,150 $ 3,187,150
============ ============ ============ ============
Distributions to:
General Partner (1.01%) $ 16,095 $ 16,095 $ 32,190 $ 32,190
============ ============ ============ ============
BAC Holders (98.99%) $ 1,577,480 $ 1,577,480 $ 3,154,960 $ 3,154,960
============ ============ ============ ============
</TABLE>

(1) Defined in the Limited Partnership Agreement as (a) all revenues received
by the Partnership during such period, plus (b) any amounts which the
Managing General Partner releases from the Working Capital Reserve as being
no longer necessary to hold as part of the Working Capital Reserve, plus
(c) any amounts released to the Partnership from the Interest Reserve
Account with respect to a mortgaged property after completion of
construction of such mortgaged property, less (i) operating expenses of the
Partnership paid from reserves during the period, including any expenses
paid to the General Partner, but not including such amounts paid from the
Working Capital Reserve, (ii) all cash payments made from Revenues during
such period to discharge Partnership indebtedness, and (iii) all amounts

-13-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

4. DISTRIBUTIONS TO BAC HOLDERS - Continued

from revenues, if any, added to the Working Capital Reserve during such
period. Cash flow as defined in the Limited Partnership Agreement is not
to be construed as an alternative to operating income in accordance with
GAAP as an indication of the Partnership's operating performance.

The Partnership's working capital reserves may be available for the ongoing
costs of operating the Partnership, for supplementing distributions to investors
and for making working capital loans to the borrowers. As of June 30, 1996 and
December 31, 1995, the working capital reserves were $4,471,445 and $4,235,144,
respectively, both of which exceed the Partnership's minimum working capital
reserve balance of approximately $3,718,000. The minimum working capital
reserve balance may be increased or decreased from time to time as deemed
necessary by the General Partner. The surplus working capital reserve balance
of approximately $753,000 as of June 30, 1996 may be used to supplement
distributions to BAC Holders. None of the distributions made during the three
and six months ended June 30, 1996 and June 30, 1995, respectively, were funded
from the surplus working capital reserves.

Interest reserves relating to Washington Ridge were $298,750 as of June 30,
1996 and December 31, 1995. During the three and six months ended June 30,
1995, $96,090 and $19,486 were transferred to working capital reserves for the
three and six months ended June 30, 1995, respectively, to fund distributions to
BAC Holders from the interest reserves. No amounts were transferred to working
capital reserves for the three and six months ended June 30, 1996, to fund
distributions to BAC Holders.

5. INCOME TAXES

For income tax purposes, base interest income is accrued when earned. The
accrual of base interest is discontinued when at the time of accrual, ultimate
collectibility of the base interest due is considered unlikely. Once a loan has
been placed on a non-accrual status, income is recorded only as cash payments
are received from the borrower or nominee until such time as the uncertainty of
collection of unpaid base interest is eliminated. Loans relating to Geary
Courtyard, Valley Creek II and Woodlane Place were placed on a non-accrual
status in 1993; therefore, for income tax purposes, income is recognized to the
extent of cash received. Contingent interest from the investment is recognized
as revenue when collected. Contingent interest of $18,816 and $46,747 was
recognized from Washington Ridge for the three and six months ended June 30,
1995, respectively. No contingent interest was received for the three or six
months ended June 30, 1996.

For federal income tax purposes, the investments in all of these mortgage
revenue bonds are treated as loans, interest on which is exempt from federal
income tax. A reconciliation of the primary differences between the financial
statement net income and municipal income for tax purposes is as follows:

-14-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

5. INCOME TAXES - Continued

<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial statement net income $ 1,741,803 $ 1,736,348 $ 3,475,841 $ 3,392,896
Adjustment for timing of municipal
income recognition 349,353 112,129 617,546 179,480
------------ ------------ ------------ ------------
Municipal income, net for tax purposes $ 2,091,156 $ 1,848,477 $ 4,093,387 $ 3,572,376
============ ============ ============ ============
Municipal income per BAC $ 0.40 $ 0.35 $ 0.78 $ 0.67
============ ============ ============ ============

</TABLE>

6. LITIGATION

On September 22, 1995, Irving Zakin commenced a putative class action (the
Zakin Action) against the Partnership, its general partner (CRITEF Associates
III Limited Partnership), its Assignor Limited Partner (CRITEF III, Inc.), CRI,
William B. Dockser, H. William Willoughby, CRITEF, CRITEF Associates Limited
Partnership, CRITEF, Inc., and CAPREIT (collectively, the Defendants) in the
court of Chancery of the State of Delaware in New Castle County (the Chancery
Court) (C.A. No. 14558). The complaint alleges, among other things, that the
price offered to the BAC Holders in the Mergers at the time the complaint was
filed was inadequate, and that the Defendants breached their fiduciary duty to
the BAC Holders, or aided and abetted such a breach, engaged in self-dealing and
misled BAC Holders, in connection with the proposed Mergers. The suit seeks to
enjoin the proposed merger, to obtain damages in an unspecified amount for the
BAC Holders, and to compel the Defendants to maximize the amount paid to the BAC
Holders and consider unspecified alternatives to the proposed merger.

