CRIIMI MAE INC, 10-Q, 1997-04-28

CRIIMI MAE INC
10-Q, 1997-04-28
REAL ESTATE INVESTMENT TRUSTS

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<PAGE>1

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended March 31, 1997
--------------

Commission file number 1-10360
-------

CRIIMI MAE INC.
- --------------------------------------------------------------------------
(Exact name of registrant as specified in charter)

Maryland 52-1622022
- ------------------------------------------ ------------------------
(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) 816-2300
- --------------------------------------------------------------------------
(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 [ ]

Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

Class Outstanding as of April 25, 1997
- ---------------------------- --------------------------------
Common Stock, $.01 par value 37,479,301

<PAGE>2

CRIIMI MAE INC.

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 1997

Page
----

PART I. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets - as of March 31, 1997
(unaudited) and December 31, 1996 . . . . . . . 3

Consolidated Statements of Income - for the
three months ended March 31, 1997
and 1996 (unaudited) . . . . . . . . . . . . . 4

Consolidated Statement of Changes in
Shareholders' Equity - for the three months
ended March 31, 1997 and 1996 (unaudited) . . . 6

Consolidated Statements of Cash Flows -
for the three months ended March 31, 1997
and 1996 (unaudited) . . . . . . . . . . . . . 7

Notes to Consolidated Financial Statements . . .
(unaudited) . . . . . . . . . . . . . . . . . . 8

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . 29

PART II. Other Information

Item 1. Legal Proceedings . . . . . . . . . . . . . . . . 38

Item 2. Changes in Securities . . . . . . . . . . . . . . 39

Item 6. Exhibits and Reports on Form 8-K . . . . . . . . 40

Signature . . . . . . . . . . . . . . . . . . . . . . . . 41

<PAGE>3

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

CRIIMI MAE INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE><CAPTION>
March 31, December 31,
1997 1996
-------------- --------------
(unaudited)
<S> <C> <C>
Assets:
Mortgage Assets:
Mortgage security collateral, at
amortized cost $ 604,019,682 $ 618,133,219
Subordinated CMBS,
at amortized cost 564,346,666 564,335,400
Mortgages, at fair value 18,204,633 72,976,503

Equity Investments 34,671,029 35,059,648

Receivables and Other Assets 71,676,847 65,774,174
Cash and cash equivalents 13,401,834 10,966,354
-------------- --------------
Total assets $1,306,320,691 $1,367,245,298
============== ==============

Liabilities:
Securitized Mortgage Obligations:
Mortgage security collateral $ 584,194,054 $ 590,222,369
Subordinated CMBS 142,000,000 142,000,000
Repurchase Agreements-Subordinated CMBS 138,933,322 241,137,588
Bank Term Loans 8,247,880 8,897,880
Payables and accrued expenses 11,543,005 11,798,073
-------------- --------------
Total liabilities 884,918,261 994,055,910
-------------- --------------
Minority interests in
consolidated subsidiary 2,870,078 26,518,125
-------------- --------------
Commitments and contingencies

Shareholders' equity:
Convertible Preferred stock 22,265 24,900
Common stock 379,802 319,128
Net unrealized (losses)/gains on
mortgage assets (29,313) 8,916,228
Additional paid-in capital 423,210,971 342,462,380
-------------- --------------
423,583,725 351,722,636

Less treasury stock, at cost-
538,635 and 538,635 shares, respectively (5,051,373 (5,051,373)
-------------- --------------
Total shareholders' equity 418,532,352 346,671,263
-------------- --------------
Total liabilities and shareholders'
equity $1,306,320,691 $1,367,245,298
============== ==============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.

<PAGE>4

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

<TABLE><CAPTION>
For the three months ended
March 31,
1997 1996
------------ -------------
<S> <C> <C>
Income:
Mortgage income $ 12,660,802 $ 14,770,146
Income from Subordinated CMBS 16,764,036 8,193,709
Equity in earnings from investments 814,522 752,000
Other investment income 920,347 1,220,082
------------ ------------
31,159,707 24,935,937
------------ ------------
Expenses:
Interest expense 18,321,923 15,675,314
General and administrative 2,393,768 1,398,695
Fees to related party 11,468 171,116
Amortization of assets acquired in the Merger 719,391 721,521
Adjustment to hedges for valuation and sales -- (148,189)
------------ ------------
21,446,550 17,818,457
------------ ------------

Income before mortgage dispositions and
minority interest 9,713,157 7,117,480

Mortgage dispositions:
Gains 17,314,552 9,692,244
Losses (175,603) (272,053)
------------ ------------
Income before minority interests 26,852,106 16,537,671

Minority interests in net income of
consolidated subsidiary (7,752,565) (4,994,546)
------------ ------------
Net income $ 19,099,541 $ 11,543,125

Preferred Dividends (1,825,387) --
------------ ------------
Net income available to common shareholders $ 17,274,154 $ 11,543,125
============ ============

<PAGE>5

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

Earnings per share:

Primary $ 0.53 $ 0.38
============ ============

Fully Diluted $ 0.50 $ 0.38
============ ============
Shares used in computing primary
earnings per share, exclusive of
shares held in treasury 32,844,343 30,407,024
============ ============

Shares used in computing fully
diluted earnings per share,
exclusive of shares held in
treasury 37,930,560 30,407,024
============ ============

The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>

<PAGE>6

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

CRIIMI MAE INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the three months ended March 31, 1997
(Unaudited)

<TABLE>
<CAPTION>
Net
Unrealized
Preferred Common Stock Gains on Additional Total
Stock Par Par Mortgage Paid-in Undistributed Treasury Shareholders'
Value Value Investments Capital Net Income Stock Equity
---------- ------------ ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 24,900 $ 319,128 $ 8,916,228 $ 342,462,380 $ -- $ (5,051,373) $346,671,263
Net income -- -- -- -- 19,099,541 -- 19,099,541
Dividends paid on preferred
shares -- -- -- -- (1,825,387) -- (1,825,387)
Dividends paid on common shares -- -- -- -- (11,330,365) -- (11,330,365)
Conversion of preferred stock
into common stock (2,635) 9,904 -- (7,269) -- -- --
Stock options exercised -- 80 -- 58,540 -- -- 58,620
Adjustment to net unrealized gains
on mortgage investments -- -- (8,945,541) -- -- -- (8,945,541)
Shares issued -- 50,690 -- 74,753,531 -- -- 74,804,221
---------- ------------ ------------- ------------- ------------- ------------ ------------
Balance, March 31, 1997 $ 22,265 $ 379,802 $ (29,313) $ 417,267,182 $ 5,943,789 $ (5,051,373) $418,532,352
========== ============ ============= ============= ============= ============ ============

The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>

<PAGE>7

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 19,099,541 $ 11,543,125
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of discount and deferred financing
costs on debt 909,448 652,432
Amortization of assets acquired in the Merger 719,391 721,521
Depreciation and other amortization 203,209 224,404
Discount/Premium amortization on mortgage assets 7,761 (534,524)
Net gains on mortgage dispositions (17,138,949) (9,420,191)
Equity in earnings from investments (181,736) (72,145)
Valuation adjustment to hedges -- (148,189)
Minority interests in earnings of consolidated subsidiary 7,752,565 4,994,546
Changes in assets and liabilities:
(Increase) Decrease in receivables and other assets (7,462,924) 2,460,465
Decrease increase in payables and accrued expenses (693,390) (893,749)
Increase (Decrease) in interest payable 563,377 (565,228)
----------- ------------
Net cash provided by operating activities 3,778,293 8,962,467
----------- ------------
Cash flows from investing activities:
Purchase of mortgages and advances on construction loans -- (115,816)
(Payment of) Decrease in deferred costs (1,593) 157,658
Servicing rights contributed to Services Partnership -- (1,558,017)
Proceeds from mortgage dispositions 69,325,577 79,961,905
Receipt of principal payments 1,756,888 2,132,185
Other investing activities -- 63,323
------------ ------------
Net cash provided by investing activities 71,080,872 80,641,238
------------ ------------
Cash flows from financing activities:
Proceeds from debt issuances 51,073,976 30,864,158
Principal payments on debt obligations (160,334,369) (57,628,684)
Increase in deferred financing costs (128,881) (197,955)
Dividends (including return of capital) paid to shareholders,
including minority interests (37,897,252) (34,775,511)
Proceeds from the issuance of common stock 74,862,841 --
------------ ------------
Net cash used in financing activities (72,423,685) (61,737,992)
------------ ------------
Net increase in cash and cash equivalents 2,435,480 27,865,713

Cash and cash equivalents, beginning of period 10,966,354 16,577,407
------------ ------------
Cash and cash equivalents, end of period $ 13,401,834 $ 44,443,120
============ ============

The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>

<PAGE>8

CRIIMI MAE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization

CRIIMI MAE Inc. (CRIIMI MAE or the Company) is a full service commercial
mortgage company structured as a self-administered real estate investment trust
(REIT). CRIIMI MAE's portfolio of assets consists primarily of non-investment
grade subordinated securities backed by first mortgage loans on multifamily and
other commercial real estate ("Subordinated CMBS") and interests in government
insured or guaranteed mortgages secured by multifamily housing complexes located
throughout the United States ("Government Insured Mortgage Assets"). CRIIMI MAE
believes that its concentration on acquiring Subordinated CMBS, together with
its expertise as an underwriter and servicer of commercial mortgage loans,
enables the Company to take advantage of the rapid growth in the securitization
of debt backed by income-producing commercial real estate. Before purchasing
Subordinated CMBS, CRIIMI MAE and its affiliates utilize their multifamily and
commercial real estate expertise to perform due diligence on the underlying
collateral and require that certain control mechanisms, such as the ability to
monitor the performance of the underlying mortgage loans and control of
workout/foreclosure proceedings, are in place. CRIIMI MAE's principal
objectives are to provide increasing dividends to its shareholders and to
enhance the value of CRIIMI MAE's capital stock.

CRIIMI MAE owns 100% of multiple financing and operating subsidiaries
(discussed in Notes 5 and 10), approximately 57% of CRI Liquidating REIT, Inc.
(CRI Liquidating), a finite-life, self-liquidating REIT which held Government
Insured Multifamily Mortgages through early 1997 and various interests in other
entities which either own or service mortgage assets.

