<PAGE>

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION

                          Washington, D.C. 20549-1004

                                   FORM 10-Q

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

     For the period ended               September 30, 1998
                          -----------------------------------------------------

                                      OR

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

     For the transition period from                     to
                                     ------------------    --------------------

     Commission File Number                           0-14122
                                     ------------------------------------------

               First Capital Institutional Real Estate, Ltd. - 3
-------------------------------------------------------------------------------
            (Exact name of registrant as specified in its charter)


                         Florida                                36-3330657
--------------------------------------------------------    -------------------
             (State or other jurisdiction of                 (I.R.S. Employer
              incorporation or organization                 Identification No.)

Two North Riverside Plaza, Suite 1000, Chicago, Illinois        60606-2607
--------------------------------------------------------    -------------------
        (Address of principal executive offices)                (Zip Code)

                                (312) 207-0020
-------------------------------------------------------------------------------
             (Registrant's telephone number, including area code)

                                Not applicable
-------------------------------------------------------------------------------
             (Former name, former address and former fiscal year,
                         if changed since last report)

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

Documents incorporated by reference:

The First Amended and Restated Certificate and Agreement of Limited Partnership
filed as Exhibit A to the definitive Prospectus dated January 17, 1985, included
in the Registrant's Registration Statement on Form S-11, is incorporated herein
by reference in Part I of this report.
<PAGE>
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Reference is made to the Partnership's Annual Report for the year ended
December 31, 1997 for a discussion of the Partnership's business.
 
Statements contained in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, which are not historical facts, may be
forward-looking statements. Such statements are subject to certain risks and
uncertainties, which could cause actual results to differ materially from those
projected. Readers are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of the date hereof.
 
One of the Partnership's objectives is to dispose of its properties when market
conditions allow for the achievement of the maximum possible sales price.
During the disposition phase of the Partnership's life cycle, comparisons of
operating results are complicated due to the timing and effect of property
sales. Partnership operations are generally expected to decline as real
property interests are sold since the Partnership no longer realizes the net
income generated from such real property interests. During the quarter and nine
months ended September 30, 1998, the Partnership sold its remaining two real
property investments.
 
OPERATIONS
The table below is a recap of certain operating results of each of the
Partnership's properties (prior to their sales) for the quarters and nine
months ended September 30, 1998 and 1997. The discussion following the table
should be read in conjunction with the Financial Statements and Notes thereto
appearing in this report.
 
<TABLE>
<CAPTION>
                               Comparative Operating Results (a)
                             For the Quarters    For the Nine Months
                                  Ended                 Ended
                             9/30/98   9/30/97   9/30/98     9/30/97
----------------------------------------------------------------------
<S>                         <C>        <C>      <C>         <C>
ELLIS BUILDING (50%)
Rental revenues             $ 180,100  $317,100 $  840,700  $  956,400
----------------------------------------------------------------------
Property net income (b)     $  15,200  $109,400 $  261,600  $  328,600
----------------------------------------------------------------------
HOLIDAY OFFICE PARK NORTH AND SOUTH (50%)
Rental revenues             $ 428,600  $469,600 $1,236,900  $1,253,200
----------------------------------------------------------------------
Property net income (b)     $ 114,000  $108,500 $  284,900  $  280,500
----------------------------------------------------------------------
PROPERTIES SOLD DURING 1997 (C)
Rental revenues             $ (33,100) $400,900 $  (28,000) $1,205,100
----------------------------------------------------------------------
Property net (loss) income  $ (34,000) $ 50,400 $  (54,500) $  115,100
----------------------------------------------------------------------
</TABLE>
(a) The above table excludes certain income and expense items, which are not
    directly related to individual property operating results such as interest
    income and general and administrative expenses. The Partnership's share of
    results from its participation in a joint venture, treated on the equity
    method, is included above.
(b) Property net income excludes the gains recorded on the sales of the Ellis
    Building ("Ellis") and Holiday Office Park North and South ("Holiday"),
    which were sold August 21, 1998 and September 22, 1998, respectively.
(c) Includes results from 3120 Southwest Freeway Office Building ("Southwest
    Freeway") and Park Plaza Professional Building ("Park Plaza"), which were
    sold February 18, 1997 and December 18, 1997, respectively.
 
