CANDLEWOOD HOTEL CO INC, S-1/A, 1996-10-30

CANDLEWOOD HOTEL CO INC
S-1/A, 1996-10-30
HOTELS & MOTELS

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 30, 1996

REGISTRATION NO. 333-12021
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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CANDLEWOOD HOTEL COMPANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
DELAWARE 7011 48-1188025
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>

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LAKEPOINT OFFICE PARK
9342 EAST CENTRAL
WICHITA, KANSAS 67206
(316) 631-1300

(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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WARREN D. FIX
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND SECRETARY
LAKEPOINT OFFICE PARK
9342 EAST CENTRAL
WICHITA, KANSAS 67206
(316) 631-1300

(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

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COPIES TO:

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<S> <C>
THOMAS W. DOBSON KENDALL BISHOP
CHARLES K. RUCK ALLISON KELLER
LATHAM & WATKINS O'MELVENY & MYERS LLP
650 TOWN CENTER DRIVE, 20TH FLOOR 1999 AVENUE OF THE STARS, SUITE 700
COSTA MESA, CALIFORNIA 92626 LOS ANGELES, CALIFORNIA 90067
</TABLE>

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APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.

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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.

SUBJECT TO COMPLETION, DATED OCTOBER 30, 1996

3,850,000 SHARES

[CANDLEWOOD LOGO]

COMMON STOCK

All of the 3,850,000 shares of Common Stock offered hereby are being sold
by Candlewood Hotel Company, Inc. (the "Company"). Prior to this offering (the
"Offering"), there has been no public market for the Common Stock of the
Company. It is currently anticipated that the initial public offering price will
be between $12.00 and $14.00 per share. See "Underwriting" for a discussion of
the factors to be considered in determining the initial public offering price.
The Company's Common Stock has been approved for listing on the Nasdaq National
Market, subject to notice of issuance, under the trading symbol "CNDL."

SEE "RISK FACTORS" COMMENCING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.

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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.

<TABLE>
<S> <C> <C> <C>
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Price to Underwriting Proceeds to
Public Discount(1) Company(2)
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Per Share............................... $ $ $
Total(3)................................ $ $ $
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</TABLE>

(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.

(2) Before deducting expenses payable by the Company estimated at $600,000.

(3) The Company has granted the Underwriters a 30-day option to purchase up to
577,500 additional shares of Common Stock solely to cover over-allotments,
if any. If the Underwriters exercise this option in full, the Price to
Public will total $ , the Underwriting Discount will total
$ and the Proceeds to Company will total $ . See
"Underwriting."

The shares of Common Stock are offered by the Underwriters named herein,
when, as and if delivered to and accepted by the Underwriters and subject to
their right to reject any order in whole or in part. It is expected that the
delivery of certificates representing the shares will be made against payment
therefor at the office of Montgomery Securities on or about , 1996.

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MONTGOMERY SECURITIES SCHRODER WERTHEIM & CO.

, 1996
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[GRAPHICS]

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IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, ON THE
OPEN MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT
ANY TIME.

2
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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements and the notes thereto appearing elsewhere
in this Prospectus. Except as otherwise noted, all information in this
Prospectus assumes (i) the consummation of the Reorganization (as defined
herein), (ii) no exercise of the Underwriters' over-allotment option and (iii)
an initial offering price of $13.00 per share (the midpoint of the range set
forth on the cover of this Prospectus). Unless the context otherwise indicates,
all references herein to the Company refer to Candlewood Hotel Company, Inc.,
together with its subsidiaries, after giving effect to the Reorganization. This
Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."

THE COMPANY

Candlewood Hotel Company, Inc. is in the business of developing, owning,
operating, franchising and managing Candlewood extended-stay hotels. Candlewood
hotels and their amenities are designed to appeal particularly to business
travelers seeking extended-stay accommodations by combining the convenience of a
hotel with many of the comforts of an apartment and providing well appointed,
high quality lodging at affordable prices. The Company's goal is to rapidly
develop and franchise Candlewood hotels to capitalize on what the Company
believes is an underserved demand for mid-priced extended-stay hotels and to
develop a leading national brand within that segment of the extended-stay
market, which the Company believes is characterized by average daily rates of
approximately $40 to $60.

As of October 15, 1996, the Company owned and operated one Candlewood hotel
and was constructing four additional hotels, two of which are expected to open
in the first quarter of 1997 and two of which are expected to open in the second
quarter of 1997. In 1997, the Company's objective is to open approximately 14
additional Company-owned hotels and to begin construction of approximately 20
additional Company-owned hotels. In pursuing this objective, as of October 15,
1996 the Company had 18 potential sites under contract and had agreements in
principle or letters of intent with respect to 17 potential sites. In addition,
the Company is developing a nationwide franchising program, and as part of that
program is a party to one multi-hotel development agreement which grants the
developer options to obtain franchises to construct and operate up to 22
Candlewood hotels over the next three years.

The Company believes that the experience of its senior management team will
be instrumental in executing its growth strategy. Jack P. DeBoer, the Company's
founder, Chairman and President, is credited by the lodging industry with
creating the extended-stay concept. Mr. DeBoer, who founded the Residence Inn
chain and co-founded Summerfield Hotel Corporation, developed and franchised a
total of 116 extended-stay hotels under those two brands. This background has
provided Mr. DeBoer with numerous contacts among potential franchisees,
representatives from the construction industry and other leaders in the
hospitality industry.

The Company expects to derive substantial benefits from its strategic
alliance with Doubletree Corporation (together with its subsidiaries,
"Doubletree"), which will own 28.7% of the Company's Common Stock outstanding
after the Offering. The Company believes it will benefit from Doubletree's
central reservation system, in-room video and service arrangement and bulk
purchasing discounts on phone rates and supplies. Candlewood also believes it
will benefit from Doubletree's management resources, extensive knowledge of
local markets, and established insurance and employee benefit programs. As
additional Candlewood hotels commence operations, the Company anticipates that
it will formalize the services to be provided by Doubletree and the cost of
certain of those services. Doubletree is not expected to manage any Candlewood
hotels. Doubletree has agreed to extend a five-year $15 million subordinated
credit facility to the Company, a substantial portion of which will have been
funded at the time of the Offering. Doubletree has also agreed to guarantee a
portion of the construction loans and long-term financing that the Company has
arranged for its qualified franchisees. Doubletree is a leading hotel management
company that managed, leased or franchised 178 hotels in 31 states, the District
of Columbia and Mexico as of June 30, 1996.

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The standard Candlewood hotel will contain approximately 75 - 135 rooms,
comprised of studios and king suites, both of which contain business and other
amenities consistent with amenities found in upscale, full-service hotels. The
studios have been designed as spacious, well appointed rooms which the Company
believes are larger than most full-service hotel rooms. Up to 25% of the rooms
in a standard Candlewood hotel may be two-room king suites designed to
accommodate guests who are willing to pay a premium rate for a bedroom separated
from the kitchen and office area. The Company believes king suites will increase
the average daily rate and the average length of stay.

The majority of extended-stay hotels are either in the upscale sector of
the market, such as Residence Inn, Homewood Suites, Hawthorn Suites and
Summerfield Suites (most with average daily rates in excess of $80), or the
economy sector, such as Suburban Lodge, Extended Stay America, Homestead Village
and Villager Lodge (most with average daily rates less than $35). The Company
believes that these brands do not meet the needs of a large number of travelers
who desire well appointed, high quality, spacious accommodations with full
kitchens, but with room rates in the mid-priced segment of the extended-stay
market. Candlewood hotels are designed to accommodate what the Company believes
to be an underserved segment of the extended-stay market. In addition, the
Company believes that the high quality of Candlewood hotels relative to their
moderate daily rate will attract certain guests who otherwise would stay at
traditional hotels. The Company anticipates that the average daily rate at
Candlewood hotels will be approximately $45 - $55 per studio, which is
significantly lower than full-service hotels with comparable room features and
amenities and generally competitive with traditional limited-service hotels that
do not offer the high quality appointments and amenities of the Company's rooms.
Accordingly, the Company believes that Candlewood hotels will be particularly
attractive to business travelers, including professionals on temporary work
assignment, consultants, travelers conducting or participating in training
seminars and government employees.

The Company has initiated a national franchising program which it believes
will accelerate the establishment of its market presence and brand awareness on
a national level, generate incremental revenues at an attractive margin, attract
franchisees and create opportunities to obtain management contracts with respect
to franchised properties. The Company intends to pursue its franchising program
not only through the sale of individual or single-site franchises, but also
through entering into development agreements. Under the development agreements,
the Company will grant, in exchange for nominal consideration, options to obtain
franchises to construct and operate Candlewood hotels in exclusive geographic
territories, which exclusive rights may be terminated by the Company if the
developer fails to submit franchise applications in accordance with a
development schedule. As of October 15, 1996, the Company was a party to one
development agreement, which grants the developer options to obtain franchises
to construct and operate up to 22 Candlewood hotels, including five Candlewood
hotels in 1996, seven Candlewood hotels in 1997, seven Candlewood hotels in 1998
and three Candlewood hotels in 1999.

The Company believes that guests will find a combination of the following
factors differentiate the Candlewood brand from other extended-stay hotels:

- Amenities for Business Travelers. Each Candlewood studio and king suite
will offer amenities designed to accommodate the needs of the business
traveler, such as two phones with two incoming direct dial phone lines
and computer connections, an oversized wooden desk with a quad-outlet to
accommodate office equipment needs, an executive chair, a bulletin board,
a guest chair and personalized, remote accessible phone mail.

- High Quality, Extended-Stay Features. Each Candlewood room will contain
a 25-inch television, video cassette player, compact disc player, an iron
and ironing board and a fully equipped kitchen, including a full-size
refrigerator, full-size microwave oven, dishwasher, two burner stovetop,
coffee maker, toaster, and a complete set of utensils and cookware. Also,
each Candlewood hotel will be equipped with an exercise room, a guest
laundry facility and a convenient dry cleaning drop with same-day
service.

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- Value Priced Features. Candlewood hotels will offer complimentary use of
laundry facilities, free local calls, $0.15-per-minute long distance
calls and the self-service "Candlewood Cupboard," featuring value priced
packaged foods and $0.25 beverages. Each Candlewood guest will receive a
free "First-Night Kit" complete with items such as breakfast bars, coffee
and popcorn.

The Company believes that a combination of the following factors will make
Candlewood an attractive brand choice for franchisees and investors compared to
other extended-stay brands:

- Operating Efficiencies. By employing only six to eight full-time
employees and one part-time employee at each Candlewood hotel, the
Company believes that it will minimize operating costs. Each hotel will
be equipped with technology that will allow guests to check-in and
check-out without the assistance of hotel employees.

- Strength of Management and Staff. In addition to Mr. DeBoer's extensive
experience in the extended-stay lodging industry, the Company is
developing the management infrastructure necessary to pursue each of its
strategies, including the formation of internal real estate,
construction, marketing, operations and franchising divisions.

- Strategic Alliance with Doubletree. The Company has a strategic alliance
with Doubletree through which the Company and its franchisees are
expected to be able to take advantage of Doubletree's purchasing power,
central reservation system and financial support.

- Sales Organization. The Company has established a sales and marketing
division which, together with a dedicated on-site direct-sales employee
at each hotel, will target institutions and employers in areas proximate
to its hotels.