On October 5, 1995, David and Johanna Wingard (the Wingard Action)
commenced a second putative class action against the Defendants in the Chancery
Court (C.A. No 14604). The complaint in the Wingard Action contains virtually
the identical allegations and seeks virtually the identical relief as in the
Zakin Action. A request to the Court has been made by the plaintiffs in both
lawsuits to consolidate the two actions.

The Defendants have denied, and continue to deny, that any of them have
committed or threatened to commit any violations of law or breaches of duty to
the BAC Holders.

-15-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

6. LITIGATION - Continued

down based upon available cash), and (b) the aggregate amount payable in
consideration for the Accrued Fees payable to CRI for the Partnership and CRITEF
was reduced to no more than $2,000,000 (subsequently reduced to $1,950,000) as
compared with $4,023,000 provided for in the original merger agreement. The
Defendants also agreed that they would not object to an application for
attorneys' fees and reimbursement of out-of-pocket expenses of plaintiffs'
counsel for up to 20% of the improved Merger consideration negotiated by them
with such fees and expenses as are awarded by the Court to plaintiffs' counsel
to be paid from the improved Merger consideration negotiated by them.
Subsequently, the parties agreed that the maximum amount of fees and expenses
for the Partnership and CRITEF, assuming the merger is consummated, shall be
$1,700,000 plus an amount equal to 20% (up to a maximum of $75,000) of any
Adjustment Amount at closing. These fees will reduce the cash paid to BAC
Holders of the Partnership and CRITEF in connection with the proposed merger, as
discussed. In the event that the proposed merger is not consummated, these fees
will not be borne by the Partnership. As such, the Partnership's financial
statements do not include any adjustment for these fees. Counsel for the
plaintiffs and experts retained by them have reviewed voluminous documents
relating to the proposed merger, and have taken depositions of representatives
of the General Partner and CAPREIT and Oppenheimer and Co., Inc., the fairness
opinion provider.

On May 16, 1996, the defendants and the plaintiffs filed the Stipulation
and Agreement of Settlement with the Chancery Court, and sought preliminary
approval of the putative classes (the Class) and approval of a form of notice to
the Class of the proposed Settlement. The Stipulation of Settlement
contemplates the complete discharge, settlement and release of all claims that
have been, could have been, or in the future might be asserted in any action or
any other proceeding in connection with the proposed merger.

The Stipulation of Settlement also permits plaintiffs to terminate the
proposed settlement if, in their opinion, a superior financial offer is
presented for the Partnership. It is expected that a hearing to determine
whether the settlement is fair, reasonable and in the best interest of the Class
will be held in early August, 1996.

Martin C. Schwartzberg is a former shareholder and executive officer of CRI
who retired from CRI as of January 1, 1990. In connection therewith, he
relinquished his general partner duties for all CRI-sponsored partnerships. In
February 1996, Mr. Schwartzberg publicly stated that he would oppose the
proposed merger until the Partnership made its financial statements and the
financial statements of the Owner Partnerships publicly available. The
financial statements of the Partnership are included in this Form 10-Q and have
been filed with the SEC quarterly. The financial statements of the Owner
Partnerships were filed as exhibits to Current Reports on Form 8-K, filed with
the SEC by the Partnership on March 25, 1996. As discussed below, Mr.
Schwartzberg has since reviewed the requested information and has determined to
support the merger.

On November 9, 1995, CRI filed a complaint seeking declaratory relief in
the Circuit Court for Montgomery County, Maryland (the Montgomery Circuit Court)
against Capital Management Strategies, Inc. (CMS), a company controlled by Mr.
Schwartzberg, to determine the proper amount of fees to be paid in 1996 under an
asset management agreement. CMS answered the complaint on January 10, 1996, but
asserted no counterclaims. Thereafter, Mr. Schwartzberg launched a hostile

-16-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

6. LITIGATION - Continued

consent solicitation to be designated as managing general partner of 125
private partnerships sponsored by CRI.

