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

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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, 1997
------------------

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 March 6, 1998, 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 $170,566,635.

3

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

1997 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

PART I
------
Page
----
Item 1. Business . . . . . . . . . . . . . . . . . . 4
Item 2. Properties . . . . . . . . . . . . . . . . . 5
Item 3. Legal Proceedings . . . . . . . . . . . . . . 6
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . 6

PART II
-------
Item 5. Market for Registrant's Securities and
Related Security Holder Matters . . . . . . 7
Item 6. Selected Financial Data . . . . . . . . . . . 9
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . 10
Item 8. Financial Statements and Supplementary Data . 17
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 . . . . . . . . . . . 18
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 . . . . . . . . . . . . 20

Signatures . . . . . . . . . . . . . . . . . . . . . . 23

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, 1997.

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, 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.

Forward-Looking Statements
- --------------------------
In accordance with the Private Securities Litigation Reform Act of 1995,
the Partnership can obtain a "Safe Harbor" for forward-looking statements by
identifying those statements and by accompanying those statements with
cautionary statements which identify factors that could cause actual results to

5

PART I

ITEM 1. BUSINESS - Continued

differ from those in the forward-looking statements. Accordingly, the following
information contains or may contain forward-looking statements: (1) information
included or incorporated by reference in this Annual Report on Form 10-K,
including, without limitation, statements made under Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations, (2)
information included or incorporated by reference in future filings by the
Partnership with the Securities and Exchange Commission including, without
limitation, statements with respect to growth, projected revenues, earnings,
returns and yields on its portfolio of mortgage assets, the impact of interest
rates, costs and business strategies and plans and (3) information contained in
written material, releases and oral statements issued by or on behalf of, the
Partnership, including, without limitation, statements with respect to growth,
projected revenues, earnings, returns and yields on its portfolio of mortgage
assets, the impact of interest rates, costs and business strategies and plans.
The Partnership's actual results may differ materially from those contained in
the forward-looking statements identifed above. Factors which may cause such a
difference to occur include, but are not limited to (i) regulatory and
litigation matters, (ii) interest rates, (iii) trends in the economy, (iv)
prepayment of mortgages and (v) defaulted mortgages.

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.

6

PART I

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 1997.

7

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 Limited Partnership Units (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 1997 and 1996 were as
follows:

Amount of
1997 Distribution
Quarter Ended High Low Per Unit
--------------------- ------- ------- ------------

March 31 $15 1/4 $14 3/8 $ 0.39(1)
June 30 15 1/8 14 1/4 0.30
September 30 15 13 13/16 0.84(2)
December 31 14 7/8 13 7/8 1.23(3)
--------
$ 2.76
========

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(4)
September 30 14 1/2 13 7/8 0.43(5)
December 31 14 7/8 14 1/8 0.85(6)
------
$ 2.25
======

(1) This amount includes approximately $0.07 per Unit from the disposition of
the following mortgages: net proceeds from the assignment of the mortgage
on Meadow Park Apartments I of $0.05 per Unit and net proceeds from the
prepayment of the mortgage on Security Apartments of $0.02 per Unit.
(2) This amount includes approximately $0.54 per Unit from the following
mortgages: final settlement of the mortgage on Pine Tree Lodge of $0.02
per Unit and net proceeds from the prepayment of the mortgage on Peachtree
Place North of $0.52 per Unit.
(3) This amount includes approximately $0.92 per Unit representing net
proceeds from the prepayment of the mortgages on Ashford Place Apartments,
Fleetwood Village Apartments, Silverwood Village Apartments and Maryland
Meadows.
(4) 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.
(5) This amount includes approximately $0.10 per Unit representing net
proceeds from the assignment of the mortgage on Woodland Village
Apartments.
(6) 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

8

PART II

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

the partial prepayment of the mortgage on Cambridge Arms 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.

Approximate Number of Unitholders
Title of Class as of December 31, 1997
- -------------------- ---------------------------------
Depositary Units of Limited
Partnership Interest 12,000

PAGE>9

PART II

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

For the Years Ended December 31,
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------

Income $ 16,761 $ 17,943 $ 18,589 $ 19,167 $ 19,202

Net gains (losses) on mortgage
dispositions/modifications 908 522 36 (151) 2,636

Net earnings 15,137 15,789 15,903 16,155 19,058

Net earnings per Limited
Partnership Unit - Basic (1) 1.20 1.26 1.27 1.29 1.52

Distributions per Limited
Partnership Unit (1)(2) 2.76 2.25 1.54 1.96 1.775

As of December 31,
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------

Total assets $203,450 $215,951 $225,691 $214,823 $227,937

Partners' equity 187,682 204,687 220,681 209,557 221,504

(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, 1997, 1996, 1995, 1994
and 1993, 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, 1997, 1996 and 1995, and the balance sheet data as of
December 31, 1997 and 1996, 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, 1994 and 1993 and the balance sheet data as of December 31, 1995, 1994 and
1993 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.

10

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.

The Partnership is currently in the process of evaluating its information
technology infrastructure for Year 2000 compliance. The Partnership does not
expect that the cost to modify its information technology infrastructure to be
Year 2000 compliant will be material to its financial condition or results of
operations. The Partnership does not anticipate any material disruption in its
operations as a result of any failure by the Partnership to be in compliance.
The Partnership is currently evaluating the Year 2000 compliance status of its
service providers. The Partnership does not expect any non Year 2000 compliance
by its service providers to cause disruption in its operations.

Prior to the expiration of the Partnership's reinvestment period in
December 1993, the Partnership was engaged 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). In accordance with the terms of the
Partnership Agreement, the Partnership is no longer authorized to originate or
acquire Insured Mortgages and, consequently, its primary objective is to manage
its portfolio of mortgage investments, all of which are insured under Section
221(d)(4) or Section 231 of the National Housing Act. The Partnership Agreement
states that the Partnership will terminate on December 31, 2009, unless
previously terminated under the provisions of the Partnership Agreement.

11

PART II

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

As of December 31, 1997, the Partnership had invested in 81 Insured
Mortgages, with an aggregate amortized cost of approximately $176.9 million, a
face value of approximately $184.1 million and a fair value of approximately
$190.6 million, as discussed below.

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:

12

PART II

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

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

December 31,
1997 1996
------------ ------------

Fully Insured Acquired Insured:
Number of
GNMA Mortgage-Backed Securities(4)(7)(8) 9 9
FHA-Insured Certificates(1)(2)(3)(4)
(5)(6) 55 62
Amortized Cost $132,530,176 $151,866,819
Face Value 137,674,964 157,889,594
Fair Value 142,822,793 159,959,297

Fully Insured Originated Insured:
Number of
GNMA Mortgage-Backed Securities 1 1
FHA-Insured Certificates 1 1
Amortized Cost $17,017,276 $ 17,126,685
Face Value 16,660,658 16,770,069
Fair Value 16,887,282 16,646,943

(1) On October 11, 1996, the servicer of the 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
recognized a gain of approximately $139,000 for the year ended December 31,
1997. A distribution of $0.05 per Unit related to this assignment, was
declared in February 1997 and was paid to Unitholders in May 1997. The
remaining 9% of proceeds due from HUD were received in May 1997, and since
the distribution was less than $0.01 per Unit, these proceeds were
distributed with regular cash flow in August 1997.

