10KSB 1 report.txt ANNUAL REPORT -------------------------------------------------------------------------------- U. S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------ FORM 10-KSB ------------------ ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 ------------------ Commission file number 0-11149 CAPITAL REALTY INVESTORS, LTD. Organized pursuant to the Laws of the District of Columbia ------------------ Internal Revenue Service - Employer Identification No. 52-1219926 11200 Rockville Pike, Rockville, Maryland 20852 (301) 468-9200 ------------------ Securities registered pursuant to Section 12(g) of the Act: UNITS OF LIMITED PARTNERSHIP INTEREST ------------------ Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB [X] State issuer's revenues for its most recent fiscal year $1,332,385. The units of limited partnership interest of the registrant are not traded in any market. Therefore, the units of limited partnership interest had neither a market selling price nor an average bid or asked price within the 60 days prior to the date of this filing. -------------------------------------------------------------------------------- CAPITAL REALTY INVESTORS, LTD. 2000 ANNUAL REPORT ON FORM 10-KSB TABLE OF CONTENTS PAGE PART I Item 1. Business....................................................... I-1 Item 2. Properties..................................................... I-5 Item 3. Legal Proceedings.............................................. I-5 Item 4. Submission of Matters to a Vote of Security Holders............ I-5 PART II Item 5. Market for the Registrant's Partnership Interests and Related Partnership Matters ............................ II-1 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... II-2 Item 7. Financial Statements........................................... II-5 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................... II-5 PART III Item 9. Directors and Executive Officers of the Registrant............. III-1 Item 10. Executive Compensation......................................... III-2 Item 11. Security Ownership of Certain Beneficial Owners and Management III-2 Item 12. Certain Relationships and Related Transactions................. III-3 Item 13. Exhibits and Reports on Form 8-K............................... III-3 Signatures.............................................................. III-5 Financial Statements................................................... III-8 PART I ITEM 1. BUSINESS -------- Capital Realty Investors, Ltd. (the Partnership) is a limited partnership which was formed under the District of Columbia Limited Partnership Act on June 1, 1981. On December 31, 1981, the Partnership commenced offering 30,000 units of limited partnership interest through a public offering which was managed by Merrill Lynch, Pierce, Fenner & Smith, Incorporated. The Partnership closed the offering on December 31, 1982 when 24,837 units of limited partnership interest became fully subscribed. As of December 31, 2000, 70 units of limited partnership interest have been abandoned. The General Partners of the Partnership are C.R.I., Inc. (CRI), which is the Managing General Partner, current and former shareholders of CRI and Rockville Pike Associates, Ltd., a Maryland limited partnership which includes the shareholders of CRI and certain former officers and employees of CRI. Services for the Partnership are performed by CRI, as the Partnership has no employees of its own. The Partnership was formed to invest in real estate, which is the Partnership's principal business activity, by acquiring and holding a limited partner interest in limited partnerships (Local Partnerships). The Partnership originally made investments in 18 Local Partnerships. As of December 31, 2000, the Partnership had investments in 16 Local Partnerships. Each of these Local Partnerships owns a federal or state government-assisted or conventionally financed apartment complex, which provides housing principally to the elderly or to individuals and families of low or moderate income. The original objectives of these investments, not necessarily in order of importance, were to: (i) preserve and protect the Partnership's capital; (ii) provide, during the early years of the Partnership's operations, current tax benefits to the partners in the form of tax losses which the partners may use to offset income from other sources; (iii) provide capital appreciation through increases in the value of the Partnership's investments and increased equity through periodic payments on the indebtedness on the apartment complexes; and (iv) provide cash distributions from sale or refinancing of the Partnership's investments and, on a limited basis, from rental operations. See Part II, Item 6, Management's Discussion and Analysis of Financial Condition and Results of Operations, for a discussion of factors affecting the original investment objectives. The Local Partnerships in which the Partnership has invested were organized by private developers who acquired the sites, or options thereon, applied for mortgage loans and applicable mortgage insurance and/or subsidies, and remained as the local general partners in the Local Partnerships. In most cases, the local general partners of the Local Partnerships retain responsibility for developing, constructing, maintaining, operating and managing the projects. The local general partners and affiliates of the Managing General Partner may operate other apartment complexes which may be in competition for eligible tenants with the Local Partnerships' apartment complexes. In the event of non-compliance with the Local Partnerships' partnership agreements, the local general partner may be removed and replaced with another local general partner or with an affiliate of the Partnership's Managing General Partner. As a result of its investment in the Local Partnerships, the Partnership became the principal limited partner in these Local Partnerships. As a limited partner, the Partnership's legal liability for obligations of the Local Partnerships is limited to its investment. In most cases, an affiliate of the Managing General Partner of the Partnership is also a general partner of the Local Partnerships. I-1 PART I ITEM 1. BUSINESS - Continued -------- Although each of the Local Partnerships in which the Partnership has invested owns an apartment complex which must compete in the market place for tenants, interest subsidies and/or rent supplements from governmental agencies generally make it possible to offer certain of these dwelling units to eligible tenants at a cost significantly below the market rate for comparable conventionally financed dwelling units. Based on available data, the Managing General Partner believes there to be no material risk of market competition in the operations of the apartment complexes described below which would adversely impact the Partnership, except in specific circumstances as described in Part II, Item 6, Management's Discussion and Analysis of Financial Condition and Results of Operations. I-2 PART I ITEM 1. BUSINESS - Continued -------- A schedule of the apartment complexes owned by Local Partnerships in which the Partnership has an investment as of December 31, 2000, follows.
SCHEDULE OF APARTMENT COMPLEXES OWNED BY LOCAL PARTNERSHIPS IN WHICH CAPITAL REALTY INVESTORS, LTD. HAS AN INVESTMENT(1) Units Expiration Mortgage Authorized for of Name and Location Payable at Financed and/or Insured Number of Rental Asst. Section 8 OF APARTMENT COMPLEX 12/31/00 (2) AND/OR SUBSIDIZED UNDER RENTAL UNITS UNDER SEC. 8 HAP CONTRACT -------------------- ------------ ----------------------------- ------------ -------------- ------------ Baltic Plaza $ 7,259,281 New Jersey Housing and 169 168 02/10/13 Atlantic City, NJ Mortgage Finance Agency Capitol Commons 6,405,744 Michigan State Housing 200 200 05/31/02 Lansing, MI Development Authority Chestnut 2,349,749 California Housing 90 88 01/13/13 Fresno, CA Finance Agency Court Place 6,128,140 Illinois Housing 160 160 02/01/13 Pekin, IL Development Authority (IHDA) Frederick Heights 2,899,545 Section 221(d)(4) of the 156 0 N/A Frederick, MD National Housing Act (NHA) Frenchman's Wharf I 6,499,180 Section 221(d)(4) 320 31 03/31/01 (4) New Orleans, LA of the NHA Hillview Terrace 2,398,540 Rural Economic Community 125 115 10/01/01 Traverse City, MI Development (RECD) Lihue Gardens 2,733,330 RECD 58 58 02/22/03 Lihue, Kauai, HI Linden Place 9,336,631 IHDA 190 190 01/01/22 Arlington Heights, IL New Sharon Woods Apts. 2,453,413 Federal Housing Administration 50 50 12/31/04 Deptford, NJ (FHA) Park Glen 5,172,131 IHDA 125 125 08/01/23 Taylorville, IL Shallowford Oaks 5,838,177 FHA 204 41 07/08/01 Chamblee, GA Sundance Apts. 2,373,383 Government National Mortgage 60 60 05/07/02 Bakersfield, CA Association/FHA Tandem Townhouses 1,337,884 Pennsylvania Housing 48 47 08/28/12 Fairview Borough, PA Finance Agency Warner House 1,953,571 Section 221(d)(4) of the NHA 60 60 09/01/01 Warren, OH Westwood Village 1,403,729 Connecticut Housing Finance 48 48 02/01/12 New Haven, CT Authority ----------- -------- ------ Totals 16 $66,542,428 2,063 1,441 =========== ======== ======
I-3 PART I ITEM 1. BUSINESS - Continued --------
