**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-K**

 

**ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

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| **For the fiscal year ended  December 31, 2004** |   | **Commission file number  1-11059** |
|--------------------------------------------------|--------|-------------------------------------|

 

**AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.**

(Exact name of registrant asspecified in its charter)

 

| **California**                                                   | ** ** | **13-3257662**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction  of  Incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**11200 Rockville Pike**

**Rockville, Maryland  20852**

(Address of principal executiveoffices)

 

Registrant’s telephone number,

including area code **(301) 255-4700**

 

**Securitiesregistered pursuant to Section 12(b) of the Act:**

 

| ** **                                        | ** ** | **Name of each exchange on** |
|---------------------------------------------------|------------|------------------------------|
| **Title of each class**                           | ** ** | **which registered**         |
| Depositary Units of Limited  Partnership Interest |       | American Stock Exchange      |

 

Securitiesregistered pursuant to Section 12(g) of the Act:

 

**None**

 

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Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.   Yes  ý   No  o

 

Indicate by check mark if disclosure of delinquentfilers 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 defini­tiveproxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K.    ý

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Exchange Act Rule 12b-2).   Yes o No  ý

 

As of December 31, 2004, 12,079,514 depositaryunits of limited partnership interest were outstanding.  The aggregate market value of such units heldby non-affiliates of the Registrant, based on the last reported saleprice on June 30, 2004, was $30,068,030.

 

**Documentsincorporated by Reference**

 

None

 

 

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**AMERICAN INSURED MORTGAGE INVESTORS - SERIES85, L.P.**

 

**2004 ANNUAL REPORT ON FORM 10-K**

 

**TABLE OF CONTENTS**

 
|       | **PART I**                                                                                  |   |
|------------|---------------------------------------------------------------------------------------------|--------|
|       |                                                                                        |   |
| Item 1.    | Business                                                                                    |   |
| Item 2.    | Properties                                                                                  |   |
| Item 3.    | Legal Proceedings                                                                           |   |
| Item 4.    | Submission of Matters to a Vote of Security  Holders                                        |   |
|       |                                                                                        |   |
|       | **PART II**                                                                                 |   |
|       |                                                                                        |   |
| Item 5.    | Market for Registrant’s Securities and  Related Security Holder Matters                |   |
| Item 6.    | Selected Financial Data                                                                     |   |
| Item 7.    | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   |
| Item 7A.   | Qualitative and Quantitative Disclosures  about Market Risk                                 |   |
| Item 8.    | Financial Statements and Supplementary Data                                                 |   |
| Item 9.    | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure       |   |
| Item 9A.   | Controls and Procedures                                                                     |   |
| Item 9B.   | Other Information                                                                           |   |
|       |                                                                                        |   |
|       | **PART III**                                                                                |   |
|       |                                                                                        |   |
| Item 10.   | Directors and Executive Officers of the  Registrant                                         |   |
| Item 11.   | Executive Compensation                                                                      |   |
| Item 12.   | Security Ownership of Certain Beneficial  Owners, Management and Related Unitholder Matters |   |
| Item 13.   | Certain Relationships and Related  Transactions                                             |   |
| Item 14.   | Principal Accountant Fees and Services                                                      |   |
|       |                                                                                        |   |
|       | **PART IV**                                                                                 |   |
|       |                                                                                        |   |
| Item 15.   | Exhibits and Financial Statement Schedules                                                  |   |
|       |                                                                                        |   |
| Signatures |                                                                                        |   |

 

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**PART I**

 

ITEM 1.          BUSINESS

 

**FORWARD-LOOKINGSTATEMENTS.  When used in this AnnualReport on Form 10-K, the words “believe,” “anticipate,” “expect,” “contemplate,”“may,” “will,” and similar expressions are intended to identify forward-lookingstatements.  Statements looking forwardin time are included in this Annual Report on Form 10-K pursuant to the “safeharbor” provision of the Private Securities Litigation Reform Act of 1995.  Such statements are subject to certain risksand uncertainties, which could cause actual results to differ materially.  Accordingly, the following informationcontains or may contain forward-looking statements:  (1) information included in this AnnualReport on Form 10-K, including, without limitation, statements made under Item7, Management’s Discussion and Analysis of Financial Condition and Results ofOperations, (2) information included or incorporated by reference in prior andfuture filings by the Partnership (defined below) with the Securities andExchange Commission (“SEC”) including, without limitation, statements withrespect to growth, projected revenues, earnings, returns, distributions andyields on its portfolio of mortgage assets, the impact of interest rates, costsand business strategies and plans and (3) information contained in writtenmaterial, releases and oral statements issued by or on behalf of, thePartnership, including, without limitation, statements with respect todisposition of investments, projected revenues, earnings, returns and yields onits portfolio of mortgage assets, the impact of interest rates, costs andbusiness strategies and plans.  Factorswhich may cause actual results to differ materially from those contained in theforward-looking statements identified above include, but are not limited to (i)regulatory matters, (ii) interest rates, (iii) prepayment of mortgages, (iv)defaulted mortgages, (v) errors in servicing defaulted mortgages and (vi) salesof mortgage investments below fair market value.  Readers are cautioned not to place unduereliance on these forward-looking statements, which speak only of the datehereof.  The Partnership undertakes noobligation to publicly revise these forward-looking statements to reflectevents or circumstances occurring after the date hereof or to reflect theoccurrence of unanticipated events.**

 

### Development andDescription of Business

 

American Insured Mortgage Investors -Series 85, L.P. (the “Partnership”) was formed pursuant to a limitedpartnership agreement, as subsequently amended (“Partnership Agreement”) underthe Uniform Limited Partnership Act of the state of California on June 26,1984.  The Partnership’s businessconsists of holding government insured mortgage investments primarily onmultifamily housing properties, and distributing the payments of principal andinterest on such mortgage investments, including debentures issued by theUnited States Department of Housing and Urban Development (“HUD”) in exchangefor such mortgages, to the holders of its depositary units of limited partnershipinterests (“Unitholders”).  During theperiod from March 8, 1985 (the initial closing date of the Partnership’s publicoffering) through January 27, 1986 (the termination date of the offering), thePartnership, pursuant to its public offering of 12,079,389 depositary Units oflimited partnership interest (“Units”) raised a total of $241,587,780 in grossproceeds.  In addition, the initiallimited partner contributed $2,500 to the capital of the Partnership inexchange for 125 Units.

 

CRIIMI, Inc., a wholly-owned subsidiary ofCRIIMI MAE Inc. (“CRIIMI MAE”), acts as the General Partner (the “GeneralPartner”) for the Partnership and holds a partnership interest of 3.9%.  The General Partner provides management andadministrative services on behalf of the Partnership.  AIM Acquisition Partners L.P. serves as theadvisor (the “Advisor”) to the Partnership. The general partner of the Advisor is AIM Acquisition Corporation (“AIMAcquisition”) and the limited partners include, but are not limited to, TheGoldman Sachs Group, L.P., Sun America Investments, Inc. (successor to Broad,Inc.) and CRI/AIM Investment, L.P., a subsidiary of CRIIMI MAE, over whichCRIIMI MAE exercises 100% voting control. AIM Acquisition is a Delaware corporation that is primarily owned by SunAmerica Investments, Inc. and The Goldman Sachs Group, L.P.

 

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Pursuant to the terms of certain originationand acquisition services, management services and disposition servicesagreements between the Advisor and the Partnership (collectively the “AdvisoryAgreements”), the Advisor renders services to the Partnership, including butnot limited to, the management of the Partnership’s portfolio of mortgages andthe disposition of the Partnership’s mortgages. Such services are subject to the review and ultimate authority of theGeneral Partner.  However, the GeneralPartner is required to receive the consent of the Advisor prior to takingcertain significant actions, including but not limited to the disposition ofmortgages, any transaction or agreement with the General Partner or itsaffiliates, or any material change as to policies regarding distributions orreserves of the Partnership (collectively the “Consent Rights”).  The Advisor is permitted to delegate and hasdelegated the performance of services to CRIIMI MAE Services LimitedPartnership (“CMSLP”), a subsidiary of CRIIMI MAE, pursuant to a sub-managementagreement (the “Sub-Advisory Agreement”). The general partner and limited partner of CMSLP are wholly-ownedsubsidiaries of CRIIMI MAE.  Thedelegation of such services by the Advisor to CMSLP does not relieve theAdvisor of its obligation to perform such services.  Furthermore, the Advisor has retained itsConsent Rights.

 

Prior to December 1993, the Partnership wasengaged in the business of originating government insured mortgage loans (“OriginatedInsured Mortgages”) and acquiring government insured mortgage loans (“AcquiredInsured Mortgages” and, together with Originated Insured Mortgages, referred toherein as “Insured Mortgages”).  Inaccordance with the terms of the Partnership Agreement, the Partnership is nolonger authorized to originate or acquire Insured Mortgages and, consequently,its primary objective is to manage its portfolio of mortgage investments, allof which are insured under Section 221(d)(4) or Section 231 of the NationalHousing Act of 1937, as amended (the “National Housing Act”).  The Partnership Agreement states that thePartnership will terminate on December 31, 2009, unless terminated earlierunder the provisions thereof.  ThePartnership is required, pursuant to the Partnership Agreement, to dispose ofits assets prior to this date.

 

As of December31, 2004, the Partnership had investments in 8 Insured Mortgages and onedebenture with an aggregate amortized cost of approximately $15.9 million, anaggregate face value of approximately $16.0 million and an aggregate fair valueof approximately $16.0 million, as compared to December 31, 2003, when thePartnership had investments in 15 Insured Mortgages and five debentures with anaggregate amortized cost of approximately $51.5 million, an aggregate facevalue of approximately $51.6 million and an aggregate fair value ofapproximately $52.4 million.

 

During 2004, threeInsured Mortgages were sold, three Insured Mortgages prepaid, five debentureswere redeemed and one debenture was issued as assignment proceeds for onemortgage.  The net aggregate amortizedcost and aggregate face value of these assets was approximately $35.4 millionas of December 31, 2003.

 

As thePartnership continues to liquidate its mortgage investments and Unitholdersreceive distributions of return of capital and taxable gains, Unitholdersshould expect a reduction in earnings and distributions due to the decreasingmortgage base.  Based upon the currentlevel of interest rates, the trend in mortgage prepayments over the past yearis likely to continue.  Such mortgageprepayments, if continued at the trend over the past year, will likely resultin a termination and liquidation of the Partnership significantly earlier thanthe December 2009 stated termination date. Upon the termination and liquidation of the Partnership, distributionsto Unitholders will be made in accordance with the terms of the PartnershipAgreement.  A final distribution will bebased on the Unitholders’ and the General Partner’s pro-rata share of thePartnership’s remaining net assets after deducting and setting aside amountsrequired to satisfy and discharge any existing Partnership obligations andexpenses, as stated in the Partnership Agreement.  Such distribution to Unitholders will besubstantially less than the amount referenced in limited partners’ equity inthe Partnership’s financial statements, since the Partnership’s financialstatements are prepared in accordance with GAAP and the distributions uponliquidation pursuant to the terms of the Partnership Agreement do not requirethe General Partner to contribute an amount equal to its General Partner’sdeficit to the Partnership.

 

Additional information concerning thebusiness of the Partnership is contained in Part II, Item 7, Management’sDiscussion and Analysis of Financial Condition and Results of Operations and inNotes 1, 5, 6, 7 and 8 of the Notes to Financial Statements (included in Item 8hereof).  See also Schedule IV-Mortgage 

 

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Loans on Real Estate for the table of the Partnership’s InsuredMortgages as of December 31, 2004.

 

### Employees and Managementof the Partnership

 

The Partnership has no employees.  The business of the Partnership is managed byits General Partner while its portfolio of mortgages is managed by the Advisorand CMSLP pursuant to the Advisory Agreements and Sub-Advisory Agreement,respectively, as discussed above.  Anaffiliate of the General Partner, CRIIMI MAE Management, Inc. providespersonnel and administrative services to the Partnership on behalf of theGeneral Partner.  The Partnershipreimburses CRIIMI MAE Management, Inc. for these services on an actual costbasis pursuant to the terms of the Partnership Agreement.

 

The fee paid by the Partnership to theAdvisor for services performed under the Advisory Agreements (the “Advisory Fee”),is equal to 0.95% of the Partnership’s Total Invested Assets. (As defined inthe Partnership Agreement, “Total Invested Assets” generally means theaggregate original face value of the Partnership’s current mortgageinvestments.)  The Advisor pays CMSLP, assub-advisor, a fee of 0.28% (the “Sub-Advisory Fee”) of Total Invested Assetsfor services performed under the Sub-Advisory Agreement from its AdvisoryFee.  The Partnership is not liable forpaying the Sub-Advisory Fee to CMSLP. Additional information concerning these fees is contained in Part II, Item7, Management’s Discussion and Analysis of Financial Condition and Results ofOperations and in Note 8 of the Notes to Financial Statements (included in Item8 hereof).

 

### Competition

 

The Partnership may elect to dispose of itsmortgage investments through a sale to third parties subject to the consent ofthe Advisor.  In disposing of mortgageinvestments, the Partnership competes with private investors, mortgage bankingcompanies, mortgage brokers, state and local government agencies, lendinginstitutions, trust funds, pension funds, and other entities, some with similarobjectives to those of the Partnership and some of which are or may beaffiliates of the Partnership, its General Partner, the Advisor, CMSLP or theirrespective affiliates.  Some of theseentities may have substantially greater capital resources and experience indisposing of mortgages investments than the Partnership.

 

CRIIMI MAE and its affiliates also may serveas general partners or managers of real estate limited partnerships, real estateinvestment trusts or other similar entities in the future.  The Partnership may attempt to dispose ofmortgages at or about the same time that CRIIMI MAE and/or other entitiesmanaged by CRIIMI MAE or its affiliates, or the Advisor or its affiliates, areattempting to dispose of mortgages.  As aresult of market conditions that could have the effect of limiting the numberof mortgage dispositions or adversely affecting the proceeds received from suchdispositions, CMSLP, the General Partner and the Advisor and their affiliatescould be faced with conflicts of interest in determining which mortgages wouldbe disposed of and at which price. CMSLP, the General Partner and the Advisor, however, are required toexercise their fiduciary duties of good faith, care and loyalty when evaluatingthe appropriate action to be taken when faced with such conflicts.

 

The General Partner maintains awebsite for the Partnership at www.americaninsuredmortgage.com. Select AIM85 to view the Partnership’s annual reports, quarterly reports anddistribution history.  Select the AMEXbutton to access current and historical price data for the Partnership’sUnits.  A copy of the General Partners’Code of Business Conduct and Ethics and any other information may be obtainedby writing to the General Partner in care of the Partnership at CRIIMI, Inc.,11200 Rockville, 4th Floor, Rockville, MD  20852 or email aimfunds@criimi.com.

 

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ITEM 2.          PROPERTIES

 

The Partnership does not own or lease anyproperties.  Generally, the mortgagesunderlying the Partnership’s mortgage investments are non-recourse first lienson multifamily residential developments or retirement homes.

