AMERICAN INSURED MORTGAGE INVESTORS SERIES 85 L P - 10-K Annual Report

Back to GetFilings.com

1
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

For the fiscal year ended December 31, 1996
------------------

Commission file number 1-11059
-----------------

AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
- -----------------------------------------------------------------
(Exact name of registrant as specified in charter)

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

11200 Rockville Pike, Rockville, Maryland 20852
- ----------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)

(301) 816-2300
- -----------------------------------------------------------------
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

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

Securities registered pursuant to Section 12(g) of the Act:

NONE
- -----------------------------------------------------------------
(Title of class)

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----

2

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

As of February 27, 1997, 12,079,389 Depositary Units of Limited Partnership
Interest were outstanding and the aggregate market value of such units held by
non-affiliates of the Registrant on such date was $176,602,564.

3

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

1996 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

PART I
------
Page
----
Item 1. Business . . . . . . . . . . . . . . . . . . 4
Item 2. Properties . . . . . . . . . . . . . . . . . 5
Item 3. Legal Proceedings . . . . . . . . . . . . . . 5
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . 5

PART II
-------
Item 5. Market for Registrant's Securities and
Related Security Holder Matters . . . . . . 6
Item 6. Selected Financial Data . . . . . . . . . . . 8
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . 9
Item 8. Financial Statements and Supplementary Data . 16
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . 17

PART III
--------
Item 10. Directors and Executive Officers of the
Registrant . . . . . . . . . . . . . . . . 17
Item 11. Executive Compensation . . . . . . . . . . . 17
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . 18
Item 13. Certain Relationships and Related Transactions 18

PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K . . . . . . . . . . . . 19

Signatures . . . . . . . . . . . . . . . . . . . . . . 22

4

PART I
ITEM 1. BUSINESS

Development and Description of Business
- ---------------------------------------
Information concerning the business of American Insured Mortgage Investors
- - Series 85, L.P. (the Partnership) is contained in Part II, Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations and in Notes 1, 5, 6 and 7 of the notes to the financial statements
of the Partnership (filed in response to Item 8 hereof), which is incorporated
herein by reference. Also see Schedule IV-Mortgage Loans on Real Estate, for
the table of the Insured Mortgages (as defined below) invested in by the
Partnership as of December 31, 1996.

Employees
- ---------
The Partnership has no employees. The business of the Partnership is
managed by CRIIMI, Inc. (the General Partner), while its portfolio of mortgages
is managed by AIM Acquisition Partners, L.P. (the Advisor) pursuant to an
advisory agreement (the Advisory Agreement). CRIIMI, Inc. is a wholly owned
subsidiary of CRIIMI MAE Inc. (CRIIMI MAE). CRIIMI MAE was formerly managed by
an affiliate of CRI, Inc. (CRI).

The general partner of the Advisor is AIM Acquisition Corporation (AIM
Acquisition) and the limited partners include, but are not limited to, AIM
Acquisition, The Goldman Sachs Group, L.P., Broad, Inc. and CRIIMI MAE.
Effective September 6, 1991 and through June 30, 1995, a sub-advisory agreement
(the Sub-advisory Agreement) existed whereby CRI/AIM Management, Inc., an
affiliate of CRI, managed the Partnership's portfolio. In connection with the
transaction in which CRIIMI MAE became a self-administered real estate
investment trust (REIT), an affiliate of CRIIMI MAE acquired the Sub-advisory
Agreement. As a result of this transaction, effective June 30, 1995, CRIIMI MAE
Services Limited Partnership, an affiliate of CRIIMI MAE, manages the
Partnership's portfolio. These transactions had no effect on the Partnership's
financial statements.

Competition
- -----------
In disposing of mortgage investments, the Partnership competes with private
investors, mortgage banking companies, mortgage brokers, state and local
government agencies, lending institutions, trust funds, pension funds, and other
entities, some with similar objectives to those of the Partnership and some of
which are or may be affiliates of the Partnership, its General Partner, the
Advisor or their respective affiliates. Some of these entities may have
substantially greater capital resources and experience in disposing of Federal
Housing Administration (FHA) insured mortgages than the Partnership.

CRIIMI MAE and its affiliates also may serve as general partners, sponsors
or managers of real estate limited partnerships, REITs or other entities in the
future. The Partnership may attempt to dispose of mortgages at or about the
same time that CRIIMI MAE, or one or more of the other AIM Partnerships and/or
other entities sponsored or managed by CRIIMI MAE, are attempting to dispose of
mortgages. As a result of market conditions that could limit dispositions,
CRIIMI MAE Services Limited Partnership and its affiliates could be faced with
conflicts of interest in determining which mortgages would be disposed of. Both
CRIIMI MAE Services Limited Partnership and CRIIMI, Inc., however, are subject
to their fiduciary duties in evaluating the appropriate action to be taken when
faced with such conflicts.

5

PART I

ITEM 2. PROPERTIES

Although the Partnership does not own the underlying real estate, the
mortgages underlying the Partnership's mortgage investments are non-recourse
first liens on the respective multifamily residential developments or retirement
homes.

ITEM 3. LEGAL PROCEEDINGS

There are no material legal proceedings to which the Partnership is a
party.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to the security holders to be voted on during the
fourth quarter of 1996.

6

PART II

ITEM 5. MARKET FOR REGISTRANT'S SECURITIES AND RELATED SECURITY
HOLDER MATTERS

Principal Market and Market Price for Units and Distributions
- -------------------------------------------------------------
Since April 8, 1992, the Units have traded on the American Stock Exchange
(AMEX) with a trading symbol of "AII."

The high and low bid prices for the Units as reported on AMEX and the
distributions, as applicable, for each quarterly period in 1996 and 1995 were as
follows:

Amount of
1996 Distribution
Quarter Ended High Low Per Unit
--------------------- ------- ------- ------------

March 31, $15 $14 3/8 $ 0.33
June 30, 14 5/8 13 3/4 0.64(1)
September 30, 14 1/2 13 7/8 0.43(2)
December 31, 14 7/8 14 1/8 0.85(3)
------
$ 2.25
======

Amount of
1995 Distribution
Quarter Ended High Low Per Unit
--------------------- ------- ------- ------------

March 31, $14 7/8 $13 $ 0.36
June 30, 14 7/8 13 3/4 0.33
September 30, 14 3/4 14 0.49 (4)
December 31, 14 3/4 14 1/4 0.36 (5)
------
$ 1.54
======

(1) This amount includes approximately $0.31 per Unit representing net
proceeds from the prepayment of the mortgages on Harbor View Estates, Bear
Creek Apartments II, and Cambridge Arms Apartments.
(2) This amount includes approximately $0.10 per Unit representing net
proceeds from the assignment of the mortgage on Woodland Village
Apartments.
(3) This amount includes approximately $0.51 per Unit representing net
proceeds from the prepayment of the mortgage on Westlake Village. In
addition, it includes approximately $0.01 per Unit representing net
proceeds from the modification of mortgage on Oak Forest Apartments II and
the partial prepayment of the mortgage on Cambridge Arms Apartments.
(4) This amount includes approximately $0.16 per Unit representing net
proceeds from the assignment of the mortgage on El Lago Apartments.
(5) This amount includes approximately $0.02 per Unit representing additional
proceeds from the assignment of the mortgage on El Lago Apartments.

There are no material legal restrictions upon the Partnership's present or
future ability to make distributions in accordance with the provisions of the
Partnership Agreement.

7

PART II

ITEM 5. MARKET FOR REGISTRANT'S SECURITIES AND RELATED SECURITY
HOLDER MATTERS - Continued

The Partnership's Dividend Reinvestment Plan (the Plan) was amended
effective January 1, 1994 to exclude the amount of any special distributions
from reinvestment under the Plan. A check will be issued to Plan Participants
for the amount of any special distributions. The regular cash flow
distributions will continue to be automatically reinvested under the Plan in
additional Units as in the past.

Approximate Number of Unitholders
Title of Class as of December 31, 1996
- -------------------- ---------------------------------
Depositary Units of Limited
Partnership Interest 12,500

8

PART II

ITEM 6. SELECTED FINANCIAL DATA
(Dollars in thousands, except per Unit amounts)

For the Years Ended December 31,
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------

Income $ 17,943 $ 18,589 $ 19,167 $ 19,202 $ 18,694

Net gains (losses) on mortgage
dispositions and loan losses 522 36 (151) 2,636 (652)

Net earnings 15,789 15,903 16,155 19,058 15,313

Net earnings per Limited
Partnership Unit (1) 1.26 1.27 1.29 1.52 1.22

Distributions per Limited
Partnership Unit (1)(2) 2.25 1.54 1.96 1.775 1.13

As of December 31,
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------

Total assets $215,951 $225,691 $214,823 $227,937 $229,616

Partners' equity 204,687 220,681 209,557 221,504 224,758

(1) Calculated based upon the weighted average number of Units outstanding.
(2) Includes distributions due the Unitholders for the Partnership's fiscal quarters ended December 31, 1996, 1995, 1994, 1993
and 1992, which were paid subsequent to year end. See Notes 3 and 7 of the notes to the financial statements of the
Partnership contained in Item 8, "Financial Statements and Supplementary Data."

The selected statements of operations data presented above for the years
ended December 31, 1996, 1995 and 1994, and the balance sheet data as of
December 31, 1996 and 1995, are derived from and are qualified by reference to
the Partnership's financial statements which have been included elsewhere in
this Form 10-K. The statements of operations data for the years ended December
31, 1993 and 1992 and the balance sheet data as of December 31, 1994, 1993 and
1992 are derived from audited financial statements not included in this Form 10-
K. This data should be read in conjunction with the financial statements and
the notes thereto.

9

PART II

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

General
- -------
American Insured Mortgage Investors - Series 85, L.P. (the Partnership) was
formed under the Uniform 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) through January 27, 1986 (the termination
date of the offering), the Partnership, pursuant to its public offering of
12,079,389 Depository Units of limited partnership interest (Units), raised a
total of $241,587,780 in gross proceeds. In addition, the initial limited
partner contributed $2,500 to the capital of the Partnership and received 125
units of limited partnership interest in exchange therefor.

CRIIMI, Inc. (the General Partner) holds a partnership interest of 3.9%.
CRIIMI, Inc. is a wholly owned subsidiary of CRIIMI MAE Inc. (CRIIMI MAE).
Prior to June 30, 1995, CRIIMI MAE was managed by an advisor whose general
partner is CRI, Inc. (CRI). However, effective June 30, 1995, CRIIMI MAE became
a self-administered real estate investment trust (REIT) and, as a result, the
advisor no longer advises CRIIMI MAE.

AIM Acquisition Partners L.P. (the Advisor) serves as the advisor of the
Partnership. The general partner of the Advisor is AIM Acquisition Corporation
(AIM Acquisition) and the limited partners include, but are not limited to, AIM
Acquisition, The Goldman Sachs Group, L.P., Broad, Inc. and CRIIMI MAE.
Pursuant to the terms of certain amendments to the Partnership Agreement, the
General Partner is required to receive the consent of the Advisor prior to
taking certain significant actions which affect the management and policies of
the Partnership.

Effective September 6, 1991 and through June 30, 1995, a sub-advisory
agreement (the Sub-advisory Agreement) existed whereby CRI/AIM Management, Inc.,
an affiliate of CRI, managed the Partnership's portfolio. In connection with
the transaction in which CRIIMI MAE became a self-administered REIT, an
affiliate of CRIIMI MAE acquired the Sub-advisory Agreement. As a consequence
of this transaction, effective June 30, 1995, CRIIMI MAE Services Limited
Partnership, manages the Partnership's portfolio. These transactions had no
effect on the Partnership's financial statements.

Prior to the expiration of the Partnership's reinvestment period on
December 31, 1993, and subject to the change in the Partnership's investment
policy, as discussed below, the Partnership was in the business of originating
mortgage loans (Originated Insured Mortgages) and acquiring mortgage loans
(Acquired Insured Mortgages, and, together with Originated Insured Mortgages,
referred to herein as Insured Mortgages). Effective September 19, 1991, the
General Partner changed, at the Advisor's recommendation, the investment
policies of the Partnership to invest only in Acquired Insured Mortgages which
are fully insured or guaranteed by the Federal National Mortgage Association,
the Government National Mortgage Association (GNMA), Federal Housing
Administration (FHA) or the Federal Home Loan Mortgage Corporation. As of
December 31, 1996, the Partnership had invested in either Originated Insured
Mortgages which are insured or guaranteed, in whole or in part, by FHA or fully
insured Acquired Insured Mortgages.