On January 18, 1996, Mr. Schwartzberg and CMS filed a complaint in the
Montgomery County, Maryland Circuit Court, against CRI and Messrs. Dockser and
Willoughby alleging, among other things, that the actions of CRI and Messrs.
Dockser and Willoughby in connection with the proposed merger involve self-
dealing and constitute a breach of their fiduciary duties to Mr. Schwartzberg.
Neither the Partnership nor the General Partner was named as a defendant in this
action, and Mr. Schwartzberg did not allege that he was a BAC Holder. Messrs.
Dockser and Willoughby entered an answer denying all of Mr. Schwartzberg's
claims and moved to dismiss or strike the allegations concerning the Partnership
and CRIIMI MAE Inc. Messrs. Dockser and Willoughby publicly responded that Mr.
Schwartzberg's suit is motivated by his budget dispute with CRI and personal
animosity.

On February 12, 1996, the Montgomery Circuit Court issued a memorandum
opinion and order enjoining CMS and Mr. Schwartzberg from using or disclosing
information made confidential under the asset management agreement.

On February 15, 1996, Mr. Schwartzberg filed suit in the New Castle County,
Delaware Chancery Court (the Chancery Court) against the General Partner and
CRITEF Associates Limited Partnership (CRITEF LP) (collectively, the General
Partners) alleging that he had made demands upon the General Partners, in his
capacity as a limited partner of the General Partner and a general and limited
partner of CRITEF LP, to inspect and obtain copies of the BAC Holder lists and
other documents and that his demands were rejected. On February 23, 1996, the
General Partners of the Partnership and CRITEF III answered the complaint,
admitting that his demands had been rejected and denying that Mr. Schwartzberg
is entitled to the materials requested because, among other things, he lacks
standing and proper purpose to inspect and obtain copies of the requested
materials. Following a hearing on March 6 and 7, 1996, on June 7, 1996, the
Chancery Court denied Mr. Schwartzberg's request for relief, holding that Mr.
Schwartzberg's request was for an "improper purpose" under Delaware law.

On February 16, 1996, the Partnership and CRITEF (collectively, the
Partnerships), together with the General Partners, CRI, and CAPREIT, filed suit
against Mr. Schwartzberg in the United States District Court for the Southern
District of New York (the New York Action). The complaint alleged that Mr.
Schwartzberg was engaged in an unlawful solicitation of proxies of the BAC
Holders through two press releases he issued. On March 18, 1996, the District
Court enjoined Mr. Schwartzberg from (1) making any further solicitation of BAC
Holders within the meaning of Section 14(a) of the Securities Exchange Act of
1934 without complying with SEC regulations, and (2) committing any violation of
Rule 14a-9 promulgated under the Securities Exchange Act (regarding false or
misleading statements) in connection with any solicitation relating to the
Partnerships.

On March 18, 1996, Mr. Schwartzberg filed a counterclaim against the
General Partners alleging that three press releases issued by the General
Partners and the Partnerships constituted solicitations in violation of the
Securities Exchange Act and that they were false and misleading. The counter-
defendants denied the allegations. On April 23, 1996, the District Court denied
Mr. Schwartzberg's motion for an injunction. The District Court held that an
injunction was unwarranted, given the scope and extent of Mr. Schwartzberg's

-17-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

6. LITIGATION - Continued

prospects for succeeding on the merits, and the fact that he could show neither
a sufficient threat of irreparable injury nor a balance in his favor of the
hardships associated with granting or denying an injunction.

On June 13, 1996, pursuant to a resolution of disputes with Mr.
Schwartzberg, the parties to the actions in the District Court filed with the
District Court a Stipulation of Dismissal with Prejudice.

After extensive review of the merger agreements, the Partnerships'
financial statements and other materials and pursuant to the terms of the
agreement between CAPREIT and Mr. Schwartzberg and CMS (the CAPREIT Agreement),
Mr. Schwartzberg has advised CAPREIT, the General Partners and the Partnerships
that he and his family members and entities under his control (the Schwartzberg
Entities) will vote their BACs in favor of the proposed merger and in accordance
with the recommendations of the General Partners. In connection therewith, the
Schwartzberg Entities have agreed to grant to CAPREIT an irrevocable proxy to
vote their interests in the Partnerships.

The Schwartzberg Entities have agreed not to attempt to (i) dispose of or
acquire any interest in the Partnerships or join or participate with any group
seeking to do the same, (ii) solicit proxies or participate in a solicitation in
opposition to the proposed merger, in opposition to the recommendations of the
General Partners with respect to the proposed merger, or to remove the General
Partners or seek to have himself or his designee become a general partner of the
Partnerships, (iii) make any public statements in opposition to the proposed
merger, (iv) make any public statements with respect to, or offer, solicit, or
submit a proposal relating to consolidation or combination with the
Partnerships, or the admission of new general partners into the Partnerships.