 

ITEM 3.          LEGAL PROCEEDINGS

 

There are no legal proceedings to which thePartnership is a party.

 

ITEM 4.          SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS

 

No matters were submitted to a vote of thePartnership’s Unitholders during the fourth quarter of 2004.

 

ITEM 5.          MARKET FORREGISTRANT’S SECURITIES AND RELATED SECURITY HOLDER MATTERS

 

PrincipalMarket and Market Price for Units and Distributions

 

The Units are listed for trading on theAmerican Stock Exchange (“AMEX”) under the trading symbol of “AII.”  The high and low sale prices for the Units asreported on AMEX and the distributions per Unit, as applicable, for eachquarterly period in 2004 and 2003 were as follows:

 
| ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | **Amount of  Distribution  Per Unit** | ** ** |
|-------------------|------------|------------|------------|------------|------------|---------------------------------------|------------|
| ** **        | ** ** | **2004**   | ** ** | ** ** |
| **Quarter Ended** | ** ** | **High**   | ** ** | **Low**    | ** ** | ** **                            |
| ** **        |       |       |       |       |       |                                  |       |
| March 31          |       | $          | 5.16       |       | $          | 2.94                                  |       | $ | 2.010 |   |
| June 30           |       | 3.06       |       | 2.45       |       | 0.925                                 |       |
| September 30      |       | 2.64       |       | 1.37       |       | 0.890                                 |       |
| December 31       |       | 1.49       |       | 1.30       |       | 0.030                                 |       |
|              |       |       |       |       |       | $                                     | 3.855      |   |
|                   |            |            |            |            |            |                                       |            |  |  |  |

 
| ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | **Amount of  Distribution  Per Unit** | ** ** |
|-------------------|------------|------------|------------|------------|------------|---------------------------------------|------------|
| ** **        | ** ** | **2003**   | ** ** | ** ** |
| **Quarter Ended** | ** ** | **High**   | ** ** | **Low**    | ** ** | ** **                            |
| March 31          |       | $          | 5.90       |       | $          | 5.43                                  |       | $ | 0.310 |   |
| June 30           |       | 5.50       |       | 5.36       |       | 0.255                                 |       |
| September 30      |       | 5.50       |       | 4.86       |       | 0.130                                 |       |
| December 31       |       | 4.95       |       | 4.58       |       | 0.200                                 |       |
|              |       |       |       |       |       | $                                     | 0.895      |   |
|                   |            |            |            |            |            |                                       |            |  |  |  |

 

There are nomaterial legal restrictions upon the Partnership’s present or future ability tomake distributions in accordance with the provisions of the Partnership Agreement.

 

The basis forpaying distributions to Unitholders is net proceeds from mortgage dispositions,if any, and cash flow from operations, which includes regular interest incomeand principal from Insured Mortgages. Although the Partnership’s Insured Mortgages pay a fixed monthlymortgage payment, the cash distributions paid to the Unitholders will varyduring each quarter due to (1) the fluctuating yields in the short-term moneymarket in which the monthly mortgage payment receipts are temporarily investedprior to the payment of quarterly distributions, (2) the reduction in the assetbase resulting from monthly mortgage payments received or mortgagedispositions, (3) variations in the cash flow attributable to the delinquencyor default of Insured Mortgages, the timing of receipt of debentures, theinterest rate on debentures and debenture redemptions, and (4) changes in thePartnership’s operating expenses As the Partnership continues to liquidate itsmortgage investments and Unitholders receive distributions of return of capitaland taxable gains, Unitholders should expect a reduction in earnings anddistributions due to the decreasing mortgage base.  Based upon the current level of interestrates, the trend in mortgage prepayments over the past year is 

 

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likely to continue.  Such mortgage prepayments, if continued atthe trend over the past year, will likely result in a termination andliquidation of the Partnership significantly earlier than the December 2009stated termination date.  Upon thetermination and liquidation of the Partnership, distributions to Unitholderswill be made in accordance with the terms of the Partnership Agreement.  A final distribution will be based on theUnitholders’ and the General Partner’s pro-rata share of the Partnership’sremaining net assets after deducting and setting aside amounts required tosatisfy and discharge any existing Partnership obligations and expenses, asstated in the Partnership Agreement. Such distribution to Unitholders will be substantially less than theamount referenced in limited partners’ equity in the Partnership’s financialstatements, since the Partnership’s financial statements are prepared inaccordance with GAAP and the distributions upon liquidation pursuant to theterms of the Partnership Agreement do not require the General Partner tocontribute an amount equal to its General Partner’s deficit to the Partnership.

 

Commencing inthe first quarter of 2005, the General Partner will declare distributions ofregular cash flow and mortgage proceeds, if any, once each quarter.  The General Partner made the decision todeclare distributions quarterly instead of monthly to reduce expensesassociated with monthly declarations. The distributions are to be declared in March, June, September andDecember and to be paid after the end of each calendar quarter.

 

As of December 31, 2004, there wereapproximately 10,540 Unitholders.

 

The Partnership has no compensation plans orindividual compensation arrangements under which equity securities of thePartnership are authorized for issuance.

 

ITEM 6.        SELECTEDFINANCIAL DATA

(Dollars in thousands, except per Unit amounts)

 
| ** **                                     | ** ** | **For the Years Ended December 31,** | ** ** |
|------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                     | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|                                           |       |                                 |       |   |   |   |   |   |   |   |   |
| Income                                         |       | $                                    | 2,312      |   | $ | 5,080 |   | $ | 6,443 |   | $ | 8,526 |   | $ | 9,979 |   |
|                                           |       |                                 |       |   |   |   |   |   |   |   |   |
| Net gains on mortgage dispositions             |       | 2,055                                |       | 1,498 |   | 1,851 |   | 1,785 |   | 428 |   |
| Net earnings                                   |       | 3,801                                |       | 5,573 |   | 7,138 |   | 8,969 |   | 8,866 |   |
| Net earnings per Unit - Basic and diluted  (1) |       | $                                    | 0.30       |   | $ | 0.44 |   | $ | 0.57 |   | $ | 0.71 |   | $ | 0.71 |   |
|                                           |       |                                 |       |   |   |   |   |   |   |   |   |
| Distributions per Unit (1)(2)                  |       | $                                    | 3.855      |   | $ | 0.895 |   | $ | 2.755 |   | $ | 1.91 |   | $ | 1.61 |   |

 
| ** **            | ** ** | **As of December 31,** | ** ** |
|-----------------------|------------|------------------------|------------|
| ** **            | ** ** | **2004**               | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|                  |       |                   |       |   |   |   |   |   |   |   |   |
| Total assets          |       | $                      | 16,802     |   | $ | 69,048 |   | $ | 78,238 |   | $ | 98,070 |   | $ | 118,621 |   |
| Partners’ equity |       | 16,342                 |       | 61,142 |   | 67,940 |   | 94,828 |   | 110,982 |   |
|                       |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)                Calculated based upon the weighted averagenumber of Units outstanding.

(2)                Includes distributions due the Unitholders forthe Partnership’s fiscal years ended December 31, 2004, 2003, 2002, 2001 and2000 which were partially paidsubsequent to year end.  See Notes 8 and9 of the Notes to Financial Statements (included in Item 8 hereof) foradditional information.

 

The selected income statement data presentedabove for the years ended December 31, 2004, 2003, 2002, and the selectedbalance sheet data as of December 31, 2004 and 2003, are derived from, and arequali­fied by, reference to the Partnership’s financial statements, which areincluded elsewhere in this Annual Report on Form 10-K.  The selected income statement data for theyears ended December 31, 2001 and 2000, and the selected balance sheet data asof December 31, 2002, 2001 and 2000 are derived from audited financialstatements not included as part of this Annual Report on Form 10-K.  This data should be read in conjunction withthe financial statements and the notes thereto.

 

7

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ITEM 7.                              MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

General

 

ThePartnership’s business consists of holding government insured mortgageinvestments primarily on multifamily housing properties and debentures issuedby HUD, and distributing the payments of principal and interest on suchinvestments to the holders of its depositary units of limited partnershipinterests (“Unitholders”).  CRIIMI, Inc.,a wholly-owned subsidiary of CRIIMI MAE Inc. (“CRIIMI MAE”), is the GeneralPartner (the “General Partner”) for the Partnership and holds a partnershipinterest of 3.9%.  The Partnership’sprimary source of revenue and cash is the payment of mortgage interest andprincipal from its Insured Mortgages and the payment of debenture interest.

 

As the Partnership’s mortgage investmentscontinue to paydown and/or are liquidated and Unitholders receive distributionsof return of capital and taxable gains, Unitholders should expect a reductionin earnings and distributions due to the decreasing mortgage base.  The magnitude of the decrease will dependupon the size of the Insured Mortgages which are prepaid, sold or assigned forinsurance proceeds.

 

### Mortgage Investments

 

As of December31, 2004, the Partnership had investments in 8 Insured Mortgages and onedebenture with an aggregate amortized cost of approximately $15.9 million, anaggregate face value of approximately $16.0 million and an aggregate fair valueof approximately $16.0 million, as compared to December 31, 2003, when thePartnership had investments in 15 Insured Mortgages and five debentures with anaggregate amortized cost of approximately $51.5 million, an aggregate facevalue of approximately $51.6 million and an aggregate fair value ofapproximately $52.4 million.

 

During the2004, three Insured Mortgages were sold, three Insured Mortgages prepaid, fivedebentures were redeemed and one debenture was issued as assignment proceedsfor one mortgage.  The net aggregateamortized cost and aggregate face value of these assets was approximately $35.4million as of December 31, 2003.

 

The Partnership’s investment in InsuredMortgages is comprised of participation certificates evidencing a 100%undivided beneficial interest in government insured multifamily mortgagesissued or sold pursuant to the Federal Housing Administration Programs (“FHA”)programs (“FHA-Insured Certificates”) and mortgage-backed securities guaranteedby the Government National Mortgage Association (“GNMA”) (“GNMA Mortgage-BackedSecurities”).  The mortgages underlyingthe FHA-Insured Certificates and GNMA Mortgage-Backed Securities arenon-recourse first liens on multifamily residential developments or retirementhomes.

 

The following is a discussion of the types ofthe Partnership’s mortgage investments:

 

### GNMA Mortgage-BackedSecurities and FHA-Insured Certificates

 

Listed below is the Partnership’s aggregateinvestment in GNMA Mortgage-Backed Securities and FHA-Insured Certificates:

 
| ** **                           | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|------------------|------------|
| ** **                           | ** ** | **2004**         | ** ** | **2003** | ** ** |
|                                 |       |             |       |   |   |
| Acquired Mortgages:                  |       |             |       |   |   |
| Number of                            |       |             |       |   |   |
| GNMA Mortgage-Backed Securities      |       | 1                |       | 1 |   |
| FHA-Insured Certificates (2) and (3) |       | 7                |       | 9 |   |
| Amortized Cost                       |       | $                | 14,154,205 |   | $ | 19,053,403 |   |
| Face Value                           |       | 14,260,814       |       | 19,122,101 |   |
| Fair Value                           |       | 14,299,980       |       | 19,264,433 |   |
|                                 |       |             |       |   |   |
| Originated Mortgages:                |       |             |       |   |   |
| Number of                            |       |             |       |   |   |
| GNMA Mortgage-Backed Securities (4)  |       | —           |       | 1 |   |
| FHA-Insured Certificates (1)         |       | —           |       | 1 |   |
| Amortized Cost                       |       | $                | —     |   | $ | 15,803,978 |   |
| Face Value                           |       | —           |       | 15,803,977 |   |
| Fair Value                           |       | —           |       | 15,882,997 |   |

 

8

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(1)          InMay 2004, the mortgage on Waterford Green Apartments was prepaid.  The Partnership received net proceeds ofapproximately $6.6 million and recognized a gain of approximately $942,000 forthe year ended December 31, 2004.  A distributionof approximately $0.455 per Unit related to the prepayment of this mortgage wasdeclared in May and a distribution of approximately $0.07 per Unit foradditional proceeds received related to the Partnership’s participationinterest in this mortgage was declared in June. Both distributions were paid to Unitholders in August 2004.

(2)          InMay 2004, the mortgage on Northwood Place was prepaid.  The Partnership received net proceeds ofapproximately $4.3 million and recognized a loss of approximately $51,000 forthe year ended December 31, 2004.  Adistribution of approximately $0.345 per Unit related to the prepayment of thismortgage was declared in June and paid to Unitholders in August 2004.

(3)          InJune 2004, the mortgage on Stafford Towers was prepaid.  The Partnership received net proceeds ofapproximately $303,000 and recognized a loss of approximately $21,000 for theyear ended December 31, 2004.  Adistribution of approximately $0.02 per Unit related to the prepayment of thismortgage was declared in July and paid to Unitholders in November 2004.

(4)          In July 2004, the GNMA security secured by themortgage on Oak Forest Apartments II was sold with the consent of theAdvisor.  The Partnership received netproceeds of approximately $10.6 million and recognized a gain of approximately $553,000for the year ended December 31, 2004.  A distribution of approximately$0.84 per Unit related to the sale of this GNMA security was declared inJuly and paid to Unitholders in November 2004.

 

As of March 1, 2005, all of the fully insuredGNMA Mortgage-Backed Securities and FHA-Insured Certificates are current withrespect to the payment of principal and interest.

 

FHA-Insured Loans

 

Listed below is the Partnership’s aggregateinvestment in FHA-Insured Loans:

 
| ** **          | ** ** | **December 31,** | ** ** |
|---------------------|------------|------------------|------------|
| ** **          | ** ** | **2004**         | ** ** | **2003** | ** ** |
|                |       |             |       |   |   |
| Acquired Loans:     |       |             |       |   |   |
| Number of Loans (1) |       | —           |       | 1 |   |
| Amortized Cost      |       | $                | —     |   | $ | 1,436,670 |   |
| Face Value          |       | —           |       | 1,701,956 |   |
| Fair Value          |       | —           |       | 1,701,956 |   |
|                |       |             |       |   |   |
| Originated Loans:   |       |             |       |   |   |
| Number of Loans (2) |       | —           |       | 2 |   |
| Amortized Cost      |       | $                | —     |   | $ | 9,191,407 |   |
| Face Value          |       | —           |       | 8,950,266 |   |
| Fair Value          |       | —           |       | 9,576,785 |   |

 

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(1)          InJanuary 2004, HUD transferred assignment proceeds to the Partnership in theform of a 5.75% debenture, with a face value of approximately $3.5 million, inexchange for the mortgage on Kaynorth Apartments.  Since the mortgage on Kaynorth Apartments wasbeneficially owned 50% by the Partnership and 50% by American Insured MortgageInvestors (“AIM 84”), approximately $1.7 million of the debenture face valuewas due to AIM 84.  See furtherdiscussion below.

(2)          InFebruary 2004, the mortgages on Cobblestone Apartments and The Plantation weresold with the consent of the Advisor. The Partnership received aggregate net proceeds of approximately $9.6million and recognized aggregate gains of approximately $386,000 for the yearended December 31, 2004.  The aggregatedistribution of approximately $0.76 per Unit related to the sale of these twomortgages was declared in February 2004 and paid to Unitholders in May 2004.