After the expiration of the Partnership's reinvestment period on December
31, 1993, the Partnership is required (subject to the conditions set forth in
the Partnership Agreement) to distribute such proceeds to its Unitholders. The
Partnership Agreement states that the Partnership will terminate on December 31,
2009, unless previously terminated under the provisions of the Partnership
Agreement.

10

PART II

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued

Investment in Insured Mortgages
- -------------------------------
The Partnership's investment in Insured Mortgages is comprised of
participation certificates evidencing a 100% undivided beneficial interest in
government insured multifamily mortgages issued or sold pursuant to FHA programs
(FHA-Insured Certificates), mortgage-backed securities guaranteed by GNMA (GNMA
Mortgage-Backed Securities) and FHA-insured mortgage loans (FHA-Insured Loans).
The mortgages underlying the FHA-Insured Certificates, GNMA Mortgage-Backed
Securities and FHA-Insured Loans are non-recourse first liens on multifamily
residential developments or retirement homes.

The following is a discussion of the types of the Partnership's mortgage
investments, along with the risks related to each type of investment:

Fully Insured FHA-Insured Certificates and GNMA Mortgage-Backed
Securities
- ---------------------------------------------------------------
Listed below is the Partnership's aggregate investment in Fully Insured
Mortgages:

December 31,
1996 1995
------------ ------------

Fully Insured Acquired Insured:
Number of
GNMA Mortgage-Backed Securities 9 9
FHA-Insured Certificates 62 66
Amortized Cost $151,866,819 $157,656,694
Face Value 157,889,594 164,397,459
Fair Value 159,959,297 169,460,375

Fully Insured Originated Insured:
Number of
GNMA Mortgage-Backed Securities 1 1
FHA-Insured Certificates 1 --
Amortized Cost $ 17,126,685 $ 10,666,346
Face Value 16,770,069 10,760,496
Fair Value 16,646,943 10,925,754

In December 1992, the Partnership entered into a modification agreement
with the mortgagor of Waterford Green Apartments. This agreement effectively
lowered the interest rate on the mortgage from 8.5% to 6.5% for a period
continuing through November 1995. The mortgagor assumed an additional note for
the difference between the interest due under the principal mortgage and the
modified interest paid under the agreement. On April 30, 1996, the mortgage on
Waterford Green was restated under the HUD 223(a)(7) program converting this
originated mortgage from a coinsured to fully insured status at a fixed rate of
7.25%. As a result of converting a coinsured mortgage to a fully insured
mortgage, the Partnership recognized a loss of approximately $103,000 on the
modification. Payments due under the new mortgage began June 1, 1996. Prior to
this restatement, as part of the prior workout arrangements with the borrower, a
portion of the interest due under the original note had been deferred

11

PART II

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued

temporarily. Concurrent with this HUD modification, the deferred interest is
now evidenced in the form of a cash surplus note in the amount of $356,600. To
the extent available, surplus cash, as defined by HUD, will be split 50/50 in
repayment of this deferred interest and another note due the property manager
for deferred management fees. Once deferred management fees have been repaid,
100% of surplus cash, if any, will be applied against the remaining deferred
interest obligation. Upon repayment of both of these obligations, any surplus
cash will be distributed based upon the terms of the participation agreement.
As of December 31, 1996, the balance of this note is $356,600.

In April 1996, the Partnership entered into a modification agreement with
the mortgagor of Oak Forest Apartments II. This agreement lowered the interest
rate on the mortgage from 8.5% to 7.5% effective May 1, 1996, through the
maturity of the note. The agreement also modified the restrictions on
prepayment of the note. The modification agreement, on this originated insured
mortgage, resulted in a gain of approximately $148,000.

In late March 1996, a retained yield holder in the Harbor View Estates
loan, exercised its right to purchase the participation interests with respect
to this acquired insured mortgage after a Notice of Default was filed with HUD.
The Partnership received net proceeds of approximately $693,000 from this
prepayment in late March 1996, resulting in a loss of approximately $1,100. A
distribution of $0.08 per Unit related to this prepayment was declared in April
1996 and distributed to Unitholders in August 1996.

In late May 1996, the mortgages on Cambridge Arms Apartments and Bear Creek
Apartments II were prepaid, resulting in net proceeds of approximately $2.9
million. The Partnership recognized a gain of approximately $235,000 from the
prepayment of the mortgage on Cambridge Arms Apartments and a gain of
approximately $276,500 from the prepayment of the mortgage on Bear Creek
Apartments II. A distribution of $0.23 per Unit related to the prepayment, on
these acquired insured mortgages, was declared in June 1996 and was distributed
to Unitholders in August 1996.

In October 1995, the Partnership filed a Notice of Default and an Election
to Assign with the United States Department of Housing and Urban Development
(HUD) related to the acquired insured mortgage on Woodland Village Apartments.
On August 30, 1996, the Partnership received approximately $1.4 million,
representing approximately 90% of the assignment proceeds. The remaining
proceeds of approximately $139,000 are included in receivables and other assets
on the accompanying balance sheet as of December 31, 1996. The Partnership
recognized a loss of approximately $41,000 during year end 1996. A distribution
of $0.10 per Unit related to this assignment was declared in September 1996 and
was paid to Unitholders in November 1996.

As of March 1, 1997, all of the fully insured FHA-Insured Certificates and
GNMA Mortgage-Backed Securities are current with respect to the payment of
principal and interest, except for the mortgage on Meadow Park Apartments I,
which was assigned in October 1996, as discussed below, and Country Club Terrace
Apartments and Pleasant View Nursing Home which are delinquent with respect to
the January 1997 payment of principal and interest. The Partnership expects to
receive the payments on Country Club Terrace Apartments and Pleasant View
Nursing Home. On October 11, 1996, the servicer of the acquired insured
mortgage on Meadow Park Apartments I filed a Notice of Default and Election to
Assign the mortgage with HUD. On January 24, 1997, the Partnership received
approximately $628,000 representing approximately 90% of the assignment
proceeds. The Partnership anticipates it will recognize a gain of approximately

12

PART II

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued

$139,000 in 1997. A distribution of $0.05 per Unit related to this assignment
was declared in February 1997 and is expected to be paid to Unitholders in May
1997.

In late February 1997, the acquired insured mortgage on Security Apartments
was prepaid. The partnership received net proceeds of approximately $304,000,
and anticipates it will recognize a gain of approximately $66,000 in 1997. A
distribution of approximately $0.02 per Unit related to this prepayment was
declared in March 1997 and is expected to be paid to Unitholders in May 1997.

In the case of fully insured Originated Insured Mortgages and Acquired
Insured Mortgages, the Partnership's maximum exposure for purposes of
determining loan losses would generally be approximately 1% of the unpaid
principal balance of the Originated Insured mortgage or Acquired Insured
Mortgage (an assignment fee charged by FHA) at the date of default, plus the
unamortized balance of acquisition of the Insured Mortgage and the loss of
approximately 30 days accrued interest.

Coinsured FHA-Insured Certificates
- ----------------------------------

Coinsured by affiliate
- ----------------------
As of December 31, 1996 and 1995, the Partnership had invested in zero and
two FHA-Insured Certificates secured by coinsured mortgages where the
coinsurance lender was Integrated Funding, Inc. (IFI).

On April 30, 1996, Waterford Green Apartments, with an unpaid principal
balance of approximately $6.5 million, was converted from a coinsured mortgage
to a fully insured originated insured mortgage, as discussed above. During
December 1996, the Partnership received net proceeds of approximately $6.5
million for the prepayment of the mortgage on Westlake Village. The Partnership
recognized a gain of approximately $7,000 on this prepayment as of December 31,
1996. A distribution of $0.51 per Unit related to this prepayment was declared
in December 1996 and distributed to Unitholders in February 1997.

Fully Insured FHA-Insured Loans
- -------------------------------
Listed below is the Partnership's aggregate investment in FHA-Insured
Loans:

13

PART II

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued

December 31,
1996 1995
------------ ------------

Fully Insured Acquired Insured:
Number of Loans 12 12
Amortized Cost $ 14,556,595 $ 14,684,828
Face Value 17,405,640 17,627,453
Fair Value 17,706,486 18,388,369

Fully Insured Originated Insured:
Number of Loans 3 3
Amortized Cost $ 13,030,131 $ 13,123,855
Face Value 12,681,532 12,766,486
Fair Value 12,969,589 13,160,443

As of March 1, 1997, all of the fully insured FHA-Insured Loans were
current with respect to the payment of principal and interest.

In addition to base interest payments under Originated Insured
Mortgages, the Partnership is entitled to additional interest based on a
percentage of the net cash flow from the underlying development (referred
to as Participations). During the years ended December 31, 1996, 1995 and
1994, the Partnership received $42,417, $64,676 and $35,314, respectively,
from the Participations. These amounts are included in mortgage investment
income on the accompanying statements of operations.

14

PART II

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued

Results of Operations
- ---------------------
1996 versus 1995
- ----------------
Net earnings decreased slightly for 1996 as compared to 1995 primarily due
to a decrease in mortgage investment income. Partially offsetting this decrease
was a decrease in asset management fees and an increase in net gains on mortgage
dispositions and modifications, as discussed below.

Mortgage investment income decreased for 1996 as compared to 1995 primarily
due to the reduction in mortgage base due to the disposition of mortgages, as
discussed above.

Interest and other income increased for 1996 as compared to 1995 primarily
due to the temporary investment of mortgage disposition proceeds prior to
distribution to Unitholders.

Asset management fees to related parties decreased for 1996 as compared to
1995 as a result of the reduction in the mortgage base.

Gains from dispositions and modifications increased as a result of a
modification agreement on the mortgage on Oakforest Apartments II and the
prepayment of mortgages on Cambridge Arms Apartments, Bear Creek Apartments II
and Westlake Village Apartments, as discussed previously. Losses from
dispositions and modifications increased primarily due to a modification
agreement on the mortgage of Waterford Green Apartments and the assignment of
the mortgage on Woodland Village Apartments, as previously discussed.

1995 versus 1994
- ----------------
Net earnings decreased for 1995 as compared to 1994 primarily due to a
decrease in mortgage investment income and interest and other income, as
discussed below.

Mortgage investment income decreased for 1995 as compared to 1994 primarily
due to the assignment to HUD of the mortgage on El Lago Apartments in June 1995.
Also contributing to the decrease was the conversion of construction loans to
permanent loans at lower effective interest rates during 1995.

Interest and other income decreased for 1995 as compared to 1994 primarily
due to a reduction in funds available for short- term investment during 1995.
During the first quarter of 1994, the Partnership had a greater amount of short-
term investments, resulting from the temporary investment of disposition
proceeds received in late 1993, prior to the distribution of these funds to
partners during the first quarter of 1994. Additionally, during the second
quarter of 1994, the notes receivable from affiliates were paid off as a result
of the prepayment of the mortgage on Richardson Road Apartments and the proceeds
were invested in the short-term money market prior to the distribution of these
proceeds to partners during the third quarter of 1994.

Asset management fee to related parties decreased for 1995 as compared to
1994 as a result of the reduction in the mortgage base during 1995 and 1994.

General and administrative expenses decreased for 1995 as compared to 1994
primarily due to a decrease in investor services expenses and annual and
quarterly reporting expenses resulting from a reduction in the number of
registered holders. Also contributing to the decrease in general and

15

PART II

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued

administrative expenses was a reduction in payroll and payroll-related expenses
as a result of the stabilization of the Partnership's mortgage portfolio as well
as a reduction in the mortgage base. In addition mortgage servicing fees
decreased primarily due to a reduction in annual servicing fee rates upon the
completion of the construction periods for several mortgage investments during
1994.

Net gains on mortgage dispositions increased for 1995 as compared to 1994.
Gains or losses on mortgage dispositions are based on the number, carrying
amounts and the proceeds of mortgage investments disposed of during the period.
During 1995, the Partnership recognized a gain of $52,730 as a result of the
final settlement of the disposition of the mortgage on Dearborne Place
Apartments, and recognized a loss of $16,665 as a result of the assignment to
HUD of the mortgage on El Lago Apartments.