In addition, Mr. Schwartzberg disclosed that he has had discussions with
Lenner Corp. regarding the terms of the offer and the submission of a competing
bid. Lenner Corp. declined to submit a competing offer to the Partnership and
has entered into a confidentiality and standstill agreement with CAPREIT
regarding the proposed merger and the Partnerships.

Provided that the Schwartzberg Entities comply with the terms of the
CAPREIT Agreement, CAPREIT is obligated to cause to be paid into escrow the
aggregate amount of $867,000 in four installments over a three year period.
These funds will be used for the partial payment of Mr. Schwartzberg's counsel
and consultants in connection with their review of the merger agreements, drafts
of the preliminary proxy statement filed with the SEC on July 17, 1996,
financial information of the Partnership, partnership documents, Delaware-
related claims, and other documents. CRI will provide CAPREIT with $400,000 in
respect of CAPREIT's obligations under the CAPREIT Agreement, counsel for the
plaintiffs in the Zakin and Wingard Actions will provide $100,000 in respect of
such payments and Mr. Schwartzberg will provide $33,500 of such payments. No
such payments other than the first installment will be paid into escrow until
the proposed merger has been consummated and each of the payments is contingent
upon there having been no defaults on the part of the Schwartzberg Entities or
under the third party standstill agreement.

-18-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

6. LITIGATION - Continued

under the CAPREIT Agreement as a result of a violation of a third party
standstill agreement, Mr. Schwartzberg shall pay CAPREIT liquidated damages in
accordance with the terms of the CAPREIT Agreement.

An agreement among Mr. Schwartzberg, CMS and CRI (the CRI Agreement), in
addition to providing that Mr. Schwartzberg will not oppose the proposed merger,
also provides for a resolution of all disputes between CRI and Mr. Schwartzberg.
As part of the CRI Agreement, Mr. Schwartzberg and CRI have agreed not to take
any actions which might interfere with each others' business. Mr. Schwartzberg
has also retracted any derogatory statements that he previously made about CRI,
its principals, and the proposed merger, and has promised not to make any
similar statements in the future. Although the CRI Agreement provides that it
is legally binding, that agreement contemplates execution of a more detailed
agreement (referred to as the Definitive Agreement) and the exchange of full
general releases between Mr. Schwartzberg and CRI, and Messrs. Dockser and
Willoughby.

7. RELATED-PARTY TRANSACTIONS

The General Partner has the authority and responsibility for, among other
things, the overall management and control of the Partnership. The General
Partner and its affiliates do not receive any fees from the Partnership for
their services to the Partnership, but are reimbursed by the Partnership for any
actual costs and expenses incurred in connection with the operation of the
Partnership. During the three and six months ended June 30, 1996, $65,300 and
$103,254, respectively and $42,584 and $96,143 for the three and six months
ended June 30, 1995, respectively, were reimbursed for such costs and are
included in general and administrative expense and merger-related expense in the
statements of income.

CRICO Mortgage Company, Inc. (CRICO Mortgage), a former affiliate of the
General Partner, was entitled to annual mortgage administration and servicing
fees from the borrowers which were payable from operating revenues each month
after payment of full base interest on the mortgage loans. On June 30, 1995,
CRICO Mortgage merged with and into CRIIMI, an affiliate of CRIIMI MAE Inc., a
publicly traded real estate investment trust (the REIT). The REIT was
originally sponsored by CRI, the general partner of the General Partner, but is
not controlled by CRI, although the CRI stockholders are directors, officers and
major stockholders of the REIT. Pursuant to the REIT merger agreement, the
right to receive the accrued and unpaid mortgage administration and servicing
fees as of the date of the REIT merger was distributed by CRICO Mortgage to its
shareholders and contributed by them to CRI. After June 30, 1995, the mortgage
administration and servicing are being performed by CRIIMI and mortgage
administration and servicing fees are payable to that entity. The merger did
not result in any increase in fees or changes in the amount of fees which are
currently payable.

The following unpaid fees were due to CRI and CRIIMI from the borrowers as
of June 30, 1996 and December 31, 1995:

-19-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

7. RELATED-PARTY TRANSACTIONS - Continued

<TABLE>
<CAPTION>
As of As of
June 30, December 31,
1996 1995
----------- -----------
<S> <C> <C>
CRI $ 1,578,694 $ 1,578,694
CRIIMI 566,676 283,338
----------- -----------
Total $ 2,145,370 $ 1,862,032
=========== ===========
</TABLE>

The unpaid fees are payable from available cash flow after payment of all
current and delinquent base interest and accrued interest on delinquent base
interest. If available cash flow from the borrower is insufficient to pay the
fee, it is payable on the earlier of prepayment or maturity of the loan, after
debt repayment. Any payments made with respect to unpaid fees will be applied
against the oldest outstanding fees first.