Unless otherwise disclosed, discussions of fluctuations between 1998 and 1997
refer to both the quarters and nine months ended September 30, 1998 and 1997.
 
Net income increased by $4,256,600 and $4,112,700 for the quarter and nine
months ended September 30, 1998 when compared to the quarter and nine months
ended September 30, 1997, respectively. The increases were primarily due to the
gains recorded on the 1998 sales of Ellis and Holiday. The increases were also
due to an increase in interest earned on the Partnership's short-term
investments, which was due to an increase in cash available for investment. The
increases were partially offset by diminished property net income resulting
from shortened holding periods due to the effects of the sales of Partnership
properties. The increase for the nine-month periods under comparison was also
partially offset by the 1997 gain recorded on the sale of Southwest Freeway.
 
LIQUIDITY AND CAPITAL RESOURCES
One of the Partnership's objectives is to dispose of its properties when market
conditions allow for the achievement of the maximum possible sales price.
Notwithstanding the Partnership's intention relative to property sales, another
primary objective of the Partnership is to provide cash distributions to
Partners from Partnership operations. To the extent cumulative cash
distributions exceed net income, such excess distributions are treated as a
return of capital. Cash Flow (as defined in the Partnership Agreement) is
generally not equal to net income or cash flows as determined by generally
accepted accounting principles ("GAAP"), since certain items are treated
differently under the Partnership Agreement than under GAAP. Management
believes that to facilitate a clear understanding of the Partnership's
operations, an analysis of Cash Flow (as defined in the Partnership Agreement)
should be examined in conjunction with an analysis of net income or cash flows,
as determined by GAAP. The following tables includes a reconciliation of Cash
Flow (as defined in the Partnership Agreement) to cash flow provided by
operating activities as determined by GAAP. Such amounts are not indicative of
actual distributions to Partners and should not necessarily be considered as an
alternative to the results disclosed in the Statements of Income and Expenses
and Statements of Cash Flows.
 
<TABLE>
<CAPTION>
                                                  Comparative
                                               Cash Flow Results
                                           For the Nine Months Ended
                                             9/30/98       9/30/97
----------------------------------------------------------------------
<S>                                        <C>           <C>
Cash Flow (as defined in the Partnership
 Agreement)                                $  1,240,600  $  1,607,300
Less: Cash Flow from joint venture             (525,100)     (497,000)
Items of reconciliation:
 (Increase) in current assets                   (25,800)       (1,100)
 (Decrease) in current liabilities              (44,100)      (61,700)
----------------------------------------------------------------------
Net cash provided by operating activities  $    645,600  $  1,047,500
----------------------------------------------------------------------
Net cash provided by investing activities  $  4,983,800  $    277,700
----------------------------------------------------------------------
Net cash (used for) financing activities   $ (9,212,000) $ (1,899,800)
----------------------------------------------------------------------
</TABLE>
 
The decrease in Cash Flow (as defined in the Partnership Agreement) of $366,700
for the nine months ended September 30, 1998 when compared to nine months ended
September 30, 1997 was primarily due to diminished operating results, exclusive
of depreciation and amortization and the gains on the sales of Ellis, Holiday
and Southwest Freeway, as previously discussed.
 
                                                                               2
<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
 
 
The decrease in the Partnership's cash of $3,582,600 for the nine months ended
September 30, 1998 was primarily the result of investments in debt securities
and distributions paid to Partners exceeding cash provided by sale proceeds,
operating results and distributions received from the Partnership's equity
investment in Holiday. Liquid assets (including cash, cash equivalents and
investments in debt securities) are comprised of Sales Proceeds and amounts
previously retained as working capital reserves.
 