Liquidity and Capital Resources
- -------------------------------
The Partnership's operating cash receipts, derived from payments of
principal and interest on Insured Mortgages, plus cash receipts from interest on
short-term investments, were sufficient during 1996 to meet operating
requirements.

The basis for paying distributions to Unitholders is net proceeds from
mortgage dispositions, if any, and cash flow from operations, which includes
regular interest income and principal from Insured Mortgages. Although the
Insured Mortgages yield a fixed monthly mortgage payment once purchased, the
cash distributions paid to the Unitholders will vary during each quarter due to
(1) the fluctuating yields in the short-term money market where the monthly
mortgage payment receipts are temporarily invested prior to the payment of
quarterly distributions, (2) the reduction in the asset base resulting from
monthly mortgage payment receipts or mortgage dispositions, (3) variations in
the cash flow attributable to the delinquency or default of Insured Mortgages
and professional fees and foreclosure costs incurred in connection with those
Insured Mortgages and (4) variations in the Partnership's operating expenses.

Since the Partnership is obligated to distribute the Proceeds of Mortgage
Prepayments, Sales and Insurance on Insured Mortgages (as defined in the
Partnership Agreement) to its Unitholders, the size of the Partnership's
portfolio will continue to decrease. The magnitude of the decrease will depend
upon the size of the Insured Mortgages which are prepaid, sold or assigned for
insurance proceeds as reflected in the preceding table.

Cash flow - 1996 versus 1995
- ----------------------------
Net cash provided by operating activities decreased slightly for 1996 as
compared to 1995. This decrease was primarily due to a decrease in mortgage
investment income, as discussed above. This decrease was offset by a reduction
in note payable and due to affiliate during 1995 resulting from the prepayment
of the mortgage on Richardson Road Apartments underlying the GNMA Mortgage-
Backed Security which had been transferred to IFI to meet IFI's minimum net
worth requirement which resulted in lower net cash provided by operations for
1995. In addition, offsetting the decrease in net cash provided by operating
activities was an increase in Due from HUD as a result of the assignment of the
Woodland Village mortgage. The balance represents the remaining proceeds, plus
interest due from HUD.

16

PART II

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued

Net cash provided by investing activities increased in 1996 as compared to
1995 due to the increase in proceeds from mortgage dispositions, as discussed
previously. In addition, receipt of mortgage principal from scheduled payments
increased for 1996 as compared to 1995 due to partial prepayment of the mortgage
on Cambridge Arms Apartments prior to disposition.

Net cash used in financing activities increased for 1996 as compared to
1995, as a result of an increase in distributions paid to partners.
Distributions paid to partners in 1996 included special distributions resulting
from the disposition of the mortgages on Harbor View Estates, Cambridge Arms
Apartments, Bear Creek Apartments II and Woodland Village Apartments.

Cash flow - 1995 versus 1994
- ----------------------------
Net cash provided by operating activities decreased for 1995 as compared to
1994. This decrease was primarily due to a decrease in receivables and other
assets during 1994 resulting from the receipt in January 1994 of accrued, but
previously undistributed, interest related to Victoria Pointe Apartments - Phase
I. Also contributing to this decrease were decreases in mortgage investment
income and other investment income, as previously discussed.

Net cash provided by investing activities increased for 1995 as compared to
1994, principally due to a decrease in mortgage acquisitions and advances on
construction loans as a result of the expiration of the Partnership's
reinvestment period. Also contributing to the increase was the receipt in 1995
of proceeds from the assignment to HUD of the mortgage on El Lago Apartments.
Partially offsetting the increase in net cash provided by investing activities
was the non-recurring payment of notes receivable from affiliates and dividends
from IFI, as a result of the prepayment of the mortgage on Richardson Road
Apartments during 1994.

Net cash used in financing activities decreased for 1995 as compared to
1994, as a result of a decrease in distributions paid to partners.
Distributions paid to partners during 1994 included special distributions
resulting from the prepayment of the mortgage on Richardson Road Apartments, the
receipt of previously undistributed accrued interest and gain received in late
1993 from the disposition of the defaulted mortgages on Chapelgate Apartments,
Sugar Creek Trace, Cumberland Village, Diamond Ridge, and Victoria Pointe
Apartments-Phase I. This compares to the distribution paid to partners during
1995 which included special distributions of net proceeds from the assignment of
the mortgage on El Lago Apartments.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item is on pages 23 through 54.

17

PART II

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(a),(b),(c),(e)

The Partnership has no officers or directors. CRIIMI, Inc. (the General
Partner) holds a partnership interest of 3.9%. The affairs of the Partnership
are managed by the General Partner, which is wholly owned by CRIIMI MAE, a
company whose shares are listed on the New York Stock Exchange. Prior to June
30, 1995, CRIIMI MAE was managed by an advisor whose general partner was CRI.
However, effective June 30, 1995, CRIIMI MAE became a self-administered REIT
and, as a result, the advisor no longer advises CRIIMI MAE.

AIM Acquisition Partners, L.P. (the Advisor) serves as the advisor of the
Partnership. AIM Acquisition is the general partner of the Advisor and the
limited partners include, but are not limited to, AIM Acquisition, The Goldman
Sachs Group, L.P, Broad, Inc. and CRIIMI MAE. Pursuant to the terms of certain
amendments to the Partnership Agreement, the General Partner is required to
receive the consent of the Advisor prior to taking certain significant actions
which affect the management and policies of the Partnership.

Effective September 6, 1991, and through June 30, 1995, a sub-advisory
agreement (the Sub-advisory Agreement) existed whereby CRI/AIM Management, Inc.,
an affiliate of CRI, managed the Partnership's portfolio. In connection with
the transaction in which CRIIMI MAE became a self-administered REIT, an
affiliate of CRIIMI MAE acquired the Sub-advisory Agreement. As a consequence
of this transaction, effective June 30, 1995, CRIIMI MAE Services Limited
Partnership, an affiliate of CRIIMI MAE, manages the Partnership's portfolio.

The General Partner is also the general partner of AIM 84, AIM 86 and AIM
88, limited partnerships with investment objectives similar to those of the
Partnership.

(d) There is no family relationship between any of the officers and
directors of the General Partner.

(f) Involvement in certain legal proceedings.

None.

(g) Promoters and control persons.

Not applicable.

(h) Based solely on its review of Forms 3,4 and 5 and amendments
thereto furnished to the Partnership, and written representations
from certain reporting persons, the Partnership believes that all
reporting persons have filed on a timely basis Forms 3, 4 and 5
as required in the fiscal year ended December 31, 1996.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 is incorporated herein by reference to
Note 3 of the notes to the financial statements of the Partnership.

18 PART III

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

As of December 31, 1996, no person was known by the Partnership to be the
beneficial owner of more than five percent (5%) of the outstanding Units of the
Partnership.

As of December 31, 1996, neither the officers and directors, as a group, of
the General Partner nor any individual director of the General Partner, are
known to own more than 1% of the outstanding Units of the Partnership.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

(a) Transactions with management and others.

Note 3 of the notes to the financial statements of the Partnership
contains a discussion of the amounts, fees and other compensation paid
or accrued by the Partnership to the directors and executive officers
of the General Partner and their affiliates, and is incorporated
herein by reference.

(b) Certain business relationships.

Other than as set forth in Item 11 of this report which is
incorporated herein by reference, the Partnership has no business
relationship with entities of which the current General Partner of the
Partnership are officers, directors or equity owners.

(c) Indebtedness of management.

None.

(d) Transactions with promoters.

Not applicable.

19 PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K

(a)(1) Financial Statements:
Page
Description Number
---------------- --------------

Balance Sheets as of December 31, 1996
and 1995 25

Statements of Operations for the years ended
December 31, 1996, 1995, and 1994 26

Statements of Changes in Partners' Equity for
the years ended December 31, 1996, 1995 and
1994 27

Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 28

Notes to Financial Statements 29

(a)(2) Financial Statement Schedules:

IV - Mortgage Loans on Real Estate

All other schedules have been omitted because they are
inapplicable, not required, or the information is included in the
Financial Statements or Notes thereto.

(a)(3) Exhibits:

3. 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. Second Amended and Restated Partnership Agreement is incorporated
by reference to Exhibit 3 to the Registration Statement.

4.(a) 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.(b) 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.(c) Amendment to the Second Amended and Restated Agreement of Limited
Partnership of the Partnership dated February 12, 1990,
incorporated by reference to Exhibit 4(c) to the Partnership's
Annual Report on Form 10-K for the year ended December 31, 1989.

10.(a) Escrow Agreement, dated January 14, 1985, among the Partnership,
the Managing General Partner and Integrated Resources Marketing,
Inc., incorporated by reference to Exhibit 10(a) to the
Registration Statement.

20 PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K - Continued

10.(b) Amended and Restated Origination and Acquisition Services
Agreement, dated as of January 8, 1985, between the Partnership
and IFI, incorporated by reference to Exhibit 10(b) to the
Registration Statement.

10.(c) Amended and Restated Management Services Agreement, dated as of
January 8, 1985, between the Partnership and IFI, incorporated by
reference to Exhibit 10(c) to the Registration Statement.

10.(d) Amended and Restated Disposition Services Agreement, dated as of
January 8, 1985, between the Partnership and IFI, incorporated by
reference to Exhibit 10(d) to the Registration Statement.

10.(e) Agreement, dated as of January 8, 1985, among the former managing
general partner, the former associate general partner and
Integrated Resources, Inc., incorporated by reference to Exhibit
10(e) to the Registration Statement.

10.(f) Reinvestment Plan, incorporated by reference to the Prospectus
contained in the Registration Statement.

10.(h) Declaration of Trust and Pooling Servicing Agreement dated as of
July 1, 1982 as to Pass-Through Certificates, is incorporated by
reference to Exhibit 10(h) to Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1986.

10.(i) Pages A-1 - A-5 of the Partnership Agreement of Registrant,
incorporated by reference to Exhibit 28 to the Partnership's
Annual Report on Form 10-K for the year ended December 31, 1990.

10.(j) Purchase Agreement among AIM Acquisition, the former managing
general partner, the former corporate general partner, IFI and
Integrated dated as of December 13, 1990, as amended January 9,
1991, incorporated by reference Exhibit 28(a) to the
Partnership's Annual Report on Form 10-K for the year ended
December 31, 1990.

10.(k) Purchase Agreement among CRIIMI, Inc., AIM Acquisition, the
former managing general partner, the former corporate general
partner, IFI and Integrated dated as of December 13, 1990 and
executed as of March 1, 1991, incorporated by reference to
Exhibit 28(b) to the Partnership's Annual Report on Form 10-K for
the year ended December 31, 1990.

10.(l) Amendment to Partnership Agreement dated September 4, 1991.
incorporated by reference to Exhibit 28(c), to the Partnership's
Annual Report on Form 10-K for the year ended December 31, 1991.

10.(m) Non-negotiable promissory note from American Insured Mortgage
Investors L.P. - Series 86 in the amount of $1,737,722 dated
December 31, 1991, incorporated by reference to Exhibit 28(d), to
the Partnership's Annual Report on Form 10-K for the year ended
December 31, 1991.

10.(n) Non-negotiable promissory note from American Insured Mortgage
Investors L.P. - Series 88 in the amount of $1,784,688 dated
December 31, 1991, incorporated by reference to Exhibit 28(e),
to the Partnership's Annual Report on Form 10-K for the year
ended December 31, 1991.

21 PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K - Continued

10.(o) 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.

10.(p) Expense Reimbursement Agreement by and among Integrated Funding
Inc. and the Partnership, American Insured Mortgage Investors
L.P. - Series 86, and American Insured Mortgage Investors L.P. -
Series 88, effective December 31, 1992, incorporated by reference
to Exhibit 28(g) to the Partnership's Quarterly Report on Form
10-Q for the quarter ended June 30, 1991.

10.(q) Non-negotiable promissory note to American Insured Mortgage
Investors L.P. - Series 88 in the amount of $319,074.67 dated
April 1, 1994, incorporated by reference to Exhibit 10(q) to the
Partnership's Annual Report on Form 10-K for the year ended
December 31, 1994.