In connection with the Restated Merger Agreement entered into by the
Partnership, as discussed in Note 2, unpaid fees accrued through June 30, 1995
will be purchased from CRI for the discounted amount of $667,485, which
represents approximately 42% of the total accrued fees owed to CRI. In
addition, unpaid fees accrued from July 1, 1995 through June 30, 1996 will be
purchased by CAPREIT from CRIIMI for $566,676, which represents 100% of the
accrued fees which are expected to be owed to CRIIMI for that period. From July
1, 1996, to the closing of the proposed merger, the purchase price of CRIIMI's
portion will be adjusted upward at a rate of $47,223 per month.

Fees paid by the borrowers to CRI/CRICO Mortgage and CRIIMI for the three
and six months ended June 30, 1996 and 1995, were as follows:

-20-
<PAGE>
CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

7. RELATED-PARTY TRANSACTIONS - Continued

<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CRI/CRICO Mortgage $ -- $ 26,625 $ -- $ 49,312
CRIIMI 18,750 -- 37,500 --
----------- ----------- ----------- -----------
Total $ 18,750 $ 26,625 $ 37,500 $ 49,312
=========== =========== =========== ===========
</TABLE>

Owner Partnerships formed to take title to properties are structured as
limited partnerships. The Owner Partnerships and the managing general partner
of the General Partner have primarily common ownership (except for Ethan's Glen
IIA prior to March 14, 1996) and are under common control. The Owner
Partnerships, rather than the Partnership, became holders of title to the
properties in an effort to maintain the tax exempt nature of the interest on the
mortgage revenue bonds. No compensation or fees were paid by the Partnership to
the Owner Partnerships or their principal in connection with the transfers of
ownership.

In connection with the Restated Merger Agreement, each of the Owner
Partnerships has agreed to either (a) sell, assign and transfer the partnership
interests in, or the real property and other assets of, such Owner Partnerships
to CAPREIT or its designee for no additional consideration or (b) admit CAPREIT
or its designee as the managing general partner, whereupon the general partner
interests of the current general partners will be converted into limited partner
interests, and CAPREIT will have the option to acquire all of the limited
partner interests at any time within five years from the closing date of the
merger at the then fair market value (based on the fair market value of the
property as encumbered by the mortgage loans) thereof. Although such interests
currently have nominal value, if the fair market value of the partnership
properties increases substantially prior to the time CAPREIT exercises its
option, such increase in value may benefit the owners of the Owner Partnerships.

-21-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------

Business
--------

The Partnership'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 and in the Partnership's Annual Report filed on Form 10-K/A,
that could cause actual results to differ materially.

In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115). This statement requires
that most investments in securities be classified into one of the following
investment categories based upon circumstances under which securities might be
sold: held to maturity, available for sale, and trading. Generally,
investments in securities for which an enterprise has both the ability and the
intent to hold to maturity should be accounted for using the amortized cost
method and all other securities must be recorded at their fair values. The
Partnership implemented SFAS 115 in 1994 for its marketable securities.
Following such adoption, the Partnership (as did others in the industry)
continued to account for its investments in mortgage revenue bonds as
investments in real estate based on acquisition, development or construction
(ADC) determination or consolidation of the Owner Partnerships in accordance
with SEC rules.

-22-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------

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.

-23-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------

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.

Merger Proposal
- ---------------

On September 11, 1995, the Partnership and its General Partner entered into
a merger agreement, subject to BAC Holder approval, with an affiliate of Capital
Apartment Properties, Inc. (CAPREIT), a private real estate investment trust.
On that date, another CAPREIT affiliate entered into a merger agreement with
Capital Realty Investors Tax Exempt Fund Limited Partnership (CRITEF), a similar
tax exempt bond fund sponsored by CRI. The two merger agreements are
independent of one another, but the closing of each merger is conditioned on
closing of the other, at CAPREIT's election. Another affiliate of CAPREIT is
the property manager for five of the eight properties securing the bonds held by
the Partnership. All five of the properties managed by the CAPREIT affiliate
had defaulted with respect to their mortgage loans held by the Partnership. If
the merger proposal is approved by a majority vote of BAC Holders, all of the
BACs in the Partnership will be redeemed for cash and the interests represented
by such BACs will be canceled. The agreement for the proposed merger has been
modified to improve the terms of the original proposal. Under the original
proposal, the redemption amount per BAC was to be $14.36. Under the most recent
modification, the Third Amended and Restated Agreement and Plan of Merger
(Restated Merger Agreement), all of the BACs will be redeemed for cash at a
redemption price of $15.02 per BAC, net to the holder, without interest, subject
to upward adjustment based on Available Cash (as defined in the Restated Merger
Agreement) to not greater than $15.22 per BAC. In arriving at the base
redemption price, the consideration to be paid to BAC holders in the merger has
been reduced by the fees and expenses payable to counsel for the plaintiffs in
certain class action litigation. If there is any upward adjustment to the base
redemption price based on Available Cash, plaintiffs' counsel shall be entitled
to an additional amount equal to 20% of the increased amount, up to a maximum of
$75,000.