(2) In late February 1997, the mortgage on Security Apartments was prepaid.
The Partnership received net proceeds of approximately $304,000, and
recognized a gain of approximately $66,000 for the year ended December 31,
1997. A distribution of approximately $0.02 per Unit related to this
prepayment was declared in March 1997 and was paid to Unitholders in May
1997.

(3) On July 1, 1997, the mortgage on Peachtree Apartments was prepaid. The
Partnership received net proceeds of approximately $6.5 million, and
recognized a gain of less than $1,000 for the year ended December 31, 1997.
A distribution of approximately $0.52 per Unit related to this prepayment
was declared in July 1997, and was paid to Unitholders in November 1997.

(4) In September 1997, the mortgage on Pine Tree Lodge was converted to a GNMA
Mortgage-Backed Security from an FHA-Insured certificate. A distribution

13

PART II

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

of approximately $0.02 per Unit related to the final settlement of this
mortgage was declared in September 1997 and paid in November 1997.

(5) On October 1, 1997, the mortgage on Ashford Place Apartments was prepaid.
The Partnership received net proceeds of approximately $3.4 million and
recognized a gain of approximately $34,000 for the year ended December 31,
1997. A distribution of approximately $0.27 was declared in October 1997
and paid in February 1998.

(6) On October 22, 1997, the mortgages on Silverwood Village Apartments and
Fleetwood Village Apartments were prepaid. The Partnership received net
proceeds of approximately $1.4 million and $1.5 million, respectively, and
recognized gains of approximately $214,000 and $237,000 for the mortgages
on Silverwood Village Apartments and Fleetwood Village Apartments,
respectively, for the year ended December 31, 1997. A distribution of
approximately $0.23 per Unit was declared in November 1997 and paid in
February 1998.

(7) In November 1997, the mortgage on Maryland Meadows was prepaid. The
Partnership received net proceeds of approximately $5.2 million, and
recognized a gain of approximately $217,000 for the year ended December 31,
1997. A distribution of approximately $0.42 per Unit was declared in
December 1997 and paid in February 1998.

(8) In February 1998, the mortgage on Spanish Trace Apartments was prepaid.
The Partnership received net proceeds of approximately $9.7 million, and
anticipates it will recognize a loss of approximately $96,000 in 1998. A
distribution of approximately $0.77 per Unit related to this prepayment was
declared in March 1998 and is expected to be paid in May 1998.

As of March 3, 1998, all of the fully insured GNMA Mortgage-Backed
Securities and FHA-Insured Certificates are current with respect to the payment
of principal and interest, except for the mortgages on Country Club Terrace
Apartments and Isle of Pines Village with respect to the January 1998 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, 1997, 1996 and 1995, the Partnership
received $51,457, $0 and $0, respectively, from the Participations. These
amounts, if any, are included in mortgage investment income on the accompanying
statements of operations.

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 fees and closing costs of the Insured
Mortgage and the loss of approximately 30 days accrued interest.

14

PART II

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

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

December 31,
1997 1996
------------ ------------

Fully Insured Acquired Insured:
Number of Loans 12 12
Amortized Cost $ 14,416,917 $ 14,556,595
Face Value 17,165,551 17,405,640
Fair Value 17,432,816 17,706,486

Fully Insured Originated Insured:
Number of Loans 3 3
Amortized Cost $ 12,928,572 $ 13,030,131
Face Value 12,589,214 12,681,532
Fair Value 13,431,769 12,969,589

As of March 3, 1998, all of the fully insured FHA-Insured Loans were
current with respect to the payment of principal and interest, except for
the mortgage on Portervillage I Apartments, which has been delinquent since
January 1997. In May 1997, the servicer of the mortgage on Portervillage I
Apartments filed a Notice of Default and an Election to Assign the mortgage
with HUD. The face value of this mortgage was approximately $1.2 million
at December 31, 1996. The Partnership expects to receive 99% of this
amount plus accrued 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, 1997, 1996 and
1995, the Partnership received $37,766, $42,417 and $64,676, respectively,
from the Participations. These amounts are included in mortgage investment
income on the accompanying statements of operations.

Results of Operations
- ---------------------
1997 versus 1996
- ----------------
Net earnings decreased for 1997 as compared to 1996 primarily due to a
decrease in mortgage investment income. Partially offsetting this decrease was
an increase in net gains on mortgage dispositions and modifications, as
discussed below.

Mortgage investment income decreased for 1997 as compared to 1996 primarily
due to the reduction in mortgage base, as previously discussed.

Interest and other income increased for 1997 as compared to 1996 primarily
due to the temporary investment of mortgage disposition proceeds prior to
distribution to Unitholders.

15

PART II

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

Asset management fees to related parties decreased for 1997 as compared to
1996 as a result of the reduction in the mortgage base.

Interest expense to affiliate decreased for 1997 as compared to 1996 due to
the cancellation of the note payable to American Insured Mortgage Investors L.P.
- - Series 88 (AIM 88), as discussed in Note 8 of the Notes to the Financial
Statements.

Gains from dispositions and modifications increased as a result of seven
mortgage dispositions in 1997, as discussed above, versus 1996 activity as
follows: 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. Losses from dispositions and
modifications decreased due to no losses in 1997 versus 1996 activity as
follows: a modification agreement on the mortgage of Waterford Green Apartments
and the 1996 assignment of the mortgage on Woodland Village Apartments.

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.

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 the years ended December 31,
1997, 1996 and 1995 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

16

PART II

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

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 - 1997 versus 1996
- ----------------------------
Net cash provided by operating activities decreased for 1997 as compared to
1996. This decrease was primarily due to a decrease in mortgage investment
income, as discussed above. In addition, receivables and other assets decreased
due to the receipt of the remaining proceeds from the mortgage on Woodland
Village.

Net cash provided by investing activities increased in 1997 as compared to
1996 due to the increase in proceeds from mortgage dispositions, as discussed
previously. In addition, receipt of mortgage principal from scheduled payments
increased slightly for 1997 as compared to 1996 due to the normal amortization
of mortgages.

Net cash used in financing activities increased for 1997 as compared to
1996, as a result of an increase in distributions paid to partners.
Distributions paid to partners in 1997 included special distributions resulting
from the disposition of the mortgages on Meadow Park Apartments I, Security
Apartments, Peachtree Apartments, Ashford Place Apartments, Silverwood Village
Apartments, Fleetwood Village Apartments and Maryland Meadows.