- Standard Design and Low Construction Costs. The Company expects that all
Candlewood hotels, including hotels owned by its franchisees, will be
designed and built according to uniform plans and specifications and
pursuant to standard construction contracts. The Company believes that
standardization will lower construction costs and establish consistent
quality, thereby enhancing its customers' loyalty and its ability to
establish a national brand. The Company has identified and approved three
major contractors in the United States, each of whom has agreed to
cost-plus contracts with a ceiling on total expense.

- Franchisee Financing. The Company has arranged with a third party lender
to provide construction loans and long-term financing for up to 80% of
the cost of franchised hotels, subject to approval by the Company and the
lender on an individual property basis. The Company expects that the
availability of this financing will expedite and provide added certainty
to the development process. Doubletree has agreed to guarantee certain
portions of the loans made to the Company's franchisees under this
arrangement.

THE REORGANIZATION

The Company was incorporated in August 1996 to succeed to the business of
Candlewood Hotel Company, L.L.C., a Delaware limited liability company
("Candlewood LLC"), in anticipation of the Offering. Candlewood LLC was formed
in November 1995 to develop, own, operate and franchise Candlewood extended-stay
hotels. The membership interests in Candlewood LLC are owned 50% by Doubletree,
42.5% by JPD Corporation, a Kansas corporation owned by Mr. DeBoer and the
DeBoer Family Partnership (the "DeBoer Partnership"), a Kansas general
partnership, the general partner of which is Mr. DeBoer and the partners of
which are certain members of his family, and 7.5% by the Warren D. Fix Family
Partnership, L.P. (the "Fix Partnership"), a Kansas limited partnership, the
general partner and majority owner of which is Mr. Warren Fix, a director and
the Executive Vice President and Chief Financial Officer of the Company
(collectively, Doubletree, Mr. DeBoer, the DeBoer Partnership and the Fix
Partnership are referred to herein as the "Initial Stockholders"). Doubletree
and the Fix Partnership each acquired its membership interest in Candlewood LLC
through a capital contribution and JPD Corporation acquired its membership
interest through the contribution of certain intangibles, including the
development of

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the Candlewood hotel concept and rights to the name of the Company, which were
valued in the course of arms-length negotiations among the members of Candlewood
LLC. Prior to the closing of the Offering, the Company's five properties will
each be owned by a separate limited liability company (the "Subsidiary LLCs"),
the membership interests of each of which will be owned 98% by Candlewood LLC,
1% by DT Real Estate, Inc., a subsidiary of Doubletree, 0.85% by JPD
Corporation, and 0.15% by the Fix Partnership.

Immediately prior to the Offering, Doubletree and the Fix Partnership will
contribute to the Company all of their outstanding membership interests in
Candlewood LLC and their minority interests in the Subsidiary LLCs. At the same
time, Mr. DeBoer and the DeBoer Partnership will contribute to the Company 100%
of the stock of JPD Corporation, the assets of which are substantially comprised
of its membership interests in Candlewood LLC and the Subsidiary LLCs. In
consideration of such transfer, each of Doubletree and the Fix Partnership will
be issued shares of Common Stock of the Company in proportion to their ownership
interests in Candlewood LLC immediately prior to such transfer and Mr. DeBoer
and the DeBoer Partnership, collectively, will be issued shares of Common Stock
of the Company in proportion to JPD Corporation's ownership interest in
Candlewood LLC immediately prior to such transfer. As a result, the ownership of
the Common Stock of the Company by Doubletree, the Fix Partnership and the
shareholders of JPD Corporation immediately prior to the Offering will be in the
same proportion as their ownership of membership interests in Candlewood LLC
immediately prior to the reorganization of the Company. Upon consummation of
such reorganization, Doubletree, the Fix Partnership and the shareholders of JPD
Corporation, including Mr. DeBoer, will own 2,587,500, 388,125 and 2,199,375
shares of Common Stock of the Company, respectively.

In addition, prior to the Offering, the amount of capital in excess of
$200,100 previously contributed to Candlewood LLC by Doubletree, together with a
preferred return on its capital contributions, will be distributed by Candlewood
LLC to Doubletree. In connection with the reorganization of the Company,
Doubletree has agreed to extend to the Company a $15 million subordinated credit
facility. Prior to the Offering, Doubletree will loan to the Company an amount
equal to the amount of the distributed capital and preferred return, which will
be evidenced by a long-term note payable as part of the subordinated credit
facility. As of October 15, 1996, Doubletree had made capital contributions to
Candlewood LLC of approximately $12.3 million. The terms of the distribution to
Doubletree, as well as the subsequent loan by Doubletree to the Company, were
determined by the members of Candlewood LLC in the course of arms-length
negotiations. The reorganization of Candlewood LLC, JPD Corporation and the
Subsidiary LLCs into the Company and the related transactions described above
are referred to herein as the "Reorganization." Following the Reorganization,
each of the Company's five hotel properties will be owned by a separate limited
liability company, the members of which will be the Company, Candlewood LLC and
JPD Corporation. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "The Reorganization."

THE OFFERING

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Common Stock offered........................ 3,850,000 shares(1)
Common Stock outstanding after the 9,025,000 shares(1)(2)
Offering..................................
Use of Proceeds............................. To fund the national expansion of Candlewood
hotels and for working capital and other
general corporate purposes.
Nasdaq National Market Symbol............... The Company's Common Stock has been approved
for listing on the Nasdaq National Market,
subject to notice of issuance, under the symbol
"CNDL."
</TABLE>

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(1) Excludes 577,500 shares of Common Stock subject to the Underwriters'
over-allotment option.

(2) Excludes 900,000 shares of Common Stock reserved for issuance pursuant to
the Company's 1996 Equity Participation Plan (the "1996 Equity Plan"). See
"Management -- Compensation Plans and Arrangements."

The executive offices of the Company are located at Lakepoint Office Park,
9342 East Central, Wichita, Kansas 67206, and its telephone number is (316)
631-1300.

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SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The Company was incorporated in August 1996 to succeed to the business of
Candlewood LLC. See "The Reorganization." The following tables present summary
historical consolidated financial information for Candlewood LLC. The following
tables also present summary pro forma consolidated financial information for the
Company, giving effect to the Reorganization. The historical results for the six
months ended June 30, 1996 are not indicative of actual results of the year. The
summary historical and pro forma consolidated financial information should be
read in conjunction with "Selected Historical and Pro Forma Consolidated
Financial Information," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the historical consolidated financial
statements of Candlewood LLC, including notes thereto, included elsewhere in
this Prospectus.

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<CAPTION>
PERIOD FROM
OCTOBER 1, 1995 SIX MONTHS
(INCEPTION) TO ENDED
DECEMBER 31, 1995(1) JUNE 30, 1996
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STATEMENT OF OPERATIONS DATA:
Revenues................................................. -- $ 120,038
Hotel operating expenses................................. -- 86,195
Corporate operating expenses............................. $ 204,361 748,348
Depreciation and amortization............................ 4,625 70,759
Operating loss........................................... (208,986) (785,264)
Interest income.......................................... -- 11,496
Net loss................................................. (208,986) (773,768)
Pro forma net loss per share(2).......................... (.04) (.15)
Pro forma weighted average shares outstanding(2)......... 5,175,000 5,175,000
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------------------
COMPANY
--------------------------
CANDLEWOOD PRO FORMA
LLC PRO AS
HISTORICAL FORMA(3) ADJUSTED(4)
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents.................................. $1,022,492 $1,022,492 $46,968,992
Total assets.......................................... 7,029,069 7,029,069 52,975,569
Accounts payable...................................... 329,828 329,828 329,828
Note payable.......................................... -- 7,334,614 7,334,614
Minority interest..................................... 47,460 -- --
Members' equity....................................... 6,569,318 -- --
Stockholders' equity (deficit)........................ -- (717,836) 45,228,664
</TABLE>

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(1) Although Candlewood LLC was not formed until November 16, 1995, certain
expenses applicable to its business were incurred during the period from
October 1, 1995 to November 16, 1995 and were funded by capital
contributions of members. Accordingly, the Company's statements of
operations have been presented as if the Company's operations began on
October 1, 1995.

(2) Pro forma net loss per share is based on (i) the 5,175,000 shares of Common
Stock of the Company issued in conjunction with the Reorganization as if
such shares had been issued and outstanding for all periods presented and
(ii) the amount of pro forma net loss as if the Company had operated as a C
Corporation for all periods presented. See Notes 1g and 1j of Notes to
Consolidated Financial Statements.

(3) Gives effect to the Reorganization as if it had occurred on June 30, 1996,
reflecting (i) the distribution of the amount of capital in excess of
$200,100 previously contributed by Doubletree and related preferred return,
(ii) the contribution of outstanding membership interests of Candlewood LLC
and minority interests of the Subsidiary LLCs held by Doubletree and the Fix
Partnership, and the contribution of the stock of JPD Corporation, to the
Company and (iii) the issuance of a note payable to Doubletree pursuant to
the subordinated credit facility. See Note 10 of Notes to Consolidated
Financial Statements.

(4) Adjusted to reflect the sale of 3,850,000 shares of Common Stock by the
Company in the Offering at an assumed public offering price of $13.00 per
share with assumed net proceeds of $45,946,500 and the application of such
net proceeds as if the transactions contemplated hereby occurred on June 30,
1996. See "Use of Proceeds" and "Capitalization."

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RISK FACTORS

In evaluating the Company's business, prospective investors should
carefully consider the following factors in addition to the other information
contained in this Prospectus. The Prospectus contains forward-looking statements
which involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed below.

LIMITED OPERATING HISTORY; RISKS OF OPERATIONS

The Company began operating its first extended-stay hotel in May 1996 and
has a limited operating history upon which investors may evaluate the Company's
performance and its claims about the proposed construction, operation, features,
rates and demand for Candlewood hotels, among other things. In addition, the
Company operates only one hotel, which hotel has not generated sufficient cash
to cover the Company's operating expenses. The Company has incurred losses to
date and there can be no assurance that the Company will be profitable in the
future. Given the substantial development and financing expenses relating to the
Company's expansion, it expects to sustain net losses for the foreseeable future
and such losses could be larger than those previously reported. Operation of
individual hotels and a chain of multiple hotels is subject to numerous risks
including the inability to operate the hotels at expected expense levels, the
inability to maintain high occupancy rates or to attract guests for extended
stays, liability for accidents and other events occurring at hotel properties
and the inability to achieve expected nightly rates. If the Company is unable to
efficiently and effectively operate its hotels, the Company's business and
results of operations would be materially and adversely effected.

DEVELOPMENT RISKS

The Company intends to grow primarily by developing and franchising
additional Candlewood extended-stay hotels. Development involves substantial
risks, including: costs exceeding budgeted or contracted amounts; delays in
completion of construction; failing to obtain all necessary zoning and
construction permits; financing not being available on favorable terms;
developed properties not achieving desired revenue or profitability levels once
opened; competition for suitable development sites from competitors, some of
whom have greater financial resources than the Company; incurring substantial
costs if a development project must be abandoned prior to completion; changes in
governmental rules, regulations and interpretations; and changes in general
economic and business conditions. As of October 15, 1996, the Company was
constructing four hotels. In 1997, the Company's objective is to open
approximately 14 additional Company-owned hotels and to begin construction of
approximately 20 additional Company-owned hotels. There can be no assurance that
present or future development will proceed in accordance with the Company's
expectations. There can be no assurance that the Company will acquire
properties, complete the development and construction of hotels or that any such
development or construction will be completed on time or within budget.