SCHEDULE OF APARTMENT COMPLEXES OWNED BY LOCAL PARTNERSHIPS IN WHICH CAPITAL REALTY INVESTORS, LTD. HAS AN INVESTMENT(1) - Continued Average Effective Annual Units Occupied As Rental Per Unit Percentage of Total Units for the Years Ended Name and Location AS OF DECEMBER 31, DECEMBER 31, ---------------------------------- ------------------------------------------------------- OF APARTMENT COMPLEX 2000 1999 1998 1997 1996 2000 1999 1998 1997 1996 -------------------- ---- ---- ---- ---- ---- -------- -------- -------- -------- -------- Baltic Plaza 100% 100% 99% 97% 100% $ 13,110 $ 13,212 $ 13,014 $ 12,981 $ 13,143 Atlantic City, NJ Capitol Commons 92% 97% 96% 94% 98% 9,208 9,479 9,464 9,340 9,451 Lansing, MI Chestnut 99% 97% 98% 98% 98% 7,573 7,451 7,523 7,459 7,580 Fresno, CA Court Place 100% 98% 100% 100% 100% 12,843 12,928 12,555 12,483 12,191 Pekin, IL Frederick Heights 99% 99% 97% 96% 96% 8,195 7,677 7,360 7,164 6,983 Frederick, MD Frenchman's Wharf I 95% 94% 88% 91% 89% 4,899 4,753 4,514 4,499 4,403 New Orleans, LA Hillview Terrace 98% 100% 99% 100% 99% 3,891 2,757 2,759 2,752 3,930 Traverse City, MI Lihue Gardens 100% 100% 100% 95% 100% 10,799 10,657 10,792 11,139 11,359 Lihue, Kauai, HI Linden Place 100% 99% 100% 100% 99% 14,661 14,256 13,944 13,246 12,880 Arlington Heights, IL New Sharon Woods Apts. 95% 96% 90% 100% 100% 11,409 11,882 11,401 11,826 11,805 Deptford, NJ Park Glen 100% 99% 100% 100% 100% 9,700 9,744 9,535 9,415 9,303 Taylorville, IL Shallowford Oaks 99% 99% 99% 99% 95% 7,932 7,663 7,379 7,162 7,002 Chamblee, GA Sundance Apts. 100% 100% 100% 100% 100% 8,355 8,305 8,365 8,559 8,390 Bakersfield, CA Tandem Townhouses 100% 100% 100% 100% 100% 9,248 9,240 9,289 9,223 8,859 Fairview Borough, PA Warner House 97% 99% 100% 100% 98% 7,631 7,457 7,635 7,624 7,584 Warren, OH Westwood Village 95% 98% 100% 98% 96% 11,378 11,544 11,416 11,217 11,017 New Haven, CT --- --- --- --- --- -------- -------- -------- -------- -------- Totals (3) 16 98% 98% 98% 98% 98% $ 9,427 $ 9,313 $ 9,184 $ 9,131 $ 9,118 === === === === === ======== ======== ======== ======== ========
(1) All properties are multifamily housing complexes. No single tenant/resident rents 10% or more of the rentable square footage. Residential leases are typically one year or less in length, with varying expiration dates, and substantially all rentable space is for residential purposes. (2) The amounts provided are the balances of first mortgage loans payable by the Local Partnerships as of December 31, 2000. (3) The totals for the percentage of units occupied and the average effective annual rental per unit are based on a simple average. (4) The Section 8 HAP Contract expiration date reflects an extension from the original expiration date, in accordance with Federal legislation. I-4 PART I ITEM 1. BUSINESS - Continued -------- On March 23, 2000, Winthrop Beach was sold. See the notes to the financial statements for additional information concerning this sale. On January 12, 2001, a contract for the sale of Frenchman's Wharf I was signed. See the notes to the financial statements for additional information concerning this contract for sale. ITEM 2. PROPERTIES ---------- Through its ownership of limited partner interests in Local Partnerships, Capital Realty Investors, Ltd. indirectly holds an interest in the underlying real estate. See Part I, Item 1 for information concerning these properties. ITEM 3. LEGAL PROCEEDINGS ----------------- There are no material pending legal proceedings to which the Partnership is a party, other than as discussed in Note 2.a. to the financial statements contained in Part III. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- No matters were submitted to a vote of security holders during the fourth quarter of 2000. I-5 PART II ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP INTERESTS AND ----------------------------------------------------- RELATED PARTNERSHIP MATTERS --------------------------- (a) There is no established market for the purchase and sale of interests in the Partnership, although various informal secondary market services exist. Due to the limited markets, however, investors may be unable to sell or otherwise dispose of their interests in the Partnership. On October 2, 2000, Equity Resource Lexington Fund (Lexington) initiated an unregistered tender offer to purchase approximately 1,200 of the outstanding units of additional limited partnership interest (Units) in the Partnership at a price of $20 per Unit; the offer expired November 2, 2000. Lexington is unaffiliated with the Managing General Partner. The price offered was determined solely at the discretion of Lexington and does not necessarily represent the fair value of each Unit. During 2001, a number of investors sold their Units in the Partnership to other investors, as a result of the unregistered tender offer made by Lexington. If more than 5% of the total outstanding Units in the Partnership are transferred in any one calendar year (not counting certain exempt transfers), the Partnership could be taxed as a "publicly traded partnership," with potentially severe tax implications for the Partnership and its investors. Specifically, the Partnership would be taxed as a corporation and the income and losses from the Partnership would no longer be considered a passive activity. From January 1, 2001, through January 17, 2001, the Partnership received sale transfer requests for approximately 4.7% of outstanding Units. Accordingly, to remain within the 5% safe harbor, effective January 18, 2001, the General Partner of the Partnership halted recognition of any transfers that would exceed the safe harbor limit through December 31, 2001. As a result, transfers of Units due to sales transactions are not being recognized by the Partnership between January 18, 2001 and December 31, 2001. The Managing General Partner has not expressed, and does not express, any opinion and remains neutral toward any offer for the purchase of Units such as that described above. (b) As of March 22, 2001, there were approximately 1,600 registered holders of Units in the Partnership. (c) On October 17, 2000, the Partnership made a cash distribution of $247,670 ($10.00 per Unit) to Additional Limited Partners, to holders of record as of September 30, 2000. The distribution was a result of cash resources accumulated from operations and distributions from Local Partnerships, and from the sale of Winthrop Beach in March 2000. No distribution was declared or paid by the Partnership during 1999. The Partnership received distributions of $500,663 and $593,125 from Local Partnerships during 2000 and 1999, respectively. Some of the Local Partnerships operate under restrictions imposed by the pertinent governmental agencies that limit the cash return available to the Partnership. II-1 PART II ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- Capital Realty Investors, Ltd.'s (the Partnership) Management's Discussion and Analysis of Financial Condition and Results of Operations section contains information that may be considered forward looking, including statements regarding the effect of governmental regulations. Actual results may differ materially from those described in the forward looking statements and will be affected by a variety of factors including national and local economic conditions, the general level of interest rates, governmental regulations affecting the Partnership and interpretations of those regulations, the competitive environment in which the Partnership operates, and the availability of working capital. GENERAL ------- The Partnership has invested, through Local Partnerships, primarily in federal or state government-assisted apartment complexes (the properties) intended to provide housing to low and moderate income tenants. In conjunction with such governmental assistance, which includes federal and/or state financing at below-market interest rates and rental subsidies, the Local Partnerships agreed to regulatory limitations on (i) cash distributions, (ii) use of the properties, and (iii) sale or refinancing. These limitations typically were designed to remain in place for the life of the mortgage. The original investment objectives of the Partnership primarily were to deliver tax benefits, as well as cash proceeds upon disposition of the properties through the Partnership's investment in local limited partnerships. Regulatory restrictions on cash distributions from the properties limited the original projections of annual cash distributions from property operations. The original investment objectives of the Partnership have been affected by the Tax Reform Act of 1986, which virtually eliminated many of the incentives for the new construction or the sale of existing low income housing properties by limiting the use of passive loss deductions. Therefore, the Managing General Partner continues to concentrate on transferring the source of investment yield from tax benefits to cash flow wherever possible, thereby potentially enhancing the ability of the Partnership to share in the appreciated value of the properties. The acquisition of interests in certain Local Partnerships was paid for in part by purchase money notes of the Partnership. The purchase money notes are nonrecourse obligations of the Partnership which typically mature 15 years from the date of acquisition of the interest in a particular Local Partnership, and are generally secured by the Partnership's interest in the Local Partnership. C.R.I., Inc. (the Managing General Partner) continues to evaluate the Partnership's underlying apartment complexes to develop strategies that make sense for all parties involved. Issues that are at the forefront of the Managing General Partner's strategic planning include: matured purchase money notes, expiring Section 8 Housing Assistance Payment (HAP) contracts, properties with state housing financing or Rural Economic Community Development (RECD) agency financing, the cessation of losses to the Partnership due to the complete depletion of low- income housing accelerated depreciation deductions on the Local Partnerships' properties, and declining mortgage interest deductions as the mortgage loans move closer to maturity. II-2 PART II ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS - Continued ----------------------------------- Lake Properties Limited Partnership (Frenchman's Wharf I), Traverse City Elderly Limited Partnership (Hillview Terrace), ARA Associates-Shangri-La Ltd. (Shallowford Oaks), and Warner Housing Partnership (Warner House) have Section 8 HAP contracts covering 10%, 92%, 20%, and 100%, respectively, of their apartment units, which contracts expire during 2001. A Section 8 HAP contract provides rental subsidies to a property owner for units occupied by low income tenants. If