 

During 2004, the Partnership disposed of allof its remaining investments in fully insured FHA-Insured Loans.

 

In addition to base interest payments underFHA Insured Loans that were Originated Insured Mortgages, the Partnership wasentitled to additional interest based on a percentage of the net cash flow fromthe underlying development (referred to as “Participations.”)  During the years ended December 31, 2004,2003 and 2002, the Partnership received $0, $0, and $8,396, respectively, fromthe Participations.  These amounts areincluded in mortgage investment income on the Statements of Income andComprehensive Income of the financial statements (included in Item 8 hereof).

 

9

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Investments in debentures and due to affiliate

 

In January 2004, HUD issued a 5.75% debentureto the Partnership in exchange for the mortgage on Kaynorth Apartments.  The face value of the debenture wasapproximately $3.5 million and pays interest semi-annually on January 1 andJuly 1.  The Partnership recognized again of approximately $246,000 for the year ended December 31, 2004 related tothis assignment.  This mortgage wasbeneficially owned 50% by the Partnership and 50% by AIM 84.  In February 2004, AIM 84 sold its 50% interestin this debenture and the Partnership subsequently transferred the cash proceedsof approximately $1.8 million to AIM 84. The fair value and face value of 50% of this debenture was approximately$1.7 million as of December 31, 2004. The fair value of this debenture was included in Investment in debentureon the Partnership’s balance sheet as of December 31, 2004.

 

### Results of Operations

2004 compared to 2003

 

Net earningsdecreased by approximately $1.8 million, or 32%, for 2004 as compared to 2003,primarily due to a decrease in mortgage investment income, of approximately$2.8 million, or 57%, resulting from the reduction in the mortgage base,partially offset by an increase in net gains on mortgage dispositions ofapproximately $557,000, and a decrease in total expenses of approximately$439,000, or 44%.  The mortgage base decreasedas a result of 7 mortgage dispositions with an aggregate principal balance ofapproximately $31.1 million, representing an approximate 68% decrease in theaggregate principal balance of the total mortgage portfolio since December2003.  See further discussion above in “GNMAMortgage-Backed Securities and FHA-Insured Certificates” and “FHA-Insured Loans”for more information on the mortgage dispositions.

 

Interest and other income decreased by approximately $11,000, or 5%,for 2004 as compared to 2003, primarily due to the timing and amount of theinvestment of mortgage proceeds prior to the distribution to Unitholders.

 

Assetmanagement fees decreased by approximately $343,000, or 56%, for 2004 ascompared to 2003, primarily due to the reduction in the mortgage base discussedabove.

 

General andadministrative expenses decreased by approximately $96,000, or 25%, for 2004 ascompared to 2003, primarily due to the decrease in the mortgage base.

 

Gains onmortgage dispositions increased by approximately $618,000 for 2004 as comparedto 2003.  Gains were recognized on onemortgage prepayment, three mortgage sales and one mortgage assignment in 2004,as discussed above, compared to gains recognized on seven mortgage prepaymentsand six mortgage assignments in 2003. Losses were recognized on two mortgage prepayments in 2004, as discussedabove.  A loss was recognized on onemortgage prepayment in 2003.

 

2003 compared to 2002

 

Net earningsdecreased by approximately $1.6 million, or 22%, for 2003 as compared to 2002,primarily due to an approximate $1.3 million, or 21%, decrease in mortgageinvestment income resulting from the reduction in the mortgage base.  The mortgage base decreased as a result of 14mortgage dispositions with an aggregate principal balance of approximately $19million, representing an approximate 21% decrease in the aggregate principalbalance of the total mortgage portfolio since December 2002.

 

Interest and other income decreased by approximately $41,000 for 2003as compared to 2002, primarily due to the timing and amount of the investmentof mortgage proceeds prior to the distribution to Unitholders.

 

Assetmanagement fees decreased by approximately $133,000, or 18%, for 2003 ascompared to 2002, primarily due to the reduction in the mortgage base discussedabove.

 

10

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General andadministrative expenses decreased by approximately $18,000 for 2003 as comparedto 2002, primarily due to the decrease in the mortgage base.

 

Gains onmortgage dispositions decreased by approximately $351,000 for 2003 as comparedto 2002.  Gains were recognized on sevenmortgage prepayments and six mortgage assignments in 2003, as discussed above,compared to gains recognized on six mortgage prepayments and four mortgageassignments in 2002.  A loss wasrecognized on one mortgage prepayment in 2003, as discussed above.  A loss was recognized on one mortgageprepayment in 2002.

 

### Liquidity and CapitalResources

 

The Partnership’s operating cash receipts,derived from payments of principal and interest on Insured Mortgages plus cashreceipts from interest on debentures and short-term investments, are thePartnership’s principal sources of cash flows, and were sufficient for theyears ended December 31, 2004, 2003 and 2002 to meet operating expenserequirements.  The Partnershipanticipates its cash flows will be sufficient to meet operating expenserequirements for 2005.

 

The basis forpaying distributions to Unitholders is net proceeds from mortgage dispositions,if any, and cash flow from operations, which includes regular interest incomeand principal from Insured Mortgages. Although the Partnership’s Insured Mortgages pay a fixed monthlymortgage payment, the cash distributions paid to the Unitholders will varyduring each quarter due to (1) the fluctuating yields in the short-term moneymarket in which the monthly mortgage payment receipts are temporarily investedprior to the payment of quarterly distributions, (2) the reduction in the assetbase resulting from monthly mortgage payments received or mortgagedispositions, (3) variations in the cash flow attributable to the delinquencyor default of Insured Mortgages, the timing of receipt of debentures, theinterest rate on debentures and debenture redemptions, and (4) changes in thePartnership’s operating expenses.  As thePartnership continues to liquidate its mortgage investments and Unitholdersreceive distributions of return of capital and taxable gains, Unitholdersshould expect a reduction in earnings and distributions due to the decreasingmortgage base.  Based upon the currentlevel of interest rates, the trend in mortgage prepayments over the past yearis likely to continue.  Such mortgageprepayments, if continued at the trend over the past year, will likely resultin a termination and liquidation of the Partnership significantly earlier thanthe December 2009 stated termination date. Upon the termination and liquidation of the Partnership, distributionsto Unitholders will be made in accordance with the terms of the PartnershipAgreement.  A final distribution will bebased on the Unitholders’ and the General Partner’s pro-rata share of thePartnership’s remaining net assets after deducting and setting aside amountsrequired to satisfy and discharge any existing Partnership obligations andexpenses, as stated in the Partnership Agreement.  Such distribution to Unitholders will besubstantially less than the amount referenced in limited partners’ equity inthe Partnership’s financial statements, since the Partnership’s financialstatements are prepared in accordance with GAAP and the distributions uponliquidation pursuant to the terms of the Partnership Agreement do not requirethe General Partner to contribute an amount equal to its General Partner’sdeficit to the Partnership.

 

Since the Partnership is obligated todistribute the proceeds of mortgage prepayments, sales and insurance on InsuredMortgages (as defined in the Partnership Agreement) to its Unitholders, thesize of the Partnership’s portfolio will continue to decrease.  The magnitude of the decrease will dependupon the size of the Insured Mortgages which are prepaid, sold or assigned forinsurance proceeds.

 

11

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Contractual Obligations

 

The following is a summary of the Partnership’scontractual obligations as of December 31, 2004:

 

(Dollarsin thousands)

 
| ** **               | ** ** | **Payments due by period** | ** ** |
|--------------------------|------------|----------------------------|------------|
| ** **               | ** ** | **Total**                  | ** ** | **2005** | ** ** | **2006-2007** | ** ** | **2008-2009** | ** ** | **Thereafter** | ** ** |
|                     |       |                       |       |   |   |   |   |   |   |   |   |
| Asset Management Fee (1) |       | $                          | 728        |   | $ | 146 |   | $ | 291 |   | $ | 291 |   | $ | — |   |
|                          |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)          The fee paid by the Partnership to the Advisor for services performedunder the Advisory Agreements (the “Asset Management Fee”), is equal to 0.95%of the Partnership’s Total Invested Assets (as defined in the PartnershipAgreement.) The Asset Management Fee declines as the mortgage base declines.

 

### Cash flow - 2004 comparedto 2003

 

Net cashprovided by operating activities decreased by approximately $1.9 million in2004 compared to 2003 primarily due to a reduction in earnings as a result ofthe reduction in mortgage base, as previously discussed.

 

Net cashprovided by investing activities increased by approximately $21.9 million in2004 compared to 2003, primarily due to an increase in net proceeds receivedfrom mortgage sales, mortgage prepayments and redemption of debentures.

 

Net cash usedin financing activities increased by approximately $31.7 million in 2004compared to 2003 due to an increase in the amount of distributions paid topartners in 2004 compared to 2003.  Theincrease in distributions is the result of higher proceeds from mortgage salesand prepayments in 2004, as discussed above.

 

### Cash flow - 2003 comparedto 2002

 

Net cashprovided by operating activities decreased by approximately $2.0 million in2003 compared to 2002 primarily due to a decrease in the receipt of interestpreviously accrued on mortgages awaiting assignment from HUD under the Section221 program and a reduction in mortgage investment income.

 

Net cashprovided by investing activities decreased by approximately $10.6 million in2003 compared to 2002, primarily due to decreases in net proceeds received frommortgage assignments, mortgage prepayments and redemption of debentures.

 

Net cash usedin financing activities decreased by approximately $7.4 million in 2003compared to 2002 due to a reduction in the amount of distributions paid topartners in 2003 compared to 2002.  Thedecrease in distributions is the result of lower proceeds from mortgageassignments and prepayments in 2003, as discussed above.

 

### Critical AccountingPolicies

 

The preparation of financial statements inconformity with GAAP requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities, the disclosure ofcontingent assets and liabilities at the date of the financial statements, andthe reported amounts of revenues and expenses during the reportingperiods.  The Partnership continuallyevaluates the estimates used to prepare the financial statements, and updatesthose estimates as necessary.  Ingeneral, management’s estimates are based on historical experience, oninformation from third parties, and other various assumptions that are believedto be reasonable under the facts and circumstances.  Actual results could differ materially fromthose estimates.

 

Management considers an accounting estimate to be critical if:

 

12

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•             itrequires assumptions to be made that were uncertain at the time the estimatewas made; and

•             changesin the estimate or different estimates that could have been selected could havea material impact on the Partnership’s results of operations or financialcondition.

 

The Partnership’s critical accounting estimates include thedetermination of fair values for Insured Mortgages:

 

•             FairValue of Insured Mortgages – The Partnership estimates the fair value ofits Insured Mortgages internally.  ThePartnership compares the Insured Mortgage interest rate to the U.S. Treasuryrate plus a spread to determine an approximate market level mortgage interestrate relative to each of the outstanding mortgages, and also considersprepayment lock outs and penalties in determining the fair value.  Due tothe relatively high coupon rate on the underlying mortgages and the currentlevel of prepayment restrictions, most of the mortgages are valued close to parreflecting an increased likelihood of prepayment. For those mortgages that havesome remaining prepayment penalties, most are valued to include the prepaymentpenalty likely to be paid in addition to par value in the event of prepayment.

 

ITEM 7A.                   QUALITATIVE ANDQUANTITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Partnership’s principal market risk isexposure to changes in interest rates in the U.S. Treasury market.  The Partnership will experience fluctuationsin the market value of its assets related to (i) changes in the interest ratesof U.S. Treasury securities, and (ii) changes in the spread between theinterest rates on U.S. Treasury securities and the interest rates on thePartnership’s Insured Mortgages.  TheInsured Mortgages held by the Partnership are generally pre-payable at any timeprior to maturity.

 

ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARYDATA

 

The information required by this Item is setforth in this Annual Report on Form 10-K commencing on page 22.

 

ITEM 9.                 CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

 

There were no changes and disagreements with accountants on accountingand financial disclosures.

 

ITEM 9A.    CONTROLSAND PROCEDURES

 

The GeneralPartner carried out an evaluation, under the supervision and with theparticipation of the General Partner’s management, including the GeneralPartner’s principal executive officer and the principal financial officer, ofthe effectiveness of the design and operation of its disclosure controls andprocedures, as that term is defined in Rule 13a-15(e) under the Securities andExchange Act of 1934, as amended.  Basedon that evaluation, the General Partner’s principal executive officer and principalfinancial officer concluded that as of December 31, 2004, which is the end ofthe period covered by the Annual Report on Form 10-K, the General Partner’sdisclosure controls and procedures are effective.

 

There havebeen no significant changes in the General Partner’s internal controls overfinancial reporting in the fiscal quarter ended December 31, 2004 that havematerially affected, or are reasonably likely to materially affect, ourinternal controls over financial reporting.

 

ITEM 9B.               OTHER INFORMATION

 

There is noadditional information to report for the last quarter of the fiscal year otherthan what has 

 

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already been reported on Form 8-K.

 

ITEM 10.  DIRECTORS AND EXECUTIVEOFFICERS OF THE REGISTRANT

 

The Partnership has no executive officers ordirectors.  The Partnership does notdirectly employ any persons responsible for managing or operating thePartnership or for providing services relating to day to day businessaffairs.  The affairs of the Partnershipare managed by its General Partner, CRIIMI, Inc. a wholly-owned subsidiary ofCRIIMI MAE, a corporation whose shares are listed on the New York StockExchange.  CRIIMI, Inc. holds a generalpartnership interest of 3.9%.

 

The business of the Partnership is managed byits General Partner while its portfolio of mortgages is managed by the Advisorand CMSLP pursuant to the Advisory Agreements and Sub-Advisory Agreement,respectively, as discussed above.  A wholly-ownedsubsidiary of CRIIMI MAE, CRIIMI MAE Management, Inc., provides personnel andadministrative services to the Partnership on behalf of the General Partner.

 

The Board of Directors of the General Partnerhas established an Audit Committee and has affirmatively determined that suchAudit Committee consists of independent directors (as defined in Section 121Aof the American Stock Exchange Company Guide and Rule 10A-3 under theSecurities Exchange Act of 1934, as amended.) The Audit Committee is currently comprised of Authur N. Haut, Robert J.Merrick and Robert E. Woods, each of whom is an audit committee financialexpert as defined in the SEC rules.  TheAudit Committee of the General Partner has appointed Ernst & Young LLP asthe Partnership’s independent public accountants for the fiscal year endingDecember 31, 2005, such appointment to continue at the discretion of the AuditCommittee.  The charter of the AuditCommittee of the General Partner is available upon request by writing to theGeneral Partner at 11200 Rockville Pike, 4th Floor, Rockville, MD20852.  In 2004, the Audit Committee metfour times and the Board of Directors of the General Partner met two times andacted by unanimous consent seven times.

 

The General Partner adopted a Code ofBusiness Conduct and Ethics that applies to the Partnership’s principalexecutive officer and principal financial and accounting officer.  A copy of the Code of Business Conduct andEthics is available upon request by writing to the General Partner at 11200Rockville Pike, 4th Floor, Rockville, MD 20852.  Any waivers of the Code of Business Conductand Ethics by the Board of Directors of the General Partner will be disclosedin a report on Form 8-K filed with the SEC within four days of such waiver.

