UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-K

(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1999
                           -----------------
                                     OR
[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from               to
                               -------------    -------------
Commission file number 0-14350
                       -------
                     BALCOR REALTY INVESTORS 85-SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
            ------------------------------------------------------
            (Exact name of registrant as specified in its charter)

           Illinois                                      36-3333344
-------------------------------                      -------------------
(State or other jurisdiction of                       (I.R.S. Employer
incorporation or organization)                       Identification No.)

2355 Waukegan Rd.
Bannockburn, IL                                             60015
----------------------------------------             -------------------
(Address of principal executive offices)                  (Zip Code)

Registrant's telephone number, including area code (847) 267-1600

    --------------
Securities registered pursuant to Section 12(b) of the Act:  None
                                                             ----
Securities registered pursuant to Section 12(g) of the Act:

                         Limited Partnership Interest
                         -----------------------------
                               (Title of class)

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 (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 [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to
this Form 10-K [X]

                                    PART I

Item 1. Business
----------------

Balcor Realty Investors 85-Series III A Real Estate Limited Partnership (the
"Registrant") is a limited partnership formed in 1984 under the laws of the
State of Illinois. The Registrant raised $59,092,000 from sales of Limited
Partnership Interests. The Registrant has retained cash reserves from the sale
of its real estate investments for contingencies which exist or may arise. The
Registrant's operations currently consist of interest income earned on
short-term investments and the payment of administrative expenses.

The Registrant utilized the net offering proceeds to acquire eight real
property investments and a minority joint venture interest in one additional
real property, and has since disposed of all of these investments. The
Partnership Agreement generally provides that the proceeds of any sale or
refinancing of the Registrant's properties will not be reinvested in new
acquisitions.

The Partnership Agreement provides for the dissolution of the Registrant upon
the occurrence of certain events, including the disposition of all its
interests in real estate. The Registrant sold its final real estate investment
in September 1997. The Registrant has retained a portion of the cash from the
property sales to satisfy obligations of the Registrant, as well as to
establish a reserve for contingencies. The timing of the termination of the
Registrant and final distribution of cash will depend upon the nature and
extent of liabilities and contingencies which exist or may arise. Such
contingencies may include legal and other fees and costs stemming from
litigation involving the Registrant including, but not limited to, the Bruss
and Masri lawsuits discussed in "Item 3. Legal Proceedings". Due to this
litigation, the Registrant will not be dissolved and reserves will be held by
the Registrant until the conclusion of such contingencies. There can be no
assurances as to the time frame for conclusion of all contingencies.

The Registrant no longer has an ownership interest in any real estate. The
General Partner is not aware of any material potential liability relating to
environmental issues or conditions affecting real estate formerly owned by the
Registrant.

The officers and employees of Balcor Partners-XVIII, the General Partner of the
Registrant, and its affiliates perform services for the Registrant. The
Registrant currently has no employees engaged in its operations.

Item 2. Properties
------------------

As of December 31, 1999, the Registrant did not own any properties.

In the opinion of the General Partner, the Registrant has obtained adequate
insurance coverage for property liability and property damage matters.

See Notes to Financial Statements for other information regarding former real
estate property investments.

Item 3. Legal Proceedings
-------------------------


Bruss et al. vs. Lehman Brothers, Inc., et al.
----------------------------------------------
On January 25, 1999, a proposed class action complaint was filed, Dorothy
Bruss, et al. vs. Lehman Brothers, Inc., et al. (Superior Court of New Jersey,
Law Division, Essex County, Docket No. L-000898-99). The Partnership, ten
additional limited partnerships which were sponsored by The Balcor Company
(together with the Partnership, the "Affiliated Partnerships"), The Balcor
Company, American Express Company, Lehman Brothers, Inc., Smith Barney, Inc.,
American Express Financial Corporation, and other affiliated entities and 9
individuals were named defendants in the action. Lead counsel representing the
plaintiffs in this case is the same counsel representing the plaintiffs in each
of the Lenore Klein case (now dismissed) and Raymond Masri case (see below).
The Bruss complaint raises largely the same issues as those raised in the
Lenore Klein and the Raymond Masri cases.

Upon the defendants' Motion to Dismiss, the Bruss complaint was dismissed
without prejudice on September 24, 1999. An amended complaint was filed on
November 30, 1999. The amended complaint differs from the original complaint
in that 8 of the 9 individual defendants and American Express Company were
deleted as defendants; the amended complaint also deletes 4 counts for breach
of fiduciary duty, breach of contract, conspiracy and violations of the New
Jersey RICO statute and similar statutes of other states. The amended complaint
alleges, common law fraud, equitable fraud, negligent misrepresentation and
violation of certain New Jersey and other similar state statutes relating to
the disclosure of information in the offering of limited partnership interests
in the Affiliated Partnerships, the marketing of interests in the Affiliated
Partnerships and the acquisition of real property for the Affiliated Partner-
ships. The complaint seeks judgement for compensatory damages equal to the
amount invested in the Affiliated Partnerships by the proposed class plus
interest; general damages for injuries arising from the defendants' alleged
actions; equitable relief, including rescission on certain counts; punitive
damages; recovery from the Defendants of all profits received by them as a
result of their alleged actions relating to the Affiliated Partnerships; and
attorneys' fees and other costs.

The defendants filed a new Motion to Dismiss on January 31, 2000. The
defendants intend to vigorously contest this action. No class has been
certified as of this date. Management of each of the defendants believes that
it has meritorious defenses to contest the claims.

Raymond Masri vs. Lehman Brothers, Inc., et al.
-----------------------------------------------

On February 29, 1996, a proposed class action complaint was filed, Raymond
Masri vs. Lehman Brothers, Inc., et al., Case No. 96/103727 (Supreme Court of
the State of New York, County of New York). The Partnership, twelve additional
limited partnerships which were sponsored by The Balcor Company, three limited
partnerships sponsored by the predecessor of Lehman Brothers, Inc., (together
with the Partnership, the "Defendant Partnerships"), Lehman Brothers, Inc. and
Smith Barney, Inc. are defendants. The complaint alleges, among other things,
common law fraud and deceit, negligent misrepresentation and breach of
fiduciary duty relating to the disclosure of information in the offering of
limited partnership interests in the Defendant Partnerships. The complaint
seeks judgment for compensatory damages equal to the amount invested in the
Defendant Partnerships by the proposed class plus interest accrued thereon;
general damages for injuries arising from the defendants' alleged actions;

recovery from the defendants of all profits received by them as a result of
their alleged actions relating to the Defendant Partnerships; exemplary
damages; attorneys' fees and other costs.