10.(r) Amendment to Reimbursement Agreement by and among Integrated
Funding Inc. and the Partnership, American Insured Mortgage
Investors L.P. - Series 86, and American Insured Mortgage
Investors L.P. - Series 88, effective April 1, 1994, incorporated
by reference to Exhibit 10(r) to the Partnership's Annual Report
on Form 10-K for the year ended December 31, 1994.

27. Financial Data Schedule (filed herewith).

(b) Reports on Form 8-K filed during the last quarter of the fiscal
year: None.

All other items are not applicable.

22

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

AMERICAN INSURED MORTGAGE
INVESTORS - SERIES 85, L.P. (Registrant)

By:CRIIMI, Inc.
General Partner

March 26, 1997 /s/ William B. Dockser
- --------------------------- -------------------------
DATE William B. Dockser
Chairman of the Board and
Principal Executive Officer

March 26, 1997 /s/ H. William Willoughby
- --------------------------- -------------------------
DATE H. William Willoughby
President and Director

March 26, 1997 /S/ Cynthia O. Azzara
- --------------------------- -------------------------
DATE Cynthia O. Azzara
Principal Financial and
Accounting Officer

March 26, 1996 /s/ Garrett G. Carlson, Sr.
- --------------------------- --------------------------
DATE Garrett G. Carlson, Sr.
Director

March 26, 1997 /s/ Larry H. Dale
- --------------------------- -------------------------
DATE Larry H. Dale
Director

March 26, 1997 G. Richard Dunnells
- --------------------------- -------------------------
DATE G. Richard Dunnells
Director

March 26, 1997 /s/ Robert F. Tardio
- --------------------------- -------------------------
DATE Robert F. Tardio
Director

23

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

Financial Statements as of December 31, 1996 and 1995

and for the Years Ended December 31, 1996, 1995 and 1994

24

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Partners of
American Insured Mortgage Investors - Series 85, L.P.:

We have audited the accompanying balance sheets of American Insured
Mortgage Investors - Series 85, L.P. (the Partnership) as of December 31, 1996
and 1995, and the related statements of operations, changes in partners' equity
and cash flows for the years ended December 31, 1996, 1995 and 1994. These
financial statements and the schedule referred to below are the responsibility
of the Partnership's management. Our responsibility is to express an opinion on
these financial statements and the schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Partnership as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for the years ended December 31, 1996, 1995 and 1994 in conformity with
generally accepted accounting principles.

As explained in Note 2 of the Notes to the Financial Statements, effective
January 1, 1994, the Partnership changed its method of accounting for its
investments in insured mortgages.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule IV-Mortgage Loans on Real
Estate as of December 31, 1996 is presented for purposes of complying with the
Securities and Exchange Commission's rules and regulations and is not a required
part of the basic financial statements. The information in this schedule has
been subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.

Arthur Andersen LLP
Washington, D.C.
March 26, 1997

25

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

BALANCE SHEETS

ASSETS

December 31, December 31,
1996 1995
------------ ------------

Investment in FHA-Insured Certificates
and GNMA Mortgage-Backed Securities,
at fair value:
Acquired insured mortgages $159,959,297 $169,460,375
Originated insured mortgages 16,646,943 22,960,468
------------ ------------
176,606,240 192,420,843
------------ ------------
Investment in FHA-Insured Loans,
at amortized cost, net of unamortized
discount and premium:
Acquired insured mortgages 14,556,595 14,684,828
Originated insured mortgages 13,030,131 13,123,855
------------ ------------
27,586,726 27,808,683

Cash and cash equivalents 9,716,786 3,368,700

Receivables and other assets 1,727,662 1,775,746

Investment in affiliate 314,072 317,151
------------ ------------
Total assets $215,951,486 $225,691,123
============ ============

LIABILITIES AND PARTNERS' EQUITY

Distributions payable $ 10,684,274 $ 4,525,104

Accounts payable and accrued expenses 198,964 163,737

Note payable and due to affiliate 380,877 320,920
------------ ------------
Total liabilities 11,264,115 5,009,761
------------ ------------
Partners' equity:
Limited partners' equity 198,836,652 210,842,615
General partner's deficit (1,762,017) (1,274,782)
Unrealized gain on investment
in FHA-Insured Certificates
and GNMA Mortgage-Backed
Securities 8,715,942 12,159,559
Unrealized loss on investment
in FHA-Insured Certificates
and GNMA Mortgage-Backed
Securities (1,103,206) (1,046,030)
------------ ------------
Total partners' equity 204,687,371 220,681,362
------------ ------------
Total liabilities and partners' equity $215,951,486 $225,691,123
============ ============

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

26

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

STATEMENTS OF OPERATIONS

For the years ended December 31,
1996 1995 1994
------------ ------------ ------------

Income:
Mortgage investment income $ 17,731,547 $ 18,404,737 $ 18,640,699
Interest and other income 211,779 183,846 526,002
------------ ------------ ------------
17,943,326 18,588,583 19,166,701
------------ ------------ ------------
Expenses:
Asset management fee to related
parties 1,997,649 2,042,886 2,064,713
General and administrative 655,426 655,831 778,666
Interest expense to affiliate 23,132 23,133 17,350
------------ ------------ ------------
2,676,207 2,721,850 2,860,729
------------ ------------ ------------
Earnings before gains (losses)
on mortgage dispositions/
modifications 15,267,119 15,866,733 16,305,972

Mortgage dispositions/modifications:
Gains 666,179 52,730 --
Losses (144,595) (16,665) (151,354)
------------ ------------ ------------
Net earnings $ 15,788,703 $ 15,902,798 $ 16,154,618
============ ============ ============

Net earnings allocated to:
Limited partners -96.1% $ 15,172,944 $ 15,282,589 $ 15,524,588
General partner - 3.9% 615,759 620,209 630,030
------------ ------------ ------------
$ 15,788,703 $ 15,902,798 $ 16,154,618
============ ============ ============

Net earnings per Limited
Partnership Unit $ 1.26 $ 1.27 $ 1.29
============ ============ ============

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

27

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

STATEMENTS OF CHANGES IN PARTNERS' EQUITY

For the years ended December 31, 1996, 1995 and 1994

Unrealized Unrealized
Gains Losses
on Investment on Investment Total
General Limited in Insured in Insured Partners'
Partner Partners Mortgages Mortgages Equity
------------- ------------ ---------------- --------------- ------------

Balance, January 1, 1994 $ (809,253) $222,313,737 $ -- $ -- $221,504,484

Net earnings 630,030 15,524,588 -- -- 16,154,618

Distributions paid or accrued of
of $1.96 per Unit, including return
of capital of $0.67 per Unit (960,830) (23,675,847) -- -- (24,636,677)

Unrealized gains (losses) on
investments in insured mortgages -- -- 5,177,224 (8,642,268) (3,465,044)
------------- ------------ ---------------- --------------- ------------
Balance, December 31, 1994 (1,140,053) 214,162,478 5,177,224 (8,642,268) 209,557,381

Net earnings 620,209 15,282,589 -- -- 15,902,798

Distributions paid or accrued of
of $1.54 per Unit, including return
of capital of $0.27 per Unit (754,938) (18,602,452) -- -- (19,357,390)

Adjustment to unrealized gains
(losses) on investment in
insured mortgages -- -- 6,982,335 7,596,238 14,578,573
------------- ------------ ---------------- --------------- ------------
Balance, December 31, 1995 (1,274,782) 210,842,615 12,159,559 (1,046,030) 220,681,362

Net earnings 615,759 15,172,944 -- -- 15,788,703

Distributions paid or accrued of
$2.25 per Unit, including return
of capital of $0.99 per Unit (1,102,994) (27,178,907) -- -- (28,281,901)

Adjustment to unrealized gains
(losses) on investment in
insured mortgages -- -- (3,443,617) (57,176) (3,500,793)
------------- ------------ ---------------- --------------- ------------
Balance, December 31, 1996 $ (1,762,017) $198,836,652 $ 8,715,942 $ (1,103,206) $204,687,371
============= ============ ================ =============== ============

Limited Partnership Units outstanding -
December 31, 1996, 1995 and 1994 12,079,514
============
The accompanying notes are an integral part
of these financial statements.

28

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

STATEMENTS OF CASH FLOWS

For the years ended December 31,
1996 1995 1994
------------ ------------ ------------

Cash flows from operating activities:
Net earnings $ 15,788,703 $ 15,902,798 $ 16,154,618
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Losses on mortgage dispositions/modification 144,595 16,665 151,354
Gains on mortgage dispositions/modification (666,179) (52,730) --
Changes in assets and liabilities:
Decrease in receivables and other assets 186,942 51 1,375,525
Decrease in investment in affiliate 3,079 1,924 --
Increase (decrease) in accounts
payable and accrued expenses 35,227 (137,195) 27,957
Increase (decrease) in note payable and
due to affiliate 59,957 (118,513) 120,358
------------ ------------ ------------
Net cash provided by operating
activities 15,552,324 15,613,000 17,829,812
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from disposition of mortgages 11,346,665 2,334,318 --
Receipt of mortgage principal from
scheduled payments 1,571,828 1,315,947 1,302,622
Investment in Insured Mortgages
and advances on construction loans -- -- (9,739,490)
Payments made in connection with mortgage
dispositions -- -- (151,354)
Principal payments on notes receivable
from affiliates -- -- 3,522,411
Dividends from affiliate investee -- -- 1,097,118
------------ ------------ ------------
Net cash provided by (used in)
investing activities 12,918,493 3,650,265 (3,968,693)
------------ ------------ ------------
Cash flows from financing activities:
Distributions paid to partners (22,122,731) (19,357,390) (26,270,742)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 6,348,086 (94,125) (12,409,623)

Cash and cash equivalents, beginning of year 3,368,700 3,462,825 15,872,448
------------ ------------ ------------
Cash and cash equivalents, end of year $ 9,716,786 $ 3,368,700 $ 3,462,825
============ ============ ============

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

29

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

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION

American Insured Mortgage Investors - Series 85, L.P. (the Partnership) was
formed under the Uniform Limited Partnership Act of the state of California on
June 26, 1984.

CRIIMI, Inc. (the General Partner) holds a partnership interest of 3.9%.
CRIIMI, Inc. is a wholly owned subsidiary of CRIIMI MAE Inc. (CRIIMI MAE). From
inception through June 30, 1995, CRIIMI MAE was managed by an advisor whose
general partner was CRI, Inc. (CRI). However, effective June 30, 1995, CRIIMI
MAE became a self-administered real estate investment trust (REIT) and, as a
result, the advisor no longer advises CRIIMI MAE.

AIM Acquisition Partners, L.P., (the Advisor) serves as the advisor to the
Partnership. AIM Acquisition Corporation (AIM Acquisition) is the general
partner of the Advisor, and the limited partners include, but are not limited
to, AIM Acquisition, The Goldman Sachs Group, L.P., Broad, Inc., and CRIIMI MAE.
Pursuant to the terms of certain amendments to the Partnership Agreement as
discussed below, the General Partner is required to receive the consent of the
Advisor prior to taking certain significant actions which affect the management
and policies of the Partnership.

Effective September 6, 1991 and through June 30, 1995, a sub-advisory
agreement (the Sub-advisory Agreement) existed whereby CRI/AIM Management, Inc.,
an affiliate of CRI, managed the Partnership's portfolio. In connection with
the transaction in which CRIIMI MAE became a self-administered REIT, an
affiliate of CRIIMI MAE acquired the Sub-advisory Agreement. As a consequence
of this transaction, effective June 30, 1995, CRIIMI MAE Services Limited
Partnership, an affiliate of CRIIMI MAE, manages the Partnership's portfolio.

Prior to the expiration of the Partnership's reinvestment period on
December 31, 1993, and subject to the change in the Partnership's investment
policy, as discussed below, the Partnership was in the business of originating
mortgage loans (Originated Insured Mortgages) and acquiring mortgage loans
(Acquired Insured Mortgages, and together with Originated Insured Mortgages,
referred to herein as Insured Mortgages). As of December 31, 1996, the
Partnership had invested in either Originated Insured Mortgages which are
insured or guaranteed, in whole or in part, by the Federal Housing
Administration (FHA) or Acquired Insured Mortgages which are fully insured (as
more fully described below).

Since the expiration of the Partnership's reinvestment period on December
31, 1993, the Partnership is required to distribute such proceeds to its
Unitholders. The Partnership Agreement states that the Partnership will
terminate on December 31, 2009, unless previously terminated under the
provisions of the Partnership Agreement.