CRIIMI MAE has elected to qualify as a REIT for tax purposes. To qualify
for tax treatment as a REIT under the Internal Revenue Code, CRIIMI MAE must
meet certain income and asset tests and distribution requirements. CRIIMI MAE
closely monitors its activities, its income and its assets in an effort to
ensure that it maintains its qualification as a REIT.

The Company intends to conduct its business so as not to become regulated
as an investment company under the Investment Company Act of 1940, as amended
(the "Investment Company Act"). The Investment Company Act exempts entities
that are "primarily engaged in the business of purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate" ("Qualifying
Interests"). Under current interpretation by the staff of the Securities and
Exchange Commission ("SEC"), to qualify for this exemption, CRIIMI MAE, among
other things, must maintain at least 55% of its assets in Qualifying Interests.
The Company will generally acquire Subordinated CMBS only when such mortgage
assets are collateralized by pools of first mortgage loans, when the Company can
monitor the performance of the underlying mortgage loans through loan management
and servicing rights, and when the Company has appropriate workout/foreclosure
rights with respect to the underlying mortgage loans. When such arrangements
exist, CRIIMI MAE believes that the related Subordinated CMBS constitute
Qualifying Interests for purposes of the Investment Company Act. Therefore,
CRIIMI MAE believes that it should not be required to register as an "investment
company" under the Investment Company Act as long as it continues to invest
primarily in such Subordinated CMBS and/or in other Qualifying Interests.
However, if the SEC or its staff were to take a different position with respect
to whether CRIIMI MAE's Subordinated CMBS constitute Qualifying Interests, the
Company could be required to modify its business plan so that it would not meet
the requirements for registering as an investment company or to register as an
investment company, both of which may adversely affect the Company.

<PAGE>9

CRIIMI MAE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. Basis of Presentation

In management's opinion, the accompanying unaudited consolidated financial
statements of CRIIMI MAE, including CRI Liquidating, CRIIMI MAE Management Inc.
(CRIIMI Management), CRIIMI MAE Financial Corporation, CRIIMI MAE Financial
Corporation II, CRIIMI MAE Financial Corporation III, CRIIMI MAE QRS 1, Inc.,
CRIIMI MAE Holdings Inc., CRIIMI MAE Holdings L.P. and CRIIMI, Inc., contain all
adjustments (consisting of only normal recurring adjustments and consolidating
adjustments) necessary to present fairly the consolidated financial position of
CRIIMI MAE as of March 31, 1997 and December 31, 1996, the consolidated results
of its operations for the three months ended March 31, 1997 and 1996 and its
cash flows for the three months ended March 31, 1997 and 1996.

These unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the SEC. Certain information and note
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. While management believes that the disclosures presented are adequate
to make the information not misleading, it is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements and the notes included in CRIIMI MAE's Annual Report filed on Form
10-K for the year ended December 31, 1996.

3. Summary of Significant Accounting Policies

Method of Accounting
--------------------
The consolidated financial statements of CRIIMI MAE are prepared on
the accrual basis of accounting in accordance with generally accepted
accounting principles. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

<PAGE>10

CRIIMI MAE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Summary of Significant Accounting Policies - Continued

Reclassifications
-----------------
Certain amounts in the consolidated financial statements as of and for
the three months ended March 31, 1996 have been reclassified to conform to
the 1997 presentation.

Subordinated CMBS
-----------------
CRIIMI MAE has the intent and ability to hold its Subordinated CMBS
until maturity. Consequently, these mortgage assets are classified as Held
to Maturity and are carried at amortized cost. For GAAP purposes, CRIIMI
MAE recognizes income from Subordinated CMBS on the effective interest
method, using the anticipated yield over the projected life of the
investment. Changes in yields are due to revisions in estimates of future
credit losses, losses incurred and actual prepayment speeds. Changes in
yield resulting from prepayments are recognized over the remaining life of
the investment with recognition of a cumulative catch-up at the date of
change from the original investment date. CRIIMI MAE recognizes impairment
on its Subordinated CMBS whenever it determines that the current estimate
of expected future credit losses, exceeds future credit losses as
originally projected. Impairment losses are determined by comparing the
fair value of a Subordinated CMBS to its current carrying amount, the
difference being recognized as a loss in the current period in the
consolidated statement of income if the fair value is less than amortized
cost. Reduced estimates of credit losses are recognized as an adjustment
to the yield over the remaining life of the Subordinated CMBS.

Consolidated Statements of Cash Flows
-------------------------------------
Cash payments made for interest during the three months ended March
31, 1997 and 1996 were $16,849,098 and $15,588,110, respectively.

Earnings per Share
------------------
Primary earnings per share is computed by deducting preferred
dividends from net income in order to determine net income available to
common shareholders. This amount is then divided by the weighted average
common shares and common stock equivalents outstanding during the period.
The common stock equivalents arise from the Company's stock options which
were assumed to be exercised at the average market rate during the quarter.

Fully diluted earnings per share is determined by dividing net income
by the weighted average number of shares outstanding during the period
after giving effect for common stock equivalents arising from stock options
and for preferred stock assumed to be converted to common stock. The stock
options were assumed to be exercised at the greater of the closing price on
the last day of the quarter or the average price for the quarter.

New Accounting Statements
-------------------------
During 1996, the Financial Accounting Standards Board (FASB) issued
SFAS No. 127 "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125" (SFAS 125). This statement defers the applicability of
FAS 125 to repurchase agreements, dollar rolls, securities lending and
certain other transactions that occur after December 31, 1997. CRIIMI MAE
believes the deferral of this aspect of SFAS 125 will have no material
impact on its financial statements.

<PAGE>11

CRIIMI MAE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Summary of Significant Accounting Policies - Continued

In February 1997, FASB issued SFAS No. 128 "Earnings per Share" ("FAS
128"). FAS 128 changes the requirements for calculation and disclosure of
earnings per share. This statement eliminates the calculation of primary
earnings per share and requires the disclosure of basic earnings per share
and diluted earnings per share. Under these provisions, CRIIMI MAE would
have basic earnings per share of $0.54 and $0.38 for the quarters ended
March 31, 1997 and 1996. Fully diluted earnings per share would be $0.50
and $0.38 for the quarters ended March 31, 1997 and 1996, respectively.

During 1997, FASB issued SFAS No. 129 "Disclosure of Information about
Capital Structure" ("FAS 129"). FAS 129 continues the existing
requirements to disclose the pertinent rights and privileges of all
securities other than ordinary common stock but expands the number of
companies subject to portions of its requirements. CRIIMI MAE does not
anticipate a significant impact to its current disclosures.

4. Transactions with Related Parties

Below is a summary of the related party transactions which occurred during
the three months ended March 31, 1997 and 1996. These items are described
further in the text which follows:

<PAGE>12

CRIIMI MAE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. Transactions with Related Parties - Continued

<TABLE><CAPTION>
For the three months ended March 31,
1997 1996
-------------- -------------
<S> <C> <C>
PAYMENTS TO THE ADVISER:
- ------------------------
Annual fee - CRI Liquidating (a)(f) $ 11,468 $ 171,116
Incentive fee - CRI Liquidating (e) 958,081 568,638
------------ ------------
Total $ 969,549 $ 739,754
============ ============
PAYMENTS TO CRI:
- ----------------
Expense reimbursement - CRIIMI MAE Management
Inc.(g) $ 109,786 $ 347,971
============ ============

AMOUNTS RECEIVED OR ACCRUED FROM RELATED PARTIES:
- ------------------------------------------------
CRIIMI, Inc.
- ------------
Income (c) $ 399,638 $ 457,964
Return of capital (d) 450,096 321,838
------------ ------------
Total $ 849,734 $ 779,802
============ ============

CRI/AIM Investment Limited
Partnership (d) $ 167,988 $ 192,682
============ ============
Expense Reimbursements to CRIIMI Management(b)
- ----------------------------------------------
CRI Liquidating and the AIM Funds $ 94,032 $ 75,000
CRIIMI MAE Services Limited Partnership -- 425,000
------------ ------------
$ 94,032 $ 500,000
============ ============
<FN>
(a) Included in the accompanying consolidated statements of income as fees to related party.
(b) Included as general and administrative expenses on the accompanying consolidated statements of income.
(c) Included as equity in earnings from investments on the accompanying consolidated statements of income.
(d) Included as a reduction of equity investments on the accompanying consolidated balance sheets.
(e) Netted with gains on mortgage dispositions on the accompanying consolidated statements of income.
(f) As a result of reaching the carryover CRIIMI I target yield during the first quarter of 1997 and 1996, CRI Liquidating paid
deferred annual fees of $12,726 and $108,809, during the three months ended March 31, 1997 and 1996, respectively.
(g) Pursuant to an agreement between CRIIMI MAE and CRI (the CRI Administrative Services Agreement), CRI provides CRIIMI MAE with
certain administrative and office facility services and other services, at cost, with respect to certain aspects of CRIIMI
MAE's business. CRIIMI MAE uses the services provided under the CRI Administrative Services Agreement to the extent such
services are not performed by CRIIMI Management or provided by another service provider. The CRI Administrative Services
Agreement is terminable on 30 days notice at any time by CRIIMI MAE.

</TABLE>

CRIIMI MAE Services Limited Partnership (Services Partnership) provides
certain servicing functions for approximately $6.3 billion of commercial
mortgage assets as of March 31, 1997, including acting as the special servicer
with respect to the approximately $6.1 billion of commercial mortgage loans

<PAGE>13

CRIIMI MAE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. Transactions with Related Parties - Continued

underlying CRIIMI MAE's Subordinated CMBS. In addition to providing fee income
to Services Partnership, CRIIMI MAE believes these servicing arrangements enable
the Company to better monitor the pool of mortgage loans securing its
Subordinated CMBS, thereby partially mitigating the risk of owning Subordinated
CMBS. The servicing contracts are contributed to the Services Partnership and
increase CRIIMI MAE's interest in that partnership. As of March 31, 1997,
CRIIMI MAE held a 33% general partnership interest in the Services Partnership.
CRIIMI MAE, through CRIIMI Management, manages the Services Partnership as
general partner.