The defendants intend to vigorously contest this action. No class has been
certified as of this date. Management of each of the defendants believes they
have meritorious defenses to contest the claims.

No activity occurred on this matter during 1999. Plaintiffs' counsel also
represents the plaintiffs in the Dorothy Bruss matter, which is based on the
same set of facts. Raymond Masri is named as an additional plaintiff in the
Dorothy Bruss matter.

Madison Partnership Liquidity Investors XX, et al. vs. The Balcor Company, et
-----------------------------------------------------------------------------
al.
---
Sandra Dee vs. The Balcor Company, et al.
-----------------------------------------

On May 7, 1999, a proposed class action complaint was filed and on May 13, 1999
was served on the defendants, Madison Partnership Liquidity Investors XX, et
al. vs. The Balcor Company, et al. (Circuit Court, Chancery Division, Cook
County, Illinois, Docket No. 99CH 08972). The General Partner of the
Partnership, the general partners of twenty-one additional limited partnerships
which were sponsored by The Balcor Company, The Balcor Company and one
individual are named as defendants in this action. The Partnership and the
twenty-one additional limited partnerships are referred to herein as the
"Affiliated Partnerships". Plaintiffs are entities that initiated tender offers
to purchase units and, in fact, purchased units in eleven of the Affiliated
Partnerships.

On June 1, 1999, a proposed class action complaint was filed and on August 16,
1999 was served on the defendants, Sandra Dee vs. The Balcor Company, et al.
(Circuit Court, Chancery Division, Cook County, Illinois, Docket No. 99CH
08123). This complaint is identical in all material respects to the Madison
Partnership Liquidity Investors XX, et al. vs. The Balcor Company et al.
complaint filed in May 1999. The defendants filed on September 15, 1999 a
motion to consolidate the Dee case with the Madison Partnership case. On
September 20, 1999, the motion was granted and this case was consolidated with
the Madison Partnership case.

The complaints allege breach of fiduciary duties and breach of contract under
the partnership agreements for each of the Affiliated Partnerships. The
complaints seek the winding up of the affairs of the Affiliated Partnerships,
the establishment of a liquidating trust for each of the Affiliated
Partnerships until a resolution of all contingencies occurs, the appointment of
an independent trustee for each such liquidating trust and the distribution of
a portion of the cash reserves to limited partners. The complaints also seek
compensatory damages, punitive and exemplary damages, and costs and expenses in
pursuing the litigation.

The defendants filed motions to dismiss the complaints on July 14, 1999 and on
September 15, 1999. On January 19, 2000 a hearing on the motions was held and
the class allegations in the complaints were struck regarding the Partnership
and ten of the Affiliated Partnerships in which plaintiffs do not own

interests. In all other respects, the motions to dismiss were denied. While the
court directed the plaintiffs to file an amended complaint by February 18,
2000, as of this date they have yet to do so.

The defendants intend to vigorously contest this action. No class has been
certified as of this date.

Item 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------

No matters were submitted to a vote of the Limited Partners of the Registrant
during 1999.

                                 PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder
-------------------------------------------------------------------------
Matters
-------

There has not been an established public market for Limited Partnership
Interests and it is not anticipated that one will develop. For information
regarding distributions, See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources".

As of December 31, 1999, the number of record holders of Limited Partnership
Interests of the Registrant was 4,779.

Item 6. Selected Financial Data
-------------------------------

                                   Year ended December 31,
                    ----------------------------------------------------------
                       1999       1998       1997       1996        1995
                    ---------- ---------- ---------- -----------  -----------

Total income          $79,216    $94,015  $3,144,396 $14,299,834  $12,057,899
(Loss) income before
  gain on sales,
  affiliates'
  participation in
  joint ventures
  and extraordinary
  items               (66,558)  (115,364)   (386,939)  4,798,662     (87,295)
Net (loss) income     (66,558)  (115,364)  9,546,094  22,556,310     (27,411)
Net (loss) income
  per Limited
  Partnership
  Interest - Basic
  and Diluted           (1.13)     (1.95)     160.86      377.90        (.46)
Total assets        1,613,805  1,653,365   2,472,953  27,755,377  45,259,656
Mortgage notes
  payable                None       None        None  24,324,028  50,428,070
Distributions per
  Limited Part-
  nership Interest (A)   None      12.18      174.02      230.00        7.50

(A) These amounts include distributions of original capital of $4.93, $159.02
and $200.00 per Limited Partnership Interest for 1998, 1997 and 1996,
respectively.

Item 7. Management's Discussion and Analysis of Financial Condition and
-----------------------------------------------------------------------
Results of Operations
---------------------

Operations
----------

Summary of Operations

---------------------

The operations of Balcor Realty Investors 85-Series III A Real Estate Limited
Partnership (the "Partnership") in 1999 and 1998 consisted primarily of
administrative expenses which were partially offset by interest income earned
on short-term investments. Primarily as a result of lower administrative
expenses in 1999, the Partnership's net loss decreased during 1999 as compared
to 1998. The Partnership sold its two remaining properties in 1997 and
recognized gains in connection with these property sales. As a result, the
Partnership recognized net income during 1997 as compared to a net loss during
1998. Further discussion of the Partnership's operations is summarized below.

1999 Compared to 1998
---------------------

As a result of lower interest rates in 1999 and higher average cash balances in
1998 prior to a distribution to Limited Partners in January 1998, interest
income on short-term investments decreased during 1999 as compared to 1998.

During 1998, the Partnership received a refund of state income taxes relating
to the gain on the sale of the Country Ridge Apartments which was sold in 1996.
This amount was recognized as other income for financial statement purposes.

During 1998, the Partnership paid its share of property operating expenses
relating to the North Hill Apartments, in which the Partnership held a joint
venture interest. The property was sold in 1997.

Primarily due to a decrease in accounting and accrued legal fees,
administrative expenses decreased during 1999 as compared to 1998.