a HAP contract is not extended, there would likely be a temporary increase in vacancy during the 6 to 12 months after expiration and an accompanying reduction in rental revenue. As residents in the low-income units move out, the units would be made available to market-rate residents. Most of the Local Partnerships in which the Partnership is invested have mortgage loans financed by various state housing agencies, and two Local Partnerships have mortgage loans financed by the RECD agency. Further, these Local Partnerships have Section 8 HAP contracts in place for all or substantially all of their apartment units which are generally regulated by the Department of Housing and Urban Development (HUD) (the state housing agencies, RECD and HUD, collectively, the Agencies). These Section 8 HAP contracts begin to expire, or have been extended to expire, in 2001. Currently, the Managing General Partner believes that the Agencies will strive to preserve the units as low income, or affordable, housing by exercising their rights under the mortgage and/or regulatory agreement to disallow the mortgage prepayment or conversion of the units to market rate housing. The Managing General Partner continues to monitor the actions of these financing Agencies to assess how these Agencies will deal with expiring Section 8 HAP contracts and what impact these Agencies' strategies will have on the operations of the Local Partnerships and, consequently, the impact on the Partnership's investments in the Local Partnerships. As of December 31, 2000, the Partnership's remaining investment in Local Partnerships with Section 8 HAP contracts expiring in the year 2001 was $0. Sales of properties with state Agency or RECD financing will be extremely difficult. Since the Agencies are unlikely to allow mortgage prepayment and/or sale for a conversion to market rate housing, prospective buyers are generally limited to tax credit buyers or not-for-profit organizations. Generally, purchase offers received from these organizations tend to be much lower per apartment unit than those from profit-motivated companies. The Managing General Partner is working diligently on behalf of the Partnership to produce the best results possible under these difficult circumstances. While the Managing General Partner cannot predict the outcome for any particular property at this time, the Managing General Partner will continue to work with the Local Partnerships to develop strategies that make sense for all parties involved. FINANCIAL CONDITION/LIQUIDITY ----------------------------- As of December 31, 2000, the Partnership had approximately 1,700 investors who subscribed to a total of 24,837 units of limited partnership interest in the original amount of $24,837,000. The Partnership originally made investments in 18 Local Partnerships, of which 16 remain at December 31, 2000. The Partnership's liquidity, with unrestricted cash resources of $3,521,455 as of December 31, 2000, along with anticipated future cash distributions from the Local Partnerships, is expected to be adequate to meet its current and anticipated operating cash needs. As of March 22, 2001, there were no material commitments for capital expenditures. During 2000 and 1999, the Partnership received cash distributions of $500,663 and $593,125, respectively, from the Local Partnerships. II-3 PART II ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS - Continued ----------------------------------- The Partnership is the maker of purchase money notes which have matured and have not been paid with respect to two Local Partnerships, Lake Properties Limited Partnership (Frenchman's Wharf I) and ARA Associates-Shangri-La Ltd. (Shallowford Oaks). The purchase money notes accrue interest and require payment in full of all unpaid accrued interest and principal upon the occurrence of certain events, such as the sale or refinancing of the underlying apartment complex or the maturity of the respective purchase money note. The purchase money notes, which are nonrecourse to the Partnership, are generally secured by the Partnership's interest in the respective Local Partnerships. The total amounts due on the purchase money notes consist of outstanding principal and accrued interest of approximately $4.479 million and $8.134 million, respectively, as of December 31, 2000, and $4.479 million and $7.664 million, respectively, as of December 31, 1999. The Partnership's inability to pay certain of the purchase money note principal and accrued interest balances when due, and the resulting uncertainty regarding the Partnership's continued ownership interest in the related Local Partnerships, does not adversely impact the Partnership's financial condition because the purchase money notes are nonrecourse and secured solely by the Partnership's interest in the related Local Partnerships. Therefore, should the investment in Frenchman's Wharf I and/or Shallowford Oaks not produce sufficient value to satisfy the related purchase money notes, the Partnership's exposure to loss is limited because the amount of the nonrecourse indebtedness of each of the matured purchase money notes exceeds the carrying amount of the investment in, and advances to, each of the related Local Partnerships. Thus, even a complete loss of the Partnership's interest in one or both of these Local Partnerships would not have a material adverse impact on the financial condition of the Partnership. However, since these notes remain unpaid, the noteholders may have the right to foreclose on the Partnership's interest in the related Local Partnerships. The noteholders with respect to Frenchman's Wharf I have already filed foreclosure lawsuits. In the event of a foreclosure, the excess of the nonrecourse indebtedness over the carrying amount of the Partnership's investment in the related Local Partnership would be deemed cancellation of indebtedness income, which would be taxable to Limited Partners at a federal tax rate of up to 39.6%. Additionally, in the event of a foreclosure, the Partnership would lose its investment in the Local Partnership and, likewise, its share of any future cash flow distributed by the Local Partnership from rental operations, mortgage debt refinancings, or the sale of the real estate. The Partnership did not receive any distributions from Frenchman's Wharf I or Shallowford Oaks during the years ended December 31, 2000 and 1999, nor was there any income or loss from these two Local Partnerships included in share of income from partnerships in the statements of operations for the years then ended. See the notes to the financial statements for additional information concerning these purchase money notes. The Partnership closely monitors its cash flow and liquidity position in an effort to ensure that sufficient cash is available for operating requirements. For the years ended December 31, 2000 and 1999, the receipt of distributions from Local Partnerships was adequate to support operating cash requirements. Cash and cash equivalents increased during 2000 due to proceeds received from the sale of the Winthrop Beach Associates property (Winthrop Beach), as discussed in the notes to the financial statements, and as the receipt of distributions from partnerships was in excess of net cash used in operating activities and cash distributed to additional limited partners. RESULTS OF OPERATIONS --------------------- 2000 VERSUS 1999 ---------------- The Partnership's net income for the year ended December 31, 2000 increased from the corresponding period in 1999 primarily due to gain on disposition of investment in partnership II-4 PART II ------- ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS - Continued ----------------------------------- related to the sale of the Winthrop Beach property in March 2000. Contributing to the increase in net income was an increase in interest income due to higher cash and cash equivalent balances and higher interest rates in 2000. Offsetting the increase in the Partnership's net income were a decrease in share of income from partnerships as a result of lower operating income at two properties, an increase in professional fees related to an increase in the cost of audit services, and an increase in general and administrative expenses, primarily due to higher reimbursed payroll costs. For financial reporting purposes, the Partnership, as a limited partner in the Local Partnerships, does not record losses from the Local Partnerships in excess of its investment to the extent that the Partnership has no further obligation to advance funds or provide financing to the Local Partnerships. As a result, the Partnership's share of income from partnerships for the years ended December 31, 2000 and 1999 did not include losses of $475,499 and $586,110, respectively. The Partnership's net loss recognized from the Local Partnerships is generally expected to decrease in subsequent years as the Partnership's investments in the Local Partnership's are reduced to zero. Accordingly, excludable losses are generally expected to increase. Distributions of $116,158 and $315,213, received from five and nine Local Partnerships during 2000 and 1999, respectively, are included in share of income from partnerships because these amounts were in excess of the Partnership's investment. INFLATION --------- Inflation allows for increases in rental rates, usually offsetting any higher operating and replacement costs. Furthermore, inflation generally does not impact the fixed rate long-term financing under which the Partnership's real property investments were purchased. Future inflation could allow for appreciated values of the Local Partnerships' properties over an extended period of time as rental revenues and replacement values gradually increase. The combined rental revenues of the Partnership's remaining 16 properties for the five years ended December 31, 2000, follow. Combined rental revenue amounts have been adjusted to reflect property sales and interests transferred during 2000 and in prior years.