-24-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------

In accordance with the Restated Merger Agreement, CAPREIT will pay the
legal costs incurred by the Partnership associated with the proposed merger,
upon consummation of the proposed merger. As the Partnership is not responsible
for payment of these costs, they have not been reflected in the accompanying
financial statements. However, in the event that the proposed merger is not
consummated with CAPREIT, the Partnership will be responsible for these costs,
as discussed above. As of August 5, 1996, the Partnership had incurred legal
costs of approximately $90,000 related to the proposed merger. There is no
reasonable estimate of remaining legal costs to be incurred by the Partnership
associated with the proposed merger.

-25-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------

duties thereunder, or (iv) a termination of such Restated Merger Agreement by
such CAPREIT affiliate because the Partnership shall have settled designated
actions for an amount in excess of an agreed upon amount or such settlement or
compromise contains terms to which such CAPREIT affiliate reasonably objects,
then the Partnership shall bear all of its own expenses, as mentioned above, and
reimburse such CAPREIT affiliate and its affiliates for reasonable out-of-pocket
expenses (including, without limitation, all fees and expenses of counsel, and
its financing sources and consultants to the CAPREIT affiliate and its
affiliates) in connection with such merger and related transactions and the
proxy statement. In no event, however, shall the amount paid to reimburse
expenses under the Restated Merger Agreement exceed $2,500,000.

Financial Condition/Liquidity
----------------------------

The primary sources of the Partnership's future cash flows are expected to
be from receipts of base interest on mortgage loans, which are dependent upon
the net operating income of the properties. Therefore, the Partnership's
investment in the mortgage revenue bonds and working capital loans is subject to
the general risks inherent to the ownership of real property. These risks

-26-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------

include reduction in rental income due to an inability to maintain occupancy
levels, adverse changes in general economic conditions, and adverse changes in
local conditions. The General Partner expects that the properties transferred
to Owner Partnerships, subject to existing indebtedness, will continue to
generate sufficient cash flow to pay all operating expenses, meet escrow deposit
requirements and pay some, but not all, of the base interest due to the
Partnership. The Partnership has no material commitments for capital expendi-
tures. However, in the event the Restated Merger Agreement is terminated or
abandoned under certain circumstances, the Partnership will be liable for
certain fees and expenses, as discussed above.

The following distributions were paid or accrued to BAC Holders of record
for each of the first two quarters of 1996 and 1995:

-27-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------

<TABLE>
<CAPTION>
1996 1995
Distributions to Distributions to
BAC Holders BAC Holders
----------------------------- ----------------------------
Quarter Ended Total Per BAC Total Per BAC
- ------------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C>
March 31, $ 1,577,480 $ 0.30 $ 1,577,480 $ 0.30
June 30, 1,577,480 0.30 1,577,480 0.30
----------- ------- ----------- -------
$ 3,154,960 $ 0.60 $ 3,154,960 $ 0.60
=========== ======= =========== =======
</TABLE>

Distributions to BAC Holders for the three and six months ended June 30,
1996 and 1995 were funded as follows:

-28-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------

to be construed as an alternative to operating income in accordance with
GAAP as an indication of the Partnership's operating performance.

The General Partner expects the distribution for the quarter ending
September 30, 1996, to be approximately $0.30 per BAC, payable on November, 14,
1996, or possibly earlier depending on the merger closing date, to BAC Holders
of record as of the last day in each month.

The Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient cash is available for operating requirements
and distributions to BAC Holders. The Partnership's net cash provided by
operating activities, which consists primarily of receipt of base interest on
mortgage loans, for the six months ended June 30, 1996 was adequate to support
operating, investing and financing requirements and the declared distributions
to BAC Holders and the General Partner. Cash and cash equivalents decreased
during the six months ended June 30, 1996 due to deposits to working capital
reserves. The Partnership estimates that future cash flows from receipt of base
interest on mortgage loans, in the aggregate, will be sufficient to pay
operating expenses and make distributions to BAC Holders and the General
Partner.