1998 Compared to 1997
---------------------

The Partnership sold the Howell Station and North Hill apartment complexes
during 1997 and recognized gains of $6,569,949 and $4,846,446, respectively, in
connection with these sales. As a result, rental and service income, interest
expense on mortgage notes payable, depreciation, amortization, real estate
taxes and property management fees ceased during 1997.

Due to higher average cash balances in 1997 as a result of the investment of
proceeds received in connection with the property sales prior to distribution
to Limited Partners, interest income on short-term investments decreased during
1998 as compared to 1997.

The Partnership recognized other income during 1997 primarily in connection
with a partial refund of prior years' insurance premiums relating to the
Partnership's properties.

Property operating expense decreased during 1998 as compared to 1997 due to the
sales of the Partnership's two remaining properties in 1997.

Due primarily to lower accounting, data processing and portfolio management
fees as a result of prior years' property sales, administrative expenses
decreased during 1998 as compared to 1997.

The North Hill Apartments was owned by a joint venture consisting of the
Partnership and an affiliate. Due to the sale of this property in 1997,
affiliate's participation in income from joint venture ceased during 1997.

In connection with the sale of the Howell Station Apartments during 1997, the
Partnership wrote-off the remaining unamortized deferred financing fees of
$95,822 and paid a prepayment penalty of $283,458. In connection with the sale
of the North Hill Apartments during 1997, the joint venture wrote-off the
remaining unamortized deferred financing fees of $617,919 of which $154,480
represents the North Hill Apartments minority joint venture partner's share.
Additionally, in connection with the sale of the property, the remaining
unamortized balance of a bond discount fee of $61,894 was written off, of which
$15,473 was the minority joint venture partner's share. These amounts were
recognized as debt extinguishment expense and classified as extraordinary items
for financial statement purposes.

As a result of the 1997 sale of the North Hill Apartments, the joint venture
recognized an extraordinary gain on forgiveness of debt of $1,350,000, of which
$337,500 represents the North Hill Apartments' minority joint venture partner's
share.

Liquidity and Capital Resources
-------------------------------

The cash position of the Partnership decreased by approximately $40,000 as of
December 31, 1999 as compared to December 31, 1998 due to cash used in
operating activities for the payment of administrative expenses, which was
partially offset by interest income earned on short-term investments.

The Partnership Agreement provides for the dissolution of the Partnership upon
the occurrence of certain events, including the disposition of all its
interests in real estate. The Partnership sold its final real estate investment
in September 1997. The Partnership has retained a portion of the cash from the
property sales to satisfy obligations of the Partnership, as well as to
establish a reserve for contingencies. The timing of the termination of the
Partnership and final distribution of cash will depend upon the nature and
extent of liabilities and contingencies which exist or may arise. Such
contingencies may include legal and other fees and costs stemming from
litigation involving the Partnership including, but not limited to, the Bruss
and Masri lawsuits discussed in "Item 3. Legal Proceedings". Due to this
litigation, the Partnership will not be dissolved and reserves will be held by
the Partnership until the conclusion of such contingencies. There can be no
assurances as to the time frame for the conclusion of all contingencies.

The Partnership made distributions in 1998 and 1997 totaling $12.18 and $174.02
per Limited Partnership Interest, respectively. No distributions were made in
1999. See Statements of Partners' Capital for additional information.
Distributions were comprised of $7.25 per Interest of Net Cash Receipts and
$4.93 per Interest of Net Cash Proceeds in 1998 and $15.00 per Interest of Net
Cash Receipts and $159.02 per Interest of Net Cash Proceeds in 1997.

Limited Partners have received cumulative distributions of Net Cash Receipts of
$59.75 per $1,000 Interest and Net Cash Proceeds of $363.95 per $1,000
Interest, totaling $423.70 per $1,000 Interest. No additional distributions are
anticipated to be made prior to the termination of the Partnership. However,
after paying final partnership expenses, any remaining cash reserves will be

distributed. Limited Partners will not recover a substantial portion of their
original investment.

The Partnership believes that its key vendors were Year 2000 compliant with
respect to the Partnership's operations as of December 31, 1999 and that there
was no material effect on the business, financial position or results of
operations of the Partnership related to Year 2000 issues.

Certain statements in this report constitute "forward looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. These
statements may include statements regarding income or losses as well as
assumptions relating to the foregoing.

The forward-looking statements made by the Partnership are subject to known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Partnership to differ from any
future results, performance or achievements expressed or implied by the
forward-looking statements.

Item 7a. Quantitative and Qualitative Disclosures About Market Risk
-------------------------------------------------------------------

The supplemental financial information specified by Item 305 of Regulation S-K
is not applicable.

Item 8. Financial Statements and Supplementary Data
---------------------------------------------------

See Index to Financial Statements in this Form 10-K.

The supplemental financial information specified by Item 302 of Regulation S-K
is not applicable.

The net effect of the differences between the financial statements and the tax
returns is summarized as follows:

                          December 31, 1999           December 31, 1998
                      ----------------------      -----------------------
                        Financial     Tax          Financial       Tax
                       Statements   Returns       Statements      Returns
                      -----------  ---------      -----------     --------

Total assets           $1,613,805 $8,128,407       $1,653,365   $8,167,967
Partners' Capital
  (deficit)
  accounts:
    General Partner      (308,517)  (307,663)        (308,517)    (307,663)
    Limited Partners    1,816,436  8,330,445        1,882,994    8,397,003
Net (loss) income:
    General Partner          None       None             None          854
    Limited Partners      (66,558)   (66,558)        (115,364)    (130,236)
    Per Limited Part-
      nership Interest      (1.13)(A)  (1.13)           (1.95)(A)    (2.20)

(A) Amount represents basic and diluted net loss per Limited Partnership
Interest.

Item 9. Changes in and Disagreements with Accountants on Accounting and
-----------------------------------------------------------------------
Financial Disclosure
--------------------

There have been no changes in or disagreements with accountants on any matter
of accounting principles, practices or financial statement disclosure.

                                   PART III

Item 10. Directors and Executive Officers of the Registrant
-----------------------------------------------------------

(a) Neither the Registrant nor Balcor Partners-XVIII, its General Partner, has
a Board of Directors.