The decrease in net cash provided by operating activities of $401,900 for the
nine months ended September 30, 1998 when compared to the nine months ended
September 30, 1997 was primarily due to the decrease in operating results,
excluding depreciation and amortization on the Partnership's properties.
 
Net cash provided by investing activities increased by $4,706,100 for the nine
months ended September 30, 1998 when compared to the nine months ended
September 30, 1997. The increase was primarily due to the 1998 receipt of
proceeds from the sales of Ellis and Holiday exceeding the 1997 receipt of
proceeds from the sale of Southwest Freeway. The increase was partially offset
by an increase in the Partnership's investments in debt securities. The
increase in investments in debt securities is the result of the extension of
the maturities of certain of the Partnership's short-term investments in an
effort to maximize the return on these amounts as they are held prior to
distribution to Limited Partners. These investments are of investment-grade and
mature less than one year from their date of purchase.
 
The increase in net cash used for financing activities of $7,312,200 for the
nine months ended September 30, 1998 when compared to the nine months ended
September 30, 1997 was due primarily to an increase in distributions paid to
Partners. The 1998 special distribution of Park Plaza Sale Proceeds exceeded
the 1997 special distribution of Southwest Freeway Sale Proceeds.
 
On December 18, 1997, a joint venture in which the Partnership owned a 50%
interest completed the sale of Park Plaza. In connection with this sale, on May
31, 1998, Limited Partners of record as of December 18, 1997 were paid a
distribution of Sale Proceeds of $8,118,300 or $177.50 per Unit.
 
On August 21, 1998, a joint venture in which the Partnership owned a 50%
interest completed the sale of Ellis. The Partnership's share of net proceeds
from this transaction amounted to $6,679,000, which was net of actual and
estimated closing expenses. The Partnership intends to distribute $6,673,000 or
$145.90 per Unit on February 28, 1999 to Limited Partners of record as of
August 21, 1998.
 
On September 22, 1998, the Partnership's investment in joint venture completed
the sale of Holiday. The Partnership's share of net proceeds from this
transaction amounted to $6,526,800, which was net of actual and estimated
closing expenses. The Partnership intends to distribute $6,499,700 or $142.11
per Unit on February 28, 1999 to Limited Partners of record as of September 22,
1998.
 
The Year 2000 problem is the result of the inability of existing computer
programs to distinguish between a year beginning with "20" rather than "19".
This is the result of computer programs using two rather than four digits to
define an applicable year. If not corrected, any program having time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a variety of problems including miscalculations,
loss of data and failure of entire systems. Critical areas that could be
affected are accounts receivable, accounts payable, general ledger, cash
management, investor services, computer hardware and telecommunications
systems.
 
The Partnership has engaged Affiliated and unaffiliated entities to perform all
of its critical functions that utilize software that may have time-sensitive
applications. All of these service providers are providing these services for
their own organizations as well as for their clients. The General Partner, on
behalf of the Partnership, has been in close communication with each of these
service providers regarding steps that they are taking to assure that there
will be no serious interruption of the operations of the Partnership resulting
from Year 2000 problems. Based on the results of these inquires, as well as a
review of the disclosures by these service providers, the General Partner
believes that the Partnership will be able to continue normal business
operations and will incur no material costs related to Year 2000 issues.
 
The Partnership has not formulated a contingency plan. However, the General
Partner believes that based on the status of the Partnership's real estate
portfolio and its limited number of transactions, aside from catastrophic
failures of banks, governmental agencies, etc., it could carry out
substantially all of its critical operations on a manual basis or easily
convert to systems that are Year 2000 compliant.
 
Distributions to Limited Partners for the quarter ended September 30, 1998 were
declared in the amount of $320,100, or $7.00 per Unit. Cash distributions are
made 60 days after the last day of each fiscal quarter.
 