-29-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------

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

The Partnership's net income for the three months ended June 30, 1996
increased approximately $5,000 or 0.3% from the corresponding period in 1995
primarily due to an increase in interest from mortgage revenue bonds of
approximately $286,000, principally due to an increase in rental rates and
occupancy levels at most of the underlying properties. Contributing to the
increase in net income was an increase in interest income primarily resulting
from increased marketable securities balances. Partially offsetting the
increase in net income were merger-related expenses incurred in the second
quarter of 1996 of approximately $316,000. There were no material increases or
decreases in the Partnership's remaining income or expenses for the three months
ended June 30, 1996.

The Partnership's net income for the six months ended June 30, 1996
increased approximately $83,000 or 2% from the corresponding period in 1995
primarily due to an increase in interest from mortgage revenue bonds of
approximately $493,000, resulting principally from the receipt of interest due
to the release of $105,000 in excess tax and insurance reserves relating to
three of the underlying properties during the first quarter of 1996. Also
contributing to the increase in interest from mortgage revenue bonds was an
increase in rental rates and occupancy levels at most of the underlying
properties, as discussed above. Contributing to the increase in net income was
a decrease in general and administrative expenses of approximately $58,000
primarily due to decreased payroll costs during 1996 and foreclosure expenses
incurred during the three months ended June 30, 1995. Partially offsetting the
increase in net income was an increase in merger-related expenses of $468,000 as
discussed above. There were no material increases or decreases in the
Partnership's remaining income or expenses for the six months ended June 30,
1996.

Presented below is a summary of base interest payments for the six months
ended June 30, 1996 and 1995, that are due to the Partnership from the
borrowers:

-30-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------

<TABLE>
<CAPTION>
For the six months ended June 30, 1995
----------------------------------------------------------------------------------
Base Interest Base Interest Cumulative
Paid From Paid From Current Base Unpaid
Current Base Properties' Non-Operating Interest Base
Interest Due(1) Operations(4) Sources(2) Not Paid Interest
--------------- ------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Ethan's Glen IIA $ 460,469 $ 391,352 $ -- $ 69,117 $ 224,342
Geary Courtyard 870,300 347,000 -- 523,300 5,267,203
Ocean Walk 887,214 871,546 -- 15,668 1,356,497
Paces River 2 384,513 420,147 -- -- 188,222
Regency Woods 346,730 203,762 17,834 125,134 182,922
Valley Creek II 459,550 340,940 -- 118,610 629,216
Washington Ridge 437,500 437,500 -- -- 72,917
Woodlane Place 703,500 442,834 -- 260,666 2,470,552
---------- ---------- ---------- ---------- -----------
$4,549,776 $3,455,081 $ 17,834 $1,112,495 $10,391,871
========== ========== ========== ========== ===========
</TABLE>

-31-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------

totaled $70,000, $12,000 and $23,000, respectively.
(4) Excludes contingent interest of $18,816 and $46,747 received by the
Partnership from Washington Ridge during the three and six months ended
June 30, 1995, respectively.

Contingent interest is payable quarterly on an estimated basis, in arrears,
but only to the extent of available net cash flow, if any, and is recognized as
revenue when collected. Contingent interest due as of June 30, 1996 and
December 31, 1995 amounted to $41,067,106 and $37,635,033, respectively. The
Partnership received contingent interest of $18,816 and $46,747 from Washington
Ridge during the three and six months ended June 30, 1995, respectively. No
contingent interest was received during the three or six months ended June 30,
1996.

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 $600,000, and will not be covered by the
property's insurance carrier. Due to the nature of the drainage problem,
occupancy levels at the property are not expected to decrease as a result of the
ongoing capital improvements. Funding for these capital improvements may be
provided from the borrower's existing replacement reserves, future property cash
flow, and/or a loan to the borrower from the working capital reserves of the
Partnership. The Partnership has joined with the borrower's insurance carrier
in a lawsuit against the original architect and general contractor of Woodlane
Place. The Partnership has joined on a contingent basis, with no legal fees
being incurred unless the Partnership receives a settlement or judgment, and
with other legal expenses estimated to be less than $20,000. All depositions
have been taken, and the lawsuit is currently in discovery mode. There is no
assurance that the Partnership will receive any funds as a result of this
lawsuit.

PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS
-----------------

-32-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS - Continued
-----------------

The Defendants have denied, and continue to deny, that any of them have
committed or threatened to commit any violations of law or breaches of duty to
the BAC Holders.