(b, c & e) The names, ages and business experience of the executive officers
and significant employees of the General Partner of the Registrant are as
follows:

          TITLE                                OFFICERS

Chairman, President and Chief                Thomas E. Meador
   Executive Officer
Senior Managing Director, Chief              Jayne A. Kosik
   Financial Officer, Treasurer
   and Assistant Secretary

Thomas E. Meador (age 52) joined Balcor in July 1979. He is Chairman, President
and Chief Executive Officer and has responsibility for all ongoing day-to-day
activities at Balcor. He is a member of the board of directors of The Balcor
Company. He is also Senior Vice President of American Express Company and is
responsible for its real estate operations worldwide. Prior to joining Balcor,
Mr. Meador was employed at the Harris Trust and Savings Bank in the commercial
real estate division where he was involved in various lending activities. Mr.
Meador received his M.B.A. degree from the Indiana University Graduate School
of Business.

Mr. Meador is on the Board of Directors of AMLI Commercial Properties Trust, a
private real estate investment trust that owns office and industrial buildings
in the Chicago, Illinois area. Mr. Meador was elected to the Board of AMLI
Commercial Properties Trust in August 1998.

Jayne A. Kosik (age 42) joined Balcor in August 1982 and, as Chief Financial
Officer, is responsible for Balcor's financial, human resources and treasury
functions. Ms. Kosik is also a member of the board of directors of The Balcor
Company. From June 1989 until October 1996, Ms. Kosik had supervisory
responsibility for accounting functions relating to Balcor's public and private
partnerships. She is also Treasurer and a Senior Managing Director of The
Balcor Company. Ms. Kosik is a Certified Public Accountant.

(d) There is no family relationship between any of the foregoing officers.

(f) None of the foregoing officers or employees are currently involved in any
material legal proceedings nor were any such proceedings terminated during the
fourth quarter of 1999 except that Mr. Meador is named, in his capacity as an
officer of Balcor, as a defendant in the Madison/Dee lawsuit described in "Item
3. Legal Proceedings".

Item 11. Executive Compensation
-------------------------------

The Registrant has not paid and does not propose to pay any remuneration to the
executive officers and directors of the General Partner. The executive officers

receive compensation from The Balcor Company (but not from the Registrant) for
services performed for various affiliated entities, which may include services
performed for the Registrant. However, the General Partner believes that any
such compensation attributable to services performed for the Registrant is
immaterial to the Registrant. See Note 9 of Notes to Financial Statements for
information relating to transactions with affiliates.

Item 12. Security Ownership of Certain Beneficial Owners and Management
-----------------------------------------------------------------------

(a)  The following entities are the sole Limited Partners which own
beneficially more than 5% of the outstanding Limited Partnership Interests of
the Registrant:


                    Name and            Amount and
                    Address of          Nature of      Percent
                    Beneficial          Beneficial     of
Title of Class      Owner               Ownership      Class
---------------     -----------       ------------    ------------

Limited             WIG 85-III          3,456.50       5.85%
Partnership         Partners            Limited
Interests           Chicago,            Partnership
                    Illinois            Interests

Limited             Metropolitan        2,567.00       4.34%
Partnership         Acquisition VII,    Limited
Interests           L.L.C. Greenville,  Partnership
                    South Carolina      Interests

While Metropolitan Acquisition VII, L.L.C. individually owns less than 5% of
the Interests, for purposes of this Item 12, Metropolitan Acquisition VII,
L.L.C. is an affiliate of WIG 85-III Partners and, collectively, they own
10.19% of the Interests.

(b) Balcor Partners-XVIII and its officers and partners own as a group the
following Limited Partnership Interests of the Registrant:

                                      Amount
                                    Beneficially
               Title of Class          Owned            Percent of Class
               --------------      -------------        ----------------
               Limited Partnership
                 Interests             None                  None

As of December 31, 1999 the relatives of the officers and affiliates of the
partners of the General Partner owned 128 Interests.

In addition, Balcor LP Corp., an affiliate of the General Partner, holds title
to 60 Limited Partnership Interests in the Partnership due exclusively to
instances in which Limited Partners abandoned title to their Limited
Partnership Interests. Balcor LP Corp. is a nominee holder only of such
Interests and has disclaimed any economic or beneficial ownership in said
Interests. All distributions of cash payable with respect to such Interests
held by Balcor LP Corp. are returned to the Partnership for distribution to
other Limited Partners in accordance with the Partnership Agreement.

(c)  The Registrant is not aware of any arrangements, the operation of which
may result in a change of control of the Registrant.

Item 13. Certain Relationships and Related Transactions
-------------------------------------------------------

(a & b) See Note 4 of Notes to Financial Statements for information relating to
the Partnership Agreement and the allocation of distributions and profits and
losses.

See Note 9 of Notes to Financial Statements for additional information relating
to transactions with affiliates.

(c) No management person is indebted to the Registrant.

(d) The Registrant has no outstanding agreements with any promoters.

                                    PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
------------------------------------------------------------------------

(a)
(1 & 2) See Index to Financial Statements in this Form 10-K.

(3) Exhibits:

(3) The Amended and Restated Agreement and Certificate of Limited Partnership,
set fourth as Exhibit 3 to Amendment No. 1 to the Registrant's Registration
Statement on Form S-11 dated August 2, 1985 (Registration No. 2-97249), is
incorporated herein by reference.

(4) Form of Subscription Agreement set forth as Exhibit 4.1 to Amendment No. 1
to the Registrant's Registration Statement on Form S-11 dated August 2, 1985
(Registration No. 2-97249), and Form of Confirmation regarding Interests in the
Partnership set forth as Exhibit 4.2 to the Registrant's Report on Form 10-Q
for the quarter ended June 30, 1992 are incorporated herein by reference.

(27) Financial Data Schedule of the Registrant for 1999 is attached hereto.

(b) Reports on Form 8-K: No reports were filed on Form 8-K during the quarter
ended December 31, 1999.

(c) Exhibits: See Item 14(a)(3) above.

SIGNATURES

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

                              BALCOR REALTY INVESTORS 85-SERIES III
                              A REAL ESTATE LIMITED PARTNERSHIP


                              By: /s/Jayne A. Kosik
                                  ---------------------------------
                                     Jayne A. Kosik
                                  Senior Managing Director and Chief
                                  Financial Officer (Principal
                                  Accounting and Financial Officer)
                                  of Balcor Partners-XVIII, the
                                  General Partner

Date: March 28, 2000
      --------------

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.