5. Mortgage Assets - Mortgage Security Collateral and Mortgages

CRIIMI MAE's consolidated portfolio of mortgage security collateral and
mortgages is comprised of FHA-Insured Loans, GNMA Mortgage-Backed Securities and
a HUD-insured non-amortizing construction loan. The construction loan is
intended to be converted to a permanent, amortizing insured loan upon final
endorsement. Additionally, mortgage security collateral includes Federal Home
Loan Mortgage Corporation (Freddie Mac) participation certificates which are
collateralized by FHA-Insured Loans and GNMA Mortgage-Backed Securities, as
discussed below. As of March 31, 1997, 22% of CRIIMI MAE's investment in
mortgage security collateral and mortgages were FHA-Insured Loans, 78% were GNMA
Mortgage-Backed Securities and less than 1% was a construction loan (including
loans which collateralize Freddie Mac participation certificates). FHA-Insured
Loans, GNMA Mortgage-Backed Securities and Government Insured Construction
Mortgages are collectively referred to as mortgages herein.

Through its wholly owned subsidiaries and CRI Liquidating, CRIIMI MAE owns
the following mortgages directly and indirectly:

<PAGE>14

CRIIMI MAE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. Mortgage Assets - Mortgage Security Collateral and Mortgages -
Continued

<TABLE><CAPTION>
As of March 31, 1997
---------------------

Weighted
Average
Number of Carrying Fair Effective Weighted Average
Mortgages Value Value(a) Interest Rate Remaining Term
--------- ------------ ------------ ------------- ----------------
<S> <C> <C> <C> <C> <C>
CRIIMI MAE (b) 5 $ 18,204,633 $ 18,204,633 8.09% 35 years
CRIIMI MAE Financial Corporation(b) 53 198,757,703 199,714,956 8.41% 32 years
CRIIMI MAE Financial Corporation II(b) 59 249,397,211 242,459,646 7.19% 30 years
CRIIMI MAE Financial Corporation III(b) 38 155,864,768 154,731,677 8.10% 32 years
--------- ------------ ------------
155 $622,224,315 $615,110,912
========= ============ ============

As of December 31, 1996
-------------------------

Weighted
Average
Number of Carrying Fair Effective Weighted Average
Mortgages Value Value(a) Interest Rate Remaining Term
--------- ------------ ------------ ------------- ----------------
<S> <C> <C> <C> <C> <C>
CRIIMI MAE 5 $ 18,527,970 $ 18,527,970 8.09% 35 years
CRIIMI MAE Financial Corporation 55 206,803,142 209,693,241 8.41% 31 years
CRIIMI MAE Financial Corporation II 59 249,969,567 247,126,393 7.19% 30 years
CRIIMI MAE Financial Corporation III 39 161,360,510 162,003,486 8.08% 32 years
CRI Liquidating(c) 11 54,448,533 54,448,533 11.3% 25 years
--------- ------------ ------------
169 $691,109,722 $691,799,623
========= ============ ============

(a) The estimated fair values of CRIIMI MAE's mortgages are presented in accordance with generally accepted accounting principles
which define fair value as the amount at which a financial instrument could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. These estimated fair values, however, do not represent the liquidation value
or the market value of CRIIMI MAE. The fair value of the Government Insured Multifamily Mortgages is based on quoted market prices.

(b) During the three months ended March 31, 1997, there were 3 prepayments of mortgages held by CRIIMI MAE and its financial
corporation subsidiaries. These prepayments generated net proceeds of approximately $12.8 million and resulted in net financial
statement losses of approximately $161,000, which are included in losses on mortgage dispositions on the accompanying consolidated
statement of income for the three months ended March 31, 1997.

(c) In January 1997, the Liquidating Company sold its remaining 11 mortgages, generating proceeds of approximately $54 million
which resulted in financial statement gains and tax basis gains of approximately $14 million.

</TABLE>

6. Mortgage Assets - Subordinated CMBS

In addition to holding Government Insured Mortgage Assets, CRIIMI MAE has
also purchased other mortgage assets which are not federally insured or
guaranteed.

<PAGE>15

CRIIMI MAE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. Mortgage Assets - Subordinated CMBS - Continued

The following table summarizes information related to these other mortgage
assets on an aggregate basis by pool:

<TABLE>
<CAPTION>
Original Current
Estimated Estimated
Unleveraged Unleveraged
Yield to Yield to
Pool Maturity(1) Maturity(2)
- ------------ ------------ ------------
<S> <C> <C>
Mortgage Capital Funding, Inc.
Series 1993-C1 13.0% 14.4%
Series 1994-MC1 14.1% 13.8%
Series 1995-MC1 12.2% 12.1%

Nomura Asset Securities Corp.
Series 1994-C3 12.3% 12.1%

Lehman Pass-Through Securities Inc.
Series 1994-A 13.4% 13.4%

Structured Mortgage Securities Corp.
Series 1995-M1 12.9% 12.4%

Fannie Mae Multifamily REMIC
Series 1996-M1 11.7% 11.6%

LB Commercial Conduit
Series 1995-C2 11.2% 11.2%
Series 1996-C2 11.8% 11.8%

DLJ Mortgage Acceptance Corp.
Series 1995-CF2 11.0% 11.0%
Series 1996-CF2 11.8% 11.8%

Asset Securitization Corp.
Series 1995-D1 11.6% 11.5%
Series 1996-D2 12.4% 12.4%
Series 1996-D3 11.9% 11.9%

Merrill Lynch Mortgage Investors, Inc.
Series 1995-C3 11.1% 11.1%
Series 1996-C2 11.9% 11.9%

Weighted average unleveraged
yield to Maturity(3) 11.9% 11.9%

(1) Represents the original estimated unleveraged yield over the expected life
(calculated as of the acquisition date) of the related Subordinated CMBS, based
on management's estimate of the timing and amount of future credit losses and
prepayments of the underlying mortgage loans.

</TABLE>

<PAGE>16

CRIIMI MAE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. Mortgage Assets - Subordinated CMBS - Continued

(2) Unless otherwise noted, changes in the current estimated yield to maturity
from that originally estimated are primarily the result of changes in prepayment
assumptions relating to mortgage collateral. As of March 31, 1997, CRIIMI MAE
has not incurred any losses on Subordinated CMBS, nor has the performance of the
underlying collateral caused CRIIMI MAE to adjust its original loss estimates.

(3) Represents the annual expected weighted average unleveraged yield over the
expected average life of the Company's Subordinated CMBS portfolio as of the
date of acquisition and March 31, 1997, respectively.

[/TABLE]

The aggregate investment by the underlying rating of the Subordinated CMBS is as
follows:

<PAGE>17

CRIIMI MAE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. Mortgage Assets - Subordinated CMBS - Continued

<TABLE>
<CAPTION>
Face Amount Fair Value
as of as of Amortized Cost as of
March 31, 1997 March 31, 1997(a) (in millions)
Security Rating (in millions) % (in millions) March 31, 1997 December 31, 1996
- --------------- ------------------- -------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C>
BBB 14.6 1.8 14.7 $ 14.3 $ 14.2

BB 362.6 45.6 327.1 308.4 307.8

B 244.5 30.7 174.0 175.3 175.0

B- 13.8 1.7 8.1 8.3 8.3

Unrated 161.0 20.2 59.5 58.0 59.0
-------- ------ --------- -------- ---------
Total $ 796.5 100.0% $ 583.4 $ 564.3 $ 564.3
======== ====== ========= ======== =========

(a) The estimated fair values of Subordinated CMBS are based on quoted market prices or an average of market quotes.

</TABLE>

The Subordinated CMBS tranches owned by CRIIMI MAE provide credit support
to the more senior tranches of the related commercial securitization. Cash flow
from the underlying mortgages generally is allocated first to the senior
tranches, with the most senior tranche having a priority right to cash flow.
Then, any remaining cash flow is allocated generally among the other tranches in
order of their relative seniority. To the extent there are defaults and
unrecoverable losses on the underlying mortgages, resulting in reduced cash
flows, the most subordinate tranche will be the first to bear this loss. To the
extent there are losses in excess of the most subordinate tranche's stated right
to principal and interest, then the remaining tranches will bear such losses in
order of their relative subordination.

The accounting treatment required under generally accepted accounting
principles requires that the income on Subordinated CMBS be recorded based on
the effective interest method using the anticipated yield over the expected life
of these mortgage assets. This currently results in income which is lower for
financial statement purposes than for tax purposes. Based on the timing and
amount of future credit losses and prepayments estimated by management, the
estimated weighted average unleveraged yield over the expected average life of
CRIIMI MAE's Subordinated CMBS as of March 31, 1997 is approximately 11.9%.

CRIIMI MAE's estimated returns on its Subordinated CMBS are based upon a
number of assumptions that are subject to certain business and economic
uncertainties and contingencies. Examples of these include the prevailing
interest rates on that portion of the Subordinated CMBS which has been financed
with floating rate debt, interest payment shortfalls due to delinquencies on the
underlying mortgage loans, the ability to renew repurchase agreements and the
terms of any such renewed agreements and the availability of alternative
financing. Further examples include the timing and magnitude of credit losses
on the mortgage loans underlying the Subordinated CMBS that are a result of the
general condition of the real estate market (including competition for tenants
and their related credit quality) and changes in market rental rates.

<PAGE>18

CRIIMI MAE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. Mortgage Assets - Subordinated CMBS - Continued

In making acquisitions of Subordinated CMBS, CRIIMI MAE applies its
experience in underwriting multifamily and other commercial real estate to
perform extensive due diligence on the properties collateralizing the loans
underlying the Subordinated CMBS. The Company's employees have broad experience
in underwriting and servicing various types of performing and nonperforming
income-producing real estate, including multifamily, retail and hotel
properties. CRIIMI MAE "re-underwrites" substantially all of the mortgage loans
in a prospective pool by reviewing historical and current operating records of
the underlying real estate assets, appraisals, environmental studies, market
studies and architectural and engineering studies, all to independently assess
the stabilized performance level of the underlying properties. In addition, the
Company conducts site visits at a substantial number of the properties. The
Company stresses the adjusted net operating incomes of the properties to
simulate certain recessionary scenarios and applies market or greater
capitalization rates to assess loan quality. Further, CRIIMI MAE will generally
purchase Subordinated CMBS only when satisfactory arrangements exist which
enable it to closely monitor the underlying mortgage loans and provide CRIIMI
MAE with appropriate workout/foreclosure rights with respect to the underlying
mortgage loans due to its status as special servicer. CRIIMI MAE believes that
all transactions entered into have had such satisfactory arrangements.