FUTURE CAPITAL NEEDS AND RISKS OF ADDITIONAL FINANCING

The development of hotels is capital intensive. The Company has arranged
with a third party lender to finance up to 60% of the cost of individual
Company-developed hotels, and the Company may finance a greater portion of such
costs in the future. Funding of the loans for each hotel will be subject to
approval of the third party lender on an individual hotel basis, upon
satisfaction of various conditions. There can be no assurance that any financing
applications submitted by the Company will be approved by the third party lender
on a timely basis, or at all, or that the Company will be able to finance
greater than 60% of the cost of any Company-developed hotel with the third party
lender. If the applications are not approved or if loans are not funded on a
timely basis, the Company may be unable to construct additional Candlewood
hotels, may experience delays in its planned development of hotels, and expects
that it will be required to seek additional financing. In addition, Doubletree
has agreed to loan the Company up to $15 million to fund operating expenses and
development of Candlewood hotels, a substantial portion of which will have been
funded at the time of the Offering. The Company's construction financing and
funds available from Doubletree will bear interest at variable rates, which will
subject the Company to risks associated with debt financing. The Company's
ability to meet its debt service obligations will depend upon the future
performance of the

8
<PAGE> 10

Company's operations, which, in turn, is subject to prevailing economic
conditions and to financial, business and other factors beyond its control.

The Company believes that the net proceeds from the Offering and cash flow
from operations, together with its subordinated credit facility from Doubletree
and construction financing from NationsBank of Texas, N.A. ("NationsBank") and
the third party lender (if approved on an individual basis), will be sufficient
to provide capital for development and operations during the 12 months following
the Offering. There can be no assurance that changes will not occur that will
require the Company to seek additional capital or financing at an earlier date.
In addition, after 12 months following the Offering, the Company anticipates
that it will require additional cash resources or financing, the amount and
timing of which will depend on a number of factors including the number of
hotels developed and the cash flow generated by the Company's hotels and
franchising operations. The Company has no current arrangements with respect to,
or sources of, such additional financing. Additionally, no assurance can be
given that additional financing will be available when needed or upon terms
acceptable to the Company. If such capital or financing is unavailable, the
Company may not be able to develop further hotels. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

RISKS ASSOCIATED WITH RAPID GROWTH; RELIANCE ON DOUBLETREE

The Company's rapid development plans will require the implementation of
specialized operational and financial systems and will require additional
management, operational and financial resources. For example, the Company will
be required to recruit and train property managers and other personnel for each
new hotel as well as additional personnel at its headquarters. There can be no
assurance that the Company will be able to achieve its planned rate of expansion
or manage its expanding operations effectively. If the Company is unable to
manage its growth effectively, the Company's business and results of operations
could be materially and adversely effected.

The Company expects to derive substantial benefits from its strategic
alliance with Doubletree. However, Doubletree is under no obligation to provide
any services or to provide any benefits to the Company. If such services or
benefits are provided, there can be no assurance that they will be provided on
terms that are beneficial to the Company or, that if provided, will not be
cancelled at any time. See "-- Control of Company by Management and Principal
Stockholders; Potential Conflicts of Interest."

DEPENDENCE ON SINGLE TYPE OF LODGING FACILITY AND SINGLE BRAND

The Company intends exclusively to develop, manage and franchise Candlewood
hotels. The Company currently does not intend to develop any lodging facilities
other than extended-stay hotels in the mid-priced segment of the market and does
not intend to develop lodging facilities with other franchisors. Accordingly,
the Company will be subject to risks inherent in concentrating investments in a
single type of lodging facility and a single franchise brand, such as a shift in
demand or a reduction in business following adverse publicity related to the
brand, which could have a material adverse effect on the Company's business and
results of operations.

The Company has only recently begun to implement the Candlewood concept,
which includes the design of the standard Candlewood hotel and available
amenities. As of the completion of the Offering, only one Candlewood hotel will
have been constructed. The Company has limited history upon which it can gauge
consumer acceptance of its hotels, and there can be no assurance that the
Company's hotels will be readily accepted by guests who are looking for
extended-stay hotel accommodations. Further, the Company's hotels will compete
against other facilities with substantially greater brand recognition.

DEPENDENCE ON KEY PERSONNEL

The Company's success depends to a significant extent upon the efforts and
abilities of its senior management and key employees, particularly, Mr. Jack P.
DeBoer, Chairman of the Board, President and Chief Executive Officer, and Mr.
Warren D. Fix, Executive Vice President and Chief Financial Officer. The loss of
the services of either of these individuals could have a material adverse effect
upon the Company's business and results of operations. The Company has entered
into an employment agreement with Mr. DeBoer

9
<PAGE> 11

under which he has agreed, subject to certain conditions, to remain in his
current position with the Company until August 1999. See
"Management -- Employment Agreement."

COMPETITION FOR AND DEPENDENCE ON FRANCHISE AGREEMENTS

The Company expects to derive a portion of its revenue through franchise
agreements with hotel owners and from the management of certain franchised
hotels. Competition for franchise agreements in the lodging industry is intense.
The Company expects to compete with national and regional brand franchisors,
most of which have greater name recognition and financial resources and a more
established market presence than the Company. The Company believes that
competition for franchise agreements is based principally upon: the perceived
value and validity of the brand; the nature and quality of services provided to
franchisees; the franchisees' view of the relationship of building cost and
operating expenses to the potential for revenues and profitability during
operation and upon sale; and the franchisees' ability to finance construction
and operation of the hotel. No assurance can be given that the Company will be
successful in establishing brand awareness or the other factors on which
franchisors compete, retaining its current franchisee or competing for or
obtaining additional franchisees. Failure to maintain and attract franchisees
could have a material adverse effect on the Company's business and results of
operations.

DEPENDENCE ON DEVELOPMENT AGREEMENTS

The Company intends to enter into development agreements pursuant to which
the Company will grant, in exchange for nominal consideration, options to obtain
franchises to construct and operate Candlewood hotels within exclusive
territories. Development agreements do not obligate the developer to construct
or operate any Candlewood hotels; however, such agreements allow the Company to
terminate the developer's exclusive territorial rights if the developer fails to
submit franchise applications pursuant to a development schedule. Each
Candlewood hotel constructed under a development agreement will be constructed
and operated under a separate franchise agreement which must be signed before
construction is commenced. Further, most franchisees will require financing for
the construction of their hotel which may not be available on terms satisfactory
to the franchisee, or at all. By granting exclusive rights in a territory, the
Company must rely on the developer, to the exclusion of the Company or other
franchisees, to franchise hotels at such locations as the developer chooses and
at such times as specified in the development schedule. As a result of
development agreements the Company may become dependent upon a few developers to
construct and operate Candlewood hotels in key geographic areas. The Company is
a party to only one development agreement and there can be no assurance that the
Company will enter into additional development agreements. There can be no
assurance that any franchise agreements will be entered into, either as a result
of development agreements or independently, or that any Candlewood hotels will
be opened pursuant to the terms and the times specified in the development
agreements, the franchise agreements or at all. Failure to franchise hotels
according to the schedules set forth in the development agreements could result
in delays in construction in certain territories and have a material adverse
effect on the Company's business and results of operations. See
"Business -- Growth and Development Strategies," "-- Franchise and Development
Agreements."

RISKS ASSOCIATED WITH THE LODGING INDUSTRY

The lodging industry, and the extended-stay segment in which the Company
operates, may be adversely affected by changes in national or local economic
conditions and other local market conditions, such as an oversupply of hotel
rooms or a reduction in demand for hotel space in a geographic area, changes in
travel patterns, extreme weather conditions, changes in governmental regulations
which influence or determine wages, prices or construction costs, changes in
interest rates, the availability of financing for operating or capital needs or
changes in real estate tax rates and other operating expenses. In addition, due
in part to the strong correlation between the lodging industry's performance and
economic conditions, the lodging industry is subject to cyclical changes in
revenues and profits. Downturns or prolonged adverse conditions in the real
estate or capital markets or in national or local economies, the inability of
the Company or its franchisees to secure financing for the development of
Candlewood hotels or an oversupply of hotel rooms coupled with a reduction in
demand could have a material adverse impact on the Company's business and
results of operations.

10
<PAGE> 12

COMPETITION IN THE LODGING INDUSTRY

The lodging industry is highly competitive. Competitive factors within the
industry include room rates, quality of accommodations, name recognition,
service levels, reputation, reservation systems, convenience of location and the
supply and availability of alternative lodging. The Company intends to build
most of its hotels in geographic locations where other extended-stay hotels may
be located. The Company expects to compete for guests and development sites with
both traditional lodging facilities and other extended-stay facilities,
including those owned and operated by competing chains and individual
extended-stay facilities. Many of these competitors have greater financial
resources and may have better relationships with prospective franchisees,
representatives of the construction industry and others in the lodging industry.
The number of competitive lodging facilities in a particular area could have a
material adverse effect on occupancy, average daily rate and revenues of the
Candlewood hotels. See "Business -- Competition."

The Company believes that competition within the extended-stay lodging
market is increasing substantially and will continue to increase in the
foreseeable future. A number of other lodging chains and developers have
developed or are attempting to develop extended-stay lodging hotels that may
compete with the Company's hotels. In particular, some of these entities target
the segment of the extended-stay market in which the Company competes. The
Company may compete for guests and for new development sites with certain of
these established entities which have greater financial resources than the
Company and better relationships with lenders and real estate sellers. Further,
there can be no assurance that new or existing competitors will not
significantly reduce their rates or offer greater convenience, services or
amenities or significantly expand or improve hotels in the market in which the
Company competes or markets in which it will compete, thereby materially
adversely affecting the Company's business and results of operations.

REAL ESTATE INVESTMENT RISKS

General Risks. The Company's investment in its hotels will be subject to
varying degrees of risk related to the ownership and operation of real property.
The underlying value of the Company's real estate investments is significantly
dependent upon its ability to maintain or increase cash provided by operating
such investments. The value of the Company's hotels and income from the hotels
may be materially adversely affected by changes in national economic conditions,
changes in general or local economic conditions and neighborhood
characteristics, competition from other lodging facilities, changes in real
property tax rates, changes in the availability, cost and terms of financing,
the impact of present or future environmental laws, the ongoing need for capital
improvements, changes in operating expenses, changes in governmental rules and
policies, natural disasters and other factors which are beyond the control of
the Company.

Illiquidity of Real Estate. Real estate investments are relatively
illiquid. The ability of the Company to vary its portfolio in response to
changes in economic and other conditions will be limited. There can be no
assurance that the Company will be able to dispose of an investment when it
finds disposition advantageous or necessary or that the sale price of any
disposition will recoup or exceed the amount of the Company's investment.

Uninsured and Underinsured Losses Could Result in Loss of Value of
Hotels. The Company will maintain comprehensive insurance on each of its
hotels, including liability, fire and extended coverage, of the type and amount
the Company believes is customarily obtained for or by an owner of similar real
property assets. However, there are certain types of losses, generally of a
catastrophic nature, such as earthquakes and floods, that may be uninsurable or
not economically insurable. The Company uses its discretion in determining
amounts, coverage limits and deductibility provisions of insurance, with a view
to obtaining appropriate insurance on the Company's hotels at a reasonable cost
and on suitable terms. This may result in insurance coverage that in the event
of a loss would be insufficient to pay the full current market value or current
replacement cost of the Company's lost investment. Inflation, changes in
building codes and ordinances, environmental considerations and other factors
also might make it infeasible to use insurance proceeds to replace a hotel after
it has been damaged or destroyed. Under these circumstances, the insurance
proceeds received by the Company might not be adequate to restore its economic
position with respect to such hotel. In

11
<PAGE> 13

addition, property and casualty insurance rates may increase depending on claims
experience, insurance market conditions and the replacement value of the
Company's hotels.