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 an 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.

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

17

PART II

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

from the disposition of the mortgages on Harbor View Estates, Cambridge Arms
Apartments, Bear Creek Apartments II and Woodland Village Apartments.

New Accounting Standards
- ------------------------
In February 1997, FASB issued SFAS No. 128 "Earnings per Share" ("FAS
128"). FAS 128 changes the requirements for the calculation and disclosure of
earnings per share. The Partnership is required to present basic net earnings
per limited partnership unit as opposed to net earnings per limited partnership
unit. However, the computational differences between FAS 128 and the prior
accounting standard do not impact the Partnership. FAS 128 has been applied to
the year ended December 31, 1997, and all prior periods.

During 1997 FASB issued SFAS No. 129 "Disclosure of Information about
Capital Structure" ("FAS 129"). FAS 129 continues the existing requirements to
disclose the pertinent rights and privileges of all securities other than
ordinary common stock but expands the number of companies subject to portions of
its requirements. The Partnership's disclosures comply with the requirements of
this statement.

During 1997 FASB issued SFAS No. 130 "Reporting Comprehensive Income" ("FAS
130"). FAS 130 states that all items that are required to be recognized under
accounting standards as components of comprehensive income are to be reported in
a separate statement of income. This would include net income as currently
reported by the Partnership adjusted for unrealized gains and losses related to
the Partnership's mortgages accounted for as "available for sale". FAS 130 is
effective for years beginning on or after December 15, 1997.

During 1997, FASB issued SFAS 131 "Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131"). FAS 131 establishes standards
for the way that public business enterprises report information about operating
segments and related disclosures about products and services, geographical areas
and major customers. FAS 131 is effective for years beginning on or after
December 15, 1997.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item is on pages 24 through 51.

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.

18

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - Continued

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 American Insured
Mortgage Investors (AIM 84), American Insured Mortgage Investors L.P.-Series 86
(AIM 86) and American Insured Mortgage Investors L.P.-Series 88 (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 that no Form 5s were required for
those 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, 1997.

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.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

As of December 31, 1997, 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, 1997, 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.

19

PART III

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Continued

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.
20

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, 1997
and 1996 26

Statements of Operations for the years ended
December 31, 1997, 1996, and 1995 27

Statements of Changes in Partners' Equity for
the years ended December 31, 1997, 1996 and
1995 28

Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 29

Notes to Financial Statements 30

(a)(2) Financial Statement Schedules:

IV - Mortgage Loans on Real Estate 42

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:

4.0 Amended and Restated Certificates of Limited Partnership are
incorporated by reference to Exhibit 4(a) to the Registration
Statement on Form S-11 (No. 2-93294) dated January 28, 1985 (such
Registration Statement, as amended, is referred to herein as the
"Registration Statement").

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

4.2 Amendment No. 1 to the Second Amended and Restated Partnership
Agreement is incorporated by reference to Exhibit 4(a) to the
Partnership's Annual Report on Form 10-K for the year ended
December 31, 1986.

4.3 Amendment No. 2 to the Second Amended and Restated Partnership
Agreement is incorporated by reference to exhibit 4(b) to the
Partnership's Annual Report on Form 10-K for the year ended
December 31, 1986.

4.4 Amendment No. 3 dated February 12, 1990, to the Second Amended
and Restated Agreement of Limited Partnership of the Partnership
incorporated by reference to Exhibit 4(c) to the Partnership's
Annual Report on Form 10-K for the year ended December 31, 1989.

10.0 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.

21

PART IV

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

10.1 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.

10.2 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.

10.3 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.

10.4 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.

10.5 Reinvestment Plan, incorporated by reference to the Prospectus
contained in the Registration Statement.

10.6 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.

10.7 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.

10.8 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.

10.9 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.

10.10 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.

10.11 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.

10.12 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.

22

PART IV

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

10.13 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.

10.14 Amendment No. 1 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.

10.15 Amendment No.2 to Reimbursement Agreement by Integrated Funding,
Inc., and American Insured Mortgage Investors L.P.-Series 86, and
American Insured Mortgage Investors L.P.-Series 88, effective
April 1, 1997, (filed herewith).

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.

23

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 20, 1998 /s/ William B. Dockser
- --------------------------- -------------------------
DATE William B. Dockser
Chairman of the Board and
Principal Executive Officer

March 20, 1998 /s/ H. William Willoughby
- --------------------------- -------------------------
DATE H. William Willoughby
President and Director

March 20, 1998 /S/ Cynthia O. Azzara
- --------------------------- -------------------------
DATE Cynthia O. Azzara
Principal Financial and
Accounting Officer

March 20, 1998 /s/ Garrett G. Carlson, Sr.
- --------------------------- --------------------------
DATE Garrett G. Carlson, Sr.
Director

March 20, 1998 /s/ Larry H. Dale
- --------------------------- -------------------------
DATE Larry H. Dale
Director

March 20, 1998 G. Richard Dunnells
- --------------------------- -------------------------
DATE G. Richard Dunnells
Director

March 20, 1998 /s/ Robert Merrick
- --------------------------- -------------------------
DATE Robert Merrick
Director

24

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

Financial Statements as of December 31, 1997 and 1996

and for the Years Ended December 31, 1997, 1996 and 1995

25

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, 1997
and 1996, and the related statements of operations, changes in partners' equity
and cash flows for the years ended December 31, 1997, 1996 and 1995. 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, 1997 and 1996, and the results of its operations and its cash flows
for the years ended December 31, 1997, 1996 and 1995 in conformity with
generally accepted accounting principles.

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, 1997 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 20, 1998

26

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

BALANCE SHEETS

ASSETS

December 31, December 31,
1997 1996
------------ ------------

Investment in FHA-Insured Certificates
and GNMA Mortgage-Backed Securities,
at fair value:
Acquired insured mortgages $142,822,793 $159,959,297
Originated insured mortgages 16,887,282 16,646,943
------------ ------------
159,710,075 176,606,240
------------ ------------
Investment in FHA-Insured Loans,
at amortized cost, net of unamortized
discount and premium:
Acquired insured mortgages 14,416,917 14,556,595
Originated insured mortgages 12,928,572 13,030,131
------------ ------------
27,345,489 27,586,726

Cash and cash equivalents 14,718,103 9,716,786

Receivables and other assets 1,676,021 1,727,662

Investment in affiliate -- 314,072
------------ ------------
Total assets $203,449,688 $215,951,486
============ ============