As of March 31, 1997, the mortgage loans underlying CRIIMI MAE's
Subordinated CMBS portfolio were secured by properties of the types and at the
locations identified below:

Property Type Percentage(3) Geographic(1) Percentage(3)
- ------------- ------------ ------------ -------------
Multifamily 48 Texas 17
Retail 21 California 13
Hotel 15 Florida 8
Office 6 Michigan 5
Other 10 Other (2) 57

(1) No significant concentration by region.
(2) No other individual state makes up more than 5% of the total.
(3) Based on a percentage of the total unpaid principal balance of the
underlying loans.

Uninsured mortgage and mortgage-related assets, such as Subordinated CMBS,
are expected to represent a significant component of CRIIMI MAE's new business
activity for the foreseeable future. Upon closing on the purchase of the
Subordinated CMBS, CRIIMI MAE, generally, enters into repurchase agreements
which provide financing to purchase the rated tranches of the Subordinated CMBS
(the unrated tranches are purchased with equity), until such time as CRIIMI MAE
is able to refinance the short-term, floating-rate debt with longer-term, fixed-
rate debt (see Note 10 for a discussion of financing). Generally, when
purchasing Subordinated CMBS, approximately 75% and 70% of the respective fair
values of the BB and B rated tranches are financed through repurchase
agreements. As of March 31, 1997, repurchase agreements in the amount of
approximately $139 million were outstanding related to the Subordinated CMBS,
including temporary principal pay-downs of approximately $96 million, pending
the purchase of additional Subordinated CMBS during 1997. Additionally, as of
March 31, 1997, securitized mortgage obligations related to Subordinated CMBS
were outstanding in the amount of $142 million, which were issued as a result of
refinancing a portion of repurchase agreements on Subordinated CMBS (see also
Note 10).

<PAGE>19

CRIIMI MAE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. Mortgage Assets - Subordinated CMBS - Continued

CRIIMI MAE is currently considering the purchase of a portion of the
Subordinate tranches of First Union-Lehman Brothers Commercial Mortgage Trust
Series 1997-C1. If completed, the purchase would occur in May 1997. <PAGE>
<PAGE>20

CRIIMI MAE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. Reconciliation of Financial Statement Net Income to Tax
Basis Income

Reconciliations of the financial statement net income to the tax basis
income for the three months ended March 31, 1997 and 1996 are as follows:

<TABLE><CAPTION>
For the three months ended March 31,
1997 1996
------------ -----------
<S> <C> <C>
Consolidated financial statement
net income $ 19,099,541 $ 11,543,125
Adjustment due to accounting for subsidiary
as a pooling for financial statement
purposes and a purchase for tax purposes (2,132,614) 2,673,771
Mortgage dispositions 91,850 146,737
Reamortization of Subordinated CMBS 1,032,735 373,020
Amortization and other interest expense
adjustments (288,159) (857,183)
Equity in earnings from investments 150,600 184,751
Amortization of assets acquired in the Merger 719,391 721,521
Other (8,926) (50,281)
------------ ------------
Tax basis income $ 18,664,418 $ 14,735,461
============ ============

Dividends paid on preferred shares (1,825,387) --
------------ ------------
Tax basis income available to
common shareholders $ 16,839,031 $ 14,735,461
============ ============

Tax basis income per share:

Ordinary income per share - Primary $ 0.28 $ 0.22
Capital gain per share - Primary 0.24 0.26
------------ ------------

Total tax basis income per share - Primary $ 0.52 $ 0.48
============ ============

Total tax basis income per share - Fully
Diluted $ 0.50 $ 0.48
============ ============
Weighted Average Shares - Primary 32,372,471 30,407,024
============ ============

Weighed Average Shares - Fully Diluted 37,458,688 30,407,024
============ ============
</TABLE>

Differences in the financial statement net income and the tax basis income
available to common shares principally relate to differences in the methods of
accounting for the merger of the CRI Mortgage Businesses, mortgages and mortgage
security collateral and Subordinated CMBS, amortization of certain deferred
costs and the merger of the CRIIMI Funds.

<PAGE>21

CRIIMI MAE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. Dividends to Common Shareholders

For the three months ended March 31, 1997, dividends of $0.35 per share
were paid to common shareholders. These dividends, which included long-term
capital gains, were paid March 31, 1997.

In March 1997, CRIIMI MAE successfully completed a common stock offering of
5.069 million shares at a price to the public of $15 5/8 per share. The net
offering proceeds were approximately $75 million. These proceeds were used to
temporarily reduce repurchase agreement financing pending the purchase of
additional Subordinated CMBS.

9. Preferred Stock

CRIIMI MAE's charter authorizes the issuance of up to 25,000,000 shares of
preferred stock, of which 150,000 shares have been classified as Series A
Preferred Shares and 3,000,000 shares have been classified as Series B Preferred
Shares as of March 31, 1997.

As of March 31, 1997, the holder of the Series A Preferred Shares had
converted all the Series A Preferred Shares into shares of common stock and no
Series A Shares were outstanding. Dividends paid on the Series A Preferred
Shares totaled $50,867 for the three months ended March 31, 1997.

During the first quarter of 1997, 188,500 Series B Preferred Shares were
converted into 430,608 shares of common stock, resulting in 2,226,500 Series B
Preferred Shares outstanding as of April 25, 1997. Dividends paid and accrued
on Series B Preferred Shares totaled $1,774,521 for the three months ended March
31, 1997.

In March 1997, CRIIMI MAE entered into an agreement with an institutional
investor pursuant to which the Company has the right to sell, and such investor
is obligated to purchase, up to 300,000 shares of a new series of cumulative
convertible preferred stock (Series C) over a period of one year from the date
of the agreement at a price of $100 per share. The preferred stock will be
convertible into shares of common stock at the option of the holders and is
subject to redemption by CRIIMI MAE.

<PAGE>22

CRIIMI MAE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. Obligations under Financing Facilities

The following table summarizes CRIIMI MAE's debt outstanding as of March
31, 1997 and December 31, 1996:

<TABLE>
<CAPTION>
Three months ended March 31, 1997
-----------------------------------------------------------------------------
Balance at Eff. rate Average Average Maturity
Type of Debt quarter end at qtr. end Balance Eff. Rate Date
- ------------ ------------ ----------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C>
Securitized Mortgage Obligations:

FHLMC Funding Note (1) $237,237,589 7.4% $237,500,000 7.4% Sept 2031

FNMA Funding Note (2) 152,322,268 7.3% 155,000,000 7.3% March 2035

CMOs (3) 194,634,197 7.3% 194,800,000 7.3% Jan 2033

Subordinated CMBS 142,000,000 7.6% 142,000,000 7.6% May 1998
March 2016
Repurchase Agreements -
Subordinated CMBS 138,933,322 6.9% 234,600,000 6.9% November 1997 -
March 1999

Bank Term Loans 8,247,880 2.8%(5) 8,300,000 2.8% April 1997 -
Dec 1998
------------
Total $873,375,256
============

</TABLE>

<TABLE>
<CAPTION>
Year ended December 31, 1996
--------------------------------------------------------
Balance Eff. Rate Average Average
Type of Debt at year end at year end Balance Eff. Rate
- ------------ ----------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
Securitized Mortgage Obligations:

FHLMC Funding Note (1) $237,708,781 7.4% $238,700,000 7.4%

FNMA Funding Note (2) 157,607,340 7.3% 169,500,000 7.4%

CMOs (3) 194,906,248 7.3% 207,800,000 7.3%

Subordinated CMBS (4) 142,000,000 7.6% 4,300,000 7.6%

Repurchase Agreements -
Subordinated CMBS 241,137,588 6.8% 193,500,000 6.8%

Bank Term Loans 8,897,880 3.1%(5) 12,300,000 3.9%
------------
Total $982,257,837
============

<PAGE>23

CRIIMI MAE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. Obligations under Financing Facilities - Continued

(1) As of March 31, 1997 and December 31, 1996, the face amount of the note was $246,154,986 and $246,708,610, respectively, with
unamortized discount of $8,917,397 and $8,999,829, respectively. During the three months ended March 31, 1997 and 1996, discount
amortization of $82,432 and $82,275, respectively, were recorded as interest expense.

(2) As of March 31, 1997 and December 31, 1996, the face amount of the note was $154,900,204 and $160,250,349, respectively, with
unamortized discount of $2,577,936 and $2,643,009, respectively. During the three months ended March 31, 1997 and 1996, discount
amortization of $65,073 and $124,890, respectively, were recorded as interest expense. Additionally, as a result of one mortgage
prepayments, principal of approximately $5.1 million was paid down in April of 1997.

(3) As of March 31, 1997 and December 31, 1996, the face amount of the note was $199,658,457 and $200,035,759, respectively, with
unamortized discount of $5,024,259 and $5,129,511, respectively. During the three months ended March 31, 1997 and 1996, discount
amortization of $105,252 and $53,155, respectively, were recorded as interest expense. Additionally, as a result of two mortgage
prepayments, principal of approximately $7.7 million was paid down in April of 1997.

(4) Balance represents face amount of notes, as the issuance did not include any bond discount.

(5) The effective interest rate as of March 31, 1997 and December 31, 1996 includes the impact of a rate reduction agreement which
was in place from July 1995 through March 31,1997, providing for a reduction in the rate on a portion of the loan based on balances
maintained at the bank.

</TABLE>

Securitized Mortgage Obligations - Subordinated CMBS
- ----------------------------------------------------
In December 1996, CRIIMI MAE, through a wholly owned financing subsidiary,
issued fixed-rate bonds in an aggregate principal amount of $142 million to
refinance short-term, floating-rate debt which had been used to finance the
acquisition of Subordinated CMBS. The three classes of bonds issued are
collateralized by $449 million in aggregate face amount of Subordinated CMBS
evidencing direct or indirect interests in 12 separate segregated pools of
commercial and multifamily mortgage loans and/or participations and other
certificated interests in individual commercial and multifamily mortgage loans.
A portion of the remaining bonds issued in connection with the refinancing, with
an aggregate face amount of $307 million, were retained by affiliates of CRIIMI
MAE. These bonds have maturities matching those of the underlying collateral.