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ----------- ----------- ----------- ----------- ------------ Combined Rental Revenue $18,888,145 $18,575,914 $18,211,811 $17,975,599 $17,933,898 Annual Percentage Increase 1.7% 2.0% 1.3% 0.2%
ITEM 7. FINANCIAL STATEMENTS -------------------- The information required by this item is contained in Part III. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ------------------------------------------------ ACCOUNTING AND FINANCIAL DISCLOSURE ----------------------------------- None. II-5 PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -------------------------------------------------- (a) and (b) The Partnership has no directors, executive officers or significant employees of its own. (a) and (b) The names, ages and business experience of the directors and executive officers of C.R.I., Inc. (CRI), the Managing General Partner of the Partnership, follow. William B. Dockser, 64, has been the Chairman of the Board and a Director of CRI since 1974. Prior to forming CRI, he served as President of Kaufman and Broad Asset Management, Inc., an affiliate of Kaufman and Broad, Inc., which managed publicly held limited partnerships created to invest in low and moderate income multifamily apartment properties. Prior to joining Kaufman and Broad, he served in various positions at HUD, culminating in the post of Deputy FHA Commissioner and Deputy Assistant Secretary for Housing Production and Mortgage Credit, where he was responsible for all federally insured housing production programs. Before coming to the Washington, D. C. area, Mr. Dockser was a practicing attorney in Boston and served as a special Assistant Attorney General for the Commonwealth of Massachusetts. He holds a Bachelor of Laws degree from Yale University Law School and a Bachelor of Arts degree, cum laude, from Harvard University. He is also Chairman of the Board and a Director of CRIIMI MAE Inc. and CRIIMI, Inc. H. William Willoughby, 54, has been President, Secretary and a Director of CRI since January 1990 and was Senior Executive Vice President, Secretary and a Director of CRI from 1974 to 1989. He is principally responsible for the financial management of CRI and its associated partnerships. Prior to joining CRI in 1974, he was Vice President of Shelter Corporation of America and a number of its subsidiaries dealing principally with real estate development and equity financing. Before joining Shelter Corporation, he was a senior tax accountant with Arthur Andersen & Co. He holds a Juris Doctor degree, a Master of Business Administration degree and a Bachelor of Science degree in Business Administration from the University of South Dakota. He is also a Director and executive officer of CRIIMI MAE Inc. and CRIIMI, Inc. Susan R. Campbell, 42, is Executive Vice President and Chief Operating Officer. Prior to joining CRI in March 1985, she was a budget analyst for the B. F. Saul Advisory Company. She holds a Bachelor of Science degree in General Business from the University of Maryland. Melissa Cecil Lackey, 45, is Senior Vice President and General Counsel. Prior to joining CRI in 1990, she was associated with the firms of Zuckerman, Spaeder, Goldstein, Taylor & Kolker in Washington, D.C. and Hirsch & Westheimer in Houston, Texas. She holds a Juris Doctor degree from the University of Virginia School of Law and a Bachelor of Arts degree from the College of William & Mary. (c) There is no family relationship between any of the foregoing directors and executive officers. (d) Involvement in certain legal proceedings. None. III-1 PART III ITEM 10. EXECUTIVE COMPENSATION ---------------------- (a), (b), (c), (d), (e), (f), (g), and (h) The Partnership has no officers or directors. However, in accordance with the Partnership Agreement, and as disclosed in the public offering, various kinds of compensation and fees were paid or are payable to the General Partners and their affiliates. Additional information required in these sections is incorporated herein by reference to Notes 3 and 4 of the notes to financial statements contained in Part III. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND --------------------------------------------------- MANAGEMENT ---------- (a) Security ownership of certain beneficial owners. The following table sets forth certain information concerning any person (including any "group") who is known to the Partnership to be the beneficial owner of more than five percent of the issued and outstanding units of additional limited partnership interest (Units) at March 22, 2001.
Name and Address Amount and Nature % of total OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP UNITS ISSUED ------------------- ----------------------- ------------ Equity Resources Group, 1,542 Units 6.2% Incorporated, et. al. 14 Story Street Cambridge, MA 02138
(b) Security ownership of management. The following table sets forth certain information concerning all Units beneficially owned, as of March 22, 2001, by each director and by all directors and officers as a group of the Managing General Partner of the Partnership.
Name of Amount and Nature % of total BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP UNITS ISSUED ---------------- ----------------------- ------------ William B. Dockser None 0% H. William Willoughby None 0% All Directors and Officers as a Group (4 persons) None 0%
(c) Changes in control. There exists no arrangement known to the Partnership, the operation of which may, at a subsequent date, result in a change in control of the Partnership. There is a provision in the Limited Partnership Agreement which allows, under certain circumstances, the ability to change control. III-2 PART III ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- (a) and (b) Transactions with management and others. The Partnership has no directors or officers. In addition, the Partnership has had no transactions with individual officers or directors of the Managing General Partner of the Partnership other than any indirect interest such officers and directors may have in the amounts paid to the Managing General Partner or its affiliates by virtue of their stock ownership in CRI. Item 10 of this report, which contains a discussion of the fees and other compensation paid or accrued by the Partnership to the General Partners or their affiliates, is incorporated herein by reference. Note 3 of the notes to financial statements contained in Part III, which contains disclosure of related party transactions, is also incorporated herein by reference. (c) Certain business relationships. The Partnership's response to Item 12(a) is incorporated herein by reference. In addition, the Partnership has no business relationship with entities of which the officers and directors of the Managing General Partner of the Partnership are officers, directors or equity owners other than as set forth in the Partnership's response to Item 12(a). (d) Transactions with promoters. Not applicable. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) INDEX OF EXHIBITS (Listed according to the number assigned in ----------------- the table in Item 601 of Regulation S-B.) Exhibit No. 4 - Instruments defining the rights of security holders, including indentures. a. Amended Certificate and Limited Partnership Agreement of Capital Realty Investors, Ltd. (Incorporated by reference to Exhibit No. 4 to Registrant's Registration Statement on Form S-11, as amended, dated December 4, 1981.) Exhibit No. 10 - Material Contracts. a. Management Services Agreement between CRI and Capital Realty Investors, Ltd. (Incorporated by reference to Exhibit No. 10(b) to Registrant's Registration Statement on Form S-11, as amended, dated December 4, 1981.) III-3 PART III ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K - Continued -------------------------------- Exhibit No. 99 - Additional Exhibits. a. Prospectus of the Partnership, dated December 31, 1981. (Incorporated by reference to Registrant's Registration Statement on Form S-11, as amended, dated December 4, 1981.) (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the quarter ended December 31, 2000. III-4 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CAPITAL REALTY INVESTORS, LTD. ---------------------------------------------- (Registrant) by: C.R.I., INC. ----------------------------------------- Managing General Partner MARCH 22, 2001 by: /S/ WILLIAM B. DOCKSER -------------- ------------------------------------ DATE William B. Dockser, Director, Chairman of the Board, and Treasurer (Principal Executive Officer) In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. MARCH 22, 2001 by: /S/ H. WILLIAM WILLOUGHBY -------------- ----------------------------------- DATE H. William Willoughby, Director, President, and Secretary MARCH 22, 2001 by: /S/ MICHAEL J. TUSZKA -------------- ----------------------------------- DATE Michael J. Tuszka, Vice President and Chief Accounting Officer (Principal Financial Officer and Principal Accounting Officer) III-5 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Partners Capital Realty Investors, Ltd. We have audited the balance sheets of Capital Realty Investors, Ltd. (a District of Columbia limited partnership) as of December 31, 2000 and 1999, and the related statements of operations, changes in partners' deficit and cash flows for the years ended December 31, 2000 and 1999. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of certain Local Partnerships. The Partnership's share of income from these Local Partnerships constitutes $1,011,418 and $1,056,190 of income in 2000 and 1999, respectively, included in the Partnership's net income. The financial statements of these Local Partnerships were audited by other auditors whose reports thereon have been furnished to us, and our opinion expressed herein, insofar as it relates to the amount included for these Local Partnerships, is based solely upon the reports of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based upon our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Capital Realty Investors, Ltd. as of December 31, 2000 and 1999 and the results of its operations, changes in partners' deficit and cash flows for the years ended December 31, 2000 and 1999, in conformity with accounting principles generally accepted in the United States. Grant Thornton LLP Vienna, VA March 16, 2001 III-6 REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS LOCAL PARTNERSHIPS IN WHICH CAPITAL REALTY INVESTORS, LTD. HAS INVESTED* * The reports of independent certified public accountants - Local Partnerships in which Capital Realty Investors, Ltd. has invested were filed in paper format under Form SE on March 22, 2001, in accordance with the Securities and Exchange Commission's continuing hardship exemption granted January 5, 2001. III-7 CAPITAL REALTY INVESTORS, LTD. BALANCE SHEETS ASSETS