       Signature                      Title                     Date
----------------------   -------------------------------    --------------
                         President and Chief Executive
                         Officer (Principal Executive
                         Officer) of Balcor Partners-XVIII,
                         the General Partner
/s/Thomas E. Meador                                         March 28, 2000
-------------------                                         --------------
   Thomas E. Meador

                         Senior Managing Director and Chief
                         Financial Officer (Principal
                         Accounting and Financial Officer) of
                         Balcor Partners-XVIII,
                         the General Partner
/s/Jayne A. Kosik                                           March 28, 2000
-----------------                                           --------------
   Jayne A. Kosik

                         INDEX TO FINANCIAL STATEMENTS

Report of Independent Accountants

Financial Statements:

Balance Sheets, December 31, 1999 and 1998

Statements of Partners' Capital (Deficit), for the years ended December 31,
1999, 1998 and 1997

Statements of Income and Expenses, for the years ended December 31, 1999, 1998
and 1997

Statements of Cash Flows, for the years ended December 31, 1999, 1998 and 1997

Notes to Financial Statements

Financial Statement Schedules are omitted for the reason that they are
inapplicable or equivalent information has been included elsewhere herein.

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Partners of
Balcor Realty Investors 85-Series III A Real Estate Limited Partnership

In our opinion, the accompanying balance sheets and the related statements of
partners' capital (deficit), of income and expenses and of cash flows present
fairly, in all material respects, the financial position of Balcor Realty
Investors 85-Series III A Real Estate Limited Partnership (An Illinois Limited
Partnership, "the Partnership") at December 31, 1999 and 1998, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. 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
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.

As described in Note 2 to the financial statements, the partnership agreement
provides for the dissolution of the Partnership upon the occurrence of certain
events, including the disposition of all its interests in real estate. The
Partnership no longer has an ownership interest in any real estate investment.
As described in Note 13, the Partnership has contingencies related to
litigation. Upon resolution of the litigation contingency matters, the
Partnership intends to cease operations and dissolve.


PricewaterhouseCoopers LLP

Chicago, Illinois
March 28, 2000

                    BALCOR REALTY INVESTORS 85 - SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (AN ILLINOIS LIMITED PARTNERSHIP)

                                BALANCE SHEETS
                          December 31, 1999 and 1998

                                    ASSETS

                                                  1999           1998
                                              ------------   -------------
Cash and cash equivalents                    $  1,605,903   $   1,646,332
Accounts and accrued interest
  receivable                                        7,902           7,033
                                              ------------   -------------
                                             $  1,613,805   $   1,653,365
                                              ============   =============


                           LIABILITIES AND PARTNERS' CAPITAL

Accounts payable                             $     74,305   $      57,724
Due to affiliates                                  31,581          21,164
                                              ------------   -------------
    Total liabilities                             105,886          78,888
                                              ------------   -------------
Commitments and contingencies

Limited Partners' capital (59,092
  Limited Partnership Interests issued
  and outstanding)                              1,816,436       1,882,994
General Partner's deficit                        (308,517)       (308,517)
                                              ------------   -------------
    Total partners' capital                     1,507,919       1,574,477
                                              ------------   -------------
                                             $  1,613,805   $   1,653,365
                                              ============   =============

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

                    BALCOR REALTY INVESTORS 85 - SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (AN ILLINOIS LIMITED PARTNERSHIP)

                   STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
             for the years ended December 31, 1999, 1998 and 1997


                                  Partners' Capital (Deficit) Accounts
                                ------------------------------------------
                                                 General        Limited
                                   Total         Partner        Partners
                                ------------   ------------   ------------
Balance at December 31, 1996   $  3,646,860   $   (348,962)  $  3,995,822

Cash distributions to Limited
  Partners  (A)                 (10,283,190)                  (10,283,190)
Deemed distribution (B)            (500,145)                     (500,145)
Net income for the year
  ended December 31, 1997         9,546,094         40,445      9,505,649
                                ------------   ------------   ------------
Balance at December 31, 1997      2,409,619       (308,517)     2,718,136

Cash distributions to Limited
  Partners  (A)                    (719,778)                     (719,778)
Net loss for the year
  ended December 31, 1998          (115,364)                     (115,364)
                                ------------   ------------   ------------
Balance at December 31, 1998      1,574,477       (308,517)     1,882,994

Net loss for the year
  ended December 31, 1999           (66,558)                      (66,558)
                                ------------   ------------   ------------
Balance at December 31, 1999   $  1,507,919   $   (308,517)  $  1,816,436
                                ============   ============   ============

(A) Summary of cash distributions paid per Limited Partnership Interest:

                                    1999           1998           1997
                                ------------   ------------   ------------
        First Quarter                   None  $       12.18  $      74.50
        Second Quarter                  None           None         11.52
        Third Quarter                   None           None         50.00
        Fourth Quarter                  None           None         38.00


(B) This amount represents state withholding taxes paid on behalf of the
    Limited Partners relating to the gain on the sales of the North Hill
    and Howell Station apartment complexes.

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

                    BALCOR REALTY INVESTORS 85 - SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (AN ILLINOIS LIMITED PARTNERSHIP)

                       STATEMENTS OF INCOME AND EXPENSES
             for the years ended December 31, 1999, 1998 and 1997


                                    1999           1998           1997
                                ------------   ------------   ------------
Income:
  Rental and service                                         $  2,895,058
  Interest on short-term
    investments                $     79,216   $     86,043        223,352
  Other                                              7,972         25,986
                                ------------   ------------   ------------
    Total income                     79,216         94,015      3,144,396
                                ------------   ------------   ------------
Expenses:
  Interest on mortgage
    notes payable                                               1,109,915
  Depreciation                                                    505,448
  Amortization of deferred
    expenses                                                       90,088
  Property operating                                17,455      1,023,498
  Real estate taxes                                               259,058
  Property management fees                                        147,902
  Administrative                    145,774        191,924        395,426
                                ------------   ------------   ------------
    Total expenses                  145,774        209,379      3,531,335
                                ------------   ------------   ------------
Loss before gain on
  sales, affiliates'
  participation in joint
  ventures and extraordinary
  items                             (66,558)      (115,364)      (386,939)
Gain on sales of properties                                    11,416,395
Affiliates' participation
  in income from
  joint ventures before
  extraordinary items                                          (1,606,722)
                                ------------   ------------   ------------
(Loss) income before
  extraordinary items               (66,558)      (115,364)     9,422,734
                                ------------   ------------   ------------