FLUCTUATION IN OPERATING RESULTS

The lodging industry is seasonal in nature and the second and third
quarters of the year generally account for a greater proportion of annual
revenues than the first and fourth quarters. The timing of openings of new
properties could lead to fluctuations in the Company's quarterly earnings.
Quarterly earnings may be adversely affected by events beyond the Company's
control such as poor weather conditions, economic factors and other
considerations affecting travel. In addition, the loss of one or several
franchise or development agreements or management contracts, the disruption of
the Company's development of hotels, the timing of achieving incremental
revenues from new franchise agreements or management contracts and the
realization of a loss upon the sale of hotels in which the Company has an equity
interest may also adversely impact earnings comparisons.

GOVERNMENT REGULATION

The hotel industry is subject to numerous federal, state and local
government regulations, including those relating to building and zoning
requirements. In addition, the Company and its franchisees are subject to laws
governing their relationships with employees, including minimum wage
requirements, overtime, working conditions and work permit requirements. The
Company is also subject to federal regulations and certain state laws that
govern the offer and sale of franchises. Many state franchise laws impose
substantive requirements on a franchise agreement, including limitations on
noncompetition provisions and termination or nonrenewal of a franchise
agreement. Some states require that certain offering materials be approved
before franchises can be offered or sold in that state. The failure to obtain
permits or licenses or approvals to sell franchises, the inability to enforce
the terms of the Company's franchise agreements or an increase in the minimum
wage rate, employee benefit costs or other costs associated with employees could
adversely affect the Company's business and results of operations.

Under the Americans with Disabilities Act of 1990 (the "ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. While the Company anticipates that its
hotels and the hotels it manages will be substantially in compliance with these
requirements, a determination that the Company is not in compliance with the ADA
could result in the imposition of fines, an award of damages to private
litigants and significant expense to the Company in bringing its hotels in
compliance. See "Business -- Government Regulation."

IMPACT OF ENVIRONMENTAL REGULATION

The Company's operating costs may be affected by the obligation to pay for
the cost of complying with existing environmental laws, ordinances and
regulations. In addition, in the event any future legislation is adopted, the
Company may, from time to time, be required to make significant capital and
operating expenditures in response to such legislation. The Company attempts to
minimize its exposure to potential environmental liability through its site
selection procedures. The Company typically enters into contracts to purchase
real estate subject to certain contingencies. Prior to exercising its option and
purchasing the property, the Company conducts a Phase I environmental assessment
(which generally includes a physical inspection and database search, but not
soil or groundwater analyses). Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may be liable for the costs of removal or remediation
of hazardous to toxic substances on, under or in the property. These laws often
impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of hazardous or toxic substances. In addition, the
presence of contamination from hazardous or toxic substances, or the failure to
properly remediate the contaminated property, may adversely affect the owner's
ability to borrow using the real property as collateral. Persons who arrange for
the disposal or treatment of hazardous or toxic substances also may be liable
for the costs of removal or remediation of these substances at the disposal or
treatment facility, whether or not such facility is or ever was owned or
operated by such person. Certain environmental laws and common law principles
could be used to impose liability for releases of hazardous

12
<PAGE> 14

materials, including asbestos-containing materials ("ACMs"), into the
environment, and third parties may seek recovery from owners or operators of
real properties for personal injury associated with exposure to released ACMs or
other hazardous materials. Environmental laws also may impose restrictions on
the manner in which property may be used or transferred or in which businesses
may be operated, and these restrictions may require expenditures. In connection
with the ownership of its properties, the Company potentially may be liable for
any such costs. The cost of defending against claims of liability or remediating
contaminated property and the cost of complying with environmental laws could
materially adversely affect the Company's results of operations and financial
condition.

POTENTIAL ANTI-TAKEOVER PROVISIONS

Preferred Stock. The Board of Directors has the authority to issue up to
5,000,000 shares of preferred stock and to fix the rights, preferences,
privileges and restrictions, including voting rights, of those shares, without
any further vote or action by the stockholders. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights of
the holders of any preferred stock that may be issued in the future. The
issuance of preferred stock could have the effect of entrenching the Company's
Board of Directors and making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company. The Company currently
has no plans to issue shares of preferred stock. See "Description of Capital
Stock -- Preferred Stock."

Certificate and Bylaws; Delaware Anti-takeover Statute. The ownership
positions of Mr. DeBoer and the other executive officers and directors of the
Company as a group, together with the anti-takeover effects of certain
provisions in the Company's Restated Certificate of Incorporation (the
"Certificate of Incorporation") and Bylaws, may have the effect of delaying,
deferring or preventing a change in control of the Company, even if a change of
control were in the stockholders' best interests. For example, the Company's
Certificate of Incorporation eliminates the right of stockholders to act without
a meeting and does not provide for cumulative voting for the election of
directors or the right of stockholders to call special meetings. The Company's
Certificate of Incorporation also requires that stockholders follow advance
notification procedures for certain stockholder nominations of candidates for
the Board of Directors and for certain other business to be conducted at any
annual meeting of stockholders. In addition, the Company is subject to Section
203 of the Delaware General Corporation Law, which contains provisions that
restrict certain business combinations with interested stockholders upon
acquiring 15% or more of the Common Stock. This statute may have the effect of
inhibiting a non-negotiated merger or other business combination involving the
Company, even if such event would be beneficial to the then-existing
stockholders. See "Description of Capital Stock -- Anti-takeover Provisions."

Stockholders' Agreement. Pursuant to a Stockholders' Agreement, each of
the Initial Stockholders has agreed to act in concert with respect to the
election of directors of the Company. In addition, the approval of the Initial
Stockholders is required before the Company can engage in certain transactions
including a merger or disposition of assets. These provisions may have the
effect of inhibiting a change in control of the Company. See "Description of
Capital Stock -- Certain Provisions of Delaware Law" and "The Reorganization."

CONTROL OF COMPANY BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS; POTENTIAL CONFLICTS
OF INTEREST

It is expected that after consummation of the Offering, Mr. DeBoer will
beneficially own approximately 24.4% of the outstanding shares of Common Stock
of the Company and, together with the other executive officers and directors of
the Company as a group, will own 28.7% of the outstanding shares of Common
Stock. In addition, Doubletree will beneficially own approximately 28.7% of the
outstanding shares of Common Stock of the Company. By reason of such holdings,
these stockholders, if they were to act as a group, would be able to control the
affairs and policies of the Company and will be able to elect a sufficient
number of directors to control the Company's Board of Directors and to approve
or disapprove any matter submitted to a vote of the stockholders, including
certain fundamental corporate transactions (such as certain mergers and sales of
assets) requiring stockholder approval. The Initial Stockholders have entered
into agreements which provide for the nomination and election of directors and
certain "veto rights" with respect to specified actions by the Company and its
subsidiaries. See "The Reorganization" and "Principal Stockholders."

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<PAGE> 15

Entities affiliated with Mr. DeBoer, the Chairman, President and Chief
Executive Officer of the Company, own a majority interest in two, and a minority
interest in six, Residence Inn hotels. Two of these hotels are located in
Wichita, Kansas, proximate to the Company's initial hotel. Certain of the
entities affiliated with Mr. DeBoer are selling seven of these Residence Inn
hotels to Innkeepers USA Trust, a lodging real estate investment trust (the
"REIT"), which owns hotels primarily in the upscale extended-stay market. Upon
the closing of the REIT's acquisition, Mr. DeBoer will be the largest
shareholder and is expected to be a member of the Board of Trustees, of the
REIT. Mr. DeBoer also owns a majority interest in a Hawthorn Suites hotel in
Houston, Texas. These hotels may now or in the future compete for guests with
Candlewood hotels. In addition, Mr. DeBoer owns a minority interest in the
limited liability company which owns and leases the building in which the
Company's headquarters are located and in the corporation through which the
Company has arranged its insurance policies. The relationships of Mr. DeBoer
could give rise to conflicts of interest. See "Certain Transactions." The
Company believes that its lease and insurance policies are on terms no less
favorable to the Company than those that could have been obtained from
unaffiliated third parties. The Company has a policy requiring any material
transaction or agreement with a related party be approved by a majority of the
directors not interested in such transaction or agreement.

Mr. Ueberroth and Mr. Ferris are both directors of the Company and
co-chairmen of Doubletree. Doubletree hotels may now or in the future compete
for guests with Candlewood hotels. There is no restriction on Doubletree's
ability to develop, own, lease or manage hotels, including extended-stay hotels,
in locales where Candlewood hotels are now, or in the future may be, located. As
of October 15, 1996, Doubletree managed eight extended-stay hotels under the
brand Residence Inn by Marriott, none of which operated in the mid-priced
segment of the extended-stay market. The relationships of Messrs. Ueberroth and
Ferris and the transactions between Doubletree and the Company could give rise
to conflicts of interest. See "Business -- Operating Strategies" and "Certain
Transactions."

ABSENCE OF PRIOR PUBLIC MARKET FOR COMMON STOCK

Prior to the Offering, there has been no public market for shares of the
Company's Common Stock, and there can be no assurance that an active trading
market will develop or, if developed, will be sustained. The initial public
offering price of the Common Stock offered hereby has been determined by
negotiations between the Company and the representatives of the Underwriters and
there can be no assurance that the Common Stock will not trade at or below the
initial public offering price. The market price of the Common Stock could be
subject to significant fluctuations in response to variations in quarterly
operating results and other factors. In addition, the securities markets have
experienced significant price and volume fluctuations from time to time in
recent years that often have been unrelated or disproportionate to the operating
performance of particular companies. These broad fluctuations may adversely
affect the market price of the Common Stock. See "Underwriting."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of the Company's Common Stock in the public market after the Offering
could adversely affect the market price of the Company's Common Stock. Upon
completion of the Offering and assuming no exercise of the Underwriters'
overallotment option, the Company will have 9,025,000 outstanding shares of
Common Stock (9,602,500 shares if the Underwriters' overallotment option is
exercised in full). Of these shares, the 3,850,000 shares sold in the Offering
(4,427,500 shares if the Underwriters' over-allotment option is exercised in
full) will be available for resale in the public market without restriction
except by affiliates of the Company. The remaining 5,175,000 shares of Common
Stock are "restricted securities" under the Securities Act and may only be sold
pursuant to an effective registration statement under the Securities Act or an
applicable exemption from the registration requirements of the Securities Act,
including Rule 144 thereunder. In addition, the Company intends to register with
the Securities and Exchange Commission a total of 900,000 shares of Common Stock
reserved for issuance under the 1996 Plan as soon as practicable following the
date of this Prospectus. See "Underwriting" and "Shares Eligible for Future
Sale."

DILUTION

Purchasers of the Common Stock will experience an immediate and substantial
dilution of approximately $8.05 in pro forma net tangible book value per share
of Common Stock from the initial public offering price per share of Common
Stock. See "Dilution."

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<PAGE> 16

ABSENCE OF DIVIDENDS

The Company does not anticipate paying any cash dividends on the Common
Stock in the foreseeable future. The Board of Directors will control the
declaration and determination of the size of dividends, if any. Pursuant to the
terms of the Stockholders Agreement among the Initial Stockholders, so long as
the Initial Stockholders hold in excess of 50% of the outstanding shares of the
Company's Common Stock, the approval of the Initial Stockholders is required
before the Company can declare or pay any dividends. The Company anticipates
that future financing, including any lines of credit, may restrict or prohibit
the Company's ability to pay dividends. See "Dividend Policy."