Through this transaction, CRIIMI MAE obtained a higher overall weighted
average credit rating for its securitized mortgage obligations than the weighted
average credit rating on the individual Subordinated CMBS that collateralize
this debt. Also, in conjunction with this refinancing, CRIIMI MAE obtained
repurchase agreement financing from two lenders in the aggregate amount of up to
$99 million. Proceeds from the issuance of these bonds and the additional
repurchase agreements were applied as follows: approximately $215 million was
used to pay down short-term, floating-rate repurchase agreements, approximately
$4 million was used to pay transaction costs and approximately $22 million was
made available for other corporate purposes.

Securitized Mortgage Obligations - Mortgage Security Collateral
- ---------------------------------------------------------------
During late 1995, CRIIMI MAE through three wholly owned financing
subsidiaries, issued approximately $664 million (face amount) of long-term,
fixed-rate debt in order to refinance short-term, floating-rate debt. Changes
in interest rates will have no impact on the cost of funds or the collateral
requirements on this debt. Proceeds from the issuance of this long-term debt,
net of original issue discount, were originally applied as follows:
approximately $557 million was used to pay down short-term, floating-rate debt
facilities, approximately $8 million was used to pay transaction costs and
approximately $80 million was used to purchase Subordinated CMBS.

<PAGE>24

CRIIMI MAE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. Obligations under Financing Facilities - Continued

As discussed further in Note 5, the refinancings were completed through
three separate transactions. GNMA Mortgage-Backed Securities with a fair value
of approximately $242.5 million as of March 31, 1997 are pledged as security for
a funding note payable to Freddie Mac (the FHLMC Funding Note). Collateralized
Mortgage Obligations (CMOs) are collateralized by FHA-Insured Loans and GNMA
Mortgage-Backed Securities with a fair value of approximately $199.7 million as
of March 31, 1997. GNMA Mortgage-Backed Securities with a fair value of
approximately $154.7 million as of March 31, 1997 are pledged as security for a
funding note payable to the Federal National Mortgage Association (the FNMA
Funding Note).

Each of the above-mentioned transactions has been accounted for as a
financing in accordance with Financial Accounting Standards Board Technical
Bulletin 85-2. The discount on the CMOs and the Funding Notes are being
amortized on a level yield basis. Transaction costs were capitalized and are
included in deferred costs on the accompanying consolidated balance sheets as of
March 31, 1997 and December 31, 1996.

Repurchase Agreements-Subordinated CMBS
- -----------------------------------------
As previously discussed, when purchasing Subordinated CMBS, CRIIMI MAE
finances, through repurchase agreements, generally, approximately 75% and 70% of
the respective fair values of the BB and B rated tranches of Subordinated CMBS.
These repurchase agreements are either provided by the issuer of the CMBS pool
or through a master repurchase agreement, as discussed below. As of March 31,
1997, the repurchase agreements on Subordinated CMBS have maturity dates ranging
from November 1997 to March 1999 and have interest rates that are generally
based on the one-month London Interbank Offered Rate (LIBOR), plus a spread
ranging from 1.0% to 1.5%.

In early 1996, CRIIMI MAE entered into a three-year master repurchase
agreement with a lender to finance up to $200 million of additional and/or
existing investments in lower rated Subordinated CMBS. Outstanding borrowings
under this master repurchase agreement are secured by the financed Subordinated
CMBS. As of March 31, 1997 and December 31, 1996, approximately $40 million and
$168 million, respectively, in borrowings were outstanding under this facility.

The aforementioned repurchase agreements are secured by the rated tranches
with an aggregate fair value of approximately $358 million as of March 31, 1997
and $348 million as of December 31, 1996. The repurchase agreements are
executed through a sale of securities with a simultaneous agreement to
repurchase them in the future at the same price plus a contracted rate of
interest. If the counterparty to the repurchase agreement defaults on its
obligation to sell the securities back to CRIIMI MAE, then CRIIMI MAE could
suffer an economic loss. At March 31, 1997, CRIIMI MAE had repurchase
agreements with German American Capital Corporation and Nomura Bermuda, Ltd.
which have such counterparty credit risk.

Repurchase Agreements and Revolving Credit Facility -
Government Insured Mortgages
- -----------------------------------------------------
In May 1996, CRIIMI MAE renewed a financing facility with a lender in an
amount up to $100 million ($20 million committed and $80 million uncommitted)
for a period of three years. Any borrowings under this facility will be secured
by FHA-Insured Loans or GNMA Mortgage-Backed Securities, and will bear interest
at CRIIMI MAE's choice of one, three- or six-month LIBOR, plus a spread of 0.75%
or 0.50%, depending on whether FHA-Insured Loans or GNMA Mortgage-Backed
Securities, respectively, are pledged as collateral. No amounts were borrowed

<PAGE>25

CRIIMI MAE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. Obligations under Financing Facilities - Continued

during 1996 or the three months ending March 31, 1997.

Bank Term Loans
- ---------------
CRIIMI MAE has two reducing term loans (Bank Term Loans) with a lender. On
April 1, 1997, Bank Term Loan I in the amount of $3,047,880 was paid off.

In connection with the Merger, CRIIMI Management assumed certain debt of
the CRI Mortgage Businesses in the principal amount of $9,100,000 (Bank Term
Loan II). Bank Term Loan II is secured by certain cash flows generated by
CRIIMI MAE's direct and indirect interests in the AIM Funds and is guaranteed by
CRIIMI MAE. The loan requires quarterly principal payments of $650,000 and
matures on December 31, 1998. Interest on the loan is based on CRIIMI MAE's
choice of one, two or three-month LIBOR, plus a spread of 1.25%.

Working Capital Line of Credit
- ------------------------------
In December 1996, CRIIMI MAE entered into a $30 million unsecured working
capital line of credit provided by two lenders with a termination date of
December 31, 1998. Outstanding borrowings under this line of credit bear
interest at one month LIBOR, plus a spread of 1.30%. No amounts were
outstanding under the line of credit as of March 31, 1997 and December 31, 1996.

Loan Origination Program Agreement
- ----------------------------------
In July 1996, CRIIMI MAE entered into a $200 million mortgage loan
origination program agreement with Citicorp Real Estate, Inc. (Citicorp). The
origination program is designed to create pools of multifamily and commercial
mortgage loans, either through origination or acquisition, of requisite size and
composition to facilitate the securitization of such pools through the issuance
of commercial mortgage obligations (CMO). Citicorp will fund a substantial
portion of the mortgage loans under the origination program. CRIIMI MAE will
service the mortgage loans and will facilitate any securitization of the loans.
In connection with any such securitization, CRIIMI MAE anticipates retaining the
Subordinated CMBS backed by these pools and an interest-only tranche of the
underlying mortgage loan payments, placing the senior tranches with other
investors and additionally retaining the right to act as special servicer with
respect to the entire pool of underlying mortgage loans.

Other Debt Related Information
- ------------------------------
In January 1996, CRIIMI MAE's management adopted and the Board of Directors
approved a change in CRIIMI MAE's mortgage asset acquisition policy requiring,
among other things: (1) A maximum overall debt-to-equity ratio of 5.0 to 1.0,
(2) maximum debt-to-equity ratios for specific asset types based on management's
perceived risk of those assets and the related funding, and (3) interest rate
protection agreements in a notional amount of at least 75% of the outstanding
floating-rate debt. This policy enables CRIIMI MAE to continue to utilize
leverage in taking advantage of mortgage asset acquisition opportunities while
directing and monitoring how CRIIMI MAE funds its purchases of Subordinated CMBS
and other mortgage assets.

As previously stated, changes in interest rates will have no impact on the
cost of funds or the collateral requirements on CRIIMI MAE's fixed-rate debt,
which approximates 83% of CRIIMI MAE's consolidated debt as of March 31, 1997
(which includes a temporary principal paydown of short-term debt of $96
million). Fluctuations in interest rates will continue to impact the value on
that portion of CRIIMI MAE's mortgage assets which are not match-funded and

<PAGE>26

CRIIMI MAE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. Obligations under Financing Facilities - Continued

could impact potential returns to shareholders through increased cost of funds
on the floating-rate debt in place. CRIIMI MAE has a series of interest rate
cap agreements in place in order to partially limit the adverse effects of
rising interest rates on the remaining floating-rate debt. When CRIIMI MAE's
cap agreements expire, CRIIMI MAE will have interest rate risk to the extent
interest rates increase on any floating-rate borrowings unless the caps are
replaced or other steps are taken to mitigate this risk. However, as previously
discussed, CRIIMI MAE's investment policy requires that at least 75% of
floating-rate debt be hedged. The flexibility in CRIIMI MAE's leverage is
dependent upon, among other things, the levels of unencumbered assets, which are
inherently linked to prevailing interest rates and changes in the credit of the
underlying asset. In certain circumstances, including, among other things,
increases in interest rates, changes in market spreads, or decreases in credit
quality of underlying assets, CRIIMI MAE would be required to provide additional
collateral in connection with its short-term, floating-rate borrowing
facilities. From time to time, the Company has been required to fund such
additional collateral needs. In each instance and currently, the Company has
had adequate unencumbered assets to meet its operating, investing and financing
requirements, and management continually monitors the levels of unencumbered
collateral.

CRIIMI MAE's ability to extend or refinance debt facilities upon maturity
will depend on a number of variables including, among other things, CRIIMI MAE's
financial condition and its current and projected results from operations which
are impacted by a number of variables. As previously discussed, in early 1996,
CRIIMI MAE entered into a three-year master repurchase agreement to finance
investments in lower-rated Subordinated CMBS. Management intends to utilize this
facility to replace a portion of existing floating-rate debt on Subordinated
CMBS which is scheduled to mature over the next 12 months and/or to finance
additional investments in lower rated Subordinated CMBS. Management
continuously monitors CRIIMI MAE's overall financing and hedging strategy in an
effort to ensure that CRIIMI MAE is making optimal use of its borrowing ability
based on market conditions and opportunities.