With the sale of Partnership's remaining properties, the General Partner has
begun the process of wrapping up the affairs of the Partnership. This process
will include the resolution of all post closing property sale matters as well
as an evaluation of all Partnership wrap-up matters. At the conclusion of this
process, the Partnership will set aside a reserve to meet wrap-up expenses as
well as actual and contingent liabilities of the Partnership. During 1999, the
Partnership expects to make a liquidating distribution to its Partners.
3
<PAGE>
 
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
 
FIRST CAPITAL INSTITUTIONAL REAL ESTATE, LTD.--3
BALANCE SHEETS
(All dollars rounded to nearest 00s)
 
<TABLE>
<CAPTION>
                                               September 30,
                                                   1998      December 31,
                                                (Unaudited)      1997
-------------------------------------------------------------------------
<S>                                            <C>           <C>
ASSETS
Investment in commercial rental property:
 Land                                           $            $   860,000
 Buildings and improvements                                    5,464,700
-------------------------------------------------------------------------
                                                               6,324,700
Accumulated depreciation and amortization                     (2,437,500)
-------------------------------------------------------------------------
 Total investment property, net of accumulated
  depreciation and amortization                                3,887,200
Cash and cash equivalents                         9,754,100   13,336,700
Investments in debt securities                    8,831,600
Restricted cash                                      50,000      100,000
Rents receivable                                     52,900       11,600
Investment in joint venture                                    5,311,400
Other assets                                         41,100       56,600
-------------------------------------------------------------------------
                                                $18,729,700  $22,703,500
-------------------------------------------------------------------------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
 Accounts payable and accrued expenses          $   221,500  $   163,900
 Due to Affiliates                                   69,300       73,000
 Distributions payable                           13,528,400    8,474,000
 Security deposits                                                26,400
 Other liabilities                                   10,000       52,800
-------------------------------------------------------------------------
                                                 13,829,200    8,790,100
-------------------------------------------------------------------------
Partners' capital:
 General Partner capital (deficit)                   14,400     (136,500)
 Limited Partners (45,737 Units issued and
  outstanding)                                    4,886,100   14,049,900
-------------------------------------------------------------------------
                                                  4,900,500   13,913,400
-------------------------------------------------------------------------
                                                $18,729,700  $22,703,500
-------------------------------------------------------------------------
</TABLE>
STATEMENTS OF PARTNERS' CAPITAL
For the nine months ended September 30, 1998 (Unaudited)
and the year ended December 31, 1997
(All dollars rounded to nearest 00s)
 
<TABLE>
<CAPTION>
                                          General     Limited
                                          Partner     Partners       Total
------------------------------------------------------------------------------
<S>                                      <C>        <C>           <C>
Partners' (deficit) capital, January 1,
 1997                                    $(183,300) $ 23,147,600  $22,964,300
Net income for the year ended
 December 31, 1997                         189,100     1,124,000    1,313,100
Distributions for the year ended
 December 31, 1997                        (142,300)  (10,221,700) (10,364,000)
------------------------------------------------------------------------------
Partners' (deficit) capital,
 December 31, 1997                        (136,500)   14,049,900   13,913,400
Net income for the nine months ended
 September 30, 1998                        257,700     4,969,400    5,227,100
Distributions for the nine months ended
 September 30, 1998                       (106,800)  (14,133,200) (14,240,000)
------------------------------------------------------------------------------
Partners' capital, September 30, 1998    $  14,400  $  4,886,100  $ 4,900,500
------------------------------------------------------------------------------
</TABLE>
                                                                               4
    The accompanying notes are an integral part of the financial statements.
<PAGE>
 