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The Company believes that this Prospectus contains certain forward-looking
statements, including without limitation statements containing the words
"believes," "anticipates," "expects" and words of similar import. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
adverse changes in national or local economic conditions, competition from other
lodging properties, changes in real property tax rates and in the availability,
cost and terms of financing, the impact of present or future environmental
legislation and compliance with environmental laws, the ongoing need for capital
improvements, changes in operating expenses, adverse changes in governmental
rules and fiscal policies, civil unrest, acts of God, including earthquakes and
other natural disasters (which may result in uninsured losses), acts of war,
adverse changes in zoning laws, and other factors referenced in this Prospectus.
Certain of these factors are discussed in more detail elsewhere in this
Prospectus, including without limitation under the captions "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and "Business." Given these uncertainties,
prospective investors are cautioned not to place undue reliance on such
forward-looking statements. The Company disclaims any obligation to update any
such factors or to publicly announce the result of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.

15
<PAGE> 17

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 3,850,000 shares of
Common Stock being offered hereby, assuming an initial public offering price of
$13.00 per share and after deducting estimated underwriting discounts and
commissions and estimated expenses of the Offering, are estimated to be
approximately $46.0 million (approximately $52.9 million if the Underwriters'
over-allotment option is exercised in full).

The Company intends to use approximately $44.0 million of the net proceeds
from the Offering to fund the national expansion of the Company through the
development of Company-owned Candlewood hotels and approximately $2.0 million
for working capital and general corporate purposes. The Company may also use
portions of the net proceeds of the Offering to fund or invest in the
development of Candlewood hotels by its franchisees; however, it has no current
obligations or commitments to do so. Pending the use of proceeds described
above, the net proceeds will be invested in interest-bearing, short-term,
investment grade securities, certificates of deposit, interest-bearing bank
deposits, or commercial paper.

DIVIDEND POLICY

The Company has not paid dividends on its Common Stock. The Company
currently intends to retain any future earnings for reinvestment in the
development and expansion of its business and does not anticipate paying any
cash dividends on its Common Stock in the foreseeable future. The payment of
dividends in the future will be at the discretion of the Board of Directors and
will be dependent upon the Company's financial condition, results of operations,
capital requirements and other factors deemed relevant by the Board of
Directors. Pursuant to the terms of the Stockholders Agreement among the Initial
Stockholders, so long as the Initial Stockholders hold in excess of 50% of the
outstanding shares of the Company's Common Stock, the approval of the Initial
Stockholders is required before the Company can declare or pay any dividends.
The Company anticipates that future financing, including any lines of credit,
may restrict or prohibit the Company's ability to pay dividends. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "The Reorganization."

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<PAGE> 18

CAPITALIZATION

The following table sets forth (i) the capitalization of the Company at
June 30, 1996, (ii) the pro forma capitalization of the Company at June 30, 1996
giving effect to the Reorganization as if it had occurred on that date and (iii)
the pro forma capitalization of the Company as adjusted to reflect the sale of
the 3,850,000 shares of Common Stock offered hereby (assuming an initial public
offering price of $13.00 per share) and the application of the net proceeds
therefrom as described under "Use of Proceeds." This table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements of the
Company and notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------------------------------
COMPANY
--------------------------
CANDLEWOOD LLC PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED
-------------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable, current portion..................... $ -- $ -- $ --
========== ========== ===========
Notes payable, less current portion................ -- $7,334,614 $ 7,334,614
Minority interest.................................. $ 47,460 -- --
Members' equity.................................... 6,569,318 -- --
Stockholders' equity:
Preferred Stock, par value $.01 per share;
5,000,000 shares authorized; no shares issued
and outstanding............................... -- -- --
Common Stock, par value $.01 per share;
100,000,000 shares authorized; 5,175,000
shares issued and outstanding, pro forma;
9,025,000 shares issued and outstanding, as
adjusted(1)................................... -- 51,750 90,250
Additional paid-in capital....................... -- 348,450 46,256,450
Retained earnings (accumulated deficit).......... -- (1,118,036) (1,118,036)
---------- ---------- -----------
Total stockholders' equity (deficit).......... -- (717,836) 45,228,664
---------- ---------- -----------
Total capitalization..................... $6,616,778 $6,616,778 $52,563,278
========== ========== ===========
</TABLE>

- ---------------
(1) Excludes 900,000 shares of Common Stock reserved for issuance pursuant to
the Company's 1996 Equity Plan. See "Management -- Compensation Plans and
Arrangements."

17
<PAGE> 19

DILUTION

The pro forma net tangible book value (deficit) of the Company at June 30,
1996 was $(1,242,989) or $(.24) per share of Common Stock. Net tangible book
value (deficit) per share represents the amount of tangible assets of the
Company, less total liabilities, divided by the number of shares of Common Stock
outstanding. Pro forma net tangible book value at June 30, 1996 assumes
completion of the Reorganization. After giving effect to the sale of the shares
of Common Stock offered hereby (based on an assumed initial public offering
price of $13.00 per share) and the application of the net proceeds therefrom,
the pro forma net tangible book value of the Company at June 30, 1996 would have
been $44,703,511 or $4.95 per share. This represents an immediate increase in
net tangible book value per share of $5.19 to existing stockholders and an
immediate dilution in net tangible book value per share of $8.05 to new
investors purchasing shares in the Offering. The following table illustrates the
per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............................. $13.00
Pro forma net tangible book value (deficit) per share at June 30, 1996..... $ (.24)
Increase per share attributable to new investors........................... 5.19
-------
Pro forma net tangible book value per share after the Offering............... 4.95
------
Dilution per share to new investors.......................................... $ 8.05
======
</TABLE>

The following table summarizes, on a pro forma basis as of June 30, 1996,
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share of Common
Stock paid by the existing stockholders and by the new investors in the Offering
(based upon an assumed initial public offering price of $13.00 per share):

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... 5,175,000 57.3% $ 400,200 0.8% $ 0.08
New investors....................... 3,850,000 42.7 50,050,000 99.2 13.00
--------- ----- ----------- ----- -------
Total..................... 9,025,000 100.0% $50,450,200 100.0% $ 5.59
========= ===== =========== ===== =======
</TABLE>

The foregoing tables exclude 900,000 shares of Common Stock reserved for
issuance pursuant to the 1996 Equity Plan and 577,500 shares of Common Stock
issuable upon the exercise of the Underwriters' over-allotment option. See
"Management -- Compensation Plan and Arrangements" and "Underwriting."

18
<PAGE> 20

SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The Company was incorporated in August 1996 to succeed to the business of
Candlewood LLC. See "The Reorganization." The selected consolidated financial
data set forth below as of and for the period from October 1, 1995 to December
31, 1995 and the six months ended June 30, 1996 have been derived from the
audited consolidated financial statements of Candlewood LLC and notes thereto
included elsewhere in this Prospectus. The historical results for the six months
ended June 30, 1996 are not necessarily indicative of the results for a full
year. The selected pro forma consolidated financial information at June 30, 1996
give effect to the Reorganization. The selected historical and pro forma
consolidated financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical consolidated financial statements and related
notes thereto of Candlewood LLC.

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

(1) Although Candlewood LLC was not formed until November 16, 1995, certain
expenses applicable to its business were incurred during the period from
October 1, 1995 to November 16, 1995 and were funded by capital
contributions of members. Accordingly, the Company's statements of
operations have been presented as if the Company's operations began on
October 1, 1995.

(3) Gives effect to the Reorganization as if it had occurred on June 30, 1996,
reflecting (i) the distribution of the amount of capital in excess of
$200,100 previously contributed by Doubletree and a related preferred
return, (ii) the contribution of outstanding membership interests of
Candlewood LLC and minority interests of the Subsidiary LLCs held by
Doubletree and the Fix partnership, and the contribution of the stock of JPD
Corporaton, to the Company and (iii) the issuance of a note payable to
Doubletree pursuant to the subordinated credit facility. See Note 10 of
Notes to Consolidated Financial Statements.

19
<PAGE> 21

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following discussion should be read in conjunction with the Company's
Financial Statements and notes thereto appearing elsewhere in this Prospectus.

OVERVIEW

The Company began operations in October 1995 to develop, own, operate and
franchise Candlewood extended-stay hotels, designed particularly for the
business traveler. The Company began construction of its first Candlewood hotel
in Wichita, Kansas in October 1995. Construction of this hotel was completed and
the hotel opened in May 1996. In May and June 1996, respectively, the Company
began construction of two additional hotels in the Omaha, Nebraska and Denver,
Colorado areas, each of which is scheduled to open in the first quarter of 1997.
In September 1996, the Company began construction of two additional hotels in
the Cincinnati, Ohio and Louisville, Kentucky areas, each of which is scheduled
to open in the second quarter of 1997. In 1997, the Company's objective is to
open approximately 14 additional Company-owned hotels and to begin construction
of approximately 20 additional hotels. In pursuing this objective, as of October
15, 1996, the Company had 18 potential Candlewood sites under contract and had
agreements in principle or letters of intent with respect to 17 potential sites.
There can be no assurance that the Company will be successful in purchasing or
developing any of these sites or that the Company will achieve its expected rate
of development. See "Risk Factors -- Development Risks" and "-- Real Estate
Investment Risks."

The Company's 107 room hotel in Wichita, Kansas was developed for a cost,
excluding land, of approximately $3.6 million (or approximately $33,500 per
room), including building structure, improvements, furniture, fixtures and
equipment and pre-opening costs. The Company estimates that the total cost of
the 131 room Candlewood hotels under construction in the Denver and Omaha areas
and the 77 room Candlewood hotels under construction in the Cincinnati and
Louisville areas will be approximately $4.9 million, $5.1 million, $3.8 million
and $4.0 million, respectively (or approximately $37,000, $39,000, $49,000 and
$52,000, respectively, per room), excluding land. The Company's hotel in Wichita
does not, and its hotels under construction in the Denver and Omaha areas will
not, contain king suites; however, the Company's hotels in the Cincinnati and
Louisville areas will contain king suites. The Company believes that its
construction costs are relatively low due to a number of factors, including
careful site selection, economical and durable exterior and interior finishes,
and refined and standardized building systems and processes. The Company
anticipates, however, that the cost to develop a facility will vary
significantly by geographic location in large part due to variable real estate
and construction costs. The cost of the Company's real estate in the Cincinnati,
Denver, Louisville, Omaha and Wichita areas was approximately $269,000,
$435,000, $670,000, $633,000 and $250,000, respectively.

In addition to the construction of Company-owned Candlewood hotels, the
Company intends to expand through its national franchising program. The Company
entered into a development agreement dated as of June 11, 1996 with Studio West
Hotel Development Company, LLC ("SWHDC") which, in exchange for nominal
consideration, grants SWHDC the option to obtain franchises to construct and
operate 22 Candlewood hotels in Northern California, Oregon and Washington. This
development agreement grants SWHDC options to obtain franchises to construct and
operate five Candlewood hotels in 1996, seven Candlewood hotels in 1997, seven
Candlewood hotels in 1998, and three Candlewood hotels in 1999. See
"Business -- Growth and Development Strategies -- Franchising." On July 25,
1996, the Company entered into a franchise agreement with SWHDC relating to the
establishment of a Candlewood hotel in Hillsboro, Oregon. SWHDC began
construction of this hotel in August 1996 and expects to commence operations in
the second quarter of 1997. Development agreements do not obligate the developer
to build or open any Candlewood hotels; however, such agreements allow the
Company to terminate the developer's exclusive territorial rights if the
developer fails to submit franchise applications pursuant to a development
schedule. The Company also expects to generate revenue through the management of
franchised hotels; however, as of the date of this Prospectus, the Company has
not entered into any management agreements and does not manage any hotels owned
by others. See "Risk Factors -- Development Risks" and "-- Competition for and
Dependence on Franchise Agreements."