 

All directors of the General Partner are electedannually by CRIIMI MAE.  All executiveofficers of the General Partner serve at the discretion of the Board ofDirectors of the General Partner.  Thereare no family relationships among any directors or executive officers of theGeneral Partner.

 

The following table sets forth informationconcerning the executive officers and the directors of the General Partner asof March 1, 2005:

 
| **Name**             | ** ** | **Age** | ** ** | **Position**                                                     |
|----------------------|------------|---------|------------|------------------------------------------------------------------|
|                 |       |    |       |                                                             |
| Barry  S. Blattman   |       | 42      |       | Chairman  of the Board of Directors and  Chief Executive Officer |
|                 |       |    |       |                                                             |
| Mark  R. Jarrell     |       | 44      |       | President  and Chief Operating Officer                           |
|                 |       |    |       |                                                             |
| Cynthia  O. Azzara   |       | 45      |       | Executive  Vice President, Chief Financial Officer and Treasurer |
|                 |       |    |       |                                                             |
| Stephen  M. Abelman  |       | 43      |       | Executive  Vice President, Asset Management                      |
|                 |       |    |       |                                                             |
| Daniel  P. Warcholak |       | 44      |       | Senior  Vice President, Fixed Income Capital Markets             |
|                 |       |    |       |                                                             |
| Arthur  N. Haut      |       | 69      |       | Director                                                         |
|                 |       |    |       |                                                             |
| Robert  J. Merrick   |       | 59      |       | Director                                                         |
|                 |       |    |       |                                                             |
| Robert  E. Woods     |       | 57      |       | Director                                                         |

 

14

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Barry S. Blattman has been Chairman of the Board of Directors and ChiefExecutive Officer of the General Partner since January 23, 2003.  Mr. Blattman is currently the Chairman andChief Executive Officer of CRIIMI MAE. From January 23, 2003 until September 15, 2003, he served as Presidentof the General Partner.  Mr. Blattman has been the Managing Partner ofBrascan Real Estate Financial Partners LLC since 2002.  From 1996 through December 2001, Mr. Blattmanwas a Managing Director of Real Estate Investment Banking at Merrill Lynch,where he oversaw the real-estate debt group which was responsible for UnitedStates and Canadian conduit loan programs, large-loan originations, syndicatedlending, mezzanine lending, third-party portfolio financing andsecuritizations, unsecured bond and preferred equity issuances, and ratingagency advisory services.  Mr. Blattmanreceived a Master of Business Administration degree from New York Universityand Bachelor of Arts degree from the University of Michigan.

 

Mark R.Jarrell has been President and Chief Operating Officer of the General Partnersince September 15, 2003.  From April 2002 to August 2003, Mr. Jarrellserved as Senior Vice President and head of the Debt Group at The CommunityDevelopment Trust, Inc. (“CDT”), a private hybrid REIT focused on debt andequity investments in projects that support affordable housing and communitydevelopment. As head of the Debt Group at CDT, he was responsible for all debtorigination, underwriting and capital markets activities and was a member ofthe REIT’s Management Committee. Prior to joining CDT, Mr. Jarrell spentfifteen years in the commercial mortgage-backed securities (CMBS) industry at anumber of Wall Street firms. From 1997 to 2002, he was a Senior Vice Presidentat Greenwich Capital Markets, Inc., where he headed that firm’s conduit loanproduction and securitization effort. Mr. Jarrell received his Bachelor of Artsdegree in Urban Studies (summa cum laude) from Columbia College and Master ofPublic Affairs degree from the Woodrow Wilson School at PrincetonUniversity.  Mr. Jarrell is currently thePresident and Chief Operating Officer of CRIIMI MAE.

 

Cynthia O.Azzara has been Executive Vice President of the General Partner since September2003, Chief Financial Officer of the GeneralPartner since 1994, and Treasurer of theGeneral Partner since 1997. She was a Senior Vice President of the General Partner from 1995 toSeptember 2003. Ms. Azzara is responsible for accounting, financial andtreasury matters of the General Partner.  Prior to 1994, she held varioussenior positions overseeing the accounting and financial functions for numerouspublic companies that invested, directly or indirectly, in commercial andmulti-family mortgage assets. Ms. Azzara has over 15 years of experience inaccounting, corporate finance and regulatory matters.  Ms. Azzara is a Certified Public Accountantand holds a Bachelor of Business Administration degree in Accounting from JamesMadison University, Magna Cum Laude.  Ms.Azzara is currently the Executive Vice President, Chief Financial Officer and Treasurer of CRIIMI MAE.

 

StephenM. Abelman has been Executive Vice President, Asset Management of the GeneralPartner since October 2003.  Mr. Abelman is responsible for all asset management functions,including surveillance, loan management and special servicing. From 1993 to2003, Mr. Abelman served with Archon Group, a wholly-owned subsidiary ofGoldman Sachs, most recently as Vice President responsible for the assetmanagement of real estate, real estate debt, and mezzanine and preferred equityinvestments owned by Goldman and its Whitehall Street Funds. Mr. Abelman wasalso responsible for asset and portfolio projections and performance, includinginvestments in mortgage-backed securities and real estate. From 1997 to 2001, hemanaged Archon’s $1 billion-plus northeast portfolio, comprised primarily ofreal estate and non-performing loans from Washington, D.C. through NewEngland.  Mr. Abelman received a Bachelorof Science in Business Administration from Boston University and a Master ofBusiness Administration from Rice University. Mr. Abelman is currently the Executive Vice President, Asset Managementof CRIIMI MAE.

 

DanielP. Warcholak has been Senior Vice President, Fixed Income Capital Markets ofthe General Partner since September 2003. He is responsible forstructured finance, corporate finance transaction

 

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analytics, securities trading, and derivatives basedinterest rate risk management. Joining the General Partner in1998, he has held the positions of Group Vice President and Vice President,focusing on financial restructuring and transaction analytics.  From 1995 to 1998, he held various positionsin financial services, software, and systems consulting, most recently withKPMG Peat Marwick. From 1988 to 1995, Mr. Warcholak was Vice President with JHMFinancial Services Corp and JHM Capital Management, a portfolio investmentmanagement firm which specializes in mortgage-backed securities. Mr. Warcholakholds a Bachelor of Science degree from Drexel University, is a CFA Charterholder and a Certified Public Accountant. Mr. Warcholak is currently the Senior VicePresident, Fixed Income Capital Markets of CRIIMI MAE.

 

Arthur N. Haut hasserved as a Director of the General Partner since 2003.  Since 1999, Mr. Haut has served as director of Business Valuation Services in UHYAdvisors Litigation and Valuation Support Group (“UHY”) where he is responsiblefor the valuation of minority and controlling interests for purposes of estateand financial planning, purchase or sale of a business and employee stockownership plans.  He also provides assistancein structuring, planning and implementing business combinations.  From 1978 until he joined UHY, Mr. Hautoperated his own business valuation firm. Prior to 1978, Mr. Haut was a partner in the international accountingfirm, Coopers and Lybrand.  Since 1975,Mr. Haut has taught various courses in accounting, federal income taxes andcorporate financial reporting and valuation at the Yale School of Management,Yale Law School and Yale College.

 

Robert J. Merrickhas served as a Director of the General Partner since 1997.  Since February 1998, Mr. Merrick has servedas the Chief Credit Officer and Director of MCG Capital Corporation where he isresponsible for approval of all of MCG’s loans and investments.  From 1985 to 1997, he served as ExecutiveVice President and Chief Credit Officer of Signet Banking Company (“Signet”).  While at Signet, Mr. Merrick also served asChairman of the Credit Policy Committee and was a member of the Asset andLiability Committee, and the Management Committee.  Mr. Merrick currently serves as a director ofthe Bank of Richmond.

 

Robert E. Woodshas served as a Director of the General Partner since 1998.  He is currently the Managing Director andHead of Debt Syndicate at Societe Generale in New York where he is responsiblefor structuring, underwriting and distribution of private and public debt inNorth and South America, and Vice Chairman of the Debt Screening Committee. Hehas served in that position since 1997. From 1991 to 1997, Mr. Woods wasManaging Director and Head of Real Estate Capital Markets and theMortgage-Backed Securities division of Citicorp where he was also a SeniorCredit and Securities Officer. From 1990 to 1991, he was Global PortfolioManager of Citicorp’s Global Corporate Finance business.

 

Section 16(a) BeneficialOwnership Reporting Compliance – Section 16 of the SecuritiesExchange Act of 1934, as amended, (the “Exchange Act”) requires each directorand executive officer of the General Partner and each person who owns more than10% of the Partnership’s Units to report to the SEC by a specified date, his,her or its beneficial ownership of, and certain transactions in the Partnership’sUnits.  Based solely on its review ofForms 3, 4 and 5 and amendments thereto furnished to the Partnership, andwritten representations from certain reporting persons that no Form 5’s wererequired for those persons, the Partnership believes that all directors,executive officers and beneficial owners of more than 10% of the Partnership’sUnits have filed on a timely basis Forms 3, 4 and 5 as required in the fiscalyear ended December 31, 2004.

 

ITEM 11.        EXECUTIVECOMPENSATION

 

The Partnership does not have any directors orexecutive officers.  The Partnership doesnot directly employ any persons responsible for managing or operating the Partnershipor for providing services relating to day to day business affairs.  CRIIMI MAE Management, Inc., an affiliate ofthe General Partner, provides personnel and administrative services to thePartnership.  None of the directors orexecutive officers of the General Partner, however, received compensation fromthe Partnership, and the General Partner does not receive reimbursement fromthe Partnership for any portion of their salaries or other compensation.  The Partnership reimburses CRIIMI MAE Management,Inc. for these services on an actual cost basis.

 

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ITEM 12.               SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT AND RELATED UNITHOLDERMATTERS

 

As of March 1, 2005, no person was known by thePartnership to be the beneficial owner of more than five percent (5%) of theoutstanding Units of the Partnership.

 

The following table sets forthcertain information regarding the beneficial ownership of the Partnership’sUnits as of March 1, 2005 by each person known by the Partnership to be thebeneficial owner of more than 5% of its Units, each director of the GeneralPartner, each named executive officer of the General Partner, and by affiliatesof the Partnership.  Unless otherwiseindicated, each Unitholder has sole voting and investment power with respect tothe Units beneficially owned.

 
| **Name**        | ** ** | **Amount and Nature  of Units  Beneficially Owned** | ** ** | **Percentage of Units  Outstanding** | ** ** |
|-----------------|------------|-----------------------------------------------------|------------|--------------------------------------|------------|
|            |       |                                                |       |                                 |       |
| CRIIMI MAE Inc. |       | 4,000                                               |       | *                                    |       |

 

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*       Less than 1%

 

There are no arrangements known to the Partnership,the operation of which may at any subsequent date result in a change in controlof the Partnership.

 

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS

 

The Partnership’s portfolio of mortgages is managed bythe Advisor and CMSLP pursuant to the Advisory Agreements and Sub-AdvisoryAgreement, respectively, as discussed above. The fee paid by the Partnership to the Advisor for services performedunder the Advisory Agreements (the “Asset Management Fee”), is equal to 0.95%of the Partnership’s Total Invested Assets (as defined in the PartnershipAgreement.)  The Advisor pays CMSLP assub-advisor, a fee of 0.28% (the “Sub-Advisory Fee”) of Total Invested Assetsfor services performed under the Sub-Advisory Agreement from its AssetManagement Fee.  The Partnership is notliable for paying the Sub-Advisory Fee to CMSLP.  The General Partner and certain affiliatedentities have, during the years ended December 31, 2004, 2003 and 2002, earnedor received compensation or payments for services from the Partnership asfollows:

 

COMPENSATION PAID OR ACCRUEDTO RELATED PARTIES

 
| ** **                          | ** ** | ** **                           | ** ** | **For the year ended December 31,** | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| **Name  of Recipient**              | ** ** | **Capacity in Which Served/Item**    | ** ** | **2004**                            | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                |       |                                 |       |                                |       |   |   |   |   |
| CRIIMI, Inc. (1)                    |       | General Partner/Distribution         |       | $                                   | 1,889,795  |   | $ | 438,747 |   | $ | 1,350,555 |   |
|                                |       |                                 |       |                                |       |   |   |   |   |
| AIM Acquisition  Partners, L.P. (2) |       | Advisor/Asset Management Fee         |       | 268,885                             |       | 611,417 |   | 744,733 |   |
|                                |       |                                 |       |                                |       |   |   |   |   |
| CRIIMI MAE  Management, Inc. (3)    |       | Affiliate of General Partner/Expense |       | 59,296                              |       | 69,820 |   | 55,487 |   |
|                                     |            |                                      |            |                                     |            |  |  |  |  |  |  |  |

 

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(1)          The General Partner is entitled to receive3.9% of the Partnership’s income, loss, capital and distributions, including,without limitation, the Partnership’s adjusted cash from operations andproceeds of mortgage prepayments, sales or insurance (both as defined in thePartnership Agreement).

 

(2)          The Advisor is entitled to an asset managementfee equal to 0.95% of Total Invested Assets (as defined in the PartnershipAgreement).  CMSLP is entitled to a feeequal to 0.28% of total invested assets from the Advisor’s asset managementfee.  Of the amounts paid to the Advisor,CMSLP earned fees equal to $79,239, $180,190, and $219,496 during the yearsended December 31, 2004, 2003, and 2002, respectively.  The general partner and limited partner ofCMSLP are wholly-owned subsidiaries of CRIIMI MAE.

 

(3)          CRIIMI MAE Management, Inc., an affiliate ofthe General Partner, is reimbursed for personnel and administrative services onan actual cost basis.

 

17

----

 

ITEM 14.        PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

Pre-approval policies and Procedures

 

The AuditCommittee of the General Partner has adopted a policy that requires advanceapproval of all audit, audit-related, tax services and other services to beperformed by the independent auditor. The Audit Committee has delegated to the Chair of the Audit Committeeauthority to approve permitted services provided that the Chair reports anydecisions to the Committee at its next scheduled meeting.

 

Fees paid to Ernst & Young LLP

 

The followingtable provides the amount of fees for professional services provided by thePartnership’s independent auditor, Ernst & Young LLP, in each of the lasttwo years ended December 31, 2004 and 2003:

 
| ** **     | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| Audit Fees     |       | $        | 47,500     |     | $          | 59,110 |   |
| Tax Fees (1)   |       | 10,458   |       | 11,065   |       |
| All Other Fees |       | —   |       | —   |       |
|                |            |          |            |          |            |  |  |

 

----

(1)          The Audit Committee has considered whether the provision of theseservices is compatible with maintaining the principal accountant’s independenceand has approved Ernst & Young LLP to provide these services to thePartnership.

 

Fees for auditservices included fees associated with the annual audit and the reviews of thePartnership’s quarterly reports on Form 10-Q. Tax fees included fees associated with tax compliance.