On January 31, 1996, the Defendants and the plaintiffs and their respective
attorneys reached a tentative settlement of the Zakin and Wingard Actions
memorialized in a Memorandum of Understanding (the Memorandum), dated as of such
date. In accordance with the Memorandum, the merger agreements were amended on
January 31, 1996, to provide that (a) the aggregate cash consideration to be
paid to the BAC Holders of the Partnership and CRITEF was increased by $8.5
million from $150.0 million to $158.5 million (subject to the adjustment up or
down based upon available cash), and (b) the aggregate amount payable in
consideration for the Accrued Fees payable to CRI for the Partnership and CRITEF
was reduced to no more than $2,000,000 (subsequently reduced to $1,950,000) as
compared with $4,023,000 provided for in the original merger agreement. The
Defendants also agreed that they would not object to an application for
attorneys' fees and reimbursement of out-of-pocket expenses of plaintiffs'
counsel for up to 20% of the improved Merger consideration negotiated by them
with such fees and expenses as are awarded by the Court to plaintiffs' counsel
to be paid from the improved Merger consideration negotiated by them.
Subsequently the parties agreed that the maximum amount of fees and expenses for
the Partnership and CRITEF, assuming the merger is consummated, shall be
$1,700,000 plus an amount equal to 20% (up to a maximum of $75,000) of any
Adjustment Amount at closing. These fees will reduce the cash paid to BAC
Holders the Partnership and CRITEF in connection with the proposed merger, as
discussed. In the event that the proposed merger is not consummated, these fees
will not be borne by the Partnership. As such, the Partnership's financial
statements do not include any adjustment for these fees. Counsel for the
plaintiffs and experts retained by them have reviewed voluminous documents
relating to the proposed merger, and have taken depositions of representatives
of the General Partner and CAPREIT and Oppenheimer and Co., Inc., the fairness
opinion provider.

-33-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS - Continued
-----------------

proposed merger until the Partnership made its financial statements and the
financial statements of the Owner Partnerships publicly available. The
financial statements of the Partnership are included in this Form 10-Q and have
been filed with the SEC quarterly. The financial statements of the Owner
Partnerships were filed as exhibits to Current Reports on Form 8-K, filed with
the SEC by the Partnership on March 25, 1996. As discussed below, Mr.
Schwartzberg has since reviewed the requested information and has determined to
support the merger.

-34-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS - Continued
-----------------

1934 without complying with SEC regulations, and (2) committing any violation of
Rule 14a-9 promulgated under the Securities Exchange Act (regarding false or
misleading statements) in connection with any solicitation relating to the
Partnerships.

On June 13, 1996, pursuant to a resolution of disputes with Mr.
Schwartzberg, the parties to the actions in the District Court filed with the
District Court a Stipulation of Dismissal with Prejudice.

-35-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS - Continued
-----------------

such payments other than the first installment will be paid into escrow until
the proposed merger has been consummated and each of the payments is contingent
upon there having been no defaults on the part of the Schwartzberg Entities or
under the third party standstill agreement.

The Schwartzberg Entities are personally liable to CAPREIT for any breaches
occasioned by them of the CAPREIT Agreement. Mr. Schwartzberg has covenanted to
CAPREIT that he will maintain a net worth of at least $3.5 million through
December 31, 2002. In the event that the Schwartzberg Entities are in default
under the CAPREIT Agreement as a result of a violation of a third party
standstill agreement, Mr. Schwartzberg shall pay CAPREIT liquidated damages in
accordance with the terms of the CAPREIT Agreement.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------

No reports on form 8-K were filed with the Commission during the quarter
ended June 30, 1996.

All other items are not applicable.

-36-
<PAGE>
SIGNATURE

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

Capital Realty Investors Tax Exempt
Fund III Limited Partnership

By: CRITEF III Associates Limited Partnership
General Partner

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

August 8, 1996 /s/ Deborah K. Browning
- -------------------------- By: ------------------------------------
Date Deborah K. Browning
Vice President/Chief Accounting Officer

Signing on behalf of the Registrant
and as Principal Accounting Officer

-37-
<PAGE>

EXHIBIT INDEX

Exhibit Page
- ------- ----------------------------
27 Financial Data Schedule Filed herewith electronically

-38-

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE SECOND QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH 10-Q.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 54,677
<SECURITIES> 6,322,764
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 77,409,362
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 75,235,648
<TOTAL-LIABILITY-AND-EQUITY> 77,409,362
<SALES> 0
<TOTAL-REVENUES> 4,133,570
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 657,729
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,475,841
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,475,841
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,475,841
<EPS-PRIMARY> 0.65
<EPS-DILUTED> 0.65

</TABLE>