20
<PAGE> 22

RESULTS OF OPERATIONS

Hotel Operations -- Wichita Hotel

The Company currently owns and operates one Candlewood hotel in Wichita,
Kansas, which opened on May 5, 1996. The following table presents summary
financial information for the Wichita, Kansas hotel for the period from May 5,
1996 to June 30, 1996. The results of operations for this period are not
necessarily indicative of the future results of operations of the Wichita hotel
or of other Company-owned hotels.

<TABLE>
<CAPTION>
MAY 5, 1996
(COMMENCEMENT OF
OPERATIONS) TO
JUNE 30, 1996
----------------
<S> <C>
Room revenue................................................ $116,113
Other revenue............................................... 3,925
Hotel operating expenses.................................... 86,195
Depreciation and amortization............................... 49,056
</TABLE>

Room revenue for the period from May 5, 1996 to June 30, 1996, was
approximately $116,000. The average occupancy rate for the same period was 48%.
Occupancy rates are determined by dividing the number of guest rooms occupied on
a daily basis by the total number of guest rooms available at the facility.
During the same period, the length of stay averaged approximately nine days and
the average daily room rate was $48.20. The Company believes that the average
daily room rate was favorably affected by stays that were shorter than six days,
as these shorter stays commanded a slightly higher rate. Other revenue for the
hotel consists of guest telephone, vending and pay-per-view movie revenues.

Hotel operating expenses for the period from May 5, 1996 to June 30, 1996,
was approximately $86,000. Hotel operating expenses consists of all expenses
directly applicable to the operation of the hotel and does not include an
allocation of corporate operating expenses. The largest portion of hotel
operating expenses is salaries, wages and fringe benefits. The balance of hotel
operating expenses is comprised of normal operating items, such as electricity,
gas and other utilities, property taxes, insurance, cleaning supplies,
promotional materials, maintenance items, and similar expenses.

Depreciation and amortization expense for the period from May 5, 1996 to
June 30, 1996, was approximately $49,000. Depreciation expense is computed using
the straight-line method over the estimated useful lives of the respective
assets, ranging from three to forty years. For the period from May 5, 1996 to
June 30, 1996, depreciation expense reflects amounts for the pro-rata portion of
a full year. Pre-opening expenses and financing and closing fees were
capitalized and are being amortized over no more than the first twelve months or
two years of operations, respectively.

Corporate Operations

Corporate operating expenses include all expenses not directly related to
the development or operation of specific hotels. Such expenses, which totaled
approximately $748,000 for the six months ended June 30, 1996, are related
principally to salaries, wages and fringe benefits of the corporate staff which
has been employed in anticipation of and preparation for the addition of new
hotel facilities. The expenses for the first six months of 1996 are higher in
relation to revenue than is anticipated for future periods because of the need
to have the personnel in place during the Company's start-up period.

Depreciation and amortization for the six months ended June 30, 1996
totaled approximately $22,000 and related to the furniture, equipment and
intangible assets of the corporate office. Depreciation and amortization was
calculated using the straight-line method over the estimated useful lives of the
respective assets, ranging from three to twenty years.

The Company earned approximately $11,000 of interest income during the
period which related principally to short-term investment of funds.

21
<PAGE> 23

LIQUIDITY AND CAPITAL RESOURCES

Working capital at June 30, 1996 was approximately $789,000, an increase of
approximately $754,000 over December 31, 1995. During the six months ended June
30, 1996, cash used in operating activities totaled approximately $596,000. The
net loss during the period was approximately $774,000, resulting primarily from
the need to employ corporate staff in anticipation of, and preparation for, the
addition of future hotel facilities. Increases in accounts receivable, prepaid
expenses, capitalized pre-opening costs and other assets also resulted in the
use of cash during the period. These uses were offset by increases in accounts
payable and accrued expenses and by expenses not requiring the use of cash.

Cash used by investing activities for the six months ended June 30, 1996
totaled approximately $4.7 million. The Company's expenditures for property and
equipment in connection with the construction of new hotels totaled
approximately $4.3 million. Pre-acquisition costs and certificates of deposits
in connection with contracts for the purchase of land for future hotels also
resulted in the use of cash.

During the six months ending June 30, 1996, the primary source of cash was
members' capital contributions to Candlewood LLC, which totaled approximately
$6.2 million.

Working capital at December 31, 1995 was approximately $35,000. The net
loss for the period ending December 31, 1995, of $209,000 resulted from
development stage activities. Increases in accounts payable and accrued expenses
provided cash flow from operating activities during the period.

Expenditures for property and equipment for the period ending December 31,
1995 of approximately $881,000 related to construction activities for the
Company's first hotel located in Wichita, Kansas. Other investing activities
related to capitalized organizational costs and certificates of deposit.

Net cash provided by financing activities during the period ending December
31, 1995, resulted from members' capital contributions in the amount of
approximately $1.2 million.

To date, the Company's material commitments for capital expenditures have
consisted exclusively of amounts committed in connection with the development
and construction of Candlewood hotels. At September 30, 1996, the Company had
material commitments for capital expenditures of approximately $18.9 million
related to the construction of the Denver, Omaha, Louisville and Cincinnati area
hotels.

The Company has financed its operations to date primarily through capital
provided by Doubletree. As of October 15, 1996, Doubletree had contributed
approximately $12.3 million to Candlewood LLC. Pursuant to the terms of the
Candlewood LLC operating agreement, Doubletree is entitled to a preferred return
on its capital contributions, including priority payments to Doubletree of any
capital distributions by Candlewood LLC and a return on all outstanding
contributions at rates of 7% and 10% for the first and second 12 month periods
following contribution, respectively, and 15% per annum thereafter. Prior to the
Offering, the amount of capital in excess of $200,100 previously contributed to
Candlewood LLC by Doubletree, together with a preferred return on the
contributed amount, will be distributed by Candlewood LLC to Doubletree. In
connection with the Reorganization, Doubletree has agreed to extend to the
Company a five-year, $15 million subordinated credit facility. Prior to the
Offering, Doubletree will loan to the Company an amount equal to the amount of
the distributed capital and preferred return, which will be evidenced by a
long-term note as part of the subordinated credit facility. The credit facility
is subordinated to debt incurred in the development of hotels and will be
subordinated to the Company's line of credit, if any. Amounts outstanding under
the credit facility will bear interest at rates of 7% and 10% per annum for the
first and second 12 month periods following funding, respectively, and 15% per
annum thereafter. The determination of the applicable interest rate for the
initial amounts loaned under the credit facility will be based on the date
equivalent amounts were originally contributed to Candlewood LLC. See "The
Reorganization."

The Company has arranged with a third party lender to finance up to 60% of
the cost of individual Company-developed hotels. Funding for loans for each
hotel will be subject to approval of the third party lender, upon satisfaction
of various conditions. Interest on each loan will be payable monthly at a
variable rate equal to the prime rate plus 1%. Principal amortization payments,
based on a 20 year amortization schedule with an assumed fixed interest rate of
10%, will begin on or after the first day of the first month after the

22
<PAGE> 24

property's hotel has achieved at least 65% occupancy for two consecutive months,
and will continue until three years from the funding of the loan. Such payments
may be extended for one year or refinanced upon the satisfaction of certain
conditions. Unless refinanced, all outstanding amounts, including principal and
interest, will be due upon maturity of the loan.

The Company estimates that construction loans with the third party lender
will be in amounts of approximately 60% of the total cost of a Candlewood hotel
which the Company estimates will generally vary between $3.5 million and $7.5
million, determined primarily by land costs and the number of rooms in the
hotel. The Company intends to apply for construction loans from the third party
lender for its hotels under construction in the Louisville, Kentucky and
Cincinnati, Ohio areas.

The Company, through its Subsidiary LLCs, has entered into a $3.0 million
term loan agreement and promissory note, dated as of October 15, 1996, with
NationsBank related to its Wichita hotel and has obtained separate term loan
commitments from NationsBank in the amounts of $4,029,500 and $4,075,000 for
each of its hotels under construction in the Denver and the Omaha areas,
respectively. The loan agreement has been, and each loan commitment will be,
entered into by the Subsidiary LLC that owns the property and the hotel to be
constructed and will be guaranteed by the Company and the other Subsidiary LLCs.
Interest on each loan will be payable monthly at a variable rate per annum equal
to NationsBank's prime rate plus 1/2%; provided, however, that the Company may
borrow up to three installments of the unused loan balance (in amounts of at
least $100,000) for one, two, three or six month periods at interest rates equal
to the adjusted Eurodollar rate plus 2.75%. Principal amortization payments
based on a 25-year term will begin not later than 13 months after completion of
the construction of the hotels and will continue until 2 1/2 years from the date
of the closing of the loan. Each loan may be extended for one additional year if
certain conditions are met and upon payment of a specified extension fee. During
the one year extension period, the Company will continue to make interest
payments and principal amortization payments based on a 25-year term. Amounts
borrowed under the loan and the loan commitments will be secured by the hotels
and the land on which they are constructed and certain funds deposited in a
demand deposit account assigned to NationsBank. Each loan will be funded
separately, with all loans being cross-collateralized and cross-defaulted.

The Company's sources of liquidity on a long-term basis include anticipated
cash flow from completed Candlewood hotels, secured and unsecured borrowings and
the issuance of debt or equity securities. It is expected that these sources of
liquidity will be used to repay borrowings under the subordinated credit
facility from Doubletree.

The Company believes that a combination of the net proceeds from the
Offering and cash from operations, together with its subordinated credit
facility from Doubletree, construction financing from NationsBank and the third
party lender (if approved on an individual basis) will be sufficient to provide
capital for development and operations during the next 12 months. See "Risk
Factors -- Future Capital Needs and Risks of Additional Financing."

IMPACT OF NEW ACCOUNTING STANDARDS

In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
which is effective for the Company beginning January 1, 1996. This statement
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. There is no impact on the
consolidated financial statements as of June 30, 1996 as a result of adoption of
the standard.

In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which is effective for the Company beginning January 1, 1996.
SFAS No. 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
cost to be measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The provisions of Statement No. 123 will not have a material
effect on the consolidated financial condition or operating results of the
Company as the Company does not intend to adopt the fair value based measurement
concept.

23
<PAGE> 25

BUSINESS

OVERVIEW

The Company is in the business of developing, owning, operating,
franchising and managing Candlewood extended-stay hotels. Candlewood hotels and
their amenities are designed to appeal particularly to business travelers
seeking extended-stay accommodations by combining the convenience of a hotel
with many of the comforts of an apartment and providing well appointed, high
quality lodging at affordable prices. The Company's goal is to rapidly develop
and franchise Candlewood hotels to capitalize on what the Company believes is an
underserved demand for mid-priced, extended-stay hotels and to develop a leading
national brand within that segment of the extended-stay market, which the
Company believes is characterized by average daily rates of approximately $40 to
$60.