LIABILITIES AND PARTNERS' EQUITY

Distributions payable $ 15,460,772 $ 10,684,274

Accounts payable and accrued expenses 306,715 198,964

Note payable and due to affiliate -- 380,877
------------ ------------
Total liabilities 15,767,487 11,264,115
------------ ------------
Partners' equity:
Limited partners' equity 180,044,243 198,836,652
General partner's deficit (2,524,665) (1,762,017)
Unrealized gain on investment
in FHA-Insured Certificates
and GNMA Mortgage-Backed
Securities 10,482,727 8,715,942
Unrealized loss on investment
in FHA-Insured Certificates
and GNMA Mortgage-Backed
Securities (320,104) (1,103,206)
------------ ------------
Total partners' equity 187,682,201 204,687,371
------------ ------------
Total liabilities and partners' equity $203,449,688 $215,951,486
============ ============

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

27

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

STATEMENTS OF OPERATIONS

For the years ended December 31,
1997 1996 1995
------------ ------------ ------------

Income:
Mortgage investment income $ 16,350,497 $ 17,731,547 $ 18,404,737
Interest and other income 410,839 211,779 183,846
------------ ------------ ------------
16,761,336 17,943,326 18,588,583
------------ ------------ ------------
Expenses:
Asset management fee to related
parties 1,873,563 1,997,649 2,042,886
General and administrative 652,511 655,426 655,831
Interest expense to affiliate 5,783 23,132 23,133
------------ ------------ -----------
2,531,857 2,676,207 2,721,850
------------ ------------ -----------
Earnings before gains (losses)
on mortgage dispositions/
modifications 14,229,479 15,267,119 15,866,733

Mortgage dispositions/modifications:
Gains 907,923 666,179 52,730
Losses -- (144,595) (16,665)
------------ ------------ ------------
Net earnings $ 15,137,402 $ 15,788,703 $ 15,902,798
============ ============ ============

Net earnings allocated to:
Limited partners -96.1% $ 14,547,043 $ 15,172,944 $ 15,282,589
General partner - 3.9% 590,359 615,759 620,209
------------ ------------ ------------
$ 15,137,402 $ 15,788,703 $ 15,902,798
============ ============ ============

Net earnings per Limited
Partnership Unit - Basic $ 1.20 $ 1.26 $ 1.27
============ ============ ============

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

28

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

STATEMENTS OF CHANGES IN PARTNERS' EQUITY

For the years ended December 31, 1997, 1996 and 1995

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

Balance, January 1, 1995 $ (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

Net earnings 590,359 14,547,043 -- -- 15,137,402

Distributions paid or accrued of
$2.76 per Unit, including return
of capital of $1.56 per Unit (1,353,007) (33,339,452) -- -- (34,692,459)

Adjustment to unrealized gains
(losses) on investment in
insured mortgages -- -- 1,766,785 783,102 2,549,887
------------- ------------ ---------------= --------------- ------------

Balance, December 31, 1997 $ (2,524,665) $180,044,243 $ 10,482,727 $ (320,104) $187,682,201
============= ============ ================ =============== ============

Limited Partnership Units outstanding -
basic, as of December 31, 1997,
1996 and 1995 12,079,514
============

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

29

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

STATEMENTS OF CASH FLOWS

For the years ended December 31,
1997 1996 1995
------------ ------------ ------------

Cash flows from operating activities:
Net earnings $ 15,137,402 $ 15,788,703 $ 15,902,798
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Losses on mortgage dispositions/modification -- 144,595 16,665
Gains on mortgage dispositions/modification (907,923) (666,179) (52,730)
Changes in assets and liabilities:
Decrease in receivables and other assets 51,641 186,942 51
Increase (decrease) in accounts
payable and accrued expenses 107,751 35,227 (137,195)
(Decrease) increase in due to affiliate (66,805) 59,957 (118,513)
Return on investment in affiliate -- 3,079 1,924
------------ ------------ ------------
Net cash provided by operating
activities 14,322,066 15,552,324 15,613,000
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from disposition of mortgages 18,996,279 11,346,665 2,334,318
Receipt of mortgage principal from
scheduled payments 1,598,933 1,571,828 1,315,947
------------ ------------ ------------
Net cash provided by investing activities 20,595,212 12,918,493 3,650,265
------------ ------------ ------------
Cash flows from financing activities:
Distributions paid to partners (29,915,961) (22,122,731) (19,357,390)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 5,001,317 6,348,086 (94,125)

Cash and cash equivalents, beginning of year 9,716,786 3,368,700 3,462,825
------------ ------------ ------------
Cash and cash equivalents, end of year $ 14,718,103 $ 9,716,786 $ 3,368,700
============ ============ ============

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

30

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 in
December 1993, the Partnership was engaged 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). In accordance with the terms of the
Partnership Agreement, the Partnership is no longer authorized to originate or
acquire Insured Mortgages and, consequently, its primary objective is to manage
its portfolio of mortgage investments, all of which are insured under Section
221(d)(4) or Section 231 of the National Housing Act. 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.

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

31

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

NOTES TO FINANCIAL STATEMENTS

2. SIGNIFICANT ACCOUNTING POLICIES - Continued

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.

As of December 31, 1997, the weighted average remaining term of the
Partnership's investments in GNMA Mortgage-Backed Securities and FHA-
Insured Certificates is approximately 30 years. However, the Partnership
Agreement states that the Partnership will terminate in approximately 12
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
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, 1997, 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.

As of December 31, 1997, 1996 and 1995, Investment in FHA-Insured
Loans are recorded at amortized cost.

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

32

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

NOTES TO FINANCIAL STATEMENTS

2. SIGNIFICANT ACCOUNTING POLICIES - Continued

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.

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, 1997, 1996 and 1995. 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
recognized assets and liabilities while not resulting in cash receipts or
cash payments.

New Accounting Standards
------------------------
In February 1997, FASB issued SFAS No. 128 "Earnings per Share" ("FAS
128"). FAS 128 changes the requirements for the calculation and disclosure
of earnings per share. The Partnership is required to present basic net
earnings per limited partnership unit as opposed to net earnings per
limited partnership unit. However, the computational differences between
FAS 128 and the prior accounting standard do not impact the Partnership.
FAS 128 has been applied to the year ended December 31, 1997, and all prior
periods.

During 1997 FASB issued SFAS No. 129 "Disclosure of Information about
Capital Structure" ("FAS 129"). FAS 129 continues the existing
requirements to disclose the pertinent rights and privileges of all
securities other than ordinary common stock but expands the number of
companies subject to portions of its requirements. The Partnership's
disclosures comply with the requirements of this statement.

During 1997 FASB issued SFAS No. 130 "Reporting Comprehensive Income"
("FAS 130"). FAS 130 states that all items that are required to be
recognized under accounting standards as components of comprehensive income
are to be reported in a separate statement of income. This would include
net income as currently reported by the Partnership adjusted for unrealized
gains and losses related to the Partnership's mortgages accounted for as
"available for sale". FAS 130 is effective for years beginning on or after
December 15, 1997.