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

                    BALCOR REALTY INVESTORS 85 - SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (AN ILLINOIS LIMITED PARTNERSHIP)

                       STATEMENTS OF INCOME AND EXPENSES
             for the years ended December 31, 1999, 1998 and 1997
                                  (Continued)


                                    1999           1998           1997
                                ------------   ------------   ------------
Extraordinary items:
  Debt extinguishment expense                                  (1,059,093)
  Affiliate's participation in
    in debt extinguishment
    expense                                                       169,953
  Gain on forgiveness of debt                                   1,350,000
  Affiliate's participation in
    gain on forgiveness
    of debt                                                      (337,500)
                                                              ------------
Total extraordinary items                                         123,360
                                ------------   ------------   ------------
Net (loss) income              $    (66,558)  $   (115,364)  $  9,546,094
                                ============   ============   ============
(Loss) income before
  extraordinary items
  allocated to General Partner          None           None  $     39,922
                                ============   ============   ============
(Loss) income before
 extraordinary items
 allocated to Limited Partners $    (66,558)  $   (115,364)  $  9,382,812
                                ============   ============   ============
(Loss) income before
  extraordinary items per
  Limited Partnership Interest
  (59,092 issued and
  outstanding) - Basic
  and Diluted                  $      (1.13)  $      (1.95)  $     158.78
                                ============   ============   ============
Extraordinary items allocated
  to General Partner                    None           None  $        523
                                ============   ============   ============
Extraordinary items allocated
  to Limited Partners                   None           None  $    122,837
                                ============   ============   ============
Extraordinary items per Limited
  Partnership Interest
 (59,092 issued and
  outstanding) - Basic
  and Diluted                           None           None  $       2.08
                                ============   ============   ============

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

                    BALCOR REALTY INVESTORS 85 - SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (AN ILLINOIS LIMITED PARTNERSHIP)

                       STATEMENTS OF INCOME AND EXPENSES
             for the years ended December 31, 1999, 1998 and 1997
                                  (Continued)


                                    1999           1998           1997
                                ------------   ------------   ------------
Net (loss) income allocated to
  General Partner                       None           None  $     40,445
                                ============   ============   ============
Net (loss) income allocated to
  Limited Partners             $    (66,558)  $   (115,364)  $  9,505,649
                                ============   ============   ============
Net (loss) income per Limited
  Partnership Interest (59,092
  issued and outstanding) -
  Basic and Diluted            $      (1.13)  $      (1.95)  $     160.86
                                ============   ============   ============

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

                    BALCOR REALTY INVESTORS 85 - SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (AN ILLINOIS LIMITED PARTNERSHIP)

                           STATEMENTS OF CASH FLOWS
             for the years ended December 31, 1999, 1998 and 1997


                                    1999           1998           1997
                                ------------   ------------   ------------
Operating activities:
  Net (loss) income            $    (66,558)  $   (115,364)  $  9,546,094
  Adjustments to reconcile net
    (loss) income to net cash
    (used in) or provided by
    operating activities:
      Gain on sales of
        properties                                            (11,416,395)
      Debt extinguishment
        expense                                                   775,635
      Gain on forgiveness of
        debt                                                   (1,350,000)
      Affiliate's participation
        in debt extinguishment
        expense                                                  (169,953)
      Affiliate's participation
        in gain on forgiveness
        of debt                                                   337,500
      Affiliates' participation
        in income from
        joint ventures                                          1,606,722
      Depreciation of
        properties                                                505,448
      Amortization of deferred
        expenses                                                   90,088
      Net change in:
        Escrow deposits                                           338,176
        Accounts and accrued
          interest receivable          (869)        51,640         34,518
        Prepaid expenses                                           59,888
        Accounts payable             16,581         23,763         (5,045)
        Due to affiliates            10,417         (8,209)       (56,131)
        Security deposits                                        (159,650)
                                ------------   ------------   ------------
  Net cash (used in) or
    provided by operating
    activities                      (40,429)       (48,170)       136,895
                                ------------   ------------   ------------

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

                    BALCOR REALTY INVESTORS 85 - SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (AN ILLINOIS LIMITED PARTNERSHIP)

                           STATEMENTS OF CASH FLOWS
             for the years ended December 31, 1999, 1998 and 1997
                                  (Continued)


                                   1999           1998           1997
                                ------------   ------------   ------------
Investing activities:
  Proceeds from sales of
    properties                                                $14,529,476
  Payment of selling costs                                       (899,132)
  Distributions from joint
    ventures with affiliates                                    1,046,660
                                                              ------------
  Net cash provided by
    investing activities                                       14,677,004
                                                              ------------
Financing activities:
  Distributions to Limited
    Partners                                  $   (719,778)   (10,283,190)
  Deemed distribution to
    Limited Partners                                             (595,459)
  Distributions to joint
    venture partners -
    affiliates                                                 (1,179,284)
  Repayment of mortgage notes
    payable                                                    (6,443,945)
  Release of capital
    improvement escrows                                           358,178
  Principal payments on
    mortgage notes payable                                       (143,959)
                                               ------------   ------------
  Net cash used in financing
    activities                                    (719,778)   (18,287,659)
                                               ------------   ------------
Net change in cash and cash
  equivalents                  $    (40,429)      (767,948)    (3,473,760)
Cash and cash equivalents at
  beginning of year               1,646,332      2,414,280      5,888,040
                                ------------   ------------   ------------
Cash and cash equivalents at
  end of year                  $  1,605,903   $  1,646,332   $  2,414,280
                                ============   ============   ============

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

                     BALCOR REALTY INVESTORS 85-SERIES III
                       A REAL ESTATE LIMITED PARTNERSHIP
                       (An Illinois Limited Partnership)

                         NOTES TO FINANCIAL STATEMENTS

1. Nature of the Partnership's Business:

Balcor Realty Investors 85-Series III A Real Estate Limited Partnership (the
"Partnership") has retained cash reserves from the sale of its real estate
investments for contingencies which exists or may arise. The Partnership's
operations currently consist of interest income earned on short-term
investments and the payment of administrative expenses.