FIRST CAPITAL INSTITUTIONAL REAL ESTATE, LTD.--3
STATEMENTS OF INCOME AND EXPENSES
For the quarters ended September 30, 1998 and 1997
(Unaudited)
(All dollars rounded to nearest 00s
except per Unit amounts)
<TABLE>
<CAPTION>
                                                              1998      1997
------------------------------------------------------------------------------
<S>                                                        <C>        <C>
Income:
 Rental                                                    $  147,200 $718,000
 Interest                                                     130,600   93,100
 Gain on sale of property                                   2,947,200
------------------------------------------------------------------------------
                                                            3,225,000  811,100
------------------------------------------------------------------------------
Expenses:
 Depreciation and amortization                                 39,700  175,000
 Property operating:
 Affiliates                                                    15,500   49,300
 Nonaffiliates                                                 41,400  147,400
 Real estate taxes                                              8,300   60,200
 Insurance--Affiliate                                           1,500    6,600
 Repairs and maintenance                                       60,400  121,900
 General and administrative:
 Affiliates                                                     4,000    4,700
 Nonaffiliates                                                 23,700   27,600
------------------------------------------------------------------------------
                                                              194,500  592,700
------------------------------------------------------------------------------
Income before income from participation in joint venture    3,030,500  218,400
Income from participation in joint venture:
 Operations                                                   114,000  108,500
 Gain on sale of property                                   1,439,000
------------------------------------------------------------------------------
Net income                                                 $4,583,500 $326,900
------------------------------------------------------------------------------
Net income allocated to General Partner                    $  186,500 $ 35,600
------------------------------------------------------------------------------
Net income allocated to Limited Partners                   $4,397,000 $291,300
------------------------------------------------------------------------------
Net income allocated to Limited Partners per Unit (45,737
 Units outstanding)                                        $    96.14 $   6.37
------------------------------------------------------------------------------
</TABLE>
 
STATEMENTS OF INCOME AND EXPENSES
For the nine months ended September 30, 1998 and 1997
(Unaudited)
(All dollars rounded to nearest 00s
except per Unit amounts)
<TABLE>
<CAPTION>
                                                      1998       1997
------------------------------------------------------------------------
<S>                                                <C>        <C>
Income:
 Rental                                            $  812,900 $2,161,500
 Interest                                             463,000    270,800
 Gain on sale of property                           2,947,200    245,400
------------------------------------------------------------------------
                                                    4,223,100  2,677,700
------------------------------------------------------------------------
Expenses:
 Depreciation and amortization                        159,500    521,800
 Property operating:
 Affiliates                                            49,200    131,000
 Nonaffiliates                                        193,000    458,700
 Real estate taxes                                     55,800    234,100
 Insurance--Affiliate                                   6,900     20,500
 Repairs and maintenance                              147,700    356,600
 General and administrative:
 Affiliates                                            13,900     13,300
 Nonaffiliates                                         93,900    107,800
------------------------------------------------------------------------
                                                      719,900  1,843,800
------------------------------------------------------------------------
Income before income from participation in joint
 venture                                            3,503,200    833,900
Income from participation in joint venture:
 Operations                                           284,900    280,500
 Gain on sale of property                           1,439,000
------------------------------------------------------------------------
Net income                                         $5,227,100 $1,114,400
------------------------------------------------------------------------
Net income allocated to General Partner            $  257,700 $  154,200
------------------------------------------------------------------------
Net income allocated to Limited Partners           $4,969,400 $  960,200
------------------------------------------------------------------------
Net income allocated to Limited Partners per Unit
 (45,737 Units outstanding)                        $   108.65 $    20.99
------------------------------------------------------------------------
</TABLE>
STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1998 and 1997
(Unaudited)
(All dollars rounded to nearest 00s)
 