As of October 15, 1996, the Company owned and operated one Candlewood hotel
and was constructing four additional hotels, two of which are expected to open
in the first quarter of 1997 and two of which are expected to open in the second
quarter of 1997. In 1997, the Company's objective is to open approximately 14
additional Company-owned hotels and to begin construction of approximately 20
additional Company-owned hotels. In pursuing this objective, as of October 15,
1996 the Company had 18 potential sites under contract and had agreements in
principle or letters of intent with respect to 17 potential sites. In addition,
the Company is developing a nationwide franchising program, and as part of that
program is currently a party to one multi-hotel development agreement which
grants the developer options to obtain franchises to construct and operate up to
22 Candlewood hotels over the next three years.

The Company believes that the experience of its senior management team will
be instrumental in executing its growth strategy. The Company was founded in
1995 by Jack P. DeBoer, the Chairman, President and Chief Executive Officer of
the Company. The Candlewood concept, developed by Mr. DeBoer is based on his
extensive background and experience in the extended-stay market, together with
his perception of a need for extended-stay lodging with rooms and amenities
comparable to those found in upscale hotels but at more affordable prices. Mr.
DeBoer, who launched the Residence Inn chain in the 1970's, is credited by the
lodging industry with creating the extended-stay concept. Thereafter, he built
or franchised 100 Residence Inn hotels before selling that company to Marriott
Corporation in 1987. Mr. DeBoer also co-founded Summerfield Hotel Corporation,
an upscale extended-stay hotel chain which developed 16 hotels under his
leadership. He sold his interest in Summerfield in 1993. As a result, Mr. DeBoer
has numerous contacts among potential franchisees, representatives from the
construction industry and other leaders in the hospitality industry.

The Company expects to derive substantial benefits from its strategic
alliance with Doubletree. The Company believes it will benefit from Doubletree's
central reservation system, in-room video and service arrangement and bulk
purchasing power, including phone rates and supplies. Candlewood also believes
it will benefit from Doubletree's management resources, extensive knowledge of
local markets, and established insurance and employee benefit programs. As
additional Candlewood hotels commence operations, the Company anticipates that
it will formalize the services to be provided by Doubletree and the cost of
certain of those services. Doubletree has agreed to extend a five-year $15
million subordinated credit facility to the Company, a substantial portion of
which will have been funded at the time of the Offering. Doubletree has also
agreed to guarantee a portion of the construction loans and long-term financing
that the Company has arranged for its franchisees. Doubletree is a leading hotel
management company that managed, leased or franchised 178 hotels in 31 states,
the District of Columbia and Mexico as of June 30, 1996. Doubletree is not
expected to manage any of the Candlewood hotels. See "Risk Factors -- Risks
Associated with Rapid Growth; Reliance on Doubletree."

The standard Candlewood hotel will contain approximately 75-135 rooms, up
to 25% of which may be king suites. The king suites are two-room suites designed
to accommodate guests who are willing to pay a premium rate for a bedroom
separated from the kitchen and office area. The Company believes king suites
will increase the average daily rate and the average length of stay. Each
Candlewood room will contain business and other amenities consistent with those
found in upscale, full-service hotels, such as two phones with two incoming
phone lines and computer connections, an oversized wooden desk with a
quad-outlet to accommo-

24
<PAGE> 26

date office equipment needs, an executive chair, a bulletin board, personalized,
remote accessible phone mail, a 25-inch television set, a video cassette player,
a compact disc player, movies on demand and the standard Candlewood hotel will
contain an exercise facility.

The majority of extended-stay hotels are either in the upscale sector of
the market, such as Residence Inn, Homewood Suites, Hawthorn Suites and
Summerfield Suites (most with average daily rates in excess of $80), or the
economy sector, such as Suburban Lodge, Extended Stay America, Homestead Village
and Villager Lodge (most with average daily rates less than $35). The Company
believes that these hotels do not meet the needs of a large number of travelers
who desire well appointed, high quality, spacious accommodations with full
kitchens, but with room rates in the mid-priced segment of the extended-stay
market. Candlewood hotels are designed to accommodate what the Company believes
to be an underserved segment of the extended-stay market. In addition, the
Company believes that the high quality of Candlewood hotels relative to their
daily rate will attract certain guests who otherwise would stay at traditional
hotels. The Company anticipates that the average daily rate at Candlewood hotels
will be approximately $45 - $55 per studio which is significantly lower than
full-service hotels with comparable room features and amenities and generally
competitive with traditional limited-service hotels that do not offer the high
quality appointments and amenities of the Company's rooms. Accordingly, the
Company believes that Candlewood hotels will be particularly attractive to
business travelers, including professionals on temporary work assignment,
consultants, travelers conducting or participating in training seminars and
government employees.

The Company believes that guests will find a combination of the following
factors differentiate the Candlewood brand from other extended-stay hotels:

- Upscale Accommodations at Moderate Prices. Candlewood hotels will offer
upscale accommodations at competitive rates within the mid-priced
extended-stay market which the Company believes will be attractive to
guests staying six nights or longer. The average nightly rate at
Candlewood hotels is expected to be approximately $45 - $55 per studio,
with a premium charged for king suites.

- Amenities for Business Travelers. Each Candlewood studio and king suite
will offer amenities designed to accommodate the needs of the business
traveler, such as two phones with two incoming direct dial phone lines
with computer connections, an oversized wooden desk with a quad-outlet to
accommodate office equipment needs, an executive chair, a bulletin board,
a guest chair and personalized, remote accessible phone mail.

- High Quality, Extended-Stay Features. In addition to extensive business
amenities, each Candlewood room will contain a fully equipped kitchen,
including a full-size refrigerator, full-size microwave oven, dishwasher,
two burner stovetop, coffee maker, toaster and a complete set of utensils
and cookware. In addition, a 25-inch television, video cassette player,
compact disc player and an iron and ironing board will be provided. Also,
each Candlewood hotel will be equipped with an exercise room, a guest
laundry facility and a convenient dry cleaning drop with same-day
service.

The Company believes that a combination of the following factors will make
Candlewood an attractive brand choice for franchisees and investors compared to
other extended-stay brands:

- Operating Efficiencies. By employing only six to eight full-time
employees and one part-time employee at each Candlewood hotel, the
Company believes that it will minimize operating costs. The office of
each hotel generally will be open daily from 7:00 a.m. to 8:00 p.m.,
although the live-in general manager will normally be available
twenty-four hours a day to respond to guests' needs. In addition, each
hotel will be equipped with technology that will allow guests to check-in
and check-out without the assistance of hotel employees.

25
<PAGE> 27

- Strength of Management and Staff. Mr. DeBoer has over 20 years of
experience in the design, construction, ownership and management of
extended-stay hotels and has founded and developed two highly successful
extended-stay hotel chains. Warren D. Fix, Executive Vice President and
Chief Financial Officer, has an extensive financial background in real
estate development, management and financing, having spent 25 years at
The Irvine Company, most recently as the Chief Financial Officer. Every
Candlewood general manager and director of sales will be required to
complete Company-administered classroom courses and on-the-job training
to learn the marketing and operating systems specific to the operation of
an extended-stay hotel, how to maximize operating efficiencies and how to
attract extended-stay guests. The Company intends to make opportunities
to invest in its Common Stock available to all of its employees in order
to attract, retain and motivate the highest quality personnel.

- Sales Organization. The Company has established a sales and marketing
division which will target institutions and employers in areas proximate
to its hotels. Each owned and franchised Candlewood hotel will have at
least one on-site employee dedicated to direct sales in support of that
hotel. By employing a dedicated on-site sales employee at every hotel,
the Company expects to be able to more effectively identify and market to
local businesses and employers who generate a large number of
extended-stay business guests.

- Standard Design and Low Construction Costs. The Company expects that all
Candlewood hotels, including hotels owned by its franchisees, will be
designed and built according to uniform plans and specifications and
pursuant to standard construction contracts. The Company believes that
standardization will lower construction costs and establish consistent
quality, thereby enhancing its customers' loyalty and its ability to
establish a national brand. The Company has identified and approved three
major contractors in the United States, all of which have extensive
experience in the construction of lodging facilities and each of which
has agreed to cost-plus contracts with a ceiling on total expense that
are expected to limit cost overruns.

- Uniform High Quality Hotels. The Company intends to expand the
Candlewood hotel brand primarily through construction of new
Company-owned and franchised hotels, rather than by converting existing
lodging facilities to Candlewood hotels. The Company believes this
strategy will increase the value of the Candlewood brand by maintaining
consistent hotel quality and appearance which is expected to build guest
loyalty and attract repeat customers.

- Franchisee Financing. The Company has arranged with a third party lender
to provide construction loans and long-term financing for up to 80% of
the cost of franchised hotels, subject to approval by the Company and the
lender on an individual property basis. The Company expects that the
availability of this financing will expedite and provide added certainty
to the development process by permitting the Company's franchisees to
devote their time to constructing, opening and operating their hotels.
Doubletree has agreed to guarantee certain portions of the loans made to
the Company's franchisees.

THE LODGING INDUSTRY

Traditional Lodging Industry

Lodging industry revenue and the room supply/demand balance have improved
in each year since 1991, according to industry sources which the Company
believes to be reliable. The industry is estimated to have generated its third
consecutive year of pre-tax profits in 1995 at a record of approximately $7.6
billion, up 38% from pre-tax profits of approximately $5.5 billion in 1994.
Hospitality Directions, a publication of Coopers & Lybrand, projects that
industry pre-tax profits will reach $14.7 billion in 1998. Room supply and
demand historically have been sensitive to shifts in economic growth, resulting
in cyclical changes in average daily room rates and occupancy rates. The
industry's profitability has been fueled by four consecutive years in which the
growth in total room demand has exceeded the growth in total room supply by
approximately 1.7%, 2.2%,

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<PAGE> 28

2.6% and 1.1% in 1992, 1993, 1994 and 1995, respectively, as estimated by Smith
Travel Research. The Company believes this trend has continued in the first
seven months of 1996, with demand growth eclipsing supply growth by 1.1%. This
sustained, favorable imbalance between supply and demand has enabled the
industry to increase revenue per available room ("RevPAR") every year since
1991. According to Smith Travel Research, RevPAR for the industry as a whole
grew 3.2%, 5.6%, 6.5%, 6.0% and 7.7% in 1992, 1993, 1994, 1995, and the first
seven months of 1996, respectively, over each of the previous periods.

Extended-Stay Market

The first extended-stay hotel chain, Residence Inn, was founded and
developed by Jack P. DeBoer in the 1970s in order to provide a comfortable
alternative to traditional hotels for a growing number of travelers who desired
the convenience of a hotel with apartment style amenities. The Company believes
the extended-stay segment has benefited from a strong and growing demand for
extended-stay rooms relative to a supply of such rooms. The Company believes
demand for extended-stay lodging has increased due to the increased number of
corporate reorganizations and trends toward downsizing and outsourcing, the
increased mobility of the workforce and technological improvements which have
allowed businesses to relocate outside of large metropolitan areas. These
changes have increased the need for extended-stay lodging for, among others,
corporate executives and trainees, consultants, sales representatives,
government workers and people between jobs or homes.

According to industry sources which the Company believes to be reliable, of
the approximately 3.3 million guest rooms available in the United States as of
August 31, 1996, there were only approximately 51,000 or 1.5% dedicated
extended-stay rooms concentrated at approximately 450 properties. D.K. Shifflet
has estimated that in 1995 approximately 195 million business non-convention
room nights were associated with stays of four nights or more, while there were
only approximately 18.6 million room nights available at extended-stay lodging
facilities. These statistics indicate that the majority of extended-stay
travelers are staying in traditional hotel rooms.