 

18

----

 

**PART IV**

 

ITEM 15.        EXHIBITS, FINANCIAL STATEMENT SCHEDULESAND REPORTS ON FORM 8 K 

 

(1)           FinancialStatements:

 
| **Description**                                                                                       | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------|
|                                                                                                  |       |       |
| Balance  Sheets as of December 31, 2004 and 2003                                                      |       |       |
|                                                                                                  |       |       |
| Statements  of Income and Comprehensive Income for the years ended December 31, 2004,  2003, and 2002 |       |       |
|                                                                                                  |       |       |
| Statements  of Changes in Partners’ Equity for the years ended December 31, 2004, 2003  and 2002 |       |       |
|                                                                                                  |       |       |
| Statements  of Cash Flows for the years ended December 31, 2004, 2003 and 2002                        |       |       |
|                                                                                                  |       |       |
| Notes to Financial  Statements                                                                        |       |       |

 

(2)  Financial Statement Schedules:

 
| IV -  Mortgage Loans on Real Estate |   |   |
|-------------------------------------|--------|--------|

 

All otherschedules have been omitted because they are not applicable, not required, orthe information is included in the Financial Statements or Notes thereto.

 

(3)  Exhibits:

 
| 4.0    |   | Amended and Restated  Certificates of Limited Partner­ship are incorporated by reference to Exhibit  4(a) to the Registration Statement on Form S-11 (No. 2-93294)  dated January 28, 1985 (such Registration Statement, as amended, is referred  to herein as the “Registration Statement”). |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                         |
| 4.1    |   | Second Amended and  Restated Partnership Agreement is incorporated by reference to Exhibit 3 to  the Registration Statement.                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 4.2    |   | Amendment No. 1 to the  Second Amended and Restated Partnership Agreement is incorporated by  reference to Exhibit 4(a) to the Partnership’s Annual Report on Form 10-K  for the year ended December 31, 1986.                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 4.3    |   | Amendment No. 2 to the  Second Amended and Restated Partnership Agreement is incorporated by  reference to Exhibit 4(b) to the Partnership’s Annual Report on Form 10-K  for the year ended December 31, 1986.                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 4.4    |   | Amendment No. 3 dated  February 12, 1990, to the Second Amended and Restated Agreement of Limited  Partnership of the Partnership incorporated by reference to Exhibit 4(c) to  the Partnership’s Annual Report on Form 10-K for the year ended  December 31, 1989.                                     |
|   |   |                                                                                                                                                                                                                                                                                                         |
| 4.5    |   | Amendment No. 4 dated  September 4, 1991, to the Second Amended and Restated Agreement of Limited  Partnership of the Partnership incorporated by reference to Exhibit 28(c), to  the Partnership’s Annual Report on Form 10-K for the year ended December 31,  1991.                                   |

 

19

----

 
| 10.1   |   | Sub-Management Agreement  by and between AIM Acquisition and CRI/AIM Management, Inc., dated as of  March 1, 1991, incorporated by reference to Exhibit 28(f) to the  Partnership’s Annual Report on Form 10-K for the year ended December 31,  1992. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                       |
| 14.0   |   | General Partner’s Code  of Business Conduct and Ethics incorporated by reference to Exhibit 28(f) to  the Partnership’s Annual Report on Form 10-K for the year ended December 31,  2003.                                                        |
|   |   |                                                                                                                                                                                                                                                       |
| 31.1   |   | Certification pursuant  to the Exchange Act Rule 13a-14(a) from Barry S. Blattman, Chairman of the  Board and Chief Executive Officer of the General Partner (Filed herewith).                                                                             |
|   |   |                                                                                                                                                                                                                                                       |
| 31.2   |   | Certification pursuant  to the Exchange Act Rule 13a-14(a) from Cynthia O. Azzara, Executive Vice  President, Chief Financial Officer and Treasurer of the General Partner  (Filed herewith).                                                              |
|   |   |                                                                                                                                                                                                                                                       |
| 32.1   |   | Certification pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 from Barry S. Blattman,  Chairman of the Board and Chief Executive Officer of the General Partner  (Furnished herewith).                                                          |
|   |   |                                                                                                                                                                                                                                                       |
| 32.2   |   | Certification pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 from Cynthia O. Azzara,  Executive Vice President, Chief Financial Officer and Treasurer of the  General Partner (Furnished herewith).                                            |

 

20

----

 

SIGNATURES

 

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

 
|   | AMERICAN INSURED  MORTGAGE        |
|--------|-----------------------------------|
|   | INVESTORS  – SERIES 85, L.P. |
|   | (Registrant)                      |
|   |                              |
|   | By:                               | CRIIMI, Inc. |
|   |                              | General Partner |
|   |                              |   |
|   | By:                               | /s/ Barry S. Blattman |   |
|   |                              | Barry S. Blattman |
|   |                              | Chairman of the Board  and |
|   |                              | Chief Executive Officer  of CRIIMI,  Inc. (Principal Executive Officer) |

 

 

Pursuant to therequirements of the Securities and Exchange Act of 1934, this report has beensigned below by the following persons on behalf of registrant and in thecapacities and on the dates indicated.

 
| March 8, 2005 |                                                                                                  | /s/ Barry S. Blattman |   |
|---------------|-------------------------------------------------------------------------------------------------------|-----------------------|--------|
| DATE          | Barry S. Blattman                                                                                     |
|          | Chairman of the Board  and                                                                            |
|          | Chief Executive Officer  of CRIIMI, Inc.                                                              |
|          | (Principal Executive  Officer)                                                                        |
|          |                                                                                                  |
|          |                                                                                                  |
| March 8, 2005 |                                                                                                  | /s/ Cynthia O. Azzara |   |
| DATE          | Cynthia O. Azzara                                                                                     |
|          | Executive Vice  President,                                                                            |
|          | Chief Financial Officer  and Treasurer of  CRIIMI, Inc. (Principal Financial and  Accounting Officer) |
|          |                                                                                                  |
|          |                                                                                                  |
| March 8, 2005 |                                                                                                  | /s/ Mark R. Jarrell   |   |
| DATE          | Mark Jarrell                                                                                          |
|          | President and Chief Operating Officer                                                                 |
|          | and a Director of CRIIMI, Inc.                                                                        |
|          |                                                                                                  |
| March 8, 2005 |                                                                                                  | /s/ Arthur N. Haut    |   |
| DATE          | Arthur N. Haut                                                                                        |
|          | Director of CRIIMI,  Inc.                                                                             |
|          |                                                                                                  |
|          |                                                                                                  |
| March 8, 2005 |                                                                                                  | /s/ Robert J. Merrick |   |
| DATE          | Robert J. Merrick                                                                                     |
|          | Director of CRIIMI,  Inc.                                                                             |
|          |                                                                                                  |
|          |                                                                                                  |
| March 8, 2005 |                                                                                                  | /s/ Robert E. Woods   |   |
| DATE          | Robert E. Woods                                                                                       |
|          | Director of CRIIMI,  Inc.                                                                             |
|               |                                                                                                       |                       |        |  |  |  |  |

 

21

----

 

**AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.**

 

 

**Financial Statements**

 

**as of December 31, 2004 and 2003**

 

**and for the Years Ended**

 

**December 31, 2004, 2003 and 2002**

 

22

----

 

REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Partners of AmericanInsured Mortgage Investors - Series 85, L.P.

 

We have auditedthe accompanying balance sheets of American Insured Mortgage Investors - Series85, L.P. (the Partnership) as of December 31, 2004 and 2003, and the relatedstatements of income and comprehensive income, changes in partners’ equity, andcash flows for each of the three years in the period ended December 31, 2004.  Our audit also included the financialstatement schedule listed in the Index at Item 15(2).  These financial statements and schedule arethe responsibility of the Partnership’s management.  Our responsibility is to express an opinionon these financial statements and schedule based on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. An audit includesconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of thePartnership’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of the Partnership atDecember 31, 2004 and 2003, and the results of its operations and its cashflows for each of the three years in the period ended December 31, 2004, inconformity with U. S. generally accepted accounting principles.  Also, in our opinion, the related financialstatement schedule, when considered in relation to the basic financialstatements taken as a whole, presents fairly in all material respects theinformation set forth therein.

 

 
| /s/ Ernst & Young LLP |   |
|---------------------------|--------|
| McLean, Virginia          |
| March 2, 2005             |

 

23

----

 

AMERICAN INSURED MORTGAGEINVESTORS - SERIES 85, L.P.

BALANCE SHEETS

 
| ** **                                                                                            | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
|                                                                                                  |       |                   |       |                   |       |
| **ASSETS**                                                                                            |       |                   |       |                   |       |
|                                                                                                  |       |                   |       |                   |       |
| Investment in  FHA-Insured Certificates and GNMA  Mortgage-Backed Securities, at fair value           |       | $                      | 14,299,980 |                   | $          | 35,147,430 |   |
| Investment in  FHA-Insured Loans, at amortized cost,  net of unamortized discount and premium         |       | —                 |       | 10,628,077             |       |
| Investment in  debentures, at fair value                                                              |       | 1,741,873              |       | 10,335,670             |       |
|                                                                                                  |       |                   |       |                   |       |
| Cash and cash  equivalents                                                                            |       | 619,856                |       | 11,345,058             |       |
|                                                                                                  |       |                   |       |                   |       |
| Receivables and  other assets                                                                         |       | 140,559                |       | 1,592,192              |       |
|                                                                                                  |       |                   |       |                   |       |
| Total assets                                                                                          |       | $                      | 16,802,268 |                   | $          | 69,048,427 |   |
|                                                                                                  |       |                   |       |                   |       |
|                                                                                                  |       |                   |       |                   |       |
| **LIABILITIES AND PARTNERS’ EQUITY**                                                             |       |                   |       |                   |       |
|                                                                                                  |       |                   |       |                   |       |
| Distributions payable                                                                                 |       | $                      | 377,092    |                   | $          | 2,513,947 |   |
|                                                                                                  |       |                   |       |                   |       |
| Accounts payable  and accrued expenses                                                                |       | 83,241                 |       | 73,460                 |       |
|                                                                                                  |       |                   |       |                   |       |
| Due to affiliate                                                                                      |       | —                 |       | 5,319,243              |       |
|                                                                                                  |       |                   |       |                   |       |
| Total  liabilities                                                                                    |       | 460,333                |       | 7,906,650              |       |
|                                                                                                  |       |                   |       |                   |       |
| Partners’  equity:                                                                               |       |                   |       |                   |       |
| Limited  partners’ equity, 15,000,000 Units  authorized, 12,079,514 Units issued and outstanding |       | 25,012,435             |       | 67,926,439             |       |
| General  partner’s deficit                                                                       |       | (8,816,275             | )          | (7,074,710             | )          |
| Accumulated  other comprehensive income                                                               |       | 145,775                |       | 290,048                |       |
|                                                                                                  |       |                   |       |                   |       |
| Total partners’  equity                                                                          |       | 16,341,935             |       | 61,141,777             |       |
|                                                                                                  |       |                   |       |                   |       |
| Total  liabilities and partners’ equity                                                          |       | $                      | 16,802,268 |                   | $          | 69,048,427 |   |

 

Theaccompanying notes are an integral partof these financial statements.

 

24

----

 

AMERICANINSURED MORTGAGE INVESTORS - SERIES 85, L.P.

 

STATEMENTS OF INCOME ANDCOMPREHENSIVE INCOME

 
| ** **                                                                                                          | ** ** | **For the years ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                          | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                                                                |       |                                 |       |   |   |   |   |
| Income:                                                                                                             |       |                                 |       |   |   |   |   |
| Mortgage  investment income                                                                                         |       | $                                    | 2,089,159  |   | $ | 4,846,437 |   | $ | 6,168,254 |   |
| Interest and  other income                                                                                          |       | 222,374                              |       | 233,299 |   | 274,342 |   |
|                                                                                                                |       |                                 |       |   |   |   |   |
|                                                                                                                |       | 2,311,533                            |       | 5,079,736 |   | 6,442,596 |   |
|                                                                                                                |       |                                 |       |   |   |   |   |
|                                                                                                                |       |                                 |       |   |   |   |   |
| Expenses:                                                                                                           |       |                                 |       |   |   |   |   |
| Asset management  fee to related parties                                                                            |       | 268,885                              |       | 611,417 |   | 744,733 |   |
| General and  administrative                                                                                         |       | 296,936                              |       | 393,410 |   | 411,226 |   |
|                                                                                                                |       |                                 |       |   |   |   |   |
|                                                                                                                |       | 565,821                              |       | 1,004,827 |   | 1,155,959 |   |
|                                                                                                                |       |                                 |       |   |   |   |   |
| Earnings before  gains (losses) on mortgage dispositions                                                            |       | 1,745,712                            |       | 4,074,909 |   | 5,286,637 |   |
|                                                                                                                |       |                                 |       |   |   |   |   |
| Mortgage  dispositions                                                                                              |       |                                 |       |   |   |   |   |
| Gains                                                                                                               |       | 2,126,903                            |       | 1,509,197 |   | 1,859,749 |   |
| Losses                                                                                                              |       | (71,836                              | )          | (11,415 | ) | (8,498 | ) |
|                                                                                                                |       |                                 |       |   |   |   |   |
| Net earnings                                                                                                        |       | $                                    | 3,800,779  |   | $ | 5,572,691 |   | $ | 7,137,888 |   |
|                                                                                                                |       |                                 |       |   |   |   |   |
| Other  comprehensive (loss) income - adjustment to unrealized gains and losses on  investments in insured mortgages |       | (144,273                             | )          | (1,121,249 | ) | 604,237 |   |
|                                                                                                                |       |                                 |       |   |   |   |   |
| Comprehensive  income                                                                                               |       | $                                    | 3,656,506  |   | $ | 4,451,442 |   | $ | 7,742,125 |   |
|                                                                                                                |       |                                 |       |   |   |   |   |
|                                                                                                                |       |                                 |       |   |   |   |   |
| Net earnings  allocated to:                                                                                         |       |                                 |       |   |   |   |   |
| Limited partners  - 96.1%                                                                                           |       | $                                    | 3,652,549  |   | $ | 5,355,356 |   | $ | 6,859,510 |   |
| General partner  - 3.9%                                                                                             |       | 148,230                              |       | 217,335 |   | 278,378 |   |
|                                                                                                                |       |                                 |       |   |   |   |   |
|                                                                                                                |       | $                                    | 3,800,779  |   | $ | 5,572,691 |   | $ | 7,137,888 |   |
|                                                                                                                |       |                                 |       |   |   |   |   |
| Net earnings per  Limited                                                                                           |       |                                 |       |   |   |   |   |
| Partnership Unit  - Basic and diluted                                                                               |       | $                                    | 0.30       |   | $ | 0.44 |   | $ | 0.57 |   |

 

The accompanying notes are anintegral partof these financial statements.

 

25

----

 

AMERICANINSURED MORTGAGE INVESTORS - SERIES 85, L.P.