<TABLE>
<CAPTION>
                                                        1998         1997
------------------------------------------------------------------------------
<S>                                                  <C>          <C>
Cash flows from operating activities:
 Net income                                          $ 5,227,100  $ 1,114,400
 Adjustments to reconcile net income to net cash
  provided by operating activities:
 Depreciation and amortization                           159,500      521,800
 (Income) from participation in joint venture         (1,723,900)    (280,500)
 Gain on sale of property                             (2,947,200)    (245,400)
 Changes in assets and liabilities:
  (Increase) decrease in rents receivable                (41,300)      11,800
  Decrease (increase) in other assets                     15,500      (12,900)
  Increase in accounts payable and accrued expenses        2,400       11,800
  (Decrease) in due to Affiliates                         (3,700)     (33,400)
  (Decrease) in other liabilities                        (42,800)     (40,100)
------------------------------------------------------------------------------
   Net cash provided by operating activities             645,600    1,047,500
------------------------------------------------------------------------------
Cash flows from investing activities:
 Payments for capital and tenant improvements             (4,100)    (197,600)
 (Increase) in investments in debt securities         (8,831,600)    (983,000)
 Decrease in restricted cash                              50,000
 Proceeds from sale of property                        6,679,000      820,300
 Distributions from joint venture                      7,090,500      638,000
------------------------------------------------------------------------------
   Net cash provided by investing activities           4,983,800      277,700
------------------------------------------------------------------------------
Cash flows from financing activities:
 Distributions paid to Partners                       (9,185,600)  (1,890,000)
 (Decrease) in security deposits                         (26,400)      (9,800)
------------------------------------------------------------------------------
   Net cash (used for) financing activities           (9,212,000)  (1,899,800)
------------------------------------------------------------------------------
Net (decrease) in cash and cash equivalents           (3,582,600)    (574,600)
Cash and cash equivalents at the beginning of the
 period                                               13,336,700    4,749,200
------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period   $ 9,754,100  $ 4,174,600
------------------------------------------------------------------------------
</TABLE>
    The accompanying notes are an integral part of the financial statements.
5
<PAGE>
 
FIRST CAPITAL INSTITUTIONAL REAL ESTATE, LTD.--3
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
September 30, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
DEFINITION OF SPECIAL TERMS:
Capitalized terms used in this report have the same meaning as those terms have
in the Partnership's Registration Statement filed with the Securities and
Exchange Commission on Form S-11. Definitions of these terms are contained in
Article III of the First Amended and Restated Certificate and Agreement of
Limited Partnership, which is included in the Registration Statement and
incorporated herein by reference.
 
ACCOUNTING POLICIES:
The financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP"). The Partnership utilizes the accrual
method of accounting. Under this method, revenues are recorded when earned and
expenses are recorded when incurred.
 
Preparation of the Partnership's financial statements in conformity with GAAP
requires management 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 differ
from those estimates.
 
The financial information included in these financial statements is unaudited;
however, in management's opinion, all adjustments (consisting of only normal,
recurring accruals) necessary for a fair presentation of the results of
operations for the periods included have been made. Results of operations for
the quarter and nine months ended September 30, 1998 are not necessarily
indicative of the operating results for the year ending December 31, 1998.
 
The financial statements include the Partnership's 50% interest in a joint
venture with an Affiliated partnership. This joint venture was formed for the
purpose of acquiring a 100% interest in certain real property and until its
sale in August 1998 was operated under the common control of the General
Partner. Accordingly, the Partnership's pro rata share of the ventures'
revenues, expenses, assets, liabilities and Partners' (deficit) capital is
included in the financial statements.
 
Investment in joint venture includes the recording of the Partnership's
interest, under the equity method of accounting, in a joint venture with an
Affiliated partnership. The joint venture acquired a preferred majority
interest in a limited partnership with the seller of the Lansing, Michigan
property ("Holiday"). Under the equity method of accounting, the Partnership
recorded its initial interest at cost and adjusts its investment account for
its share of Holiday's income or loss and its distributions of cash flow (as
defined by the limited partnership agreement).
 
Commercial rental properties are recorded at cost, net of any provisions for
value impairment, and depreciated (exclusive of amounts allocated to land) on
the straight-line method over their estimated useful lives. Lease acquisition
fees are recorded at cost and amortized on the straight-line method over the
life of each respective lease. Repair and maintenance costs are expensed
against operations as incurred; expenditures for improvements are capitalized
to the appropriate property accounts and depreciated on the straight-line
method over the estimated life of such improvements.
 