For the three months ended March 31, 1997, CRIIMI MAE's weighted average
cost of borrowing, including amortization of discounts and deferred financing
fees of approximately $909,000, was approximately 7.5%. As of March 31, 1997,
CRIIMI MAE's debt-to-equity ratio was approximately 2.1 to 1.0. Under certain
of CRIIMI MAE's existing debt facilities, CRIIMI MAE's debt-to-equity ratio, as
defined, may not exceed 5.0 to 1.0.

11. Interest Rate Hedge Agreements

CRIIMI MAE has entered into interest rate protection (cap) agreements to
partially limit the adverse effects of rising interest rates on its floating-
rate borrowings. Interest rate caps provide protection to CRIIMI MAE to the
extent interest rates, based on a readily determinable interest rate index,
increase above the stated interest rate cap, in which case, CRIIMI MAE will
receive payments based on the difference between the index and the cap. None of
CRIIMI MAE's caps are held for trading purposes. At April 25, 1997, CRIIMI MAE
held caps with a notional amount of approximately $435 million ($150 million of
which will expire in the second half of 1997). The remaining $285 million of
caps are used to hedge current variable rate debt and variable rate debt
expected to be incurred throughout the year to fund the Company's planned
acquisition of Subordinated CMBS.

<PAGE>27

CRIIMI MAE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. Interest Rate Hedge Agreements - Continued

Notional
Amount Effective Date Maturity Date(b) Cap Index
- ------------ -------------------- ----------------- ------ -------
<S> <C> <C> <C> <C>
$ 50,000,000 June 25, 1993 June 25, 1998 6.5000% 3M LIBOR
50,000,000 July 20, 1993 July 20, 1998 6.2500% 3M LIBOR
35,000,000 February 2, 1994 February 2, 1999 6.1250% 1M LIBOR
50,000,000 March 25, 1994 March 25, 1998 6.5000% 3M LIBOR
50,000,000 August 27, 1993 August 27, 1997 6.1250% 3M LIBOR
50,000,000 November 10, 1993 November 10, 1997 6.0000% 3M LIBOR
50,000,000 August 10, 1993 August 11, 1997 6.0000% 3M LIBOR
100,000,000 April 8, 1997 April 10, 2000 6.6875% 1M LIBOR
- ------------
$435,000,000(a)
============

(a) CRIIMI MAE's designated interest rate protection agreements hedge CRIIMI MAE's floating-rate borrowing costs. As of March 31,
1997 total borrowings of approximately $147.2 million (including temporary principal paydowns of $96 million) are hedged by the
interest rate hedge agreements.
(b) The weighted average remaining term for these interest rate cap agreements is approximately 1.4 years.

</TABLE>

CRIIMI MAE is exposed to credit loss in the event of nonperformance by the
counterparties to the interest rate protection agreements should interest rates
exceed the caps. However, management does not anticipate nonperformance by any
of the counterparties. All of the counterparties have long-term debt ratings of
A+ or above by Standard and Poor's and A1 or above by Moody's. Management
believes that these cap agreements are highly liquid. The cap agreements could
be sold or transferred with the consent of the counterparties. Management does
not believe that this consent would be withheld. Although none of CRIIMI MAE's
cap agreements are exchange-traded, there are a number of financial institutions
which enter into these types of transactions as part of their day-to-day
activities.

12. Litigation

In June 1995, Edge Partners, L.P. (the Plaintiff), derivatively on behalf
of CRIIMI MAE, filed a Derivative Complaint in the District Court of Maryland,
Southern Division. This complaint was dismissed in December 1995. The
Plaintiff filed a First Amended Class and Derivative Complaint (the Complaint)
in February 1996. The Complaint names as defendants each of the Directors who
served on the board at the time of the Merger and CRIIMI MAE as a nominal
defendant. Each of the Directors has an indemnity from CRIIMI MAE.

Count I of the complaint alleges violations of Section 14(a) of the
Securities Exchange Act of 1934 for issuing a materially false and misleading
proxy in connection with the Merger and brings such count individually on its
own behalf and asks the court to certify such count as a class action. Count II
alleges a breach of fiduciary duty owed to CRIIMI MAE and its shareholders and
purports to bring such count derivatively in the right of and for the benefit of
CRIIMI MAE. Through the Complaint, the Plaintiff seeks, among other relief,
that unspecified damages be accounted to CRIIMI MAE, that the stockholder vote
in connection with the Merger be null and void, and that certain salaries and
other remuneration paid to the Directors be returned to CRIIMI MAE.

<PAGE>28

CRIIMI MAE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. Litigation - Continued

In November 1996, each defendant filed an Answer to the Complaint.
Discovery proceedings began in December 1996 and are continuing. Management
believes the suit is without merit and does not expect the case to have a
material adverse financial impact on CRIIMI MAE.

<PAGE>29

PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Introduction and Business Strategy
- ----------------------------------

Introduction
- ------------
CRIIMI MAE Inc.'s (CRIIMI MAE or the Company) Management's Discussion and
Analysis of Financial Condition and Results of Operations contains statements
that may be considered forward looking. These statements contain a number of
risks and uncertainties as discussed herein and in CRIIMI MAE's reports filed
with the Securities and Exchange Commission that could cause actual results to
differ materially.

General
- -------
CRIIMI MAE is a full service commercial mortgage company structured as a
self-administered real estate investment trust (REIT). CRIIMI MAE's portfolio of
assets consists primarily of non-investment grade subordinated securities backed
by first mortgage loans on multifamily and other commercial real estate
("Subordinated CMBS") and interests in government insured or guaranteed
mortgages secured by multifamily housing complexes located throughout the United
States ("Government Insured Mortgage Assets"). CRIIMI MAE believes that its
concentration on acquiring Subordinated CMBS, together with its expertise as an
underwriter and servicer of commercial mortgage loans, enables the Company to
take advantage of the rapid growth in the securitization of debt backed by
income-producing commercial real estate. Before purchasing Subordinated CMBS,
CRIIMI MAE and its affiliates utilize their multifamily and commercial real
estate expertise to perform due diligence on the underlying collateral and
require that certain control mechanisms, such as the ability to monitor the
performance of the underlying mortgage loans, and control of workout/foreclosure
proceedings, are in place. CRIIMI MAE's principal objectives are to provide
increasing dividends to its shareholders and to enhance the value of CRIIMI
MAE's capital stock.

As a result of a shareholder-approved merger transaction (the Merger) with
certain mortgage businesses affiliated with C.R.I., Inc. (CRI) (the CRI Mortgage
Businesses) on June 30, 1995, CRIIMI MAE expanded its lines of business to
include mortgage advisory services, mortgage servicing and mortgage origination.
Through the Merger and as a result of employee additions, CRIIMI MAE has a team
of real estate and financial professionals to take advantage of the
opportunities available for expanded acquisition of uninsured mortgage and
mortgage-related products and services.

CRIIMI MAE conducts its mortgage loan servicing and advisory operations
through its affiliate, CRIIMI MAE Services Limited Partnership (the "Services
Partnership"). The Services Partnership has been approved as a special servicer
by four major rating agencies. As of March 31, 1997, the Services Partnership
was responsible for certain servicing functions on a mortgage loan portfolio of
approximately $6.3 billion, as compared to approximately $2.7 billion as of
February 1, 1996. CRIIMI MAE has increased its mortgage advisory and servicing
activities through its purchases of Subordinated CMBS by
acquiring certain servicing rights for the mortgage loans collateralizing the
Subordinated CMBS. CRIIMI MAE will generally acquire Subordinated CMBS only
when satisfactory arrangements exist which enable it to closely monitor the
underlying mortgage loans and provide CRIIMI MAE with workout/foreclosure rights
with respect to the underlying mortgage loans due to its status as special
servicer. CRIIMI MAE believes that all transactions entered into to date have
had such satisfactory arrangements.

<PAGE>30

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

1997 Strategies
- ---------------
For 1997 and beyond, CRIIMI MAE's business strategies are designed to
increase recurring earnings. Management believes the development of CRIIMI MAE
into a full-service commercial mortgage company during 1995 -- with mortgage
servicing and loan origination capabilities -- has strengthened CRIIMI MAE's
opportunities for continued growth.

Specific strategies for 1997 are summarized below:

o Raise additional equity capital, and use the proceeds primarily to
purchase additional Subordinated CMBS. During March 1997, CRIIMI MAE
completed a public offering of common stock resulting in net equity
proceeds of approximately $75 million. Pending investment in
Subordinated CMBS, the net proceeds were used temporarily to pay-down
repurchase agreement financing.

o CRIIMI MAE intends to purchase at least $250 million of Subordinated
CMBS using a combination of debt and equity. The company expects to
purchase additional Subordinated CMBS beginning in the second quarter.

o CRIIMI MAE intends to increase its $6.3 billion mortgage servicing
portfolio through the purchase of such additional Subordinated CMBS.
Additionally, CRIIMI MAE expects to become a rated master servicer of
commercial mortgage assets in mid 1997, which will enable it to
increase its servicing functions and servicing income.

o CRIIMI MAE will continue to originate/acquire commercial mortgage
loans, which are intended to be pooled for securitization. The
Company expects to retain the Subordinate CMBS portion of these pools
and interest-only tranche of the underlying mortgage loan payments and
to retain the right to act as special servicer with respect to the
entire pool of underlying mortgage loans, thereby further increasing
its servicing portfolio.

o CRIIMI MAE will continue to explore alternatives that would provide
the Company with more financial flexibility and continue its plan to
replace a portion of its remaining short-term, floating-rate debt with
longer-term financing.

CRIIMI MAE believes that these strategies will result in continued growth
in income from uninsured mortgage assets, particularly Subordinated CMBS, as
well as growth from its mortgage servicing and origination operations. As
future events may alter these assumptions, no assurance can be given that the
business plan results will be achieved.

Results of Operations
- ---------------------
1997 versus 1996
- ----------------
Tax Basis Income
----------------
CRIIMI MAE earned approximately $16.8 million in tax basis income available
to common shareholders for the three months ended March 31, 1997, a 14% increase
from approximately $14.7 million for the corresponding period in 1996. On a
primary share basis, tax basis income for the three months ended March 31, 1997
increased to $.52 from $0.48 for the corresponding period in 1996. Tax basis
recurring earnings increased from approximately $6.5 million for the three
months ended March 31, 1996 to approximately $9.2 million (net of preferred
dividends) for the corresponding period in 1997, resulting in a 27% increase on

<PAGE>31

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

a primary share basis to $.28 per weighted average primary share for the three
months ended March 31, 1997 from $0.22 for the corresponding period in 1996.
Capital gains from CRI Liquidating decreased on a primary share basis, from
$0.26 per weighted average primary share for the three months ended March 31,
1996 to $.24 per weighted average primary share for the corresponding period in
1997.