DECEMBER 31, ---------------------------- 2000 1999 ------------ ------------ Investments in and advances to partnerships ....................................... $ 3,910,073 $ 3,265,726 Investment in partnerships held for sale .......................................... 144,293 15,439 Cash and cash equivalents ......................................................... 3,521,455 2,711,200 Restricted cash equivalents ....................................................... -- 140,000 Acquisition fees, principally paid to related parties, net of accumulated amortization of $301,244 and $384,432, respectively .......... 356,825 513,960 Property purchase costs, net of accumulated amortization of $95,108 and $97,035, respectively ............ 111,811 127,032 Other assets ...................................................................... 1,407 778 ------------ ------------ Total assets ................................................................ $ 8,045,864 $ 6,774,135 ============ ============ LIABILITIES AND PARTNERS' DEFICIT Due on investments in partnerships ................................................ $ 4,478,800 $ 4,478,800 Accrued interest payable .......................................................... 8,134,169 7,663,972 Accounts payable and accrued expenses ............................................. 86,759 93,514 ------------ ------------ Total liabilities ........................................................... 12,699,728 12,236,286 ------------ ------------ Commitments and contingencies Partners' capital (deficit): Capital paid in: General Partners .............................................................. 14,000 14,000 Limited Partners .............................................................. 24,837,000 24,837,000 ------------ ------------ 24,851,000 24,851,000 Less: Accumulated distributions to partners ......................................... (1,243,772) (996,102) Offering costs ................................................................ (2,689,521) (2,689,521) Accumulated losses ............................................................ (25,571,571) (26,627,528) ------------ ------------ Total partners' deficit ..................................................... (4,653,864) (5,462,151) ------------ ------------ Total liabilities and partners' deficit ..................................... $ 8,045,864 $ 6,774,135 ============ ============
The accompanying notes are an integral part of these financial statements. III-8 CAPITAL REALTY INVESTORS, LTD. STATEMENTS OF OPERATIONS
For the years ended DECEMBER 31, ----------------------------- 2000 1999 ----------- ----------- Share of income from partnerships $ 1,127,576 $ 1,288,874 ----------- ----------- Other revenue and expenses: Revenue: Interest and other income 204,809 141,103 ----------- ----------- Expenses: Interest 470,197 470,196 Management fee 95,208 95,208 General and administrative 135,131 128,627 Professional fees 75,679 64,642 Amortization of deferred costs 28,063 28,725 ----------- ----------- 804,278 787,398 ----------- ----------- Total other revenue and expenses (599,469) (646,295) ----------- ----------- Income before gain on disposition of investment in partnership 528,107 642,579 Gain on disposition of investment in partnership 527,850 -- ----------- ----------- Net income $ 1,055,957 $ 642,579 =========== =========== Net income allocated to General Partners (3%) $ 31,679 $ 19,277 =========== =========== Net income allocated to Limited Partners (97%) $ 1,024,278 $ 623,302 =========== =========== Net income per unit of Limited Partnership Interest based on 24,767 units outstanding $ 41.36 $ 25.17 =========== ===========
The accompanying notes are an integral part of these financial statements. III-9 CAPITAL REALTY INVESTORS, LTD. STATEMENTS OF CHANGES IN PARTNERS' DEFICIT General Limited PARTNERS PARTNERS TOTAL --------- ----------- ----------- Partners' deficit, January 1, 1999 $(819,466) $(5,285,264) $(6,104,730) Net income 19,277 623,302 642,579 --------- ----------- ----------- Partners' deficit, December 31, 1999 (800,189) (4,661,962) (5,462,151) Net income 31,679 1,024,278 1,055,957 Distribution of $10.00 per unit of Limited Partnership Interest -- (247,670) (247,670) --------- ----------- ----------- Partners' deficit, December 31, 2000 $(768,510) $(3,885,354) $(4,653,864) ========= =========== =========== The accompanying notes are an integral part of these financial statements. III-10 CAPITAL REALTY INVESTORS, LTD. STATEMENTS OF CASH FLOWS
For the years ended DECEMBER 31, -------------------------- 2000 1999 ----------- ----------- Cash flows from operating activities: Net income .................................................................. $ 1,055,957 $ 642,579 Adjustments to reconcile net income to net cash used in operating activities: Share of income from partnerships ......................................... (1,127,576) (1,288,874) Amortization of deferred costs ............................................ 28,063 28,725 Gain on disposition of investment in partnership .......................... (527,850) -- Changes in assets and liabilities: Increase in accrued interest receivable on advances to partnerships ..... (6,137) (6,135) (Increase) decrease in other assets ..................................... (629) 891 Increase in accrued interest payable .................................... 470,197 470,196 (Decrease) increase in accounts payable and accrued expenses ............ (6,755) 9,709 ----------- ----------- Net cash used in operating activities ................................. (114,730) (142,909) ----------- ----------- Cash flows from investing activities: Receipt of distributions from partnerships .................................. 500,663 593,125 Proceeds from disposition of investment in partnership ...................... 543,289 -- Release of investment held in escrow ........................................ 140,000 -- Advances made to local partnerships ......................................... (11,825) (57,318) Collection of advances made to local partnerships ........................... 528 -- ----------- ----------- Net cash provided by investing activities ............................. 1,172,655 535,807 ----------- ----------- Cash flow from financing activities: Distribution to Additional Limited Partners ................................. (247,670) -- ----------- ----------- Net increase in cash and cash equivalents ..................................... 810,255 392,898 Cash and cash equivalents, beginning of year .................................. 2,711,200 2,318,302 ----------- ----------- Cash and cash equivalents, end of year ........................................ $ 3,521,455 $ 2,711,200 =========== ===========
The accompanying notes are an integral part of these financial statements. III-11 CAPITAL REALTY INVESTORS, LTD. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. ORGANIZATION ------------ Capital Realty Investors, Ltd. (the Partnership) was formed under the District of Columbia Limited Partnership Act on June 1, 1981 and shall continue until December 31, 2030 unless sooner dissolved in accordance with the Partnership Agreement. The Partnership was formed to invest in real estate by acquiring and holding a limited partner interest in limited partnerships (Local Partnerships) which own and operate federal or state government-assisted or conventionally financed apartment properties located throughout the United States, which provide housing principally to the elderly or to individuals and families of low or moderate income. The General Partners of the Partnership are C.R.I., Inc. (CRI), which is the Managing General Partner, current and former shareholders of CRI and Rockville Pike Associates, Ltd., a Maryland limited partnership which includes the shareholders of CRI and certain former officers and employees of CRI. The Partnership sold 24,837 units at $1,000 per unit of limited partnership interest through a public offering. The offering period was terminated on December 31, 1982. b. METHOD OF ACCOUNTING -------------------- The financial statements of the Partnership are prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States. c. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS ------------------------------------------- The investments in and advances to Local Partnerships (see Note 2) are accounted for by the equity method because the Partnership is a limited partner in the Local Partnerships. Under this method, the carrying amount of the investments in and advances to Local Partnerships is (i) reduced by distributions received and (ii) increased or reduced by the Partnership's share of earnings or losses, respectively, of the Local Partnerships. As of December 31, 2000 and 1999, the Partnership's share of cumulative losses of eight and nine of the Local Partnerships exceeded the amount of the Partnership's investments in and advances to those Local Partnerships by $8,430,339 and $8,965,422, respectively. Since the Partnership has no further obligation to advance funds or provide financing to these Local Partnerships, the excess losses have not been reflected in the accompanying financial statements. As of December 31, 2000 and 1999, cumulative cash distributions of $2,975,173 and $2,859,015, respectively, have been received from the Local Partnerships for which the Partnership's carrying value is zero. These distributions are recorded as increases in the Partnership's share of income from partnerships. Costs incurred in connection with acquiring these investments have been capitalized and are being amortized using the straight-line method over the estimated useful lives of the properties owned by the Local Partnerships. III-12 CAPITAL REALTY INVESTORS, LTD. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued d. INVESTMENT IN PARTNERSHIPS HELD FOR SALE ---------------------------------------- On January 12, 2001, the Local Partnership entered into a contract to sell Frenchman's Wharf I, as discussed in Note 2.d. The Partnership's investment in this Local Partnership was classified as an investment in partnerships held for sale in the accompanying balance sheet at December 31, 2000. On March 23, 2000, Winthrop Beach sold its property, as discussed in Note 2.d. Accordingly, the Partnership's investment in this Local Partnership was classified as an investment in partnerships held for sale in the accompanying balance sheet at December 31, 1999. Assets held for sale are not recorded in excess of their estimated net realizable value. e. CASH AND CASH EQUIVALENTS ------------------------- Cash and cash equivalents consist of all money market funds, time and demand deposits, repurchase agreements and commercial paper with original maturities of three months or less. f. OFFERING COSTS -------------- The Partnership incurred certain costs in connection with the offering and selling of limited partnership interests. Such costs were recorded as a reduction of partners' capital when incurred. g. INCOME TAXES ------------ For federal and state income tax purposes, each partner reports on his or her personal income tax return his or her share of the Partnership's income or loss as determined for tax purposes. Accordingly, no provision has been made for income taxes in these financial statements. h. USE OF ESTIMATES ---------------- In preparing financial statements in conformity with accounting principles generally accepted in the United States, the Partnership is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and of revenues and expenses during the reporting period. Actual results could differ from those estimates. i. FAIR VALUE OF FINANCIAL INSTRUMENTS ----------------------------------- The financial statements include estimated fair value information as of December 31, 2000, as required by Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosure About Fair Value of Financial Instruments." Such information, which pertains to the Partnership's financial instruments (primarily cash and cash equivalents and purchase money notes), is based on the requirements set forth in SFAS No. 107 and does not purport to represent the aggregate net fair value of the Partnership. The balance sheet carrying amounts for cash and cash equivalents approximate estimated fair values of such assets. III-13 CAPITAL REALTY INVESTORS, LTD. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued The Partnership has determined that it is not practicable to estimate the fair value of the purchase money notes, either individually or in the aggregate, due to: (i) the lack of an active market for this type of financial instrument, (ii) the variable nature of purchase money note interest payments as a result of fluctuating cash flow distributions received from the related Local Partnerships, and (iii) the excessive costs associated with an independent appraisal of the purchase money notes. 2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS a. DUE ON INVESTMENTS IN PARTNERSHIPS AND ACCRUED INTEREST PAYABLE --------------------------------------------------------------- As of December 31, 2000 and 1999, the Partnership held limited partner interests in 16 and 17 Local Partnerships, respectively, which were organized to develop, construct, own, maintain and operate rental apartment properties which provide housing principally to the elderly or to individuals and families of low or moderate income. The remaining amounts due on investments in the Local Partnerships were as follows. DECEMBER 31, ----------------------------------- 2000 1999 ----------- ----------- Purchase money notes due in: 1997 $ 700,000 $ 700,000 1998 3,778,800 3,778,800 ----------- ----------- Subtotal 4,478,800 4,478,800 ----------- ----------- Accrued interest payable 8,134,169 7,663,972 ----------- ----------- Total $12,612,969 $12,142,772 =========== =========== The purchase money notes have stated interest rates ranging from 7.25% to 11.10%. The purchase money notes are payable in full upon the earliest of: (i) sale or refinancing of the respective Local Partnership's rental property; (ii) payment in full of the respective Local Partnership's permanent loan; or (iii) maturity. The Partnership's inability to pay the purchase money note principal and accrued interest balances when due, and the resulting uncertainty regarding the Partnership's continued ownership interest in the related Local Partnerships, does not adversely impact the Partnership's financial condition because the purchase money notes are nonrecourse and secured solely by the Partnership's interest in the related Local Partnerships. Therefore, should the investment in Frenchman's Wharf I and/or Shallowford Oaks not produce sufficient value to satisfy the related purchase money notes, the Partnership's exposure to loss is limited because the amount of the nonrecourse indebtedness of each of the maturing purchase money notes exceeds the carrying amount of the investment in, and advances to, each of the related Local Partnerships. Thus, even a complete loss of the Partnership's interest in one or both of these Local Partnerships would not have a material adverse impact on the financial condition of the Partnership. However, since these notes remain unpaid, the noteholders have the right to foreclose on the Partnership's interest in the related Local Partnerships. The noteholders with respect to Frenchman's Wharf I have already filed foreclosure lawsuits. In the event of a foreclosure, the excess of the nonrecourse indebtedness over the carrying amount of the Partnership's investment in the III-14 CAPITAL REALTY INVESTORS, LTD. NOTES TO FINANCIAL STATEMENTS 2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued related Local Partnership would be deemed cancellation of indebtedness income, which would be taxable to Limited Partners at a federal tax rate of up to 39.6%. Additionally, in the event of a foreclosure, the Partnership would lose its investment in the Local Partnership and, likewise, its share of any future cash flow distributed by the Local Partnership from rental operations, mortgage debt refinancings, or the sale of the real estate. The Partnership did not receive any distributions from Frenchman's Wharf I or Shallowford Oaks during the years ended December 31, 2000 and 1999, nor was there any income or loss from these two Local Partnerships included in share of income from partnerships in the statements of operations for the years then ended. See further discussion of these purchase money notes, below. Interest expense on the Partnership's purchase money notes for the year ended December 31, 2000 and 1999 was $470,197 and $470,196, respectively. The accrued interest payable on the purchase money notes of $8,134,169 and $7,663,972 as of December 31, 2000 and 1999, respectively, is currently due because all the notes have matured. FRENCHMAN'S WHARF I ------------------- The Partnership defaulted on its purchase money notes related to Lake Properties Limited Partnership (Frenchman's Wharf I) on June 1, 1998 when the notes matured and were not paid. The default amount included principal and accrued interest of $3,778,800 and $6,086,253, respectively. As of March 22, 2001, principal and accrued interest of $3,778,800 and $7,263,002, respectively, were due. The purchase money notes were initially due to mature on June 1, 1988, but were extended to mature on June 1, 1998. The Partnership requested another extension of the maturity date of the purchase money notes until May 2000, to be coterminous with the expiration of the Local Partnership's provisional workout agreement (PWA) with HUD related to its mortgage loan. The purchase money noteholders initiated two separate foreclosure proceedings in two states. One group of plaintiffs has indicated it would be willing to stay its action until the end of the forbearance period with the Local Partnership's lender, so long as the plaintiff in the other lawsuit does the same, but to date there has been no agreement with that noteholder other than a brief continuance. The Partnership has retained local counsel and intends to move to dismiss the later filed suit and consolidate it with the pending suit in the state where the property is located. However, there is no assurance that the Partnership will be able to retain its interest in Frenchman's Wharf I. In 1996, HUD sold the mortgage loan to the same lender as Shallowford Oaks (see discussion concerning Shallowford Oaks, below). The previously agreed-to Provisional Workout Agreement with HUD expired in May 2000. On May 31, 2000, the local managing general partner obtained a forbearance agreement from the lender which expires March 31, 2001. The forbearance agreement allows for the discounted payoff of the mortgage loan. In January 2001, the Local Partnership entered into a contract to sell this property with the adjacent property (not a Partnership investment) for a combined price of $15.2 million. Unless the sale can be consummated within the forbearance period, it appears likely that the first mortgage lender will obtain the Frenchman's Wharf real estate through deed-in-lieu of foreclosure on or after March 31, 2001. In the event of a foreclosure, the Partnership would lose its share of any future cash flow distributed by the Local Partnership from rental operations, mortgage debt refinancings, or the sale of the real estate. Should the Partnership lose its ownership III-15 CAPITAL REALTY INVESTORS, LTD. NOTES TO FINANCIAL STATEMENTS 2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued interest in Frenchman's Wharf I through foreclosure of the purchase money note, there would be no adverse impact on the Partnership's financial condition, as discussed above. However, should the Local Partnership lose its real estate through foreclosure by its mortgage lender, it is anticipated that there will be a severe adverse tax impact on the partners in the Partnership. The total federal tax gain from cancellation of mortgage indebtedness and purchase money indebtedness for the year 2001 related to Frenchman's Wharf I is estimated to be approximately $17 million. Due to the impending sale of the property related to the Partnership's investment in Frenchman's Wharf I, the net unamortized amounts of acquisition fees and property purchase costs, which totaled $144,293 as of December 31, 2000, have been reclassified to investment in partnership held for sale in the accompanying balance sheet at December 31, 2000. SHALLOWFORD OAKS ---------------- The Partnership defaulted on its purchase money note relating to ARA Associates- Shangri-La Ltd. (Shallowford Oaks) on January 1, 1997 when the note matured and was not paid. The default amount included principal and accrued interest of $700,000 and $761,389, respectively. As of March 22, 2001, principal and accrued interest of $700,000 and $975,512, respectively, were due. The Managing General Partner proposed to extend the maturity date of the note until November 2001, coterminous with the expiration of the Local Partnership's PWA related to its mortgage loan which matures in November 2001. As of March 22, 2001, there had been no response from the noteholders. There is no assurance that any agreement for an extension will be reached with the noteholders. In addition, Shallowford Oaks' mortgage lender filed notice on November 3, 1997 accelerating the maturity of the Local Partnership's mortgage loan and demanding payment in full due to a purported nonmonetary default of the PWA with the lender's predecessor, HUD. Subsequently, the local managing general partner filed an action to enjoin the attempted foreclosure. The court entered an order for equitable relief in Shallowford's favor on November 12, 1998. The lender filed a motion for a new trial and a motion to alter or amend judgment in December 1998. The court denied the lender's motions by order dated March 24, 1999. Subsequently, the lender filed an appeal to the order for equitable relief, and oral arguments were held on October 13, 1999. In February 2000, the Partnership received written notification of the court's ruling in its favor. In connection with the mortgage lender's attempt to foreclose on Shallowford Oaks, the Partnership filed a countersuit against the mortgage lender. On October 6, 2000, the court of jurisdiction heard the mortgage lender's motion for dismissal of the countersuit. As of March 22, 2001, there has been no ruling on the motion. For the years ended December 31, 2000 and 1999, the Partnership advanced Shallowford Oaks $11,298 (net) and $57,318, respectively, for legal costs. Due to the uncertainties regarding the outcome of an extension of the maturity date of the purchase money note, there is no assurance that