2. SIGNIFICANT ACCOUNTING POLICIES

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

30

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

NOTES TO FINANCIAL STATEMENTS

2. SIGNIFICANT ACCOUNTING POLICIES - Continued

Investment in Insured Mortgages
-------------------------------
The Partnership's investment in Insured Mortgages is comprised of
participation certificates evidencing a 100% undivided beneficial interest
in government insured multifamily mortgages issued or sold pursuant to FHA
programs (FHA-Insured Certificates), mortgage-backed securities guaranteed
by the Government National Mortgage Association (GNMA) (GNMA Mortgage-
Backed Securities) and FHA-insured mortgage loans (FHA-Insured Loans). The
mortgages underlying the FHA-Insured Certificates, GNMA Mortgage-Backed
Securities and FHA-Insured Loans are non-recourse first liens on
multifamily residential developments or retirement homes.

Payments of principal and interest on FHA-Insured Certificates and
FHA-Insured Loans are insured by the United States Department of Housing
and Urban Development (HUD) pursuant to Title 2 of the National Housing
Act. Payments of principal and interest on GNMA Mortgage-Backed Securities
are guaranteed by GNMA pursuant to Title 3 of the National Housing Act.

Prior to January 1, 1994, the Partnership accounted for its investment
in mortgages at amortized cost in accordance with Statement of Financial
Accounting Standards No. 65 "Accounting for Certain Mortgage Banking
Activities" (SFAS 65) since it had the ability and intent to hold these
assets for the foreseeable future. The difference between the cost and the
unpaid principal balance, at the time of purchase, is carried as a discount
or premium and amortized over the remaining contractual life of the
mortgage using the effective interest method. The effective interest
method provides a constant yield of income over the term of the mortgage.
Mortgage investment income is comprised of amortization of the discount
plus the stated mortgage interest payments received or accrued, less
amortization of the premium.

In May 1993, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115), effective for fiscal
years beginning after December 15, 1993. The Partnership adopted this
statement as of January 1, 1994. This statement requires that investments
in debt and equity securities be classified into one of the following
investment categories based upon the circumstances under which such
securities might be sold: Held to Maturity, Available for Sale, and
Trading. Generally, certain debt securities for which an enterprise has
both the ability and intent to hold to maturity should be accounted for
using the amortized cost method and all other securities must be recorded
at their fair values.

As of December 31, 1996, the weighted average remaining term of the
Partnership's investments in GNMA Mortgage-Backed Securities and FHA-
Insured Certificates is approximately 31 years. However, the Partnership
Agreement states that the Partnership will terminate in approximately 13
years, on December 31, 2009, unless previously terminated under the
provisions of the Partnership Agreement. As the Partnership is anticipated
to terminate prior to the weighted average remaining term of its
investments in GNMA Mortgage-Backed Securities and FHA-Insured
Certificates, the Partnership does not have the ability, at this time, to
hold these investments to maturity. Consequently, the General Partner
believes that the Partnership's investments in GNMA Mortgage-Backed
Securities and FHA-Insured Certificates should be included in the Available
for Sale category. Although the Partnership's investments in GNMA
Mortgage-Backed Securities and FHA-Insured Certificates are classified as

31

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

NOTES TO FINANCIAL STATEMENTS

2. SIGNIFICANT ACCOUNTING POLICIES - Continued

Available for Sale for financial statement purposes, the General Partner
does not intend to voluntarily sell these assets other than those which may
be sold as a result of a default or those which are eligible to be put to
FHA at the expiration of 20 years from the date of the final endorsement.

In connection with this classification, as of December 31, 1996 and
1995, all of the Partnership's investments in GNMA Mortgage-Backed
Securities and FHA-Insured Certificates are recorded at fair value, with
the net unrealized gains or losses on these assets reported as a separate
component of partners' equity. Subsequent increases or decreases in the
fair value of GNMA Mortgage-Backed Securities and FHA-Insured Certificates,
classified as Available for Sale, will be included as a separate component
of partners' equity. Realized gains and losses on GNMA Mortgage-Backed
Securities and FHA-Insured Certificates, classified as Available for Sale,
will continue to be reported in earnings. The amortized cost of the
investments in GNMA Mortgage-Backed Securities and FHA-Insured Certificates
in this category is adjusted for amortization of discounts and premiums to
maturity. Such amortization is included in mortgage investment income.

Gains from dispositions of mortgage investments are recognized upon
the receipt of cash or HUD debentures.

Losses on dispositions of mortgage investments are recognized when it
becomes probable that a mortgage will be disposed of and that the
disposition will result in a loss. In the case of Insured Mortgages fully
insured by HUD, the Partnership's maximum exposure for purposes of
determining the loan losses would generally be an assignment fee charged by
HUD representing approximately 1% of the unpaid principal balance of the
Insured Mortgage at the date of default, plus the unamortized balance of
acquisition fees and closing costs paid in connection with the acquisition
of the Insured Mortgage and the loss of approximately 30 days accrued
interest.

Cash and Cash Equivalents
-------------------------
Cash and cash equivalents consist of money market funds, time and
demand deposits, commercial paper and repurchase agreements with original
maturities of three months or less.

Reclassification
----------------
Certain amounts in the financial statements for the year ended
December 31, 1994 have been reclassified to conform with the 1996 and 1995
presentation.

Income Taxes
------------
No provision has been made for Federal, state or local income taxes in
the accompanying statements of operations since they are the personal
responsibility of the Unitholders.

Statements of Cash Flows
------------------------
No cash payments were made for interest expense during the years ended
December 31, 1996, 1995 and 1994. Since the statements of cash flows are
intended to reflect only cash receipt and cash payment activity, the
statements of cash flows do not reflect operating activities that affect

32

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

NOTES TO FINANCIAL STATEMENTS

2. SIGNIFICANT ACCOUNTING POLICIES - Continued

recognized assets and liabilities while not resulting in cash receipts or
cash payments.

The following non-cash operating activities were recorded during the
year ended December 31, 1996:

Investment in mortgages $(138,858)
=========
Receivables and other assets $ 138,858
=========

3. TRANSACTIONS WITH RELATED PARTIES

In addition to the related party transactions described in Note 8, the
General Partner and certain affiliated entities, during the years ended December
31, 1996, 1995 and 1994, earned or received compensation or payments for
services from the Partnership as follows:

33

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

NOTES TO FINANCIAL STATEMENTS

3. TRANSACTIONS WITH RELATED PARTIES - Continued

COMPENSATION PAID OR ACCRUED TO RELATED PARTIES
-----------------------------------------------

Capacity in Which For the years ended December 31,
Name of Recipient Served/Item 1996 1995 1994
---------------------------- ---------- ---------- ----------

CRIIMI, Inc.(1) General Partner/Distribution $1,102,994 $ 754,938 $ 960,830

AIM Acquisition Advisor/Asset Management Fee 1,997,649 2,042,886 2,064,713
Partners, L.P.(2)

CRI(3) Affiliate of General Partner/ -- 71,129 140,960
Expense Reimbursement

CRIIMI MAE Affiliate of General Partner/ 68,328 28,087 --
Management, Inc.(3) Expense Reimbursement

(1) The General Partner, pursuant to amendments to the Partnership Agreement, effective September 6, 1991, is entitled to receive
3.9% of the Partnership's income, loss, capital and distributions including, without limitation, the Partnership's Adjusted
Cash from Operations and Proceeds of Mortgage Prepayments, Sales or Insurance (both as defined in the Partnership Agreement).

(2) The Advisor, pursuant to the Partnership Agreement, effective October 1, 1991, is entitled to an Asset Management Fee equal to
.95% of Total Invested Assets (as defined in the Partnership Agreement). The sub-advisor to the Partnership (the Sub-advisor)
is entitled to a fee equal to 0.28% of Total Invested Assets. CRI/AIM Management, Inc., which through June 30, 1995 acted as
the Sub-advisor, earned a fee equal to $302,682 and $608,580, for the six months ended June 30, 1995 and for the year ended
December 31, 1994, respectively. As discussed in Note 1, effective June 30, 1995, CRIIMI MAE Services Limited Partnership now
serves as the Sub-advisor. Of the amounts paid to the Advisor, CRIIMI MAE Services Limited Partnership earned a fee equal to
$590,353 and $299,460 for the year ended December 31, 1996, and the six months ended December 31, 1995, respectively. No fees
were earned by CRIIMI MAE Services Limited Partnership for the year ended December 31, 1994.

(3) Prior to CRIIMI MAE becoming a self-administered REIT, amounts were paid to CRI as reimbursement for expenses incurred prior to
June 30, 1995 on behalf of the General Partner and the Partnership. As discussed in Note 1, the transaction in which CRIIMI
MAE became a self-administered REIT has no impact on the payments required to be made by the Partnership, other than that the
expense reimbursement, previously paid by the Partnership to CRI in connection with the provision of services by the Sub-
advisor are, effective June 30, 1995, paid to a wholly-owned subsidiary of CRIIMI MAE, CRIIMI MAE Management, Inc. The amounts
paid to CRI during the year ended December 31, 1995 represent reimbursement of expenses incurred prior to June 30, 1995.

34

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

NOTES TO FINANCIAL STATEMENTS

4. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following estimated fair values of the Partnership's financial
instruments are presented in accordance with generally accepted accounting
principles which define fair value as the amount at which a financial instrument
could be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale. These estimated fair values, however, do not
represent the liquidation value or the market value of the Partnership.

35

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

NOTES TO FINANCIAL STATEMENTS

4. FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

As of December 31, 1996 As of December 31, 1995
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ------------ ------------ ------------

Investment in FHA-Insured Certificates
and GNMA Mortgage-Backed Securities:
Acquired insured mortgages $151,866,819 $159,959,297 $157,656,694 $169,460,375
Originated insured mortgages 17,126,685 16,646,943 23,650,620 22,960,468
------------ ------------ ------------ ------------
$168,993,504 $176,606,240 $181,307,314 $192,420,843
============ ============ ============ ============
Investment in FHA-Insured Loans:
Acquired insured mortgages $ 14,556,595 $ 17,706,486 $ 14,684,828 $ 18,388,369
Originated insured mortgages 13,030,131 12,969,589 13,123,855 13,160,443
------------ ------------ ------------ ------------
$ 27,586,726 $ 30,676,075 $ 27,808,683 $ 31,548,812
============ ============ ============ ============

Cash and cash equivalents $ 9,716,786 $ 9,716,786 $ 3,368,700 $ 3,368,700
============ ============ ============ ============
Accrued interest receivable $ 1,426,113 $ 1,426,113 $ 1,567,816 $ 1,567,816
============ ============ ============ ============

36

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

NOTES TO FINANCIAL STATEMENTS

4. FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

The following methods and assumptions were used to estimate the fair value
of each class of financial instrument:

Investment in FHA-Insured Certificates, GNMA Mortgage-Backed
Securities and FHA-Insured Loans
------------------------------------------------------------
The fair value of the FHA-Insured Certificates, GNMA Mortgage-Backed
Securities and FHA-Insured Loans is based on quoted market prices. In
order to determine the fair value of the coinsured FHA-Insured
Certificates, the Partnership valued the coinsured FHA-Insured Certificates
as though they were fully insured (in the same manner fully insured FHA-
Insured Certificates were valued). From this amount, the Partnership
deducted a discount factor from the face value of the mortgage. This
discount factor is based on the Partnership's historical analysis of the
difference in fair value between coinsured FHA-Insured Certificates and
fully insured FHA-Insured Certificates.

Cash and cash equivalents and accrued interest receivable
---------------------------------------------------------
The carrying amount approximates fair value because of the short
maturity of these instruments.