The primary factor resulting in the net increase in tax basis recurring
earnings during the three months ended March 31, 1997 as compared to the
corresponding period in 1996 was the net earnings associated with CRIIMI MAE's
growing portfolio of Subordinated CMBS. Partially offsetting this increase to
tax basis income was a decrease in mortgage interest earned due to the
prepayment of CRIIMI MAE mortgages during 1997 and 1996 and the sale of CRI
Liquidating's mortgage investments according to its business plan.

Financial Statement Net Income
------------------------------
Net income available to common shareholders for financial statement
purposes was approximately $17.2 million for the three months ended March 31,
1997, as compared to approximately $11.5 million for the corresponding period in
1996. On a primary earnings per share basis, financial statement net income for
the three months ended March 31, 1997 increased to $0.53 per share from $0.38
per weighted average common share for the corresponding period in 1996.
Descriptions of the significant changes in financial statement net income are
discussed below.

Mortgage Income
- ---------------
Mortgage income decreased by approximately $2.1 million or 14% to $12.7
million for the three months ended March 31, 1997 from $14.8 million for the
corresponding period in 1996. This decrease was principally due to the
disposition of CRI Liquidating's mortgages (according to its business plan) in
1996 and 1997. Also contributing to the decrease in mortgage income was the
prepayment of mortgages held by CRIIMI MAE and its wholly owned subsidiaries
(aggregating approximately $12.7 million and $51.9 million of amortized cost,
respectively) during the three months ended March 31, 1997 and the year ended
December 31, 1996, respectively.

While CRIIMI MAE and its financing subsidiaries do not intend to sell any
of their mortgages, CRI Liquidating's business plan calls for an orderly
liquidation of its portfolio by the end of 1997. In accordance with CRI
Liquidating's business plan, in January 1997, the remaining 11 mortgages were
disposed of generating net proceeds of approximately $55 million. On April 23,
1997, CRI Liquidating Shareholders approved the adoption of a plan of complete
liquidation and dissolution of CRI Liquidating.

Income from Subordinated CMBS
- -----------------------------
Income from Subordinated CMBS increased by approximately $8.6 million to
$16.8 million for the three months ended March 31, 1997 from $8.2 million for
the corresponding period in 1996. This increase was the result of the
acquisition of Subordinated CMBS at purchase prices aggregating approximately
$285 million during 1996, $228 million of which were purchased during the fourth
quarter.

Generally accepted accounting principles require that the income on
Subordinated CMBS be recorded based on the effective interest method using the
anticipated yield over the expected life of these mortgage assets. This results
in income which is lower for financial statement purposes than for tax purposes.
Based on the timing and amount of future credit losses and certain other

<PAGE>32

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

assumptions estimated by management, as discussed below, the estimated weighted
average unleveraged yield over the expected average life of CRIIMI MAE's
Subordinated CMBS for financial statement purposes as of March 31, 1997 is
approximately 11.9%. Although there can be no assurance, the estimated weighted
average leveraged yield over the expected average life of CRIIMI MAE's existing
Subordinate CMBS for financial statement purposes as of March 31, 1997 is
approximately 21%. This return was determined based on the anticipated yield
over the expected weighted average life of the Subordinated CMBS, which
considers, among other things, anticipated losses, net of interest expense
attributable to the financing of the rated tranches at current interest rates
and borrowing amounts (adjusted for the assumed reborrowing of $96 million).

In making acquisitions of Subordinated CMBS, CRIIMI MAE applies its
experience in underwriting multifamily and other commercial real estate to
perform extensive due diligence on the properties collateralizing the loans
underlying the Subordinated CMBS. The Company's employees have broad experience
underwriting and servicing various types of performing and nonperforming income-
producing real estate, including multifamily, retail and hotel properties.
CRIIMI MAE "re-underwrites" substantially all of the mortgage loans in a
prospective pool by reviewing historical and current operating records of the
underlying real estate assets, appraisals, environmental studies, market studies
and architectural and engineering studies, all to independently assess the
stabilized performance level of the underlying properties. In addition, the
Company conducts site visits at a substantial number of the properties. The
Company stresses the adjusted net operating incomes of the properties to
simulate certain recessionary scenarios and applies market or greater
capitalization rates to assess loan quality.

Equity In Earnings From Investments
- -----------------------------------
Equity in earnings from investments increased by approximately $63,000 or
8% to approximately $815,000 for the three months ended March 31, 1997 as
compared to $752,000 for the corresponding period in 1996. This increase was
primarily attibutable to increased net revenue as a result of the growth in
CRIIMI MAE's servicing portfolio, partially offset by a reduction in earnings
from the AIM Funds due primarily to a lower asset base.

Other Investment Income
- -----------------------
Other investment income decreased by approximately $300,000 or 25% to
approximately $920,000 for the three months ended March 31, 1997 as compared to
approximately $1.2 million for the corresponding period in 1996. This decrease
was primarily attributable to decreases in short-term interest income earned by
CRIIMI MAE Financial Corporation III in the first quarter of 1996 on prepayment
proceeds that were invested pending debt payoff.

<PAGE>33

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

Interest Expense
- ----------------
Interest expense increased by approximately $2.6 million or 17% to
approximately $18.3 million for the three months ended March 31, 1997 from
approximately $15.7 million for the corresponding period in 1996. This increase
was principally a result of additional amounts borrowed in connection with the
acquisition of Subordinated CMBS during 1996, and, to a lesser extent, the
higher cost of debt on the $142 million fixed-rate refinancing of December 1996.

General and Administrative Expenses
- -----------------------------------
General and administrative expenses increased by approximately $1.0 million
or 71% to approximately $2.4 million for the three months ended March 31, 1997
as compared to approximately $1.4 million for the corresponding period in 1996.
This increase was primarily due to the growth of CRIIMI MAE's operations during
1996.

Fees to Related Party
- ---------------------
Total fees to related party decreased by approximately $160,000 or 93% to
approximately $11,000 for the three months ended March 31, 1997 from $171,000
for the corresponding period in 1996. The decrease in fees to related party was
due to a reduction in the annual fees payable by CRI Liquidating resulting from
its reduced asset base during 1996 and 1997.

Gains/Losses on Mortgage Dispositions
- -------------------------------------
Net gains on mortgage dispositions increased to approximately $17.1 million
for the three months ended March 31, 1997 as compared to to approximately $9.4
million for the corresponding period in 1996. Gains or losses on mortgage
dispositions are based on the number, carrying amounts and proceeds of mortgages
disposed of during the period. The proceeds realized from the disposition of
mortgage assets are based on the net coupon rates of the specific mortgages
disposed of in relation to prevailing long-term interest rates at the date of
disposition. During the three months ended March 31, 1997, 11 CRI Liquidating
mortgage assets were disposed of resulting in financial statement gains of
approximately $14.1 million and tax basis gains of approximately $14.0 million.
In addition, during the first quarter of 1997, CRI Liquidating disposed of its
interest in one limited partnership participation agreement and a portion of its
interest in a second limited partnership participation agreement which resulted
in net gains for financial statement purposes of approximately $3.2 million and
net tax basis losses of approximately $212,000. This compares to the
disposition of 11 CRI Liquidating mortgage assets during the corresponding
period in 1996, that generated net financial statement gains of approximately
$9.7 million and tax basis gains of approximately $14.5 million. These
increases were partially offset by three prepayments of mortgage assets held by
CRIIMI MAE and its subsidiaries during the three months ended March 31, 1997,
which resulted in financial statement net losses of approximately $161,000 and
tax basis net losses of approximately $70,000 as compared to the disposition of
four CRIIMI MAE mortgages during the corresponding period in 1996 resulting in
financial statement losses of approximately $272,000 and tax basis losses of
approximately $125,000.

Cash Flow
- ---------
1997 versus 1996
- ----------------
Net cash provided by operating activities decreased for the three months
ended March 31, 1997 as compared to the corresponding period in 1996 primarily
due to the increase in receivables and other assets related to prepayment

<PAGE>34

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

proceeds from a mortgage asset previously held by CRIIMI MAE Financial
Corporation I, which were received in April 1997. Partially offsetting these
decreases to cash provided by operation was an increase in net income, as
previously discussed.

Net cash provided by investing activities decreased for the three months
ended March 31, 1997 as compared to the corresponding period in 1996 primarily
as a result of decreased proceeds from mortgage dispositions.

Net cash used in financing activities increased for the three months ended
March 31, 1997 as compared to the corresponding period in 1996 primarily due to
(1) increased dividends paid in the first quarter of 1997 as compared to 1996
and (2) increased principal payments on debt obligations due primarily to
prepayments of the underlying mortgage assets and the temporary principal
paydown of repurchase agreements using net proceeds from the common stock
offering. Partially offsetting these decreases were increased proceeds from
debt issuances and proceeds from the issuance of common stock, as previously
discussed.

LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------

Financial Flexibility
- --------------------
To meet its capital requirements, CRIIMI MAE uses proceeds from long-term,
fixed-rate debt refinancings, repurchase agreements, other borrowings, an
unsecured working capital line of credit and issuances of capital stock. In
general, CRIIMI MAE initially funds a significant portion of its Subordinated
CMBS acquisitions with short term, variable rate debt. CRIIMI MAE's strategy is
to refinance at least 50% of this short term variable rate acquisition debt with
fixed rate debt having maturities that match those of the underlying collateral
through resecuritizations of its Subordinated CMBS. In December 1996, CRIIMI
MAE completed the first resecuritization of its Subordinated CMBS portfolio,
which refinanced $142 million of short term variable rate debt with fixed rate
match-funded debt, thereby substantially reducing the impact of changing
interest rates on that portion of its debt. The Company intends to enter into a
similar resecuritization or refinancing approximately every two years after
accumulating a sufficient pool of Subordinated CMBS. Additionally, the Company
replaced other floating-rate debt with fixed rate match-funded debt through
three separate refinancings during the second half of 1995. As of March 31,
1997, approximately 83% of CRIIMI MAE's consolidated debt (which includes a
temporary paydown of repurchase agreements in the amount of $96 million) was
fixed rate.