the Partnership will be able to retain its interest in Shallowford Oaks. In the event of a foreclosure, the Partnership would also lose its share of any future cash flow distributed by the Local Partnership from rental operations, mortgage debt refinancings, or the sale of the real estate. The uncertainty regarding the continued ownership of the Partnership's interest in Shallowford Oaks does not adversely impact the Partnership's financial condition, as discussed above. III-16 CAPITAL REALTY INVESTORS, LTD. NOTES TO FINANCIAL STATEMENTS 2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued b. INTERESTS IN PROFITS, LOSSES AND CASH DISTRIBUTIONS MADE BY LOCAL ---------------------------------------------------------------------- PARTNERSHIPS ------------ The Partnership has a 74.99% to 98.99% interest in profits, losses and cash distributions (as restricted by various federal and state housing agencies) (collectively, the Agencies) of each Local Partnership. An affiliate of the Managing General Partner of the Partnership is also a general partner of each Local Partnership. As stipulated by the Local Partnerships' partnership agreements, the Local Partnerships are required to make annual cash distributions from surplus cash flow, if any. During 2000 and 1999, the Partnership received cash distributions from the rental operations of the Local Partnerships of $500,663 and $593,125, respectively. As of both December 31, 2000 and 1999, 13 of the Local Partnerships had aggregate surplus cash, as defined by their respective regulatory Agencies, in the amount of $2,392,441 and $2,978,040, respectively, which may be available for distribution in accordance with their respective regulatory Agencies' regulations. The cash distributions to the Partnership from the operations of the rental properties may be limited by the Agencies' regulations. Such regulations limit annual cash distributions to a percentage of the owner's equity investment in a rental property. Funds in excess of those which may be distributed to owners are generally required to be placed in a residual receipts account held by the governing state or federal agency for the benefit of the property. Upon sale or refinancing of a property owned by a Local Partnership, or upon the liquidation of a Local Partnership, the proceeds from such sale, refinancing or liquidation shall be distributed in accordance with the respective provisions of each Local Partnership's partnership agreement. In accordance with such provisions, the Partnership would receive from such proceeds its respective percentage interest of any remaining proceeds, after payment of (i) all debts and liabilities of the Local Partnership and certain other items, (ii) the Partnership's capital contributions plus certain specified amounts as outlined in each partnership agreement, and (iii) certain special distributions to general partners and related entities of the Local Partnership. c. ADVANCES TO LOCAL PARTNERSHIPS ------------------------------ FRENCHMAN'S WHARF I ------------------- To cover operating deficits incurred in prior years for Frenchman's Wharf I, the Partnership advanced funds totaling $305,398 as of both December 31, 2000 and 1999. No advances have been made to Frenchman's Wharf I since March 1987, and the Partnership does not expect to advance any additional funds to the Local Partnership. These loans, together with accrued interest of $183,102 as of both December 31, 2000 and 1999, are payable from cash flow of Frenchman's Wharf I after payment of first mortgage debt service and after satisfaction by the Partnership of certain other interest obligations on the purchase money notes relating to the Local Partnership. No interest has been accrued since 1992 due to the uncertainty of future collection. There is no assurance that the Local Partnership, upon expiration of the forbearance agreement with its mortgage lender on March 31, 2001, will be able to repay the loans in accordance with the terms thereof. For financial reporting purposes, these loans have been reduced to zero by the Partnership as a result of losses at the Local Partnership level during prior years. III-17 CAPITAL REALTY INVESTORS, LTD. NOTES TO FINANCIAL STATEMENTS 2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued SHALLOWFORD OAKS ---------------- On November 23, 1994, the Partnership advanced $72,195 to Shallowford Oaks to help repay the Local Partnership's outstanding obligations related to its mortgage loan. This loan, together with accrued interest of $37,467 and $31,331 as of December 31, 2000 and 1999, respectively, is payable from cash flow of Shallowford Oaks after payment of first mortgage debt service and after satisfaction by the Partnership of certain other interest obligations on the related purchase money note. The Partnership advanced additional amounts of $11,825, $57,318, and $106,212 during the years ended December 31, 2000, 1999 and 1998, respectively, to Shallowford Oaks to help fund legal expenses relating to the Shallowford litigation. Due to the non-payment of the purchase money note when due, as discussed above, it is probable that the Partnership will not receive any repayment of its loans. For financial reporting purposes, these loans have been reduced to zero by the Partnership as a result of losses at the Local Partnership level during prior years. See Note 2.a., above, concerning the potential foreclosure on the real estate in early 2001. d. PROPERTY MATTERS FRENCHMAN'S WHARF I ------------------- The report of the auditors on the financial statements of Frenchman's Wharf I for the year ended December 31, 2000 indicated that substantial doubt exists about the ability of the Local Partnership to continue as a going concern due to the Local Partnership's default on its mortgage loan and the expiration of its Section 8 Rental Housing Assistance Payments (HAP) contract with HUD. The HAP contract has been extended to March 31, 2001. See Note 2.a., above, concerning the potential foreclosure on the real estate in early 2001. WINTHROP BEACH -------------- On March 23, 2000, Winthrop Beach Associates (Winthrop Beach) sold its property. The sale resulted in a financial statement gain of $527,850, and an estimated federal tax gain of $1.4 million. e. AFFORDABLE HOUSING LEGISLATION ------------------------------ Lake Properties Limited Partnership (Frenchman's Wharf I), Traverse City Elderly Limited Partnership (Hillview Terrace), ARA Associates-Shangri-La Ltd. (Shallowford Oaks), and Warner Housing Partnership (Warner House) have Section 8 HAP contracts covering 10%, 92%, 20%, and 100%, respectively, of their apartment units, which contracts expire during 2001. A Section 8 HAP contract provides rental subsidies to a property owner for units occupied by low income tenants. If a HAP contract is not extended, there would likely be a temporary increase in vacancy during the 6 to 12 months after expiration and an accompanying reduction in rental revenue. As residents in the low- income units move out, the units would be made available to market-rate residents. Most of the Local Partnerships in which the Partnership is invested have mortgage loans financed by various state housing agencies, and two Local Partnerships have mortgage loans financed by the RECD agency. Further, these Local Partnerships have Section 8 HAP contracts in place for all or substantially all of their apartment units which are generally regulated by the Department of Housing and Urban Development (HUD) (the III-18 CAPITAL REALTY INVESTORS, LTD. NOTES TO FINANCIAL STATEMENTS 2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued state housing agencies, RECD and HUD, collectively, the Agencies). These Section 8 HAP contracts begin to expire, or have been extended to expire, in 2001. Currently, the Managing General Partner believes that the Agencies will strive to preserve the units as low income, or affordable, housing by exercising their rights under the mortgage and/or regulatory agreement to disallow the mortgage prepayment or conversion of the units to market rate housing. The Managing General Partner continues to monitor the actions of these financing Agencies to assess how these Agencies will deal with expiring Section 8 HAP contracts and what impact these Agencies' strategies will have on the operations of the Local Partnerships and, consequently, the impact on the Partnership's investments in the Local Partnerships. As of December 31, 2000, the Partnership's remaining investment in Local Partnerships with Section 8 HAP contracts expiring in the year 2001 was $0. f. SUMMARIZED FINANCIAL INFORMATION -------------------------------- Combined balance sheets and combined statements of operations for the 16 and 17 Local Partnerships in which the Partnership is invested as of December 31, 2000 and 1999, respectively, follow. The combined statement of operations for the year ended December 31, 2000, includes information for Winthrop Beach through the date of its sale. COMBINED BALANCE SHEETS
For the years ended DECEMBER 31, ----------------------------- 2000 1999 ----------- ----------- Rental property, at cost, net of accumulated depreciation of $57,487,272 and $55,195,378, respectively $31,817,823 $34,902,249 Land 7,525,546 7,605,686 Other assets 18,668,381 17,421,264 ----------- ----------- Total assets $58,011,750 $59,929,199 =========== =========== Mortgage notes payable $66,542,428 $68,911,065 Other liabilities 7,295,559 8,036,335 ----------- ----------- Total liabilities 73,837,987 76,947,400 Partners' deficit (15,826,237) (17,018,201) ----------- ----------- Total liabilities and partners' deficit $58,011,750 $59,929,199 =========== ===========
III-19 CAPITAL REALTY INVESTORS, LTD. NOTES TO FINANCIAL STATEMENTS 2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued COMBINED STATEMENTS OF OPERATIONS For the years ended DECEMBER 31, ------------------------------ 2000 1999 ----------- ----------- Revenue: Rental $18,942,509 $18,859,599 Interest 762,559 647,297 Other 278,669 413,480 ----------- ----------- Total revenue 19,983,737 19,920,376 ----------- ----------- Expenses: Operating 9,530,893 9,396,165 Interest 6,194,270 6,323,999 Depreciation 3,333,160 3,355,890 Amortization 39,596 39,830 ----------- ----------- Total expenses 19,097,919 19,115,884 ----------- ----------- Net income $ 885,818 $ 804,492 =========== =========== g. RECONCILIATION OF THE LOCAL PARTNERSHIPS' FINANCIAL STATEMENT ------------------------------------------------------------- NET INCOME TO TAXABLE INCOME ---------------------------- For federal income tax purposes, the Local Partnerships report on a basis whereby: (i) certain revenue and the related assets are recorded when received rather than when earned; (ii) certain costs are expensed when paid or incurred rather than capitalized and amortized over the period of benefit; and (iii) a shorter life is used to compute depreciation on the property as permitted by Internal Revenue Service (IRS) Regulations. These returns are subject to examination and, therefore, possible adjustment by the IRS. A reconciliation of the Local Partnerships' financial statement net income reflected above to taxable income follows.