During 1997, FASB issued SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information" ("FAS 131"). FAS 131 establishes
standards for the way that public business enterprises report information
about operating segments and related disclosures about products and

33

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

NOTES TO FINANCIAL STATEMENTS

2. SIGNIFICANT ACCOUNTING POLICIES - Continued

services, geographical areas and major customers. FAS 131 is effective for
years beginning on or after December 15, 1997.

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, 1997, 1996 and 1995, earned or received compensation or payments for
services from the Partnership as follows:

34

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 1997 1996 1995
---------------------------- ---------- ---------- ----------

CRIIMI, Inc.(1) General Partner/Distribution $1,353,007 $1,102,994 $ 754,938

AIM Acquisition Advisor/Asset Management Fee 1,873,563 1,997,649 2,042,886
Partners, L.P.(2)

CRIIMI MAE Affiliate of General Partner/ 62,274 68,328 28,087
Management, Inc.(3) Expense Reimbursement

CRI(3) Affiliate of General Partner/ -- -- 71,129
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
0.95% 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 from the Advisors Asset Management Fee. 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 $552,222, $590,353 and $299,460 for the years ended
December 31, 1997 and 1996, and the six months ended December 31, 1995, respectively. CRI/AIM Management, Inc., which through
June 30, 1995 acted as the Sub-advisor, earned a fee equal to $302,682 for the six months ended June 30, 1995.

(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. This
is included with general and administrative expenses.

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, 1997 As of December 31, 1996
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ------------ ------------ ------------

Investment in FHA-Insured Certificates
and GNMA Mortgage-Backed Securities:
Acquired insured mortgages $132,530,176 $142,822,793 $151,866,819 $159,959,297
Originated insured mortgages 17,017,276 16,887,282 17,126,685 16,646,943
------------ ------------ ------------ ------------
$149,547,452 $159,710,075 $168,993,504 $176,606,240
============ ============ ============ ============
Investment in FHA-Insured Loans:
Acquired insured mortgages $ 14,416,917 $ 17,432,816 $ 14,556,595 $ 17,706,486
Originated insured mortgages 12,928,572 13,431,769 13,030,131 12,969,589
------------ ------------ ------------ ------------
$ 27,345,489 $ 30,864,585 $ 27,586,726 $ 30,676,075
============ ============ ============ ============

Cash and cash equivalents $ 14,718,103 $ 14,718,103 $ 9,716,786 $ 9,716,786
============ ============ ============ ============
Accrued interest receivable $ 1,421,935 $ 1,421,935 $ 1,426,113 $ 1,426,113
============ ============ ============ ============

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.

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

36

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

NOTES TO FINANCIAL STATEMENTS

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

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

December 31,
1997 1996
------------ ------------

Fully Insured Acquired Insured:
Number of
GNMA Mortgage-Backed Securities(4)(7)(8) 9 9
FHA-Insured Certificates(1)(2)(3)(4)
(5)(6) 55 62
Amortized Cost $132,530,176 $151,866,819
Face Value 137,674,964 157,889,594
Fair Value 142,822,793 159,959,297

Fully Insured Originated Insured:
Number of
GNMA Mortgage-Backed Securities 1 1
FHA-Insured Certificates 1 1
Amortized Cost $17,017,276 $ 17,126,685
Face Value 16,660,658 16,770,069
Fair Value 16,887,282 16,646,943

(1) On October 11, 1996, the servicer of the 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
recognized a gain of approximately $139,000 for the year ended December 31,
1997. A distribution of $0.05 per Unit related to this assignment, was
declared in February 1997 and was paid to Unitholders in May 1997. The
remaining 9% of proceeds due from HUD were received in May 1997, and since
the distribution was less than $0.01 per Unit, these proceeds were
distributed with regular cash flow in August 1997.

(2) In late February 1997, the mortgage on Security Apartments was prepaid.
The Partnership received net proceeds of approximately $304,000, and
recognized a gain of approximately $66,000 for the year ended December 31,
1997. A distribution of approximately $0.02 per Unit related to this
prepayment was declared in March 1997 and was paid to Unitholders in May
1997.

(3) On July 1, 1997, the mortgage on Peachtree Apartments was prepaid. The
Partnership received net proceeds of approximately $6.5 million, and
recognized a gain of less than $1,000 for the year ended December 31, 1997.
A distribution of approximately $0.52 per Unit related to this prepayment
was declared in July 1997, and was paid to Unitholders in November 1997.

(4) In September 1997, the mortgage on Pine Tree Lodge was converted to a GNMA
Mortgage-Backed Security from an FHA-Insured certificate. A distribution

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

of approximately $0.02 per Unit related to the final settlement of this
mortgage was declared in September 1997 and paid in November 1997.

(5) On October 1, 1997, the mortgage on Ashford Place Apartments was prepaid.
The Partnership received net proceeds of approximately $3.4 million and
recognized a gain of approximately $34,000 for the year ended December 31,
1997. A distribution of approximately $0.27 was declared in October 1997
and paid in February 1998.

(6) On October 22, 1997, the mortgages on Silverwood Village Apartments and
Fleetwood Village Apartments were prepaid. The Partnership received net
proceeds of approximately $1.4 million and $1.5 million, respectively, and
recognized gains of approximately $214,000 and $237,000 for the mortgages
on Silverwood Village Apartments and Fleetwood Village Apartments,
respectively, for the year ended December 31, 1997. A distribution of
approximately $0.23 per Unit was declared in November 1997 and paid in
February 1998.

(7) In November 1997, the mortgage on Maryland Meadows was prepaid. The
Partnership received net proceeds of approximately $5.2 million, and
recognized a gain of approximately $217,000 for the year ended December 31,
1997. A distribution of approximately $0.42 per Unit was declared in
December 1997 and paid in February 1998.

(8) In February 1998, the mortgage on Spanish Trace Apartments was prepaid.
The Partnership received net proceeds of approximately $9.7 million, and
anticipates it will recognize a loss of approximately $96,000 in 1998. A
distribution of approximately $0.77 per Unit related to this prepayment was
declared in March 1998 and is expected to be paid in May 1998.

As of March 3, 1998, all of the fully insured GNMA Mortgage-Backed
Securities and FHA-Insured Certificates are current with respect to the payment
of principal and interest, except for the mortgages on Country Club Terrace
Apartments and Isle of Pines Village with respect to the January 1998 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, 1997, 1996 and 1995, the Partnership
received $51,457, $0 and $0, respectively, from the Participations. These
amounts, if any, are included in mortgage investment income on the accompanying
statements of operations.

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 fees and closing costs of the Insured
Mortgage and the loss of approximately 30 days accrued interest.