2. Partnership Termination:

The Partnership Agreement provides for the dissolution of the Partnership upon
the occurrence of certain events, including the disposition of all its
interests in real estate. The Partnership sold its final real estate investment
in September 1997. The Partnership has retained a portion of the cash from the
property sales to satisfy obligations of the Partnership, as well as to
establish a reserve for contingencies. The timing of the termination of the
Partnership and final distribution of cash will depend upon the nature and
extent of liabilities and contingencies which exist or may arise. Such
contingencies may include legal and other fees and costs stemming from
litigation involving the Partnership including, but not limited to, the Bruss
and Masri lawsuits discussed in Note 13 of Notes to the Financial Statements.
Due to this litigation, the Partnership will not be dissolved and reserves will
be held by the Partnership until the conclusion of such contingencies. There
can be no assurances as to the time frame for the conclusion of all
contingencies.

3. Accounting Policies:

(a) The preparation of the financial statements in conformity with generally
accepted accounting principles requires the General Partner to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent 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 vary from those estimates.

(b) Depreciation expense was computed using the straight-line method. Rates
used in the determination of depreciation were based upon the following
estimated useful lives:

     Buildings and improvements                   30 years
     Furniture and fixtures                        5 years

Maintenance and repairs were charged to expense when incurred. Expenditures for
improvements were charged to the related asset account.

As properties were sold, the related costs and accumulated depreciation were
removed from the respective accounts. Any gain or loss on disposition was
recognized in accordance with generally accepted accounting principles.

(c) The Partnership recorded its investments in real estate at the lower of
cost or fair value, and periodically assessed, but not less than on an annual

basis, possible impairment to the value of its properties. The General Partner
estimated the fair value of its properties based on the current sales price
less estimated closing costs. The General Partner determined that no impairment
in value had occurred prior to the sales of the properties. The General Partner
considered the method referred to above to result in a reasonable measurement
of a property's fair value, unless other factors affecting the property's value
indicated otherwise.

(d) Deferred expenses consisted of loan financing and modification fees which
were amortized over the terms of the respective agreements. Upon sale, any
remaining unamortized balance was recognized as debt extinguishment expense and
classified as an extraordinary item.

(e) The Partnership calculates the fair value of its financial instruments
based on estimates using present value techniques. The Partnership includes
this additional information in the notes to the financial statements when the
fair value is different than the carrying value of those financial instruments.
When the fair value reasonably approximates the carrying value, no additional
disclosure is made.

(f) In order for the capital account balances to appropriately reflect the
partners' remaining economic interests in the Partnership Agreement, the income
(loss) allocations have been adjusted.

(g) Cash and cash equivalents include all unrestricted, highly liquid
investments with an original maturity of three months or less. Cash is held or
invested in one financial institution.

(h) The Partnership is not liable for Federal income taxes and each partner
recognizes his proportionate share of the Partnership income or loss in his tax
return; therefore, no provision for income taxes is made in the financial
statements of the Partnership.

(i) Revenue is recognized on an accrual basis in accordance with generally
accepted accounting principles.

(j) Investment in joint venture with an affiliate represented the Partnership's
40.25% interest, under the equity method of accounting, in a joint venture with
an affiliated partnership. Under the equity method of accounting, the
Partnership recorded its initial investment at cost and adjusted its investment
account for additional capital contributions, distributions and its share of
joint venture income or loss.

(k) Statement of Financial Accounting Standards, No. 128, "Earnings per Share"
was adopted by the Partnership effective for the year-ended December 31, 1997.
Since the Partnership has no dilutive securities, there is no difference
between basic and diluted net income (loss) per Limited Partnership Interest.

4. Partnership Agreement:

The Partnership was organized on October 25, 1984. The Partnership Agreement
provides for Balcor Partners-XVIII to be the General Partner and for the
admission of Limited Partners through the sale of up to 70,000 Limited
Partnership Interests at $1,000 per Interest, 59,092 of which were sold on or
prior to December 31, 1985, the termination date of the offering.

Pursuant to the Partnership Agreement, Partnership income and losses were to be
allocated 99% to the Limited Partners and 1% to the General Partner. In order
for the capital account balances to appropriately reflect the partners'
remaining economic interests in the Partnership Agreement, the income (loss)
allocations have been adjusted.

Pursuant to the Partnership Agreement, one hundred percent of Net Cash Receipts
available for distribution was distributed to the holders of Interests in
proportion to their participating percentages as of the record date for such
distributions. Under certain circumstances, the General Partner would have
participated in the Net Cash Proceeds of the sale or refinancing of Partnership
properties. Since the required subordination levels were not met, the General
Partner has not received any distributions of Net Cash Receipts or Net Cash
Proceeds during the lifetime of the Partnership.

5. Mortgage Notes Payable:

During 1997, the Partnership incurred interest expense on mortgage notes
payable of $1,109,915 and paid interest expense of $1,122,982.

6. Management Agreements:

The Partnership's properties were managed by a third party management company
prior to the sale of the properties. These management agreements provided for
annual fees of 5% of gross operating receipts.

7. Affiliates' Participation in Joint Ventures:

The North Hill Apartments was owned by a joint venture consisting of the
Partnership and an affiliated partnership. The North Hill Apartments was sold
in 1997. Profits and losses were allocated 75% to the Partnership and 25% to
the affiliate. All assets, liabilities, income and expenses of the joint
venture were included in the financial statements of the Partnership with the
appropriate adjustment to profit or loss for the affiliate's participation. Net
distributions of $1,274,598 were made to the joint venture partner during 1997.
See Notes 10 and 11 of Notes to Financial Statements for additional
information.

8. Tax Accounting:

The Partnership keeps its books in accordance with the Internal Revenue Code,
rules and regulations promulgated thereunder and existing interpretations
thereof. The accompanying financial statements, which are prepared in
accordance with generally accepted accounting principles, differed in prior
years from the tax returns due to the different treatment of various items as
specified in the Internal Revenue Code. The net loss for 1999 in the financial
statements is equal to the tax loss of the Partnership for the same period.