 

STATEMENTS OF CHANGES INPARTNERS’ EQUITY

 

For the years ended December31, 2004, 2003 and 2002

 
| ** **                                                                                                                  | ** ** | **General  Partner** | ** ** | **Limited  Partners** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Total**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|-----------------------|------------|-----------------------------------------------|------------|-------------|------------|
|                                                                                                                        |       |                 |       |                  |       |                                          |       |        |       |
| Balance, January  1, 2002                                                                                                   |       | $                    | (5,781,121 | )                     | $          | 99,801,805                                    |       | $           | 807,060    |   | $ | 94,827,744 |   |
|                                                                                                                        |       |                 |       |                  |       |                                          |       |        |       |
| Net Earnings                                                                                                                |       | 278,378              |       | 6,859,510             |       | —                                        |       | 7,137,888   |       |
| Adjustment to  unrealized gains and losses on investments in insured mortgages                                              |       | —               |       | —                |       | 604,237                                       |       | 604,237     |       |
| Distributions  paid or accrued of $2.755 per Unit, including return of capital of $2.185  (unaudited) per Unit              |       | (1,350,555           | )          | (33,279,063           | )          | —                                        |       | (34,629,618 | )          |
|                                                                                                                        |       |                 |       |                  |       |                                          |       |        |       |
| Balance,  December 31, 2002                                                                                                 |       | (6,853,298           | )          | 73,382,252            |       | 1,411,297                                     |       | 67,940,251  |       |
|                                                                                                                        |       |                 |       |                  |       |                                          |       |        |       |
| Net Earnings                                                                                                                |       | 217,335              |       | 5,355,356             |       | —                                        |       | 5,572,691   |       |
| Adjustment to  unrealized gains and losses on investments in insured mortgages                                              |       | —               |       | —                |       | (1,121,249                                    | )          | (1,121,249  | )          |
| Distributions  paid or accrued of $0.895 per Unit, including return of capital of $0.455  (unaudited) per Unit              |       | (438,747             | )          | (10,811,169           | )          | —                                        |       | (11,249,916 | )          |
|                                                                                                                        |       |                 |       |                  |       |                                          |       |        |       |
| Balance,  December 31, 2003                                                                                                 |       | (7,074,710           | )          | 67,926,439            |       | 290,048                                       |       | 61,141,777  |       |
|                                                                                                                        |       |                 |       |                  |       |                                          |       |        |       |
| Net Earnings                                                                                                                |       | 148,230              |       | 3,652,549             |       | —                                        |       | 3,800,779   |       |
| Adjustment to  unrealized gains and losses on investments in insured mortgages                                              |       | —               |       | —                |       | (144,273                                      | )          | (144,273    | )          |
| Distributions  paid or accrued of $3.855 per Unit, including return of capital of $3.555  (unaudited) per Unit              |       | (1,889,795           | )          | (46,566,553           | )          | —                                        |       | (48,456,348 | )          |
|                                                                                                                        |       |                 |       |                  |       |                                          |       |        |       |
| Balance,  December 31, 2004                                                                                                 |       | $                    | (8,816,275 | )                     | $          | 25,012,435                                    |       | $           | 145,775    |   | $ | 16,341,935 |   |
|                                                                                                                        |       |                 |       |                  |       |                                          |       |        |       |
| Limited  Partnership Units outstanding - Basic and diluted, as of and for the years  ended December 31, 2004, 2003 and 2002 |       |                 |       | 12,079,514            |       |                                          |       |        |       |

 

The accompanying notes are anintegral partof these financial statements.

 

26

----

 

AMERICANINSURED MORTGAGE INVESTORS - SERIES 85, L.P.

 

STATEMENTS OF CASH FLOWS

 
| ** **                                                                           | ** ** | **For the years ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                           | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                                 |       |                                 |       |   |   |   |   |
| Cash flows from  operating activities:                                               |       |                                 |       |   |   |   |   |
| Net earnings                                                                         |       | $                                    | 3,800,779  |   | $ | 5,572,691 |   | $ | 7,137,888 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities: |       |                                 |       |   |   |   |   |
| Gains on  mortgage dispositions                                                      |       | (2,126,903                           | )          | (1,509,197 | ) | (1,859,749 | ) |
| Losses on  mortgage dispositions                                                     |       | 71,836                               |       | 11,415 |   | 8,498 |   |
| Changes in  assets and liabilities:                                                  |       |                                 |       |   |   |   |   |
| Decrease  (increase) in receivables and other assets                                 |       | 640,973                              |       | (60,238 | ) | 913,856 |   |
| Increase  (decrease) in accounts payable and accrued expenses                        |       | 9,781                                |       | (42,339 | ) | (5,860 | ) |
| (Decrease)  increase in due to affiliate                                             |       | (151,408                             | )          | 151,408 |   | (42,487 | ) |
|                                                                                 |       |                                 |       |   |   |   |   |
| Net cash  provided by operating activities                                           |       | 2,245,058                            |       | 4,123,740 |   | 6,152,146 |   |
|                                                                                 |       |                                 |       |   |   |   |   |
| Cash flows from  investing activities:                                               |       |                                 |       |   |   |   |   |
| Proceeds from  mortgage prepayments and sales                                        |       | 31,413,766                           |       | 12,794,305 |   | 14,111,131 |   |
| Proceeds from  redemption of debenture                                               |       | 11,146,330                           |       | — |   | 2,385,233 |   |
| Debenture proceeds  paid to affiliate                                                |       | (5,167,835                           | )          | — |   | (1,192,617 | ) |
| Proceeds from  mortgage assignments                                                  |       | —                               |       | 2,291,423 |   | 10,190,539 |   |
| Receipt of  mortgage principal from scheduled payments                               |       | 230,682                              |       | 604,527 |   | 769,593 |   |
|                                                                                 |       |                                 |       |   |   |   |   |
| Net cash  provided by investing activities                                           |       | 37,622,943                           |       | 15,690,255 |   | 26,263,879 |   |
|                                                                                 |       |                                 |       |   |   |   |   |
| Cash flows from  financing activities:                                               |       |                                 |       |   |   |   |   |
| Distributions  paid to partners                                                      |       | (50,593,203                          | )          | (18,917,453 | ) | (26,333,594 | ) |
|                                                                                 |       |                                 |       |   |   |   |   |
| Net (decrease)  increase in cash and cash equivalents                                |       | (10,725,202                          | )          | 896,542 |   | 6,082,431 |   |
|                                                                                 |       |                                 |       |   |   |   |   |
| Cash and cash  equivalents, beginning of year                                        |       | 11,345,058                           |       | 10,448,516 |   | 4,366,085 |   |
|                                                                                 |       |                                 |       |   |   |   |   |
| Cash and cash  equivalents, end of year                                              |       | $                                    | 619,856    |   | $ | 11,345,058 |   | $ | 10,448,516 |   |
|                                                                                 |       |                                 |       |   |   |   |   |
| Non-cash  investing activity:                                                        |       |                                 |       |   |   |   |   |
| Portion of  debentures due from a third party in exchange for assigned mortgages     |       | $                                    | —     |   | $ | 810,660 |   | $ | 744,159 |   |
| Debentures  received from HUD in exchange for assigned mortgages                     |       | 1,741,873                            |       | 10,335,670 |   | — |   |
| Portion of  debentures due to an affiliate                                           |       | —                               |       | (5,167,835 | ) | — |   |

 

The accompanying notes are anintegral partof these financial statements.

 

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AMERICAN MORTGAGE INVESTORS - SERIES 85, L.P.

 

NOTES TO FINANCIAL STATEMENTS

 

1.       ORGANIZATION

 

American InsuredMortgage Investors - Series 85, L.P. (the “Partnership”) was formedpursuant to a limited partnership agreement (“Partnership Agreement”) under theUniform Limited Partnership Act of the state of California on June 26,1984.  During the period from March 8,1985 (the initial closing date of the Partnership’s public offering) throughJanuary 27, 1986 (the termination date of the offering), the Partnership,pursuant to its public offering of 12,079,389 Depositary Units of limitedpartnership interest (“Units”) raised a total of $241,587,780 in grossproceeds.  In addition, the initiallimited partner contributed $2,500 to the capital of the Partnership inexchange for 125 units of limited partnership interest.

 

CRIIMI, Inc., awholly-owned subsidiary of CRIIMI MAE Inc. (“CRIIMI MAE”), acts as the GeneralPartner (the “General Partner”) for the Partnership and holds a partnershipinterest of 3.9%.  The General Partnerprovides management and administrative services on behalf of thePartnership.  AIM Acquisition PartnersL.P. serves as the advisor (the “Advisor”) to the Partnership.  The general partner of the Advisor is AIMAcquisition Corporation (“AIM Acquisition”) and the limited partners include,but are not limited to, The Goldman Sachs Group, L.P., Sun America Investments,Inc. (successor to Broad, Inc.) and CRI/AIM Investment, L.P., a subsidiary ofCRIIMI MAE, over which CRIIMI MAE exercises 100% voting control.  AIM Acquisition is a Delaware corporationthat is primarily owned by Sun America Investments, Inc. and The Goldman SachsGroup, L.P.

 

Pursuant to theterms of certain origination and acquisition services, management services anddisposition services agreements between the Advisor and the Partnership(collectively the “Advisory Agreements”), the Advisor renders services to thePartnership, including but not limited to, the management of the Partnership’sportfolio of mortgages and the disposition of the Partnership’s mortgages.  Such services are subject to the review andultimate authority of the General Partner. However, the General Partner is required to receive the consent of theAdvisor prior to taking certain significant actions, including but not limitedto the disposition of mortgages, any transaction or agreement with the GeneralPartner or its affiliates, or any material change as to policies regardingdistributions or reserves of the Partnership (collectively the “Consent Rights”).  The Advisor is permitted and has delegatedthe performance of services to CRIIMI MAE Services Limited Partnership (“CMSLP”),a subsidiary of CRIIMI MAE, pursuant to a sub-management agreement (the “Sub-AdvisoryAgreement”).  The general partner andlimited partner of CMSLP are wholly-owned subsidiaries of CRIIMI MAE.  The delegation of such services by theAdvisor to CMSLP does not relieve the Advisor of its obligation to perform suchservices.  Furthermore, the Advisor hasretained its Consent Rights.

 

Prior to December1993, the Partnership was engaged in the business of originating governmentinsured mortgage loans (“Originated Insured Mortgages”) and acquiringgovernment insured mortgage loans (“Acquired Insured Mortgages” and, togetherwith Originated Insured Mortgages, referred to herein as “Insured Mortgages”).  In accordance with the terms of thePartnership Agreement, the Partnership is no longer authorized to originate oracquire Insured Mortgages and, consequently, its primary objective is to manageits portfolio of mortgage investments, all of which are insured under Section221(d)(4) or Section 231 of the National Housing Act of 1937, as amended (the “NationalHousing Act”).  The Partnership Agreementstates that the Partnership will terminate on December 31, 2009, unlessterminated earlier under the provisions thereof.  The Partnership is required, pursuant to thePartnership Agreement, to dispose of its assets prior to this date.

 

As the Partnership continues to liquidate its mortgageinvestments and Unitholders receive distributions of return of capital andtaxable gains, Unitholders should expect a reduction in earnings anddistributions due to the decreasing mortgage base.  Based upon the current level of interestrates, the trend in mortgage prepayments over the past year is likely tocontinue.  Such mortgage prepayments, ifcontinued at the trend over the past year, will likely result in a terminationand liquidation of the Partnership significantly earlier than the December 2009stated termination date.  Upon thetermination and liquidation of the Partnership, distributions to Unitholderswill be made in accordance with the terms of the Partnership Agreement.  A

 

28

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final distribution will be based on the Unitholders’ and the GeneralPartner’s pro-rata share of the Partnership’s remaining net assets afterdeducting and setting aside amounts required to satisfy and discharge anyexisting Partnership obligations and expenses, as stated in the PartnershipAgreement.  Such distribution toUnitholders will be substantially less than the amount referenced in limitedpartners’ equity in the Partnership’s financial statements, since thePartnership’s financial statements are prepared in accordance with GAAP and thedistributions upon liquidation pursuant to the terms of the PartnershipAgreement do not require the General Partner to contribute an amount equal toits General Partner’s deficit to the Partnership.

 

2.       SIGNIFICANT ACCOUNTINGPOLICIES

 

Method ofAccounting

 

The Partnership’sfinancial statements are prepared on the accrual basis of accounting inaccordance with accounting principles generally accepted in the United States(“GAAP”).  The preparation of financialstatements in conformity with GAAP requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities at thedate of the financial statements and the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from those estimates.

 

Investment inInsured Mortgages

 

The Partnership’sinvestment in Insured Mortgages is comprised of participation certificatesevidencing a 100% undivided beneficial interest in government insuredmultifamily mortgages issued or sold pursuant to Federal Housing Administration(“FHA”) programs (“FHA-Insured Certificates”), mortgage-backed securitiesguaranteed by the Government National Mortgage Association (“GNMA”) (“GNMAMortgage-Backed Securities”).  Themortgages underlying the FHA-Insured Certificates and GNMA Mortgage-Backed Securitiesare primarily non-recourse first liens on multifamily residential developmentsor retirement homes.

 

Payments ofprincipal and interest on FHA-Insured Certificates are insured by the UnitedStates Department of Housing and Urban Development (“HUD”) pursuant to Title 2of the National Housing Act.  Payments ofprincipal and interest on GNMA Mortgage-Backed Securities are guaranteed byGNMA pursuant to Title 3 of the National Housing Act.

 

As of December 31,2004, the weighted average remaining term of the Partnership’s investments inGNMA Mortgage-Backed Securities and FHA-Insured Certificates is approximately25 years.  However, the PartnershipAgreement states that the Partnership will terminate in approximately 5 yearson December 31, 2009, unless terminated earlier under the provisions of thePartnership Agreement.  As thePartnership is anticipated to terminate prior to the weighted average remainingterm of its investments in GNMA Mortgage-Backed Securities and FHA-InsuredCertificates, the Partnership does not have the ability or intent, at thistime, to hold these investments to maturity. Consequently, the General Partner believes that the Partnership’sinvestments in GNMA Mortgage-Backed Securities and FHA-Insured Certificatesshould be classified as available for sale.

 

In connection withthis classification, all of the Partnership’s investments in GNMAMortgage-Backed Securities and FHA-Insured Certificates are recorded at fairvalue as of December 31, 2004 and 2003, with the net unrealized gains andlosses on these assets reported as other comprehensive income and as a separatecomponent of partners’ equity. Subsequent increases or decreases in the fair value of GNMAMortgage-Backed Securities and FHA-Insured Certificates, classified as availablefor sale, will be included as a separate component of partners’ equity.  Realized gains and losses on GNMAMortgage-Backed Securities and FHA-Insured Certificates, classified asavailable for sale, will continue to be reported in earnings.

 

29

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As of December 31,2003, the Partnership’s Investment in FHA-Insured Loans is recorded atamortized cost.

 

The amortized costof the investments in GNMA Mortgage-Backed Securities, FHA-Insured Certificatesand FHA-Insured Loans is adjusted for amortization of discounts and premiums tomaturity.  Such amortization is includedin mortgage investment income.