The Partnership evaluates its rental properties for impairment when conditions
exist which may indicate that it is probable that the sum of expected future
cash flows (undiscounted) from a property is less than its carrying value. Upon
determination that an impairment has occurred, the carrying basis in the rental
property is reduced to estimated fair value. Management was not aware of any
indicator that would result in a significant impairment loss during the periods
reported.
 
Property sales are recorded when title transfers and sufficient consideration
has been received by the Partnership. Upon disposition, the related costs and
accumulated depreciation and amortization are removed from the respective
accounts. Gains on sales are recognized in accordance with GAAP.
 
Cash equivalents are considered all highly liquid investments with maturity of
three months or less when purchased.
 
Investments in debt securities are comprised of corporate debt securities and
are classified as held-to-maturity. These investments are carried at their
amortized cost basis in the financial statements, which approximated fair
market value. All of these securities had maturities of less than one year when
purchased.
 
Certain reclassifications have been made to the previously reported 1997
statements in order to provide comparability with the 1998 statements. These
reclassifications have no effect on net income or Partners' capital (deficit).
 
Reference is made to the Partnership's Annual Report for the year ended
December 31, 1997 for a description of other accounting policies and additional
details of the Partnership's financial condition, results of operations,
changes in Partners' capital and changes in cash balances for the year then
ended. The details provided in the notes thereto have not changed except as a
result of normal transactions in the interim or as otherwise disclosed herein.
 
2. RELATED PARTY TRANSACTIONS:
 
In accordance with the Partnership Agreement, subsequent to May 16, 1986, the
Termination of the Offering, the General Partner is entitled to 10% of Cash
Flow (as defined in the Partnership Agreement) as a Partnership Management Fee.
Net Profits (exclusive of Net Profits from the sale or disposition of
Partnership properties) are allocated to the General Partner in an amount equal
to the greater of 1% of such Net Profits or the Partnership Management Fee paid
by the Partnership to the General Partner and, the balance, if any, to the
Limited Partners. Net Losses (exclusive of Net Losses from the sale,
disposition or provision for value impairment of Partnership properties) are
allocated 1% to the General Partner and 99% to the Limited Partners. Net
Profits from the sale or disposition of a Partnership property are allocated:
first, prior to giving effect to any distributions of Sale Proceeds from the
transaction, to all Partners with negative balances in their Capital Accounts,
pro rata in proportion to such respective negative balances, to the extent of
the total of such negative balances; second, to the General
 
                                                                               6
<PAGE>
 
Partner, in an amount necessary to make the positive balance in its Capital
Account equal to the amount of Sale Proceeds to be distributed to the General
Partner with respect to the sale or disposition of such property; and third,
the balance, if any, to the Limited Partners. Net Losses from the sale,
disposition or provision for value impairment of Partnership properties are
allocated: first, after giving effect to any distributions of Sale Proceeds
from the transaction to all Partners with positive balances in their Capital
Accounts, pro rata in proportion to such respective positive balances, to the
extent of the total amount of such positive balances; and second, the balance,
if any, 1% to the General Partner and 99% to the Limited Partners.
Notwithstanding anything to the contrary, there shall be allocated to the
General Partner not less than 1% of all items of Partnership income, gain,
loss, deduction and credit during the existence of the Partnership. For the
quarter and nine months ended September 30, 1998, the General Partner was
entitled to a Partnership Management Fee, and accordingly, allocated Net
Profits, of $35,600 and $106,800, respectively. In addition, during the quarter
and nine months ended September 30, 1998, the General Partner was also
allocated Net Profits from the sales of Ellis and Holiday totaling $150,900.
 