For the years ended DECEMBER 31, ---------------------------- 2000 1999 ----------- ---------- Financial statement net income $ 885,818 $ 804,492 Adjustments: Additional book depreciation, net of depreciation on construction period expenses capitalized for financial statement purposes 2,583,981 1,947,285 Amortization for financial statement purposes not deducted for income tax purposes 45,099 101,541 Miscellaneous, net (2,875) 288,836 ----------- ---------- Taxable income $ 3,512,023 $3,142,154 =========== ==========
III-20 CAPITAL REALTY INVESTORS, LTD. NOTES TO FINANCIAL STATEMENTS 3. RELATED-PARTY TRANSACTIONS In accordance with the terms of the Partnership Agreement, the Partnership paid the Managing General Partner a fee for services in connection with the review, selection, evaluation, negotiation and acquisition of the interests in the Local Partnerships. The fee amounted to $993,480, which is equal to four percent of the Limited Partners' capital contributions to the Partnership. The acquisition fee was capitalized and is being amortized over a 40-year period using the straight-line method. In accordance with the terms of the Partnership Agreement, the Partnership is obligated to reimburse the Managing General Partner for its direct expenses in connection with managing the Partnership. For the years ended December 31, 2000 and 1999, the Partnership paid $104,656 and $93,608, respectively, to the Managing General Partner as direct reimbursement of expenses incurred on behalf of the Partnership. Such expenses are included in the accompanying statements of operations as general and administrative expenses. In accordance with the terms of the Partnership Agreement, the Partnership is obligated to pay the Managing General Partner an annual incentive management fee (Management Fee) after all other expenses of the Partnership are paid. The amount of the Management Fee shall be equal to 0.25% of invested assets, as defined in the Partnership Agreement, and shall be payable from the Partnership's cash available for distribution, as defined in the Partnership Agreement, as of the end of each calendar year, as follows: (i) First, on a monthly basis as an operating expense before any distributions to limited partners in an annual amount equal to $95,208; and (ii) Second, after distributions to the limited partners in the amount of one percent of the gross proceeds of the offering, the balance of such 0.25% of invested assets. For each of the years ended December 31, 2000 and 1999, the Partnership paid the Managing General Partner a Management Fee of $95,208. The Managing General Partner and/or its affiliates may receive a fee of not more than two percent of the sales price of an investment in a Local Partnership or the property it owns, payable under certain conditions upon the sale of an investment in a Local Partnership or the property it owns. The payment of the fee is subject to certain restrictions, including the achievement of a certain level of sales proceeds and making certain minimum distributions to limited partners. No such fees were earned by the Managing General Partner or its affiliates during 2000 or 1999. 4. PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS All profits and losses are allocated 97% to the limited partners and 3% to the General Partners. The net proceeds resulting from the liquidation of the Partnership or the Partnership's share of the net proceeds from any sale or refinancing of the Local Partnerships or their rental properties which are not reinvested shall be distributed and applied as follows: III-21 CAPITAL REALTY INVESTORS, LTD. NOTES TO FINANCIAL STATEMENTS 4. PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS - Continued (i) to the payment of debts and liabilities of the Partnership (including all expenses of the Partnership incident to the sale or refinancing) other than loans or other debts and liabilities of the Partnership to any partner or any affiliate; such debts and liabilities, in the case of a non-liquidating distribution, to be only those which are then required to be paid or, in the judgment of the Managing General Partner, required to be provided for; (ii) to the establishment of any reserves which the Managing General Partner deems reasonably necessary for contingent, unmatured or unforeseen liabilities or obligations of the Partnership; (iii)to the limited partners in the amount of their capital contributions without deduction for prior cash distributions other than prior distributions of proceeds from any sale or refinancing; (iv) to the repayment of any unrepaid loans theretofore made by any partner or any affiliate to the Partnership for Partnership obligations and to the payment of any unpaid amounts owing to the General Partners pursuant to the Partnership Agreement; (v) to the General Partners in the amount of their capital contributions; (vi) thereafter, for their services to the Partnership, in equal shares to certain general partners (or their designees), whether or not any is then a general partner, an aggregate fee of one percent of the gross proceeds resulting from (A) such sale (if the proceeds are from a sale rather than a refinancing) and (B) any prior sales from which such one percent fee was not paid to the General Partners or their designees; and, (vii)the remainder, 15% to the General Partner (or their assignees) and 85% to the limited partners (or their assignees)Fees payable to certain general partners (or their designees) under (vi) above, together with all other property disposition fees and any other commissions or fees payable upon the sale of apartment properties, shall not in the aggregate exceed the lesser of the competitive rate or six percent of the sales price of the apartment properties. The Managing General Partner and/or its affiliates may receive a fee of not more than two percent of the sales price of the investment in a Local Partnership or the property it owns. The fee would only be payable upon the sale of the investment in a Local Partnership or the property it owns and would be subject to certain restrictions, including the achievement of a certain level of sales proceeds and making certain minimum distributions to limited partners. No such amounts were paid to the Managing General Partner and/or its affiliates during 2000 or 1999. Pursuant to the Partnership Agreement, all cash available for distribution, as defined, shall be distributed, not less frequently than annually, 97% to the limited partners and three percent to the General Partners, after payment of the Management Fee (see Note 3), as specified in the Partnership Agreement. On October 17, 2000, the Partnership made a cash distribution of $247,670 ($10.00 per Unit) to Additional Limited Partners, to holders of record as of September 30, 2000. The distribution was a result of cash resources accumulated from operations and distributions from Local Partnerships, and from the sale of Winthrop Beach in March 2000. No distribution was declared or paid by the Partnership during 1999. As defined in the Partnership Agreement, after the payment of the distribution to Additional Limited Partners as described in the previous paragraph, after the establishment of any reserves deemed necessary by the Managing General Partner and after payment of the Management Fee, the Partnership had no remaining cash available for distribution for the years ended December 31, 2000 and 1999. The Managing General Partner has reserved all of the III-22 CAPITAL REALTY INVESTORS, LTD. NOTES TO FINANCIAL STATEMENTS 4. PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS - Continued Partnership's undistributed cash for the possible repayment, prepayment or purchase of the Partnership's outstanding purchase money notes related to Local Partnerships. 5. RECONCILIATION OF THE PARTNERSHIP'S FINANCIAL STATEMENT NET INCOME TO TAXABLE INCOME For federal income tax purposes, the Partnership reports on a basis whereby: (i) certain expenses are amortized rather than expensed when incurred; (ii) certain costs are amortized over a shorter period for tax purposes, as permitted by IRS Regulations, and (iii) certain costs are amortized over a longer period for tax purposes. The Partnership records its share of losses from its investments in limited partnerships for federal income tax purposes as reported on the Local Partnerships' federal income tax returns (see Note 2.g.), including losses in excess of related investment amounts. These returns are subject to examination and, therefore, possible adjustment by the IRS.A reconciliation of the Partnership's financial statement net income to taxable income follows. For the years ended DECEMBER 31, ------------------------ 2000 1999 ---------- ---------- Financial statement net income $1,055,957 $ 642,579 Adjustments: Differences between taxable income and financial statement net income related to the Partnership's equity in the Local Partnerships' income 3,282,328 1,838,684 Costs amortized over a shorter period for income tax purposes 37,017 28,326 ---------- ---------- Taxable income $4,375,302 $2,509,589 ========== ========== # # # III-23