38

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,
1997 1996
------------ ------------

Fully Insured Acquired Insured:
Number of Loans 12 12
Amortized Cost $ 14,416,917 $ 14,556,595
Face Value 17,165,551 17,405,640
Fair Value 17,432,816 17,706,486

Fully Insured Originated Insured:
Number of Loans 3 3
Amortized Cost $ 12,928,572 $ 13,030,131
Face Value 12,589,214 12,681,532
Fair Value 13,431,769 12,969,589

As of March 3, 1998, all of the fully insured FHA-Insured Loans were
current with respect to the payment of principal and interest, except for
the mortgage on Portervillage I, which has been delinquent since January
1997. In May 1997, the servicer of the mortgage on Portervillage I
Apartments filed a Notice of Default and an Election to Assign the mortgage
with HUD. The face value of this mortgage was approximately $1.2 million
at December 31, 1996. The Partnership expects to receive 99% of this
amount plus accrued 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, 1997, 1996 and
1995, the Partnership received $37,766, $42,417 and $64,676, 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, 1997, 1996 and 1995 are as follows:

1997 1996 1995
------ ------ ------
Quarter ended March 31, $0.39(1) $0.33 $0.36
Quarter ended June 30, 0.30 0.64 (4) 0.33
Quarter ended September 30, 0.84(2) 0.43 (5) 0.49(7)
Quarter ended December 31, 1.23(3) 0.85 (6) 0.36 (8)
----- ----- -----
$2.76 $2.25 $1.54
===== ===== =====

39

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

NOTES TO FINANCIAL STATEMENTS

7. DISTRIBUTIONS TO UNITHOLDERS - Continued

(1) This amount includes approximately $0.07 per Unit from the disposition of
the following mortgages: net proceeds from the assignment of the mortgage
on Meadow Park Apartments I of $0.05 per Unit and net proceeds from the
prepayment of the mortgage on Security Apartments of $0.02 per Unit.
(2) This amount includes approximately $0.54 per Unit from the following
mortgages: final settlement of the mortgage on Pine Tree Lodge of $0.02
per Unit and net proceeds from the prepayment of the mortgage on Peachtree
Place North of $0.52 per Unit.
(3) This amount includes approximately $0.92 per Unit representing net proceeds
from the prepayment of the mortgages on Ashford Place Apartments, Fleetwood
Village Apartments, Silverwood Village Apartments and Maryland Meadows.
(4) 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.
(5) This amount includes approximately $0.10 per Unit representing net proceeds
from the assignment of the mortgage on Woodland Village Apartments.
(6) 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.
(7) This amount includes approximately $0.16 per Unit representing net proceeds
from the assignment of the mortgage on El Lago Apartments.
(8) This amount includes approximately $0.02 per Unit representing additional
net proceeds from the assignment of the mortgage on El Lago 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.

8. INVESTMENT IN AFFILIATE, NOTE PAYABLE AND DUE TO AFFILIATE

Integrated Funding, Inc. (IFI), an affiliate of the Partnership, was the
coinsurance lender for coinsured mortgages previously held by the Partnership.
In order to capitalize IFI with sufficient net worth under HUD regulations, in
April 1994, American Insured Mortgage Investors L.P. - Series 88 (AIM 88), an
affiliate of the Partnership, transferred a GNMA mortgage-backed security in the
amount of $2.0 million to IFI. The Partnership and American Insured Mortgage
Investors L.P. - Series 86 (AIM 86), an affiliate of the Partnership, each
issued a demand note payable to AIM 88 and recorded an investment in IFI through
an affiliate (AIM Mortgage, Inc.) in proportion to each entity's coinsured
mortgages for which IFI was mortgagee of record as of April 15, 1994. Interest
expense on the note payable was based on an interest rate of 7.25% per annum.

IFI had 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

40

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

NOTES TO FINANCIAL STATEMENTS

8. INVESTMENT IN AFFILIATE, NOTE PAYABLE AND DUE TO
AFFILIATE - Continued

reimbursement, interest from the two notes and the Partnership's equity interest
in IFI's net income or loss, substantially equals the mortgage principal and
interest on the GNMA mortgage-backed security transferred to IFI.

The final coinsured mortgages held by the Partnership were prepaid in late
1996. As a result, the aforementioned demand note payable to AIM 88 and the
expense reimbursement agreement from IFI were cancelled as of April 1, 1997.

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
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.
41

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, 1997, 1996 and 1995.

1997
Quarter ended
March 31 June 30 September 30 December 31
----------- --------- -------------- -------------

Income $ 4,274 $ 4,318 $ 4,123 $ 4,046
Net gains from mortgage
dispositions 205 -- -- 703
Net earnings 3,848 3,675 3,480 4,134
Net earnings per Limited
Partnership Unit - Basic 0.31 0.29 0.28 0.32

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 - Basic 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 - Basic 0.32 0.32 0.31 0.32

42

AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1997

Interest
Rate on Face Net Annual Payment
Maturity Put Mortgage Value of Carrying Value (Principal and
Development Name/Location Date Date (1) (5)(9) Mortgage (3)(11)(12) Interest)(9)(10)
- ------------------------- ---------- -------- ------------ ------------- -------------- ------------------

ACQUIRED INSURED MORTGAGES
- --------------------------
FHA-Insured Certificates
(carried at fair value)
The Executive House
Dayton, Ohio 8/21 12/01 7.5% $ 871,101 $ 880,943 $ 78,855(4)
Walnut Apartments
La Puente, California 3/20 11/01 7.5% 2,669,575 2,700,340 248,862(4)
Woodland Hills Apartments
Auburn, Alabama 10/19 6/99 7.5% 723,142 731,529 68,044(4)
Fairlawn II
Waterbury, Connecticut 6/20 5/00 7.5% 795,141 804,241 73,364(4)
Willow Dayton
Chicago, Illinois 8/19 12/00 7.5% 1,062,339 1,074,620 99,489(4)
Cedar Ridge Apartments
Richton Park, Illinois 4/20 2/01 7.5% 2,839,009 2,871,562 262,699(4)
Park Hill Apartments
Lexington, Kentucky 3/19 3/00 7.5% 1,841,699 1,863,104 173,845(4)
Fairfax House
Buffalo, New York 11/19 5/00 7.5% 2,248,500 2,274,412 209,608(4)
Country Club Terrace Apt.
Holidaysburg, Pennsylvania 8/19 6/00 7.5% 1,522,007 1,539,602 142,537(4)
Summit Square Manor
Rochester, Minnesota 8/19 5/99 7.5% 2,001,763 2,024,903 187,467(4)
Park Place
Rochester, Minnesota 3/20 10/99 7.5% 792,389 801,530 73,980(4)

43

AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1997

Interest
Rate on Face Net Annual Payment
Maturity Put Mortgage Value of Carrying Value (Principal and
Development Name/Location Date Date (1) (5)(9) Mortgage (3)(11)(12) Interest)(9)(10)
- ------------------------- ---------- -------- ------------ ------------- -------------- ------------------