5. INVESTMENT IN FHA-INSURED CERTIFICATES AND GNMA MORTGAGE-
BACKED SECURITIES

Fully Insured FHA-Insured Certificates and GNMA Mortgage-
Backed Securities
---------------------------------------------------------
Listed below is the Partnership's aggregate investment in Fully Insured
Acquired Insured Mortgages:

December 31,
1996 1995
------------ ------------

Fully Insured Acquired Insured:
Number of
GNMA Mortgage-Backed Securities 9 9
FHA-Insured Certificates 62 66
Amortized Cost $151,866,819 $157,656,694
Face Value 157,889,594 164,397,459
Fair Value 159,959,297 169,460,375

Fully Insured Originated Insured:
Number of
GNMA Mortgage-Backed Securities 1 1
FHA-Insured Certificates 1 --
Amortized Cost $ 17,126,685 $ 10,666,346
Face Value 16,770,069 10,760,496
Fair Value 16,646,943 10,925,754

37

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

NOTES TO FINANCIAL STATEMENTS

5. INVESTMENT IN FHA-INSURED CERTIFICATES AND GNMA MORTGAGE-
BACKED SECURITIES - Continued

In December 1992, the Partnership entered into a modification agreement
with the mortgagor of Waterford Green Apartments. This agreement effectively
lowered the interest rate on the mortgage from 8.5% to 6.5% for a period
continuing through November 1995. The mortgagor assumed an additional note for
the difference between the interest due under the principal mortgage and the
modified interest paid under the agreement. On April 30, 1996, the mortgage on
Waterford Green was restated under the HUD 223(a)(7) program converting this
originated mortgage from a coinsured to fully insured status at a fixed rate of
7.25%. As a result of converting a coinsured mortgage to a fully insured
mortgage, the Partnership recognized a loss of approximately $103,000 on the
modification. Payments due under the new mortgage began June 1, 1996. Prior to
this restatement, as part of the prior workout arrangements with the borrower, a
portion of the interest due under the original note had been deferred
temporarily. Concurrent with this HUD modification, the deferred interest is
now evidenced in the form of a cash surplus note in the amount of $356,600. To
the extent available, surplus cash, as defined by HUD, will be split 50/50 in
repayment of this deferred interest and another note due the property manager
for deferred management fees. Once deferred management fees have been repaid,
100% of surplus cash, if any, will be applied against the remaining deferred
interest obligation. Upon repayment of both of these obligations, any surplus
cash will be distributed based upon the terms of the participation agreement.
As of December 31, 1996, the balance of this note is $356,600.

In April 1996, the Partnership entered into a modification agreement with
the mortgagor of Oak Forest Apartments II. This agreement lowered the interest
rate on the mortgage from 8.5% to 7.5% effective May 1, 1996, through the
maturity of the note. The agreement also modified the restrictions on
prepayment of the note. The modification agreement, on this originated insured
mortgage, resulted in a gain of approximately $148,000.

In late March 1996, a retained yield holder in the Harbor View Estates
loan, exercised its right to purchase the participation interests with respect
to this acquired insured mortgage after a Notice of Default was filed with HUD.
The Partnership received net proceeds of approximately $693,000 from this
prepayment in late March 1996, resulting in a loss of approximately $1,100. A
distribution of $0.08 per Unit related to this prepayment was declared in April
1996 and distributed to Unitholders in August 1996.

In late May 1996, the mortgages on Cambridge Arms Apartments and Bear Creek
Apartments II were prepaid, resulting in net proceeds of approximately $2.9
million. The Partnership recognized a gain of approximately $235,000 from the
prepayment of the mortgage on Cambridge Arms Apartments and a gain of
approximately $276,500 from the prepayment of the mortgage on Bear Creek
Apartments II. A distribution of $0.23 per Unit related to the prepayment, on
these acquired insured mortgages, was declared in June 1996 and was distributed
to Unitholders in August 1996.

In October 1995, the Partnership filed a Notice of Default and an Election
to Assign with the United States Department of Housing and Urban Development
(HUD) related to the acquired insured mortgage on Woodland Village Apartments.
On August 30, 1996, the Partnership received approximately $1.4 million,
representing approximately 90% of the assignment proceeds. The remaining
proceeds of approximately $139,000 are included in receivables and other assets
on the accompanying balance sheet as of December 31, 1996. The Partnership
recognized a loss of approximately $41,000 during year end 1996. A distribution
of $0.10 per Unit related to this assignment was declared in September 1996 and
was paid to Unitholders in November 1996.

38

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

NOTES TO FINANCIAL STATEMENTS

5. INVESTMENT IN FHA-INSURED CERTIFICATES AND GNMA MORTGAGE-
BACKED SECURITIES - Continued

As of March 1, 1997, all of the fully insured FHA-Insured Certificates and
GNMA Mortgage-Backed Securities are current with respect to the payment of
principal and interest, except for the mortgage on Meadow Park Apartments I,
which was assigned in October 1996, as discussed below, and Country Club Terrace
Apartments and Pleasant View Nursing Home which are delinquent with respect to
the January 1997 payment of principal and interest. The Partnership expects to
receive the payments on Country Club Terrace Apartments and Pleasant View
Nursing Home. On October 11, 1996, the servicer of the acquired insured
mortgage on Meadow Park Apartments I filed a Notice of Default and Election to
Assign the mortgage with HUD. On January 24, 1997, the Partnership received
approximately $628,000 representing approximately 90% of the assignment
proceeds. The Partnership anticipates it will recognize a gain of approximately
$139,000 in 1997. A distribution of $0.05 per Unit related to this assignment
was declared in February 1997 and is expected to be paid to Unitholders in May
1997.

In late February 1997, the acquired insured mortgage on Security Apartments
was prepaid. The partnership received net proceeds of approximately $304,000,
and anticipates it will recognize a gain of approximately $66,000 in 1997. A
distribution of approximately $0.02 per Unit related to this prepayment was
declared in March 1997 and is expected to be paid to Unitholders in May 1997.

In the case of fully insured Originated Insured Mortgages and Acquired
Insured Mortgages, the Partnership's maximum exposure for purposes of
determining loan losses would generally be approximately 1% of the unpaid
principal balance of the Originated Insured mortgage or Acquired Insured
Mortgage (an assignment fee charged by FHA) at the date of default, plus the
unamortized balance of acquisition of the Insured Mortgage and the loss of
approximately 30 days accrued interest.

Coinsured FHA-Insured Certificates
- ----------------------------------

Coinsured by affiliate
- ----------------------
As of December 31, 1996 and 1995, the Partnership had invested in zero and
two FHA-Insured Certificates, respectively, secured by coinsured mortgages where
the coinsurance lender was Integrated Funding, Inc. (IFI).

On April 30, 1996, Waterford Green Apartments, with an unpaid principal
balance of approximately $6.5 million, was converted from a coinsured mortgage
to a fully insured originated insured mortgage, as discussed above. During
December 1996, the Partnership received net proceeds of approximately $6.5
million for the prepayment of the mortgage on Westlake Village. The Partnership
recognized a gain of approximately $7,000 on this prepayment as of December 31,
1996. A distribution of $0.51 per Unit related to this prepayment was declared
in December 1996 and distributed to Unitholders in February 1997.
39

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

NOTES TO FINANCIAL STATEMENTS

6. INVESTMENT IN FHA-INSURED LOANS

Fully Insured FHA-Insured Loans
-------------------------------
Listed below is the Partnership's aggregate investment in FHA-Insured
Loans:

December 31,
1996 1995
------------ ------------

Fully Insured Acquired Insured:
Number of Loans 12 12
Amortized Cost $ 14,556,595 $ 14,684,828
Face Value 17,405,640 17,627,453
Fair Value 17,706,486 18,388,369

Fully Insured Originated Insured:
Number of Loans 3 3
Amortized Cost $ 13,030,131 $ 13,123,855
Face Value 12,681,532 12,766,486
Fair Value 12,969,589 13,160,443

As of March 1, 1997, all of the fully insured FHA-Insured Loans were
current with respect to the payment of principal and interest.

In addition to base interest payments under Originated Insured
Mortgages, the Partnership is entitled to additional interest based on a
percentage of the net cash flow from the underlying development (referred
to as Participations). During the years ended December 31, 1996, 1995 and
1994, the Partnership received $42,417, $64,676 and $35,314, respectively,
from the Participations. These amounts are included in mortgage investment
income on the accompanying statements of operations.

7. DISTRIBUTIONS TO UNITHOLDERS

The distributions paid or accrued to Unitholders on a per Unit basis for
the years ended December 31, 1996, 1995 and 1994 are as follows:

1996 1995 1994
------ ------ ------
Quarter ended March 31, $0.33 $0.36 $0.39 (6)
Quarter ended June 30, 0.64 (1) 0.33 0.73 (7)
Quarter ended September 30, 0.43 (2) 0.49(4) 0.48 (8)
Quarter ended December 31, 0.85 (3) 0.36(5) 0.36
----- ----- -----
$2.25 $1.54 $1.96
===== ===== =====

(1) This amount includes approximately $0.31 per Unit representing net proceeds
from the prepayment of the mortgages on Harbor View Estates, Bear Creek
Apartments II, and Cambridge Arms Apartments.
(2) This amount includes approximately $0.10 per Unit representing net proceeds
from the assignment of the mortgage on Woodland Village Apartments.
(3) This amount includes approximately $0.51 per Unit representing net proceeds
from the prepayment of the mortgage on Westlake Village. In addition,

40

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

NOTES TO FINANCIAL STATEMENTS

7. DISTRIBUTIONS TO UNITHOLDERS - Continued

includes approximately $0.01 per Unit representing net proceeds from the
modification of the mortgage on Oak Forest Apartments II and the partial
prepayment of the mortgage on Cambridge Arms Apartments.
(4) This amount includes approximately $0.16 per Unit representing net proceeds
from the assignment of the mortgage on El Lago Apartments.
(5) This amount includes approximately $0.02 per Unit representing additional
net proceeds from the assignment of the mortgage on El Lago Apartments.
(6) This amount includes approximately $0.05 per Unit representing previously
undistributed accrued interest and gain from the disposition of the
mortgage on Victoria Pointe Apartments-Phase I.
(7) This amount includes approximately $0.37 per Unit representing net
principal proceeds from the prepayment of the mortgage on Richardson Road
Apartments.
(8) This amount includes approximately $0.11 per Unit representing a one-time
distribution of funds that had previously been set aside, pending
resolution of the Partnership's troubled loans. Also included is
approximately $0.01 per Unit representing a return of capital from a
partial prepayment of the mortgage on Garden Court Apartments.

The basis for paying distributions to Unitholders is net proceeds from
mortgage dispositions, if any, and cash flow from operations, which includes
regular interest income and principal from Insured Mortgages. Although the
Insured Mortgages yield a fixed monthly mortgage payment once purchased, the
cash distributions paid to the Unitholders will vary during each quarter due to
(1) the fluctuating yields in the short-term money market where the monthly
mortgage payment receipts are temporarily invested prior to the payment of
quarterly distributions, (2) the reduction in the asset base resulting from
monthly mortgage payments received or mortgage dispositions, (3) variations in
the cash flow attributable to the delinquency or default of Insured Mortgages
and professional fees and foreclosure costs incurred in connection with those
Insured Mortgages and (4) variations in the Partnership's operating expenses.

41

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

NOTES TO FINANCIAL STATEMENTS

8. INVESTMENT IN AFFILIATE, NOTES RECEIVABLE FROM AFFILIATES,
NOTE PAYABLE TO AFFILIATE AND DUE TO AFFILIATES

Effective December 31, 1991, the Partnership transferred a GNMA Mortgage-
Backed Security underlying its investment in Richardson Road Apartments with a
carrying value of approximately $4.7 million to IFI in order to capitalize IFI
with sufficient net worth under HUD regulations. American Insured Mortgage
Investors L.P. - Series 86 (AIM 86) and American Insured Mortgage Investors L.P.
- - Series 88 (AIM 88), affiliates of the Partnership, each issued a demand note
payable to the Partnership and recorded an investment in IFI through an
affiliate (AIM Mortgage, Inc.) at an amount proportionate to each entity's
coinsured mortgages for which IFI was the mortgagee of record as of December 31,
1991. AIM Mortgage, Inc. is jointly owned by AIM 86, AIM 88 and the
Partnership. The Partnership accounts for its investment in IFI under the
equity method of accounting.

In 1992, IFI entered into an expense reimbursement agreement with the
Partnership, AIM 86 and AIM 88 (collectively, the AIM Funds) whereby IFI
reimburses the AIM Funds for general and administrative expenses incurred on
behalf of IFI. The expense reimbursement is allocated to the AIM Funds based on
an amount proportionate to each entity's IFI coinsured mortgages. The expense
reimbursement, interest from the two notes and the Partnership's equity interest
in IFI's net income or loss, substantially equalled the mortgage principal and
interest on the GNMA Mortgage-Backed Security transferred to IFI.