 

Income Recognition

 

Mortgageinvestment income consists of amortization of the discount or premiums plus thestated mortgage interest payments received or accrued.  The difference between the cost and theunpaid principal balance at the time of purchase is carried as a discount orpremium and amortized over the remaining contractual life of the mortgage usingthe effective interest method.  The effectiveinterest method provides a constant yield of income over the term of themortgage.

 

Gains fromdispositions of mortgage investments are recognized upon the receipt of cash ordebentures.

 

Losses ondispositions of mortgage investments are recognized when it becomes probablethat a mortgage will be disposed of and that the disposition will result in aloss.  In the case of Insured Mortgagesfully insured by HUD, the Partnership’s maximum exposure for purposes of determiningthe loan losses would generally be an assignment fee charged by HUDrepresenting approximately 1% of the unpaid principal balance of the InsuredMortgage at the date of default, plus the unamortized balance of acquisitionfees and closing costs paid in connection with the acquisition of the InsuredMortgage and the loss of approximately 30 days accrued interest.

 

Impairment

 

The Partnershipmakes an assessment of each Insured Mortgage for other than temporaryimpairment when the fair market value of the asset declines below amortized costfor a significant period of time and it is concludes that the Partnership nolonger has the ability to hold the Insured Mortgage through the marketdownturn.  An impairment loss is measuredby comparing the fair value of an Insured Mortgage to its current amortizedcost basis, with the difference recognized as a loss in the incomestatement.  The Partnership did notrecognize an impairment loss on any Insured Mortgage during the years endedDecember 31, 2004, 2003 and 2002.

 

At December 31,2004, some of the Insured Mortgage had fair values below their currentamortized cost basis.  The fair value andcost basis of these insured mortgages which have been in unrealized losspositions for greater than 12 months was approximately $402,000 and $405,000,respectively, resulting in approximately $3,000 in unrealized losses.  The fair value and cost basis of InsuredMortgages which have been in an unrealized loss position for less than 12months was approximately $5.6 million, resulting in approximately $5,000 inunrealized losses.  Considering thenature of these investments and the severity and duration of the unrealizedlosses, and based on our assessment as described above, we do not believe theseinsured mortgages are other than temporarily impaired at December 31, 2004.

 

Investment inDebenture

 

The Partnershiphas received debentures by assigning mortgages to HUD under the Section 221program, as discussed in Note 7.  Inaddition, the Partnership may receive debentures by assigning a defaultedmortgage to HUD in order to collect the amount of delinquent principal andinterest.  In the

 

30

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case of a defaultassignment, the mortgagee may elect to have the claim settled in cash or by theissuance of a debenture.  Debentures areobligations of the mortgage insurance funds and are unconditionally guaranteedby the United States government.  Theterm of these debentures are generally 10 years and the interest rate is setbased upon the interest rate in effect at the commitment date to provideinsurance or at the final endorsement date, whichever is greater.  The Partnership classifies its Investment inFHA Debenture as an available for sale debt security with changes in fair valuerecorded as an adjustment to equity and other comprehensive income.

 

Cash and CashEquivalents

 

Cash and cashequivalents consist of cash and money market funds.

 

Income Taxes

 

No provision hasbeen made for Federal, state or local income taxes in the accompanyingstatements of income and comprehensive income since, as a pass-through entity,all income taxes assessed on the Partnership’s income are the responsibility ofits Unitholders.  The taxable net incomefor December 31, 2004, 2003 and 2002 is $3.9 million, $6.4 million and $7.6million, respectively.  The variancebetween GAAP net income and taxable net income is primarily due to theamortization of certain costs related to the Partnership’s Insured Mortgageportfolio and the basis of the Insured Mortgages.

 

3.                     FAIRVALUE OF FINANCIAL INSTRUMENTS

 

The followingestimated fair values of the Partnership’s financial instruments are presentedin accordance with GAAP which define fair value as the amount at which afinancial instrument could be exchanged in a current transaction between willingparties, other than in a forced or liquidation sale.  These estimated fair values, however, do notrepresent the liquidation value or the market value of the Partnership.

 
| ** **                                                                   | ** ** | **As of December 31, 2004** | ** ** | **As of December 31, 2003** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                   | ** ** | **Amortized  Cost**         | ** ** | **Fair  Value**             | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
|                                                                         |       |                        |       |                        |       |   |   |   |   |
| Investment in  FHA-Insured Certificates and GNMA Mortgage-Backed Securities: |       |                        |       |                        |       |   |   |   |   |
| Acquired Insured  Mortgages (1)                                              |       | $                           | 14,154,205 |                        | $          | 14,299,980 |   | $ | 19,053,403 |   | $ | 19,264,433 |   |
| Originated  Insured Mortgages (1)                                            |       | —                      |       | —                      |       | 15,803,978 |   | 15,882,997 |   |
|                                                                         |       |                        |       |                        |       |   |   |   |   |
|                                                                         |       | $                           | 14,154,205 |                        | $          | 14,299,980 |   | $ | 34,857,381 |   | $ | 35,147,430 |   |
| Investment in  FHA-Insured Loans:                                            |       |                        |       |                        |       |   |   |   |   |
| Acquired Insured  Mortgages                                                  |       | —                      |       | —                      |       | 1,436,670 |   | 1,701,956 |   |
| Originated  Insured Mortgages                                                |       | —                      |       | —                      |       | 9,191,407 |   | 9,576,785 |   |
|                                                                         |       |                        |       |                        |       |   |   |   |   |
|                                                                         |       | $                           | —     |                        | $          | — |   | $ | 10,628,077 |   | $ | 11,278,741 |   |
|                                                                         |       |                        |       |                        |       |   |   |   |   |
| Cash and cash  equivalents                                                   |       | $                           | 619,856    |                        | $          | 619,856 |   | $ | 11,345,058 |   | $ | 11,345,058 |   |
|                                                                         |       |                        |       |                        |       |   |   |   |   |
| Investment in  Debentures                                                    |       | $                           | 1,741,873  |                        | $          | 1,741,873 |   | $ | 10,335,670 |   | $ | 10,335,670 |   |
|                                                                              |            |                             |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)  Carried at fair value on the Partnership’sbalance sheet.

 

The followingmethods and assumptions were used to estimate the fair value of each class offinancial instrument:

 

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Investment inFHA-Insured Certificates, GNMA Mortgage-Backed Securities, FHA-Insured Loansand Debentures

 

The fair values ofthe FHA-Insured Certificates and GNMA Mortgage-Backed Securities are pricedinternally.  The Partnership compares theInsured Mortgage interest rate to the U.S. Treasury rate plus a spread todetermine an approximate market level mortgage interest rate relative to eachof the outstanding mortgages, and also considers prepayment lock outs andpenalties in determining the fair value.  Due to the relatively highcoupon rate on the underlying mortgages and the current level of prepaymentrestrictions, most of the mortgages are valued close to par reflecting anincreased likelihood of prepayment. For those mortgages that have someremaining prepayment penalties, most are valued to include the prepaymentpenalty likely to be paid in addition to par value in the event of prepayment.  Since the Partnership’s debentures may beredeemed by HUD, at any time, the face value of the debentures is equivalent tothe fair value of the debentures.

 

Cash and cashequivalents

 

The carryingamount approximates fair value because of the short maturity of theseinstruments.

 

4.                     COMPREHENSIVEINCOME

 

Comprehensiveincome includes net earnings as currently reported by the Partnership adjustedfor other comprehensive income.  Othercomprehensive income for the Partnership consists of changes in unrealizedgains and losses related to the Partnership’s Insured Mortgages and debenturesaccounted for as available for sale.  Thetable below details other comprehensive income for the periods presented intothe following two categories:  (1) thechange to unrealized gains and losses that relate to Insured Mortgages whichwere disposed of during the period with the resulting realized gain or lossreflected in net earnings (reclassification adjustments) and (2) the change inthe unrealized gains or losses related to those investments that were notdisposed of during the period.

 
| ** **                                                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002**   | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
| Reclassification  adjustment for gains included in net income |       | $        | (57,538    | )        | $          | (578,360   | )          | $ | (768,721 | ) |
| Unrealized  holding (losses) gains arising during the period  |       | (86,735  | )          | (542,889 | )          | 1,372,958  |       |
|                                                          |       |     |       |     |       |       |       |
| Net adjustment  to unrealized gains and losses                |       | $        | (144,273   | )        | $          | (1,121,249 | )          | $ | 604,237 |   |
|                                                               |            |          |            |          |            |            |            |  |  |  |  |  |

 

5.       INVESTMENT IN FHA-INSURED CERTIFICATESAND GNMA MORTGAGE-BACKED SECURITIES

 

Listed below isthe Partnership’s aggregate investment in GNMA Mortgage-Backed Securities andFHA-Insured Certificates:

 
| ** **                            | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|------------------|------------|
| ** **                            | ** ** | **2004**         | ** ** | **2003** | ** ** |
|                                  |       |             |       |   |   |
| Acquired  Mortgages:                  |       |             |       |   |   |
| Number of                             |       |             |       |   |   |
| GNMA  Mortgage-Backed Securities      |       | 1                |       | 1 |   |
| FHA-Insured  Certificates (2) and (3) |       | 7                |       | 9 |   |
| Amortized Cost                        |       | $                | 14,154,205 |   | $ | 19,053,403 |   |
| Face Value                            |       | 14,260,814       |       | 19,122,101 |   |
| Fair Value                            |       | 14,299,980       |       | 19,264,433 |   |
|                                  |       |             |       |   |   |
| Originated  Mortgages:                |       |             |       |   |   |
| Number of                             |       |             |       |   |   |
| GNMA  Mortgage-Backed Securities (4)  |       | —           |       | 1 |   |
| FHA-Insured  Certificates (1)         |       | —           |       | 1 |   |
| Amortized Cost                        |       | $                | —     |   | $ | 15,803,978 |   |
| Face Value                            |       | —           |       | 15,803,977 |   |
| Fair Value                            |       | —           |       | 15,882,997 |   |
|                                       |            |                  |            |  |  |  |  |  |

 

32

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(1)               InMay 2004, the mortgage on Waterford Green Apartments was prepaid.  The Partnership received net proceeds ofapproximately $6.6 million and recognized a gain of approximately $942,000 forthe year ended December 31, 2004.  Adistribution of approximately $0.455 per Unit related to the prepayment of thismortgage was declared in May and a distribution of approximately $0.07 per Unitfor additional proceeds received related to the Partnership’s participationinterest in this mortgage was declared in June. Both distributions were paid to Unitholders in August 2004.

(2)               InMay 2004, the mortgage on Northwood Place was prepaid.  The Partnership received net proceeds ofapproximately $4.3 million and recognized a loss of approximately $51,000 forthe year ended December 31, 2004.  Adistribution of approximately $0.345 per Unit related to the prepayment of thismortgage was declared in June and paid to Unitholders in August 2004.

(3)               InJune 2004, the mortgage on Stafford Towers was prepaid.  The Partnership received net proceeds ofapproximately $303,000 and recognized a loss of approximately $21,000 for theyear ended December 31, 2004.  Adistribution of approximately $0.02 per Unit related to the prepayment of thismortgage was declared in July and paid to Unitholders in November 2004.

(4)               In July 2004, the GNMA security secured by themortgage on Oak Forest Apartments II was sold, with the consent of theAdvisor.  The Partnership received netproceeds of approximately $10.6 million and recognized a gain of approximately$553,000 for the year ended December 31, 2004.  A distribution of approximately$0.84 per Unit related to the sale of this GNMA security was declared inJuly and paid to Unitholders in November 2004.

 

As of March 1,2005, all of the fully insured GNMA Mortgage-Backed Securities and FHA-InsuredCertificates are current with respect to the payment of principal and interest.

 

6.                    INVESTMENTIN FHA-INSURED LOANS

 

Listed below isthe Partnership’s aggregate investment in FHA-Insured Loans:

 
| ** **           | ** ** | **December 31,** | ** ** |
|----------------------|------------|------------------|------------|
| ** **           | ** ** | **2004**         | ** ** | **2003** | ** ** |
|                 |       |             |       |   |   |
| Acquired Loans:      |       |             |       |   |   |
| Number of Loans  (1) |       | —           |       | 1 |   |
| Amortized Cost       |       | $                | —     |   | $ | 1,436,670 |   |
| Face Value           |       | —           |       | 1,701,956 |   |
| Fair Value           |       | —           |       | 1,701,956 |   |
|                 |       |             |       |   |   |
| Originated  Loans:   |       |             |       |   |   |
| Number of Loans  (2) |       | —           |       | 2 |   |
| Amortized Cost       |       | $                | —     |   | $ | 9,191,407 |   |
| Face Value           |       | —           |       | 8,950,266 |   |
| Fair Value           |       | —           |       | 9,576,785 |   |
|                      |            |                  |            |  |  |  |  |  |

 

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(1)               InJanuary 2004, HUD transferred assignment proceeds to the Partnership in theform of a 5.75% debenture, with a face value of approximately $3.5 million, inexchange for the mortgage on Kaynorth Apartments.  Since the mortgage on Kaynorth Apartments wasbeneficially owned 50% by the Partnership and 50% by American Insured MortgageInvestors (“AIM 84”), approximately $1.7 million of the debenture face valuewas due to AIM 84.  See furtherdiscussion below.

(2)               InFebruary 2004, the mortgages on Cobblestone Apartments and The Plantation weresold, with the consent of the Advisor. The Partnership received aggregate net proceeds of approximately $9.6million and recognized aggregate gains of approximately $386,000 for the yearended December 31, 2004.  The aggregatedistribution of approximately $0.76 per Unit related to the sale of these twomortgages was declared in February 2004 and paid to Unitholders in May 2004.

 

During 2004, thePartnership has disposed of all of its investments in fully insured FHA-InsuredLoans.

 

33

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In addition tobase interest payments under FHA Insured Loans that were Originated InsuredMortgages, the Partnership was entitled to additional interest based on apercentage of the net cash flow from the underlying development (referred to as“Participations.”)  During the yearsended December 31, 2004, 2003 and 2002, the Partnership received $0, $0, and$8,396, respectively, from the Participations. These amounts are included in mortgage investment income on theStatements of Income and Comprehensive Income.

 

7.       INVESTMENTS IN DEBENTURES AND DUE TO AFFILIATE

 

In January 2004,HUD issued a 5.75% debenture to the Partnership in exchange for the mortgage onKaynorth Apartments.  The face value ofthe debenture was approximately $3.5 million and pays interest semi-annually onJanuary 1 and July 1.  The Partnershiprecognized a gain of approximately $246,000 for the year ended December 31,2004 related to this assignment.  Thismortgage was beneficially owned 50% by the Partnership and 50% by AIM 84.  In February 2004, AIM 84 sold its 50%interest in this debenture and the Partnership subsequently transferred thecash proceeds of approximately $1.8 million to AIM 84.  The fair value and face value of 50% of thisdebenture was approximately $1.7 million as of December 31, 2004.  The fair value of this debenture was includedin Investment in debenture on the Partnership’s balance sheet as of December31, 2004.