9. Transactions with Affiliates:

Fees and expenses paid and payable by the Partnership to affiliates are:

                              Year Ended      Year Ended    Year Ended
                               12/31/99        12/31/98      12/31/97
                            --------------  --------------  -------------
                            Paid   Payable  Paid  Payable  Paid  Payable
                            -----  -------  ----- -------  ----- -------
Reimbursement of expenses
  to the General Partner,
  at cost:
     Accounting            $7,726   $7,071 $6,029  $4,081 $31,829 $6,337
     Data processing        4,798    8,192  2,328     872   3,991  1,456
     Legal                  3,083    4,284  4,417   3,001  20,483  6,950
     Portfolio management  11,690   12,034 19,347  13,210  75,807 13,598
     Property sales
       administration        None     None  1,032    None  70,769  1,032

Subject to the provisions of the partnership agreement, the Partnership has
agreed to advance the legal fees incurred by the General Partner in defending
the Madison Partnership lawsuit discussed in Note 13 of Notes to Financial
Statements.

10. Property Sales:

(a) In May 1997, the Partnership sold the Howell Station Apartments in an all
cash sale for $10,000,000. From the proceeds of the sale, the Partnership paid
$6,443,945 to the third party mortgage holder in full satisfaction of the first
mortgage loan, $283,458 of prepayment penalties and $272,478 in selling costs.
In addition, the Partnership paid a state withholding tax of $214,203 on behalf
of the Limited Partners relating to the gain on sale of the property which has
been recorded as a deemed distribution for financial statement purposes. The
basis of the property was $4,881,076, which is net of accumulated depreciation
of $3,209,515. For financial statement purposes, the Partnership recognized a
gain of $4,846,446 from the sale of this property.

(b) The North Hill Apartments was owned by a joint venture consisting of the
Partnership and an affiliate. The Partnership and the affiliate held
participating percentages in the joint venture of 75% and 25%, respectively. In
September 1997, the joint venture sold the property for a sales price of
$21,000,000. The purchaser of the property took title subject to the existing
first mortgage loan in the amount of $16,470,524, which represents a noncash
transaction to the Partnership. Accordingly, the noncash aspect of this
transaction is not presented in the Partnership's Statements of Cash Flows.
From the proceeds of the sale, the joint venture paid $164,705 in fees relating
to the assumption of the mortgage loan by the purchaser and $461,949 in selling
costs. In addition, a state withholding tax of $381,256 was paid relating to
the gain on sale of the property which has been recorded as a deemed
distribution for financial statement purposes, of which $95,314 was the
minority joint venture partner's share. The basis of the property was
$13,803,397, which is net of accumulated depreciation of $9,035,587. For
financial statement purposes, the joint venture recognized a gain of $6,569,949
from the sale of this property, of which $1,642,542 is the minority joint
venture partner's share.

11. Extraordinary Items:

(a) In connection with the sale of the Howell Station Apartments during 1997,
the Partnership wrote-off the remaining unamortized financing fees of $95,822
and paid a prepayment penalty of $283,458. In connection with the sale of the

North Hill Apartments during 1997, the joint venture wrote-off the remaining
unamortized deferred financing fees of $617,919, of which $154,480 represents
the North Hill Apartments minority joint venture partner's share. Additionally,
in connection with the 1994 bond refinancing of the North Hill Apartments, the
joint venture paid a bond discount fee of $84,400 which was recorded as a
reduction of the underlying mortgage balance. In connection with the 1997 sale
of the property, the remaining unamortized balance of the discount fee of
$61,894 was written off. The minority joint venture partner's share of this
amount was $15,473. These amounts were recognized as extraordinary items and
classified as debt extinguishment expense for financial statement purposes.

(b) In connection with the 1994 bond refinancing of the North Hill Apartments,
the joint venture was obligated under a $1,350,000 non-interest bearing note
from an unaffiliated party, which was to be repaid only to the extent that net
sales proceeds exceeded a certain predetermined level. The net proceeds
received from the sale of the property did not meet the required level.
Therefore, the note was not repaid and has been forgiven, which resulted in an
extraordinary gain on forgiveness of debt of $1,350,000 for financial statement
purposes, of which $337,500 represents the minority joint venture partner's
share.

12. Other Income:

The Partnership recognized other income during 1998 in connection with a refund
of state income taxes relating to the gain on the 1996 sale of the Country
Ridge Apartments and during 1997 primarily in connection with a partial refund
of prior years' insurance premiums relating to the Partnership's properties.

13. Contingencies:

(a) The Partnership is currently involved in two related lawsuits, Masri vs.
Lehman Brothers, Inc., et al. and Bruss, et al. vs. Lehman Brothers, Inc., et
al., whereby the Partnership and certain affiliates have been named as
defendants alleging substantially similar claims involving certain state
securities and common law violations with regard to the property acquisition
process of the Partnership, and to the adequacy and accuracy of disclosures of
information concerning, as well as marketing efforts related to, the offering
of the Limited Partnership Interests of the Partnership. The defendants
continue to vigorously contest these actions. A plaintiff class has not been
certified in either action. With respect to the Masri case, no determinations
upon any significant issues have been made. The Bruss complaint was filed on
January 25, 1999. On September 24, 1999, the court granted the defendants'
motion to dismiss the complaint for failure to state a cause of action. The
plaintiffs filed an amended complaint on November 30, 1999. The defendants have
filed a motion to dismiss the complaint for failure to state a cause of action.
The defendants continue to vigorously contest these actions. The Partnership
believes it has meritorious defenses to contest the claims. It is not
determinable at this time how the outcome of either action will impact the
remaining cash reserves of the Partnership.

(b) In May 1999, a lawsuit was filed, Madison Partnership Liquidity Investors
XX, et al. vs. The Balcor Company, et al. whereby the General Partner and
certain affiliates have been named as defendants. The plaintiffs are entities
that initiated tender offers to purchase and, in fact, purchased units in
eleven affiliated partnerships. The complaint alleges breach of fiduciary
duties and breach of contract under the partnership agreement and seeks the
winding up of the affairs of the Partnership, the establishment of a

liquidating trust, the appointment of an independent trustee for the trust and
the distribution of a portion of the cash reserves to limited partners. On June
1, 1999, a second lawsuit was filed and was served on August 16, 1999, Sandra
Dee vs. The Balcor Company, et al. The Dee complaint is virtually identical to
the Madison Partnership complaint and on September 20, 1999 was consolidated
into the Madison Partnership case. On January 19, 2000, a hearing was held on
the defendants' motion to dismiss the complaint; at the hearing the class
allegations were struck regarding eleven of the partnerships, including the
Partnership. The defendants intend to vigorously contest these actions. It is
not determinable at this time how the outcome of these actions will impact the
remaining cash reserves of the Partnership.