ACQUIRED INSURED MORTGAGES
- --------------------------
FHA-Insured Certificates
(carried at fair value)
Nevada Hills Apartments
Reno, Nevada 2/21 8/00 7.5% 1,209,355 1,223,091 110,345(4)
Bentgrass Hills Apartments
Milwaukee, Wisconsin 7/21 5/01 7.5% 240,388 243,109 21,817(6)
Colony West Apartments
Chico, California 7/20 12/00 7.5% 676,910 684,650 62,365(6)
Dunhaven Apartments Section I
Baltimore County, Maryland 1/20 12/99 7.5% 940,697 951,516 87,429(6)
Emerald Green Apartments
Indianapolis, Indiana 1/20 12/99 7.5% 1,079,973 1,092,393 100,374(6)
Isle of Pines Village
Apartments
Baltimore County, Maryland 12/20 4/00 7.5% 1,279,142 1,293,698 117,030(6)
Kings Villa/Discovery Commons
Sacramento, California 7/19 11/99 7.5% 1,134,530 1,147,658 106,414(6)
Stoney Brook Apartments
North Providence
Rhode Island 9/20 10/00 7.5% 1,505,110 1,522,285 138,278(6)
Steeplechase Apartments
Aiken, South Carolina 9/18 8/98 7.5% 532,336 538,579 50,921(6)
Walnut Hills Apartments
Plainfield, Indiana 9/19 3/00 7.5% 510,048 515,938 47,692(6)
Woodland Villas
Jasper, Alabama 8/19 3/00 7.5% 325,340 329,101 30,468(6)
Ashley Oaks Apartments
Carrollton, Georgia 3/22 4/02 7.5% 582,762 589,308 52,292(7)
Highland Oaks Apartments,
Phase III
Wichita Falls, Texas 2/21 4/02 7.5% 983,537 994,709 89,741(7)

44

AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1997

Interest
Rate on Face Net Annual Payment
Maturity Put Mortgage Value of Carrying Value (Principal and
Development Name/Location Date Date (1) (5)(9) Mortgage (3)(11)(12) Interest)(9)(10)
- ------------------------- ---------- -------- ------------ ------------- -------------- ------------------

Holden Court Apartments
Seattle, Washington 12/21 4/02 7.5% 227,179 229,735 20,435(7)
Magnolia Place Apartments
Franklin, Tennessee 5/20 4/02 7.5% 333,384 337,204 30,804(7)
Quail Creek Apartments
Howell, Michigan 5/20 4/02 7.5% 558,147 564,541 51,572(7)
Rainbow Terrace Apartments
Milwaukee, Wisconsin 7/22 4/02 7.5% 331,251 334,959 29,581(7)
Rock Glen Apartments
Baltimore, Maryland 1/22 4/02 7.5% 1,104,748 1,117,177 99,375(7)
Stonebridge Apartments, Phase I
Montgomery, Alabama 4/20 4/02 7.5% 1,071,253 1,083,537 99,125(7)
Village Knoll Apartments
Harrisburg, Pennsylvania 4/20 4/02 7.5% 1,112,213 1,124,966 102,914(7)
Bowling Brook, Section 1
Towson, Maryland 5/30 N/A 8.50% 11,991,085 12,791,749 1,090,128
Cedar Bluff
Eagan, Minnesota 3/27 N/A 8.50% 4,430,470 4,727,057 411,371
Executive Tower
Toledo, Ohio 3/27 N/A 8.75% 2,896,863 3,090,705 275,283
New Castle Apartments
Austin, Texas 3/18 N/A 8.75% 2,072,819 2,213,474 219,143
Lincoln Green
Burrillville, Rhode Island 6/33 N/A 10.25% 3,133,410 3,353,534 330,066
Turtle Creek Apartments
San Antonio, Texas 4/16 N/A 8.95% 1,690,153 1,805,417 188,596
Sangnok Villa
Los Angeles, California 1/30 N/A 10.25% 908,587 972,514 96,825
The Meadows of Livonia
Livonia, Michigan 9/34 N/A 10.00% 6,463,493 6,958,138 627,836

45

AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1997

Interest
Rate on Face Net Annual Payment
Maturity Put Mortgage Value of Carrying Value (Principal and
Development Name/Location Date Date (1) (5)(9) Mortgage (3)(11)(12) Interest)(9)(10)
- ------------------------- ---------- -------- ------------ ------------- -------------- ------------------

Gamel & Gamel Apartments
Benton, Kentucky 4/27 N/A 8.75% $ 680,770 $ 726,317 $ 64,612
Wayland Health Center
Providence, Rhode Island 10/33 N/A 9.75% 6,905,970 7,434,621 696,610
Eaglewood Villa Apartments
Springfield, Ohio 2/27 N/A 8.875% 2,754,713 2,938,997 264,707
Gold Key Village Apartments
Englewood, Ohio 6/27 N/A 9.00% 2,909,518 2,882,074 282,030
Stafford Towers
Baltimore, Maryland 8/16 N/A 9.50% 368,788 397,583 42,613
Garden Court Apartments
Lexington, Kentucky 8/27 N/A 8.60% 1,184,553 1,263,798 110,583
Northdale Commons
Coon Rapids, Minnesota 9/27 N/A 9.00% 693,765 740,145 67,173
Northwood Place
Meridian, Mississippi 6/34 N/A 8.75% 4,518,711 4,819,597 412,635
Amador Residential
Jackson, California 1/34 N/A 9.00% 1,346,351 1,435,988 126,173
Cheswick Apartments
Indianapolis, Indiana 9/27 N/A 8.75% 3,125,377 3,334,397 295,736
Nassau Apartments
New Orleans, Louisiana 11/27 N/A 8.63% 879,007 937,799 82,139
The Gate House Apartments
Lexington, Kentucky 2/28 N/A 8.55% 2,850,730 3,041,386 264,092
Bradley Road Nursing
Bay Village, Ohio 5/34 N/A 8.875% 2,527,349 2,695,615 233,708

46

AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1997

Interest
Rate on Face Net Annual Payment
Maturity Put Mortgage Value of Carrying Value (Principal and
Development Name/Location Date Date (1) (5)(9) Mortgage (3)(11)(12) Interest)(9)(10)
- ------------------------- ---------- -------- ------------ ------------- -------------- ------------------