 

8.       TRANSACTIONS WITH RELATED PARTIES

 

The principalexecutive officers of the General Partner did not receive fees for serving asexecutive officers of the General Partner during the years ended December 31,2004, 2003 and 2002, nor are any fees expected to be paid to the executiveofficers in the future.  The GeneralPartner and certain affiliated entities have, during the years ended December31, 2004, 2003 and 2002, earned or received compensation or payments forservices from the Partnership as follows:

 

COMPENSATION PAID OR ACCRUEDTO RELATED PARTIES

 
| ** **                          | ** ** | ** **                           | ** ** | **For the year ended December 31,** | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| **Name  of Recipient**              | ** ** | **Capacity in Which Served/Item**    | ** ** | **2004**                            | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                |       |                                 |       |                                |       |   |   |   |   |
| CRIIMI, Inc. (1)                    |       | General Partner/Distribution         |       | $                                   | 1,889,795  |   | $ | 438,747 |   | $ | 1,350,555 |   |
|                                |       |                                 |       |                                |       |   |   |   |   |
| AIM Acquisition  Partners, L.P. (2) |       | Advisor/Asset Management Fee         |       | 268,885                             |       | 611,417 |   | 744,733 |   |
|                                |       |                                 |       |                                |       |   |   |   |   |
| CRIIMI MAE  Management, Inc. (3)    |       | Affiliate of General Partner/Expense |       | 59,296                              |       | 69,820 |   | 55,487 |   |
|                                     |            |                                      |            |                                     |            |  |  |  |  |  |  |  |

 

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(1)          The General Partner is entitled to receive3.9% of the Partnership’s income, loss, capital and distributions, including,without limitation, the Partnership’s adjusted cash from operations andproceeds of mortgage prepayments, sales or insurance (both as defined in thePartnership Agreement).

 

(2)          The Advisor is entitled to an asset management fee equal to 0.95% of Total InvestedAssets (as defined in the Partnership Agreement).  CMSLP is entitled to a fee equal to 0.28% oftotal invested assets from the Advisor’s asset management fee.  Of the amounts paid to the Advisor, CMSLPearned fees equal to $79,239, $180,190, and $219,496 during the years endedDecember 31, 2004, 2003, and 2002, respectively.  The general partner and limited partner ofCMSLP are wholly-owned subsidiaries of CRIIMI MAE.

 

(3)          CRIIMI MAE Management, Inc., an affiliate ofthe General Partner, is reimbursed for personnel and administrative services onan actual cost basis.

 

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9.       DISTRIBUTIONS TOUNITHOLDERS

 

The distributionspaid or accrued to Unitholders on a per Unit basis during the years endedDecember 31, 2004, 2003 and 2002 are as follows:

 
| ** **                 | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|
|                       |       |     |       |     |       |     |       |
| Quarter ended  March 31    |       | $        | 2.010      |     | $          | 0.310    |       | $ | 1.325 |   |
| Quarter ended  June 30     |       | 0.925    |       | 0.255    |       | 0.210    |       |
| Quarter ended September 30 |       | 0.890    |       | 0.130    |       | 0.410    |       |
| Quarter ended  December 31 |       | 0.030    |       | 0.200    |       | 0.810    |       |
|                       |       |     |       |     |       |     |       |
|                       |       | $        | 3.855      |     | $          | 0.895    |       | $ | 2.755 |   |

 

The basis for paying distributions to Unitholders isnet proceeds from mortgage dispositions, if any, and cash flow from operations,which includes regular interest income and principal from InsuredMortgages.  Although the Partnership’sInsured Mortgages pay a fixed monthly mortgage payment, the cash distributionspaid to the Unitholders will vary during each quarter due to (1) thefluctuating yields in the short-term money market in which the monthly mortgagepayment receipts are temporarily invested prior to the payment of quarterlydistributions, (2) the reduction in the asset base resulting from monthlymortgage payments received or mortgage dispositions, (3) variations in the cashflow attributable to the delinquency or default of Insured Mortgages, thetiming of receipt of debentures, the interest rate on debentures and debentureredemptions, and (4) changes in the Partnership’s operating expenses.  As the Partnership continues to liquidate itsmortgage investments and Unitholders receive distributions of return of capitaland taxable gains, Unitholders should expect a reduction in earnings anddistributions due to the decreasing mortgage base.  Based upon the current level of interestrates, the trend in mortgage prepayments over the past year is likely tocontinue.  Such mortgage prepayments, ifcontinued at the trend over the past year, will likely result in a terminationand liquidation of the Partnership significantly earlier than the December 2009stated termination date.  Upon thetermination and liquidation of the Partnership, distributions to Unitholderswill be made in accordance with the terms of the Partnership Agreement.  A final distribution will be based on theUnitholders’ and General Partners’ pro-rata share of the Partnership’sremaining net assets after deducting and setting aside amounts required tosatisfy and discharge any existing Partnership obligations and expenses, asstated in the Partnership Agreement. Such distribution to Unitholders will be substantially less than theamount referenced in limited partners’ equity in the Partnership’s financialstatements, since the Partnership’s financial statements are prepared inaccordance with GAAP and the distributions upon liquidation pursuant to the termsof the Partnership Agreement do not require the General Partner to contributean amount equal to its General Partner’s deficit to the Partnership.

 

Commencing in the first quarter of 2005, the GeneralPartner will declare distributions of regular cash flow and mortgage proceeds,if any, once each quarter.  The GeneralPartner made the decision to declare distributions quarterly instead of monthlyto reduce expenses associated with monthly declarations.  The distributions are to be declared inMarch, June, September and December and to be paid after the end of eachcalendar quarter.

 

10.     PARTNERS’ EQUITY

 

          Depositary Units representing economicrights in limited part­nership interests (“Units”) were issued at a statedvalue of $20.  A total of 12,079,389 Unitswere issued prior to February 1986 for an aggregate capital contribution of$241,587,780.  In addition, the initiallimited partner contributed $2,500 to the capital of the Partnership inexchange for 125 Units.

 

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11.     SUMMARY OF QUARTERLY RESULTS OF OPERATIONS(UNAUDITED)

 

The following is asummary of unaudited quarterly results of operations for the years endedDecember 31, 2004 and 2003.

 

(In Thousands,Except Per Unit Data)

 
| ** **                                                           | ** ** | **2004  Quarter ended** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                           | ** ** | **March 31**            | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|                                                                 |       |                    |       |   |   |   |   |   |   |
| Income                                                               |       | $                       | 869        |   | $ | 665 |   | $ | 416 |   | $ | 362 |   |
| Net gains from mortgage dispositions                                 |       | 632                     |       | 851 |   | 572 |   | — |   |
| Net earnings                                                         |       | 1,307                   |       | 1,367 |   | 867 |   | 260 |   |
| Net earnings per  Limited Partnership Unit – Basic and  diluted |       | 0.10                    |       | 0.11 |   | 0.07 |   | 0.02 |   |
|                                                                      |            |                         |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                                           | ** ** | **2003  Quarter ended** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                           | ** ** | **March 31**            | ** ** | **June 30** | ** ** | **September  30** | ** ** | **December  31** | ** ** |
|                                                                 |       |                    |       |   |   |   |   |   |   |
| Income                                                               |       | $                       | 1,345      |   | $ | 1,302 |   | $ | 1,239 |   | $ | 1,194 |   |
| Net gains from mortgage dispositions                                 |       | 453                     |       | 293 |   | 627 |   | 125 |   |
| Net earnings                                                         |       | 1,528                   |       | 1,322 |   | 1,612 |   | 1,111 |   |
| Net earnings per  Limited Partnership Unit – Basic and  diluted |       | 0.12                    |       | 0.11 |   | 0.13 |   | 0.08 |   |
|                                                                      |            |                         |            |  |  |  |  |  |  |  |  |  |  |

 

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AMERICANINSURED MORTGAGE INVESTORS - SERIES 85, L.P.

 

SCHEDULEIV - MORTGAGE LOANS ON REAL ESTATE

 

December31, 2004

 
| **Development  Name/Location**                                                      | ** ** | **Maturity  Date** | ** ** | **Put  Date** | ** ** | **Interest  Rate on  Mortgage  (2)** | ** ** | **Face  Value of  Mortgage (1)** | ** ** | **Net  Carrying Value  (1)(5)(6)** | ** ** | **Annual Payment  (Principal and  Interest(4)** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------|------------|---------------|------------|--------------------------------------|------------|----------------------------------|------------|------------------------------------|------------|-------------------------------------------------|------------|
|                                                                                |       |               |       |          |       |                                 |       |                             |       |                               |       |                                            |       |
| INSURED MORTGAGES                                                                   |       |               |       |          |       |                                 |       |                             |       |                               |       |                                            |       |
| FHA-Insured  Certificates (carried at fair value)                                   |       |               |       |          |       |                                 |       |                             |       |                               |       |                                            |       |
|                                                                                |       |               |       |          |       |                                 |       |                             |       |                               |       |                                            |       |
| Steeplechase  Apts., Aiken, SC                                                      |       | 9/18               |       | N/A           |       | 7.5                                  | %          | $                                | 431,509    |                               | $          | 431,509                                         |       | $ | 50,921 | (3) |
| Executive Tower,  Toledo, OH                                                        |       | 3/27               |       | N/A           |       | 8.75                                 | %          | 2,687,279                        |       | 2,687,279                          |       | 275,283                                         |       |
| Sangnok Villa,  Los Angeles, CA                                                     |       | 1/30               |       | N/A           |       | 10.25                                | %          | 870,992                          |       | 879,702                            |       | 96,827                                          |       |
| Eaglewood Villa  Apts., Springfield, OH                                             |       | 2/27               |       | N/A           |       | 8.875                                | %          | 2,559,402                        |       | 2,559,402                          |       | 264,707                                         |       |
| Cheswick Apts.,  Indianapolis, IN                                                   |       | 9/27               |       | N/A           |       | 8.75                                 | %          | 2,911,386                        |       | 2,911,386                          |       | 295,752                                         |       |
| Bradley Road  Nursing, Bay Village, OH                                              |       | 5/34               |       | N/A           |       | 8.875                                | %          | 2,436,521                        |       | 2,466,977                          |       | 233,705                                         |       |
| Heritage Heights  Apts., Harrison, AR                                               |       | 4/32               |       | N/A           |       | 9.50                                 | %          | 401,876                          |       | 401,876                            |       | 41,313                                          |       |
|                                                                                |       |               |       |          |       |                                 |       |                             |       |                               |       |                                            |       |
| Total FHA-Insured  Certificates - Acquired Insured Mortgages, carried at fair value |       |               |       |          |       |                                 |       | 12,298,965                       |       | 12,338,131                         |       |                                            |       |
|                                                                                |       |               |       |          |       |                                 |       |                             |       |                               |       |                                            |       |
| GNMA  Mortgage-Backed Securities (carried at fair value)                            |       |               |       |          |       |                                 |       |                             |       |                               |       |                                            |       |
|                                                                                |       |               |       |          |       |                                 |       |                             |       |                               |       |                                            |       |
| Pine Tree Lodge,  Pasadena, TX                                                      |       | 12/33              |       | N/A           |       | 9.25                                 | %          | 1,961,849                        |       | 1,961,849                          |       | 194,494                                         |       |
|                                                                                |       |               |       |          |       |                                 |       |                             |       |                               |       |                                            |       |
| TOTAL INVESTMENT  IN INSURED MORTGAGES                                              |       |               |       |          |       |                                 |       | $                                | 14,260,814 |                               | $          | 14,299,980                                      |       |   |   |
|                                                                                |       |               |       |          |       |                                 |       |                             |       |                               |       |                                            |       |
| TOTAL ANNUAL  PRINCIPAL AND INTEREST                                                |       |               |       |          |       |                                 |       |                             |       |                               |       | $                                               | 1,453,002  |   |
|                                                                                     |            |                    |            |               |            |                                      |            |                                  |            |                                    |            |                                                 |            |  |  |  |  |

 

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(1)                                  Themortgages underlying the Partnership’s investments in FHA-Insured Certificatesand GNMA Mortgage-Backed Securities are primarily non-recourse first liens onmultifamily residential developments and retirement homes.  Prepayment of these Insured Mortgages wouldbe based upon the unpaid principal balance at the time of prepayment.

 

(2)                                  Thisis the stated interest rate.  Inaddition, the servicer or the sub-servicer of the Insured Mortgage, primarilyunaffiliated third parties, is entitled to receive compensation for certainservices rendered.

 

(3)                                  InJune 1985 and February 1986, the Partnership purchased pass-throughcertificates representing undivided fractional interests of 317/392 and 11/392,respectively, in a pool of 13 FHA-Insured Mortgages.  In January and February 1988, the Partnershipsold undivided fractional interests of 100/392 and 104/392, respectively, inthis pool.  Accordingly, the Partnershipnow owns an undivided fractional interest aggregating 124/392, or approximately31.6%, in this pool.  For purposes ofillustration only, the amounts shown in this table represent the Partnership’sshare of these items as if an undivided interest in each mortgage was acquired.

 

(4)                                  Principaland interest are payable at level amounts over the life of the mortgages.

 

(5)                                  Areconciliation of the carrying value of Insured Mortgages for the years endedDecember 31, 2004 and 2003 is as follows:

 
| ** **                                                                           | ** ** | **2004**    | ** ** | **2003**    | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
|                                                                                 |       |        |       |        |       |
| Beginning  balance                                                                   |       | $           | 45,775,507 |        | $          | 66,323,565 |   |
|                                                                                 |       |        |       |        |       |
| Principal  receipts on mortgages                                                     |       | (230,682    | )          | (604,527    | )          |
|                                                                                 |       |        |       |        |       |
| Proceeds from  mortgage prepayments and sales                                        |       | (31,413,766 | )          | (12,794,305 | )          |
|                                                                                 |       |        |       |        |       |
| Proceeds from  mortgage assignments                                                  |       | —      |       | (1,547,264  | )          |
|                                                                                 |       |        |       |        |       |
| Net gains on  mortgage dispositions                                                  |       | 2,055,067   |       | 1,497,782   |       |
|                                                                                 |       |        |       |        |       |
| Portion of  debentures due from a third party in exchange for assigned the mortgages |       | —      |       | (810,660    | )          |
|                                                                                 |       |        |       |        |       |
| Debentures due  from HUD                                                             |       | (1,741,873  | )          | (10,335,670 | )          |
|                                                                                 |       |        |       |        |       |
| Portion of  debentures due to affiliate                                              |       | —      |       | 5,167,835   |       |
|                                                                                 |       |        |       |        |       |
| (Decrease)  increase to unrealized gains on Investments in Insured Mortgages         |       | (144,273    | )          | (1,121,249  | )          |
|                                                                                 |       |        |       |        |       |
| Ending balance                                                                       |       | $           | 14,299,980 |        | $          | 45,775,507 |   |
|                                                                                      |            |             |            |             |            |  |  |  |

 

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(6)               As of December 31,2004 and 2003, the tax basis of the Insured Mortgages was approximately $14.1million and $45.3 million, respectively.

 

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