In April 1994, IFI received net proceeds of approximately $4.7 million from
the prepayment of the GNMA Mortgage-Backed Security, which IFI distributed to
the AIM Funds, in proportion to each entity's coinsured mortgage investments for
which IFI was the mortgagee of record as of December 31, 1991. On June 30, 1994,
AIM 86 and AIM 88 repaid the Partnership for the outstanding balance on the
notes receivable. Interest income on the notes receivable, based on an interest
rate of 8% per annum, which represented the interest rate on the GNMA Mortgage-
Backed Security, was $70,449 for the year ended December 31, 1994.

As a result of the prepayment, in April 1994, AIM 88 transferred a GNMA
Mortgage-Backed Security in the amount of approximately $2.0 million to IFI in
order to recapitalize IFI with sufficient net worth under HUD regulations. The
Partnership and AIM 86 each issued a demand note payable to AIM 88 and recorded
an investment in IFI through AIM Mortgage, Inc. in proportion to each entity's
coinsured mortgages for which IFI was the mortgagee of record as of April 1,
1994. Interest expense on the note payable is based on an annual interest rate
of 7.25%.

The note payable was executed in the amount of $319,075, which represents
the outstanding balance as of December 31, 1996 and 1995. Additionally, as of
December 31, 1996 and 1995, the Partnership owed a total of $61,802 and $1,845,
respectively, to AIM 84.

In connection with these transactions, the expense reimbursement agreement
was amended, as of April 1, 1994, to adjust the allocation of the expense
reimbursement agreement to the AIM Funds to an amount proportionate to each
entity's coinsured mortgage investments for which IFI was the mortgagee of
record as of April 1, 1994. The expense reimbursement, as amended, along with
the Partnership's equity interest in IFI's net income or loss, substantially
equals the Partnership's interest expense on the note payable.

9. PARTNERS' EQUITY

Depositary Units representing economic rights in limited partnership
interests (Units) were issued at a stated value of $20. A total of 12,079,389

42

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

NOTES TO FINANCIAL STATEMENTS

Units were issued for an aggregate capital contribution of $241,587,780. In
addition, the initial limited partner contributed $2,500 to the capital of the
Partnership and received 125 Units in exchange therefore.

43

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

NOTES TO FINANCIAL STATEMENTS

10. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(In Thousands, Except Per Unit Data)

The following is a summary of unaudited quarterly results of operations for
the years ended December 31, 1996, 1995 and 1994.

1996
Quarter ended
March 31 June 30 September 30 December 31
----------- --------- -------------- -------------

Income $ 4,612 $ 4,529 $ 4,447 $ 4,355
Net gains (losses) from
mortgage dispositions (1) 556 (40) 7
Net earnings 3,928 4,417 3,790 3,654
Net earnings per Limited
Partnership Unit 0.31 0.35 0.30 0.30

1995
Quarter ended
March 31 June 30 September 30 December 31
----------- --------- -------------- -------------

Income $ 4,640 $ 4,717 $ 4,626 $ 4,606
Net gains (losses) from
mortgage dispositions 53 (36) -- 19
Net earnings 3,980 4,017 3,944 3,962
Net earnings per Limited
Partnership Unit 0.32 0.32 0.31 0.32

1994
Quarter ended
March 31 June 30 September 30 December 31
---------- --------- -------------- -------------

Income $ 4,825 $ 4,806 $ 4,899 $ 4,637
Net losses from mortgage
dispositions -- -- -- (151)
Net earnings 4,061 4,086 4,202 3,806
Net earnings per Limited
Partnership Unit 0.32 0.33 0.33 0.31

44
AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1996

Interest
Rate on Face Net Annual Payment
Maturity Put Mortgage Value of Carrying Value (Principal and
Development Name/Location Date Date (1) (5)(10) Mortgage (3)(12)(13) Interest)(10)(11)
- ------------------------- -------- -------- ----------- ------------ -------------- -----------------

ACQUIRED INSURED MORTGAGES
- --------------------------
FHA-Insured Certificates

(carried at fair value)
The Executive House
Dayton, Ohio 8/21 12/01 7.5% $ 884,090 $ 898,848 $ 78,855(4)
Walnut Apartments
La Puente, California 3/20 11/01 7.5% 2,716,299 2,762,199 248,862(4)
Woodland Hills Apartments
Auburn, Alabama 10/19 6/99 7.5% 736,406 748,898 68,044(4)
Fairlawn II
Waterbury, Connecticut 6/20 5/00 7.5% 808,327 821,927 73,364(4)
Willow Dayton
Chicago, Illinois 8/19 12/00 7.5% 1,081,371 1,099,678 99,489(4)
Cedar Ridge Apartments
Richton Park, Illinois 4/20 2/01 7.5% 2,886,818 2,935,448 262,699(4)
Park Hill Apartments
Lexington, Kentucky 3/19 3/00 7.5% 1,876,007 1,907,873 173,845(4)
Fairfax House
Buffalo, New York 11/19 5/00 7.5% 2,287,854 2,326,513 209,608(4)
Country Club Terrace Apt.
Holidaysburg, Pennsylvania 8/19 6/00 7.5% 1,549,273 1,575,502 142,537(4)
Silverwood Village Apts.
Gallatin, Tennessee 9/20 2/00 7.5% 1,376,214 1,399,329 124,420(4)
Fleetwood Village Apts.
Cookeville, Tennessee 6/20 2/00 7.5% 1,541,191 1,567,123 139,879(4)
Summit Square Manor
Rochester, Minnesota 8/19 5/99 7.5% 2,037,623 2,072,121 187,467(4)
Park Place
Rochester, Minnesota 3/20 10/99 7.5% 806,366 820,000 73,980(4)

45

AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1996

Interest
Rate on Face Net Annual Payment
Maturity Put Mortgage Value of Carrying Value (Principal and
Development Name/Location Date Date (1) (5)(10) Mortgage (3)(12)(13) Interest)(10)(11)
- ------------------------- -------- -------- ----------- ------------ -------------- -----------------

ACQUIRED INSURED MORTGAGES
- --------------------------
FHA-Insured Certificates
(carried at fair value) - Continued

Nevada Hills Apartments
Reno, Nevada 2/21 8/00 7.5% 1,228,223 1,248,794 110,345(4)
Bentgrass Hills Apartments
Milwaukee, Wisconsin 7/21 5/01 7.5% 244,027 248,105 21,817(6)
Colony West Apartments
Chico, California 7/20 12/00 7.5% 688,050 699,620 62,365(6)
Dunhaven Apartments Section I
Baltimore County, Maryland 1/20 12/99 7.5% 956,908 973,057 87,429(6)
Emerald Green Apartments
Indianapolis, Indiana 1/20 12/99 7.5% 1,098,584 1,117,124 100,374(6)
Isle of Pines Village
Apartments
Baltimore County, Maryland 12/20 4/00 7.5% 1,299,404 1,321,191 117,030(6)
Kings Villa/Discovery Commons
Sacramento, California 7/19 11/99 7.5% 1,155,012 1,174,579 106,414(6)
Meadow Park Apartments I
Anniston, Alabama 9/20 8/00 7.5% 673,876 667,989 60,923(6)
Stoney Brook Apartments
North Providence
Rhode Island 9/20 10/00 7.5% 1,529,503 1,555,192 138,278(6)
Security Apartments
Mankato, Minnesota 7/19 6/99 7.5% 303,694 308,839 27,980(6)
Steeplechase Apartments
Aiken, South Carolina 9/18 8/98 7.5% 542,899 552,172 50,921(6)
Walnut Hills Apartments
Plainfield, Indiana 9/19 3/00 7.5% 519,114 527,898 47,692(6)
Woodland Villas
Jasper, Alabama 8/19 3/00 7.5% 331,168 336,774 30,468(6)
Ashley Oaks Apartments
Carrollton, Georgia 3/22 4/02 7.5% 591,008 600,839 52,292(7)
Highland Oaks Apartments,
Phase III
Wichita Falls, Texas 2/21 4/02 7.5% 998,882 1,015,611 89,741(7)

46

AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1996

Interest
Rate on Face Net Annual Payment
Maturity Put Mortgage Value of Carrying Value (Principal and
Development Name/Location Date Date (1) (5)(10) Mortgage (3)(12)(13) Interest)(10)(11)
- ------------------------- -------- -------- ----------- ------------ -------------- -----------------

ACQUIRED INSURED MORTGAGES
- --------------------------
FHA-Insured Certificates
(carried at fair value) - Continued

Holden Court Apartments
Seattle, Washington 12/21 4/02 7.5% 230,442 234,279 20,435(7)
Magnolia Place Apartments
Franklin, Tennessee 5/20 4/02 7.5% 338,956 344,662 30,804(7)
Quail Creek Apartments
Howell, Michigan 5/20 4/02 7.5% 567,474 577,027 51,572(7)
Rainbow Terrace Apartments
Milwaukee, Wisconsin 7/22 4/02 7.5% 335,801 341,376 29,581(7)
Rock Glen Apartments
Baltimore, Maryland 1/22 4/02 7.5% 1,120,614 1,139,273 99,375(7)
Stonebridge Apartments, Phase I
Montgomery, Alabama 4/20 4/02 7.5% 1,089,293 1,107,642 99,125(7)
Village Knoll Apartments
Harrisburg, Pennsylvania 4/20 4/02 7.5% 1,130,942 1,149,993 102,914(7)
Bowling Brook, Section 1
Towson, Maryland 5/30 N/A 8.50% 12,058,813 12,331,086 1,090,128
Cedar Bluff
Eagan, Minnesota 3/27 N/A 8.50% 4,463,701 4,565,149 411,371
Executive Tower
Toledo, Ohio 3/27 N/A 8.75% 2,917,672 2,983,906 275,283
New Castle Apartments
Austin, Texas 3/18 N/A 8.75% 2,108,859 2,158,439 219,143
Lincoln Green
Burrillville, Rhode Island 6/33 N/A 10.25% 3,141,821 3,236,752 330,066
Turtle Creek Apartments
San Antonio, Texas 4/16 N/A 8.95% 1,725,732 1,766,795 188,596
Sangnok Villa
Los Angeles, California 1/30 N/A 10.25% 912,084 939,729 96,825
The Meadows of Livonia
Livonia, Michigan 9/34 N/A 10.00% 6,482,766 6,661,573 627,836

47

AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1996

Interest
Rate on Face Net Annual Payment
Maturity Put Mortgage Value of Carrying Value (Principal and
Development Name/Location Date Date (1) (5)(10) Mortgage (3)(12)(13) Interest)(10)(11)
- ------------------------- -------- -------- ----------- ------------ -------------- -----------------

ACQUIRED INSURED MORTGAGES
- --------------------------

FHA-Insured Certificates
(carried at fair value) - Continued

Gamel & Gamel Apartments
Benton, Kentucky 4/27 N/A 8.75% $ 685,584 $ 701,141 $ 64,612
Wayland Health Center
Providence, Rhode Island 10/33 N/A 9.75% 6,928,064 7,119,266 696,610
Peachtree Place North
Doraville, Georgia 4/22 N/A 9.00% 6,490,533 6,639,797 651,339
Eaglewood Villa Apartments
Springfield, Ohio 2/27 N/A 8.875% 2,773,999 2,836,931 264,707
Gold Key Village Apartments
Englewood, Ohio 6/27 N/A 9.00% 2,928,742 2,995,090 282,030
Stafford Towers
Baltimore, Maryland 8/16 N/A 9.50% 375,990 386,855 42,613
Garden Court Apartments
Lexington, Kentucky 8/27 N/A 8.60% 1,192,871 1,219,936 110,583
Northdale Commons
Coon Rapids, Minnesota 9/27 N/A 9.00% 698,276 714,089 67,173
Northwood Place
Meridian, Mississippi 6/34 N/A 8.75% 4,535,169 4,636,832 412,635
Amador Residential
Jackson, California 1/34 N/A 9.00% 1,351,117 1,381,393 126,173
Cheswick Apartments
Indianapolis, Indiana 9/27 N/A 8.75% 3,146,623 3,217,958 295,736
Nassau Apartments
New Orleans, Louisiana 11/27 N/A 8.63% 885,046 905,116 82,139
The Gate House Apartments
Lexington, Kentucky 2/28 N/A 8.55% 2,870,172 2,935,247 264,092
Bradley Road Nursing
Bay Village, Ohio 5/34 N/A 8.875% 2,536,318 2,593,154 233,708