Franklin Plaza
Cleveland, Ohio 5/23 N/A 8.175% 5,379,054 5,518,914 503,183
Heritage Heights Apartments
Harrison, Arizona 4/32 N/A 9.50% 417,860 449,865 41,313
Pleasant View Nursing Home
Union, New Jersey 6/29 N/A 7.75% 7,567,785 7,761,802 643,312
------------- --------------
Total FHA-Insured Certificates -
Acquired Insured Mortgages,
carried at fair value 110,802,149 115,776,426
------------- --------------
GNMA Mortgage-Backed Securities
(carried at fair value)
Pine Tree Lodge
Pasadena, Texas 12/33 N/A 9.50% 2,028,264 2,028,819 196,864
Spanish Trace Apartments
Md. Heights, Missouri 9/28 N/A 7.35% 9,676,350 9,743,834 770,973
Stone Hedge Village Apts.
Farmington, New York 11/27 N/A 7.00% 1,826,132 1,839,027 143,285
Afton Square Apartments
Portsmouth, Virginia 12/28 N/A 7.25% 1,069,345 1,076,802 81,448
Carlisle Apartments
Houston, Texas 12/28 N/A 7.125% 2,136,970 2,151,914 165,943
Independence Park
Largo, Florida 9/29 N/A 7.75% 4,018,453 4,046,029 330,878
Ridgecrest Timbers
Portland, Oregon 12/28 N/A 7.25% 1,556,716 1,567,572 120,915

47

AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1997

Interest
Rate on Face Net Annual Payment
Maturity Put Mortgage Value of Carrying Value (Principal and
Development Name/Location Date Date (1) (5)(9) Mortgage (3)(11)(12) Interest)(9)(10)
- ------------------------- ---------- -------- ------------ ------------- -------------- ------------------

Huntington Apartments
Concord, North Carolina 12/29 N/A 7.25% 2,966,045 2,986,717 233,189
Northwood Apartments
Mockville, North Carolina 12/29 N/A 7.25% 1,594,540 1,605,653 125,362
------------ --------------
Total GNMA Mortgage-Backed
Securities 26,872,815 27,046,367
------------ --------------
Total investment in Acquired
Insured Mortgages, carried
at fair value 137,674,964 142,822,793
------------ --------------
ORIGINATED INSURED MORTGAGES
- ----------------------------
GNMA Mortgage-Backed Security
(carried at fair value)
Oak Forest Apartments II
Ocoee, Florida 12/31 11/09 8.25% 10,637,301 10,709,532 840,090
FHA-Insured Certificate
(carried at fair value)
Waterford Green Apartments
South St. Paul, Minnesota (11) 11/30 12/04 8.50% 6,023,357 6,177,750 481,564
------------ --------------
Total investment in Originated Insured
Mortgages, carried at fair value 16,660,658 16,887,282
------------ --------------
Total investment in FHA-Insured Certificates
and GNMA Mortgage-Backed Securities 154,335,622 159,710,075
------------ --------------

48

AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1997

Interest
Rate on Face Net Annual Payment
Maturity Put Mortgage Value of Carrying Value (Principal and
Development Name/Location Date Date (1) (5)(9) Mortgage (3)(11)(12) Interest)(9)(10)
- ------------------------- ---------- -------- ------------ ------------- -------------- ------------------

ACQUIRED INSURED MORTGAGES
- --------------------------
FHA-Insured Loans
(carried at amortized cost)(2)
Bay Pointe Apartments
Lafayette, Indiana 2/23 11/00 7.5% 2,069,768 1,705,470 185,268(8)
Baypoint Shoreline Apartments
Duluth, Minnesota 1/22 8/00 7.5% 977,925 803,331 87,967(8)
Berryhill Apartments
Grass Valley, California 1/21 8/99 7.5% 1,268,509 1,044,711 115,899(8)
Brougham Estates II
Kansas City, Kansas 11/22 8/00 7.5% 2,597,377 2,128,223 230,860(8)
College Green Apartments
Wilmington, North Carolina 3/23 6/01 7.5% 1,395,308 1,142,583 123,455(8)
Fox Run Apartments
Dothan, Alabama 10/19 12/97 7.5% 1,243,489 1,028,200 116,242(8)
Kaynorth Apartments
Lansing, Michigan 4/23 3/01 7.5% 1,893,162 1,549,755 167,318(8)
Lakeside Apartments
Bennettsville, South Carolina 1/22 3/01 7.5% 392,461 322,708 35,303(8)
Portervillage I Apartments
Portervillage, California 8/21 5/00 7.5% 1,144,441 941,454 103,733(8)
Town Park Apartments
Rockingham, North Carolina 10/22 6/01 7.5% 637,453 522,941 56,755(8)
Westbrook Apartments
Kokomo, Indiana 11/22 12/00 7.5% 1,810,993 1,491,160 163,177(8)
Continental Village
New Hope, Minnesota 1/22 N/A 8.95% 1,734,665 1,736,381 175,954
------------ --------------
Total investment in Acquired
Insured Mortgages, carried
at amortized cost 17,165,551 14,416,917
------------ --------------

49

AMERICAN INSURED MORTGAGE INVESTORS - SERIES 85, L.P.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1997

Interest
Rate on Face Net Annual Payment
Maturity Put Mortgage Value of Carrying Value (Principal and
Development Name/Location Date Date (1) (5)(9) Mortgage (3)(11)(12) Interest)(9)(10)
- ------------------------- ---------- -------- ------------ ------------- -------------- ------------------

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% 5,020,691 5,173,123 462,703
Longleaf Lodge
Hoover, Alabama 7/26 -- 8.25% 3,100,462 3,139,846 282,958
The Plantation
Greenville, North Carolina 4/28 4/03 8.25% 4,468,061 4,615,603 402,046
------------ ------------
Total investment in Originated
Insured Mortgages, carried at amortized
cost 12,589,214 12,928,572
------------ ------------
Total investment in FHA-Insured Loans 29,754,765 27,345,489
------------ ------------
TOTAL INVESTMENT IN INSURED MORTGAGES $ 184,090,387 $ 187,055,564
============ ============

50

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

NOTES TO SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE

DECEMBER 31, 1997

(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 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

51

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

NOTES TO SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE

DECEMBER 31, 1997

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 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, 1997, 1996 and 1995, the
Partnership received additional interest of $89,223, $42,417 and $64,676,
respectively, from the Participations.

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

(11) A reconciliation of the carrying value of Insured Mortgages for the years
ended December 31, 1997 and 1996, is as follows:

1997 1996
------------ ------------

Beginning balance $204,192,966 $220,229,526

Principal receipts on mortgages (1,598,933) (1,571,828)

Due from HUD -- (138,858)

Proceeds from disposition of
Mortgages (18,996,279) (11,346,665)

Net gains on mortgage
dispositions/modifications 907,923 521,584

Decrease (increase) in unrealized
losses on investment in
Insured Mortgages 783,102 (57,176)

Increase (decrease) in unrealized
gains on investment in
Insured Mortgages 1,766,785 (3,443,617)
------------ ------------
Ending balance $187,055,564 $204,192,966
============ ============

(12) As of December 31, 1997 and 1996, the tax basis of the Insured Mortgages
was approximately $174.4 million and $194.1 million, respectively.