Fees and reimbursements paid and payable by the Partnership to Affiliates
during the quarter and nine months ended September 30, 1998 were as follows:
 
<TABLE>
<CAPTION>
                                                         Paid
                                                  Quarter Nine Months Payable
-----------------------------------------------------------------------------
<S>                                               <C>     <C>         <C>
Property management and leasing fees              $12,700   $53,800   $ 6,500
Reimbursement of property insurance premiums, at
 cost                                               1,500     6,900      None
Real estate commissions (a)                          None      None    40,200
Legal                                               6,900    15,300    20,500
Reimbursement of expenses, at cost
 --Accounting                                       1,100     6,700     1,400
 --Investor communications                          1,700     4,000       700
-----------------------------------------------------------------------------
                                                  $23,900   $86,700   $69,300
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(a) As of September 30, 1998, the Partnership owed $40,200 to the General
    Partner for real estate commissions earned in connection with the sales of
    certain Partnership properties. These commissions have been accrued but not
    paid. In accordance with the Partnership Agreement, the Partnership will
    not pay the General Partner or any Affiliate a real estate commission from
    the sale of a Partnership property until Limited Partners have received
    cumulative distributions of Sale or Financing Proceeds equal to 100% of
    their Original Capital Contribution, plus a cumulative return (including
    all Cash Flow (as defined in the Partnership Agreement) which has been
    distributed to the Limited Partners from the initial investment date) of 6%
    simple interest per annum on their Capital Investment.
 
3. PROPERTY SALES:
 
On August 21, 1998, a joint venture in which the Partnership owns a 50%
interest consummated the sale of the Ellis Building, located in Sarasota,
Florida for a sale price of $13,875,000. The Partnership's share of Sale
Proceeds from this transaction was $6,679,000, which was net of actual and
estimated closing expenses. The Partnership recorded a gain of $2,947,200 for
financial reporting purposes in connection with this sale and will distribute
$6,673,000, or $145.90 per Unit, on February 28, 1999 to Limited Partners of
record as of August 21, 1998.
 
On September 22, 1998, the joint venture in which the Partnership owns a 50%
interest, treated on the equity method, consummated the sale of its property,
Holiday Office Park North and South, located in Ann Arbor, Michigan for a sale
price of $13,500,000. The Partnership's share of Sale Proceeds from this
transaction was $6,526,800, which was net of actual and estimated closing
expenses. The Partnership recorded a gain of $1,439,000 for financial reporting
purposes in connection with this sale and will distribute $6,499,700 or $142.11
per Unit, on February 28, 1999 to Limited Partners of record as of September
22, 1998.
 
4.SPECIAL DISTRIBUTION:
 
On May 31, 1998, the Partnership distributed proceeds from the sale of Park
Plaza totaling $8,118,300 or $177.50 per Unit to Limited Partners of record as
of December 18, 1997. For additional information related to this sale, see Note
7 of Notes to Financial Statements in the Partnership's Annual Report for the
year ended December 31, 1997.
<PAGE>
 
 
                                  SIGNATURES

Pursuant to the requirements 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.

                                 FIRST CAPITAL INSTITUTION REAL ESTATE, LTD. - 3
                        
                                 By: FIRST CAPITAL FINANCIAL CORPORATION
                                     GENERAL PARTNER
                        
Date:  November 13, 1998         By:  /s/  DOUGLAS CROCKER II
       -----------------              --------------------------------------
                                           DOUGLAS CROCKER II
                                      President and Chief Executive Officer
                        
Date:  November 13, 1998         By:  /s/  NORMAN M. FIELD
       -----------------              --------------------------------------
                                           NORMAN M. FIELD
                                      Vice President - Finance and Treasurer

<PAGE>

                          PART II. OTHER INFORMATION

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<CAPTION>
Item 6.     Exhibits and Reports on Form 8-K
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<S>         <C>
      (a)   Exhibits:  None
 
      (b)   Reports on Form 8-K:

            A report on Form 8-K filed on September 8, 1998 reporting the sale
            of Ellis. 
            A report on Form 8-K filed on October 6, 1998 reporting
            the sale of Holiday.
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