48

AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1996

Interest
Rate on Face Net Annual Payment
Maturity Put Mortgage Value of Carrying Value (Principal and
Development Name/Location Date Date (1) (5)(10) Mortgage (3)(12)(13) Interest)(10)(11)
- ------------------------- -------- -------- ----------- ------------ -------------- -----------------

ACQUIRED INSURED MORTGAGES
- --------------------------

FHA-Insured Certificates
(carried at fair value) - Continued

Franklin Plaza
Cleveland, Ohio 5/23 N/A 8.175% 5,439,777 5,439,243 503,183
Ashford Place Apartments
Mobile, Alabama 10/24 N/A 7.125% 3,418,654 3,418,533 282,875
Heritage Heights Apartments
Harrison, Arizona 4/32 N/A 9.50% 419,396 430,988 41,313
Pleasant View Nursing Home
Union, New Jersey 6/29 N/A 7.75% 7,622,278 7,619,105 643,312
Pine Tree Lodge
Pasadena, Texas 12/33 N/A 9.50% 2,145,244 2,209,601 222,323(9)
------------- --------------
Total FHA-Insured Certificates -
Acquired Insured Mortgages,
carried at fair value 127,817,014 130,221,199
------------- --------------
GNMA Mortgage-Backed Securities
(carried at fair value)

Maryland Meadows
Glendale, Arizona 10/27 N/A 8.35% 5,023,655 4,967,475 436,957
Spanish Trace Apartments
Md. Heights, Missouri 9/28 N/A 7.35% 9,757,159 9,648,849 771,094
Stone Hedge Village Apts.
Farmington, New York 11/27 N/A 7.00% 1,843,227 1,822,912 143,222
Afton Square Apartments
Portsmouth, Virginia 12/28 N/A 7.25% 1,078,281 1,066,312 81,383
Carlisle Apartments
Houston, Texas 12/28 N/A 7.125% 2,155,307 2,131,422 165,877
Independence Park
Largo, Florida 9/29 N/A 7.75% 4,046,782 4,001,445 330,715
Ridgecrest Timbers
Portland, Oregon 12/28 N/A 7.25% 1,569,726 1,552,302 120,849

49

AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1996

Interest
Rate on Face Net Annual Payment
Maturity Put Mortgage Value of Carrying Value (Principal and
Development Name/Location Date Date (1) (5)(10) Mortgage (3)(12)(13) Interest)(10)(11)
- ------------------------- -------- -------- ----------- ------------ -------------- -----------------

ACQUIRED INSURED MORTGAGES
- --------------------------

FHA-Insured Certificates
(carried at fair value) - Continued

Huntington Apartments
Concord, North Carolina 12/29 N/A 7.25% 2,990,667 2,957,458 233,099
Northwood Apartments
Mockville, North Carolina 12/29 N/A 7.25% 1,607,776 1,589,923 125,313
------------ --------------

Total GNMA Mortgage-Backed
Securities 30,072,580 29,738,098
------------ --------------
Total investment in Acquired
Insured Mortgages, carried
at fair value 157,889,594 159,959,297
------------ --------------

ORIGINATED INSURED MORTGAGES
- ----------------------------
GNMA Mortgage-Backed Security
(carried at fair value)

Oak Forest Apartments II
Ocoee, Florida 12/31 11/09 8.25% 10,703,555 10,582,963 898,012
FHA-Insured Certificate
(carried at fair value)

Waterford Green Apartments
South St. Paul, Minnesota (11) 11/30 12/04 8.50% 6,066,514 6,063,980 610,218
------------ --------------
Total investment in Originated Insured
Mortgages, carried at fair value 16,770,069 16,646,943
------------ --------------
Total investment in FHA-Insured Certificates
and GNMA Mortgage-Backed Securities 174,659,663 176,606,240
------------ --------------

50

AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1996

Interest
Rate on Face Net Annual Payment
Maturity Put Mortgage Value of Carrying Value (Principal and
Development Name/Location Date Date (1) (5)(10) Mortgage (3)(12)(13) Interest)(10)(11)
- ------------------------- -------- -------- ----------- ------------ -------------- -----------------

ACQUIRED INSURED MORTGAGES
- --------------------------

FHA-Insured Loans
(carried at amortized cost)(2)
Bay Pointe Apartments
Lafayette, Indiana 2/23 11/00 7.5% 2,098,622 1,720,728 185,268(8)
Baypoint Shoreline Apartments
Duluth, Minnesota 1/22 8/00 7.5% 991,971 811,102 87,967(8)
Berryhill Apartments
Grass Valley, California 1/21 8/99 7.5% 1,288,451 1,055,933 115,899(8)
Brougham Estates II
Kansas City, Kansas 11/22 8/00 7.5% 2,632,011 2,147,084 230,860(8)
College Green Apartments
Wilmington, North Carolina 3/23 6/01 7.5% 1,413,373 1,152,372 123,455(8)
Fox Run Apartments
Dothan, Alabama 10/19 12/97 7.5% 1,265,562 1,040,891 116,242(8)
Kaynorth Apartments
Lansing, Michigan 4/23 3/01 7.5% 1,917,493 1,562,914 167,318(8)
Lakeside Apartments
Bennettsville, South Carolina 1/22 3/01 7.5% 398,098 325,836 35,303(8)
Portervillage I Apartments
Portervillage, California 8/21 5/00 7.5% 1,161,634 951,052 103,733(8)
Town Park Apartments
Rockingham, North Carolina 10/22 6/01 7.5% 646,046 527,648 56,755(8)
Westbrook Apartments
Kokomo, Indiana 11/22 12/00 7.5% 1,837,983 1,504,863 163,177(8)
Continental Village
New Hope, Minnesota 1/22 N/A 8.95% 1,754,396 1,756,172 175,954
------------ --------------
Total investment in Acquired
Insured Mortgages, carried
at amortized cost 17,405,640 14,556,595
------------ --------------

51

AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1996

Interest
Rate on Face Net Annual Payment
Maturity Put Mortgage Value of Carrying Value (Principal and
Development Name/Location Date Date (1) (5)(10) Mortgage (3)(12)(14) Interest)(10)(11)
- ------------------------- -------- -------- ----------- ------------ -------------- -----------------

ORIGINATED INSURED MORTGAGES
- ----------------------------
Fully Insured Mortgages
- -----------------------
FHA-Insured Loans

(carried at amortized cost)(2)
Cobblestone Apartments
Fayetteville, North Carolina 3/28 12/02 8.50 5,055,033 5,212,122 462,703
Longleaf Lodge
Hoover, Alabama 7/26 -- 8.25% 3,126,455 3,166,895 282,958
The Plantation
Greenville, North Carolina 4/28 4/03 8.25% 4,500,044 4,651,114 402,046
------------ ------------

Total investment in Originated
Insured Mortgages, carried at amortized
cost 12,681,532 13,030,131
------------ ------------

Total investment in FHA-Insured Loans 30,087,172 27,586,726
------------ ------------
TOTAL INVESTMENT IN INSURED MORTGAGES $ 204,746,835 $ 204,192,966
============ ============

52

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

NOTES TO SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE

DECEMBER 31, 1996

(1) Under the Section 221 program of the National Housing Act of 1937, as
amended, a mortgagee has the right to assign an Insured Mortgage (put) to
FHA at the expiration of 20 years from the date of final endorsement, if
the Insured Mortgage is not in default at such time. Any mortgagee
electing to assign a FHA-insured mortgage to FHA will receive, in exchange
therefor, HUD debentures having a total face value equal to the then
outstanding principal balance of the FHA-insured mortgage plus accrued
interest to the date of assignment. These HUD debentures will mature 10
years from the date of assignment and will bear interest at the "going
Federal rate" at such date. This assignment procedure is applicable to an
Insured Mortgage which had a firm or conditional FHA commitment for
insurance on or before to November 30, 1983 and, in the case of mortgages
sold in a GNMA auction, was sold in an auction prior to February 1984.
Certain of the Partnership's Insured Mortgages may have the right of
assignment under this program. Certain mortgages that do not qualify under
this program possess a special assignment option, in certain Insured
Mortgage documents, which allow the Partnership, anytime after this date,
the option to require payment by the borrower of the unpaid principal
balance of the Insured Mortgages. At such time, the borrowers must make
payment to the Partnership, or the Partnership, at its option, may cancel
the FHA insurance and institute foreclosure proceedings.

(2) Inclusive of closing costs and acquisition fees.

(3) The mortgages underlying the Partnership's investments in FHA-Insured
Certificates, GNMA Mortgage-Backed Securities and FHA-Insured Loans are
non-recourse first liens on multifamily residential developments and
retirement homes. Prepayment of these Insured Mortgages would be based
upon the unpaid principal balance at the time of prepayment.

(4) In April and July 1985, and February 1986, the Partnership purchased pass-
through certificates representing undivided fractional interests of
157/537, 69/537 and 259/537, respectively, in a pool of 19 FHA-insured
mortgages. In July 1986 and October 1987, the Partnership sold undivided
fractional interests of 67/537 and 40/537, respectively, in this pool.
Accordingly, the Partnership now owns an undivided fractional interest
aggregating 378/537, or approximately 70.4%, in this pool. For purposes of
illustration only, the amounts shown in this table represent the
Partnership's current share of these items as if an undivided interest in
each mortgage was acquired.

(5) In addition, the servicer or the sub-servicer of the Insured Mortgage,
primarily unaffiliated third parties, is entitled to receive compensation
for certain services rendered.

(6) In June 1985 and February 1986, the Partnership purchased pass-through
certificates 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 Partnership sold undivided fractional interests of
100/392 and 104/392, respectively, in this pool. Accordingly, the
Partnership now owns an undivided fractional interest aggregating 124/392,
or approximately 31.6%, in this pool. For purposes of illustration only,
the amounts shown in this table represent the Partnership's share of these
items as if an undivided interest in each mortgage was acquired.

(7) In June 1985 and February 1986, the Partnership purchased pass-through
certificates representing undivided fractional interests of 200/341 and

53

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

NOTES TO SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE

DECEMBER 31, 1996

101/341, respectively, in a pool of 12 FHA-insured mortgages. In October
1987, the Partnership sold undivided fractional interests of 200/341 in
this pool. Accordingly, the Partnership now owns an undivided fractional
interest aggregating 101/341, or approximately 29.6%, in this pool. For
purposes of illustration only, the amounts shown in this table represent
the Partnership's share of these items as if an undivided interest in each
mortgage was acquired.

(8) These amounts represent the Partnership's 50% interest in these mortgages.
The remaining 50% interest was acquired by American Insured Mortgage
Investors, an affiliate of the Partnership.

(9) This information is based upon the estimated amount of the Insured Mortgage
upon completion of construction.

(10) This represents the base interest rate during the permanent phase of these
Insured Mortgages. Additional interest (referred to as Participations)
measured as a percentage of the net cash flow from the development and the
net proceeds from the sale, refinancing or other disposition of the
underlying development (as defined in the Participation Agreements), will
also be due. During the years ended December 31, 1996, 1995 and 1994, the
Partnership received additional interest of $42,417, $64,676 and $35,314,
respectively, from the Participations.

(11) Principal and interest are payable at level amounts over the life of the
mortgages.

(12) A reconciliation of the carrying value of Insured Mortgages for the years
ended December 31, 1996 and 1995, is as follows:

1996 1995
------------ ------------

Beginning balance $220,229,526 $209,265,153

Principal receipts on mortgages (1,571,828) (1,315,947)

Due from HUD (138,858) --

Proceeds from disposition of
Mortgages (11,346,665) (2,334,318)

Net gains on mortgage
dispositions/modifications 521,584 36,065

(Increase) decrease in unrealized
losses on investment in
Insured Mortgages (57,176) 7,596,238

(Decrease) increase in unrealized
gains on investment in
Insured Mortgages (3,443,617) 6,982,335
------------ ------------
Ending balance $204,192,966 $220,229,526
============ ============

54

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

NOTES TO SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE

DECEMBER 31, 1996

(13) As of December 31, 1996 and 1995, the tax basis of the Insured Mortgages
was approximately $194.1 million and $207.5 million, respectively.