For the three months ended March 31, 1997, CRIIMI MAE's weighted average
cost of borrowing (including amortization of discounts and deferred financing
fees of approximately $909,000) was approximately 7.5%. As of March 31, 1997,
CRIIMI MAE's debt-to-equity ratio was approximately 2.1 to 1.0. Under certain
of CRIIMI MAE's existing debt facilities, CRIIMI MAE's debt-to-equity ratio, as
defined, may not exceed 5.0 to 1.0.

CRIIMI MAE has a series of interest rate cap agreements in place in order
to partially limit the adverse effects of rising interest rates on the floating-
rate debt. When CRIIMI MAE's cap agreements expire, CRIIMI MAE will have
interest rate risk to the extent interest rates increase on any floating-rate
borrowings unless the caps are replaced or other steps are taken to mitigate
this risk. However, as previously discussed, CRIIMI MAE's investment policy
requires that at least 75% of floating-rate debt be hedged and as of April 25,
1997, 100% of CRIIMI MAE's outstanding floating-rate debt is hedged with
interest rate cap agreements that have weighted average strike price of 6.3%.

<PAGE>35

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

The flexibility in CRIIMI MAE's leverage is dependent upon, among other things,
the levels of unencumbered assets, which are inherently linked to prevailing
interest rates and changes in the credit of the underlying asset. In certain
circumstances, including, among other things, increases in interest rates,
changes in market spreads, or decreases in credit quality of underlying assets,
CRIIMI MAE would be required to provide additional collateral in connection with
its short-term, floating-rate borrowing facilities. From time to time, the
Company has been required to fund such additional collateral needs. In each
instance and currently, the Company has had adequate unencumbered assets to meet
its operating, investing and financing requirements, and management continually
monitors the levels of unencumbered collateral.

The Company's ability to achieve its objectives depends not only on its
ability to borrow money in sufficient amounts and on favorable terms but also on
its ability to renew or replace on a continuous basis its maturing short term
borrowings. As previously discussed, in early 1996 CRIIMI MAE entered into a
three-year master repurchase agreement with a lender to finance up to $200
million of additional and/or existing investments in lower-rated Subordinated
CMBS. CRIIMI MAE's business strategy relies in part on short-term borrowings to
fund acquisitions of long-term mortgage assets including Subordinated CMBS. If
CRIIMI MAE is unable to fund additional collateral needs as discussed above, or
renew or replace maturing borrowings, the Company could be required to sell,
under adverse market conditions, a portion of its mortgage assets, and could
incur losses as a result. Furthermore, no active secondary market for
Subordinated CMBS currently exists and there can be no assurance that one will
develop, thereby possibly limiting the Company's ability to dispose of its
Subordinated CMBS in such situations. Also, if CRIIMI MAE is unable to complete
additional resecuritizations or other refinancings of its Subordinated CMBS, the
Company would be required to rely more heavily on short-term borrowings, such as
repurchase agreements or other sources of financing, which may be on less
favorable terms.

CRIIMI MAE's repurchase agreements are executed through a sale of
securities with a simultaneous agreement to repurchase them in the future at the
same price plus a contracted rate of interest. If the counterparty to the
repurchase agreement defaults on its obligation to sell the securities back to
CRIIMI MAE, then CRIIMI MAE could suffer an economic loss. At March 31, 1997,
CRIIMI MAE had repurchase agreements with German American Capital Corporation
and Nomura Bermuda, Ltd.

Dividends
- ---------
CRIIMI MAE's principal objectives are to provide increasing dividends to
its shareholders and to enhance the value of CRIIMI MAE's capital stock. Tax
basis income, as well as financial statement net income and recurring earnings,
increased for the three months ended March 31, 1997 as compared to the
corresponding periods in 1996 and, as a result, total dividends increased.
Specifically, common stock dividends were $0.35 per share as compared to $0.30
for the corresponding period in 1996. Dividends paid on Series B Preferred
Shares were $0.797 per share for the three months ended March 31, 1997.
Dividends totaling $50,848 were paid on the Series A Preferred Shares for the
three months ended March 31, 1997. There were no Preferred Shares outstanding
prior to the third quarter of 1996.

Although the mortgage assets held by CRIIMI MAE and its subsidiaries yield
a fixed monthly mortgage payment once purchased, the cash dividends paid by
CRIIMI MAE and by its subsidiaries may vary during each period due to several
factors. The factors which impact CRIIMI MAE's dividend include (i) the level
of income earned on CRIIMI MAE's or its subsidiaries' mortgage security
collateral depending on prepayments, defaults, etc., (ii) the level of income

<PAGE>36

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

earned on uninsured mortgage assets, such as Subordinated CMBS, which varies
depending on prepayments, defaults, etc. (iii) the fluctuating yields on
short-term debt and the rate at which CRIIMI MAE's LIBOR-based debt is priced,
as well as the rate CRIIMI MAE pays on its refinanced debt, (iv) the fluctuating
yields in the short-term money market where the monthly mortgage payments
received are temporarily invested prior to the payment of quarterly dividends,
(v) the yield at which principal from scheduled monthly mortgage asset payments,
mortgage dispositions and distributions from its subsidiaries can be reinvested,
(vi) changes in operating expenses, (vii) dividends paid on preferred shares and
(viii) through 1997, the distributions which CRIIMI MAE receives on its CRI
Liquidating shares. CRIIMI MAE's dividends will also be impacted by the timing
and amounts of cash flows attributable to its other lines of business - mortgage
servicing, advisory and origination services.

REIT STATUS
- -----------
CRIIMI MAE has qualified and intends to continue to qualify as a REIT under
Sections 856-860 of the Internal Revenue Code. As a REIT, CRIIMI MAE does not
pay taxes at the corporate level. Qualification for treatment as a REIT
requires CRIIMI MAE to meet certain criteria, including certain requirements
regarding the nature of their ownership, assets, income and distributions of
taxable income. CRIIMI MAE however, may be subject to tax at normal corporate
rates on net income or capital gains not distributed.

The Company intends to conduct its business so as not to become regulated
as an investment company under the Investment Company Act of 1940, as amended
(the "Investment Company Act"). The Investment Company Act exempts entities
that are "primarily engaged in the business of purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate" ("Qualifying
Interests"). Under current interpretation by the staff of the Securities and
Exchange Commission ("SEC"), to qualify for this exemption, CRIIMI MAE, among
other things, must maintain at least 55% of its assets in Qualifying Interests.
The Company will generally acquire Subordinated CMBS only when such mortgage
assets are collateralized by pools of first mortgage loans, when the Company can
monitor the performance of the underlying mortgage loans through loan management
and servicing rights, and when the Company has appropriate workout/foreclosure
rights with respect to the underlying mortgage loans. When such arrangements
exist, CRIIMI MAE believes that the related Subordinated CMBS constitute
Qualifying Interests for purposes of the Investment Company Act. Therefore,
CRIIMI MAE believes that it should not be required to register as an "investment
company" under the Investment Company Act as long as it continues to invest
primarily in such Subordinated CMBS and/or in other Qualifying Interests.
However, if the SEC or its staff were to take a different position with respect
to whether CRIIMI MAE's Subordinated CMBS constitute Qualifying Interests, the
Company could be required to modify its business plan so that it would not meet
the requirements for registering G1`3as an investment company or to register as
an investment company, both of which may adversely affect the Company.

OTHER EVENTS
- ------------
In June 1995, Edge Partners, L.P. (the Plaintiff), derivatively on behalf
of CRIIMI MAE, filed a Derivative Complaint in the District Court of Maryland,
Southern Division. This complaint was dismissed in December 1995. The
Plaintiff filed a First Amended Class and Derivative Complaint (the Complaint)
in February 1996. The Complaint names as defendants each of the Directors who
served on the board at the time of the Merger and CRIIMI MAE as a nominal
defendant. Each of the Directors has an indemnity from CRIIMI MAE.

Count I of the complaint alleges violations of Section 14(a) of the
Securities Exchange Act of 1934 for issuing a materially false and misleading

<PAGE>37

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

proxy in connection with the Merger and brings such count individually on its
own behalf and asks the court to certify such count as a class action. Count II
alleges a breach of fiduciary duty owed to CRIIMI MAE and its shareholders and
purports to bring such count derivatively in the right of and for the benefit of
CRIIMI MAE. Through the Complaint, the Plaintiff seeks, among other relief,
that unspecified damages be accounted to CRIIMI MAE, that the stockholder vote
in connection with the Merger be null and void, and that certain salaries and
other remuneration paid to the Directors be returned to CRIIMI MAE.

<PAGE>38

PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS

Reference is made to Note 12 of the notes to the consolidated financial
statements of CRIIMI MAE Inc., which is incorporated herein by reference.

<PAGE>39

PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES

Reference is made to Note 9 of the notes to the consolidated financial
statements of CRIIMI MAE Inc., which is incorporated herein by reference.

<PAGE>40

PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

No reports on form 8-K were filed during the quarter ended March 31, 1997.

The exhibits filed as part of this report are listed below:

Exhibit No. Description
---------- -----------
27 Financial Data Schedule

<PAGE>41

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.

CRIIMI MAE INC.

April 25, 1997 /s/ Cynthia O. Azzara
--------------- -----------------------------
DATE Cynthia O. Azzara
Senior Vice President,
Principal Accounting Officer
and Chief Financial Officer<PAGE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 13,402
<SECURITIES> 1,186,571
<RECEIVABLES> 71,677
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 1,306,321
<BONDS> 0
0
22
<COMMON> 380
<OTHER-SE> 418,130
<TOTAL-LIABILITY-AND-EQUITY> 1,306,321
<SALES> 0
<TOTAL-REVENUES> 48,474
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,125
<LOSS-PROVISION> 176
<INTEREST-EXPENSE> 18,322
<INCOME-PRETAX> 19,100
<INCOME-TAX> 0
<INCOME-CONTINUING> 19,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,100
<EPS-PRIMARY> 0.53
<EPS-DILUTED> 0.50

</TABLE>