The table below illustrates occupancy, average daily rate ("ADR") and
RevPAR for the U.S. lodging industry as a whole and for the limited-service,
all-suite segment and the extended-stay segment. The limited-service, all-suite
hotel segment of the lodging industry contains the extended-stay segment in its
entirety and has been included because of its larger sample size.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, JANUARY 1 TO
-------------------------------------------------- JULY 31,
1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C>
OCCUPANCY
U.S. hotels....................... 60.7% 61.7% 63.0% 64.6% 65.3% 66.6%
Limited-service, all-suite
hotels.......................... 71.9 74.6 77.4 78.1 77.8 78.9
Extended-stay hotels(1)........... 73.9 76.9 79.9 81.3 80.8 81.1
ADR
U.S. hotels....................... $59.02 $59.90 $61.97 $64.35 $67.45 $71.44
Limited-service, all-suite
hotels.......................... 69.15 69.57 71.65 73.70 77.76 82.44
Extended-stay hotels(1)........... 73.12 73.61 73.09 74.28 77.54 79.69
REVPAR
U.S. hotels....................... $35.83 $36.96 $39.04 $41.57 $44.04 $47.58
Limited-service, all-suite
hotels.......................... 49.72 51.90 55.46 57.56 60.50 65.05
Extended-stay hotels(1)........... 54.04 56.61 58.40 60.39 62.65 64.63
</TABLE>

- ---------------
Source: Smith Travel Research

(1) Sample contains AmeriSuites, Hawthorn Suites, Homewood Suites, Lexington
Suites, Residence Inn by Marriott, Studio Plus, Summerfield Suites and
Woodfin Suites.

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<PAGE> 29

Mid-Priced Extended-Stay Segment

The Company believes that the majority of existing extended-stay rooms are
in the upscale and economy segments of the extended-stay market, leaving the
mid-priced segment underserved by the existing supply and type of rooms. Of the
approximately 450 extended-stay properties, the Company believes that
approximately 300, or approximately 67%, operate in the upscale segment,
approximately 105, or approximately 23%, operate in the economy segment, and
only approximately 45 properties, or 10%, operate in the mid-priced segment.
Based on the published occupancy rates for other extended-stay hotels and D.K.
Shifflet's estimate that approximately 50% of extended-stay demand is in the
mid-priced segment, the Company believes that there is strong demand for
mid-priced extended-stay hotels. The Company believes mid-priced extended-stay
hotels provide guests with many of the amenities of an upscale extended-stay
hotel at a more affordable price, attracting both upscale guests who wish to
save money and economy guests who desire high quality amenities. Smith Travel
Research, Coopers & Lybrand and D.K. Shifflet are the sources of the industry
information set forth herein; however, none provided any formal consultation,
advice or counsel regarding any aspect of, or were in any way associated with,
the Offering.

GROWTH AND DEVELOPMENT STRATEGIES

The Company's goal is to become a leading national brand of extended-stay
hotels in the mid-priced segment of the extended-stay market through the
development and franchising of Candlewood hotels. The Company believes that
through its development and franchising of Candlewood hotels, it will be able to
expand rapidly in several key markets and begin to build national brand
recognition among travelers and businesses. As of October 15, 1996, the Company
owned and operated one Candlewood hotel, was constructing four additional
hotels, two of which are expected to open in the first quarter of 1997 and two
of which are expected to open in the second quarter of 1997, had 18 potential
sites under contract and had agreements in principle or letters of intent with
respect to 17 potential sites. The Company is also pursuing a nationwide
franchise program and has entered into a development agreement which grants the
developer options to obtain franchises to construct and operate up to 22
Candlewood hotels.

The Company believes that the experience of its senior management team will
be instrumental in executing its growth strategy. Jack P. DeBoer, the Company's
founder, Chairman and President is credited by the lodging industry with
creating the extended-stay concept. Mr. DeBoer founded the Residence Inn chain
and co-founded Summerfield Hotel Corporation, developing a total of 116
extended-stay hotels under those two brands. This background has provided Mr.
DeBoer with numerous contacts among potential franchisees, representatives from
the construction industry and other leaders in the hospitality industry. In
addition, the Company expects to benefit from its strategic alliance with
Doubletree, which has extensive experience in sales, franchising and management
in the lodging industry.

The Company has begun to assemble an experienced management team, hire the
personnel and develop the infrastructure necessary to pursue its growth and
development strategies. Through its real estate division, the Company will
coordinate and select sites for the development of new Candlewood hotels. The
Company's construction division will coordinate and oversee the construction of
both Company-owned and franchised hotels in an attempt to ensure consistency and
quality. The marketing division, in conjunction with an on-site director of
sales at each hotel, will coordinate the Company's direct sales efforts in an
effort to attempt to ensure high occupancy and longer stays. The Company's
franchising division will actively identify and pursue potential franchisees and
monitor and regulate the quality of franchised hotels. Through its operations
division, the Company will monitor the quality of facilities, management and
guest service at each Company-owned hotel.

Development and Ownership

As of October 15, 1996, the Company owned and operated one Candlewood hotel
and was constructing four additional hotels. In 1997, the Company's objective is
to open approximately 14 additional Company-owned hotels and to begin
construction of approximately 20 additional Company-owned hotels. These hotels
will be constructed on sites the Company has under contract, on sites for which
the

28
<PAGE> 30

Company has signed letters of intent or agreements in principle, on which it has
made offers or on sites which the Company identifies in the future. Through the
development of Company-owned hotels, Candlewood expects to be able to ensure a
presence in key markets and to achieve economies of scale in management,
marketing and purchasing.

The Company's real estate division is evaluating a variety of sites for
purchase and construction of Candlewood hotels. The Company has entered into
agreements with several commercial brokers, including CB Commercial, New America
Network and certain independent brokers, that identify potential sites for
Candlewood hotels. The Company intends to build Candlewood hotels within 15
minutes of employment centers, including large corporate headquarters, and
within five minutes of services such as restaurants and grocery stores. The
Company expects to expand throughout the United States and no area of the
country has been excluded from the Company's expansion plans. To date, the
Company has targeted locales for the development of Candlewood hotels in which
the Company has identified properties which were zoned for hotel use or in which
the Company believed it could obtain any necessary zoning, conditional use and
building permits within a six month period.

As of October 15, 1996, the Company had acquired or contracted to acquire
sites for the construction of Candlewood hotels in the following areas:

<TABLE>
<CAPTION>
AREA SITE STATUS
------------------------------------------------------- ---------------------
<S> <C>
Wichita, Kansas........................................ Completed
Denver, Colorado....................................... Under construction*
Louisville, Kentucky................................... Under construction**
Omaha, Nebraska........................................ Under construction*
Cincinnati, Ohio....................................... Under construction**
Birmingham, Alabama.................................... Under contract
Phoenix, Arizona(2).................................... Under contract
Irvine, California..................................... Under contract
Los Angeles, California................................ Under contract
Colorado Springs, Colorado............................. Under contract
Denver, Colorado....................................... Under contract
Jacksonville, Florida.................................. Under contract
Kansas City, Kansas.................................... Under contract
Southfield (Detroit), Michigan......................... Under contract
Ramsey, New Jersey..................................... Under contract
Philadelphia, Pennsylvania............................. Under contract
Knoxville, Tennessee................................... Under contract
Fort Worth, Texas...................................... Under contract
Houston, Texas(2)...................................... Under contract
Arlington, Virginia (Washington, D.C.)(2).............. Under contract
Norfolk, Virginia...................................... Under contract
Madison, Wisconsin..................................... Under contract
Salt Lake City, Utah (2)............................... Under contract
</TABLE>

- ---------------
* Anticipated opening in the first quarter of 1997.

** Anticipated opening in the second quarter of 1997.

In addition, as of October 15, 1996 the Company had executed letters of
intent or had agreements in principle with respect to the purchase of an
additional 17 sites in 12 states. The contracts which the Company enters into
for the purchase of potential hotel sites provide for numerous investigations
and other diligence, including environmental studies and title reports, prior to
the closing of the sale of the real property. The Company reserves the right to
terminate each contract if it is not satisfied with the results of the
investigations and diligence. There can be no assurance that the Company will be
successful in purchasing or developing any of the sites that are under contract
or are subject to a letter of intent or an offer, or that the Company will

29
<PAGE> 31

achieve its expected rate of development. See "Risk Factors -- Development
Risks" and "-- Real Estate Investment Risks."

The Company's construction division is responsible for the oversight and
coordination of the construction of Candlewood hotels owned by the Company. The
construction division has identified and approved three major contractors in
various regions of the United States, each of which have extensive experience in
the construction of lodging facilities. Each of the approved contractors has
agreed to construction contracts on a cost-plus basis with a ceiling on total
expense that are expected to limit cost overruns. Any savings in the
construction costs will be shared by the Company and the general contractors.
The Company's construction division will be responsible for site visits and
inspection during construction and upon completion of construction must approve
a hotel's quality before it can commence operations. The Company estimates that
average construction time on each hotel will be approximately eight months,
subject to delays due to weather and other circumstances.

The Company has developed uniform plans and specifications for the design
of Candlewood facilities. The Company expects that the standard Candlewood hotel
will contain approximately 75 - 135 rooms, up to 25% of which may be king
suites. The king suites are designed for guests who prefer a suite in which the
bedroom is separated from the kitchen and office area. The Company expects to
make design variations, including changes in the number of studios and king
suites, based on market demographics and site restrictions, among other factors.
The Company believes that its coordination of the construction of Candlewood
hotels and use of uniform plans and specifications, will lower costs and result
in consistent quality and appearance.

The Company's 107 room hotel in Wichita, Kansas was developed for a cost,
excluding land, of approximately $3.6 million (or approximately $33,500 per
room), including building structure, improvements, furniture, fixtures,
equipment and pre-opening costs. The Company estimates that the total cost of
the 131 room Candlewood hotels under construction in the Denver and Omaha areas
and the 77 room Candlewood hotels under construction in the Cincinnati and
Louisville areas will be approximately $4.9 million, $5.1 million, $3.8 million
and $4.0 million, respectively (or approximately $37,000, $39,000, $49,000 and
$52,000, respectively, per room), excluding land. Neither the Company's hotel in
Wichita nor its hotels under construction in the Denver and Omaha areas will
contain king suites; however, the Company's hotels in the Cincinnati and
Louisville areas will contain king suites. The Company believes that its
construction costs are relatively low due to a number of factors, including
careful site selection, economical and durable exterior and interior finishes
and refined and standardized building systems and processes. The Company
anticipates, however, that the cost to develop a facility will vary
significantly by geographic location in large part due to variable real estate
and construction costs. The cost of the Company's real estate in the Cincinnati,
Denver, Louisville, Omaha and Wichita areas was approximately $269,000,
$435,000, $670,000, $633,000 and $250,000, respectively.

The Company believes that a combination of the net proceeds from the
Offering and cash from operations, together with its subordinated credit
facility from Doubletree and construction financing from NationsBank and a third
party lender (if approved on an individual property basis), will be sufficient
to provide capital for development and operations during the next 12 months.
However, there can be no assurance that additional capital will not be needed at
an earlier time. See "Risk Factors -- Future Capital Needs and Risks of
Additional Financing" and "Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Liquidity and Capital Resources."

Franchising

30
<PAGE> 32

operate Candlewood hotels in an exclusive geographic territory, which exclusive
rights may be rescinded by the Company if the developer fails to submit
franchise applications pursuant to a development schedule. As of September 30,
1996, the Company was a party to one development agreement which currently
grants the developer options to obtain franchises to construct and operate five
Candlewood hotels in 1996, seven Candlewood hotels in 1997, seven Candlewood
hotels in 1998 and three Candlewood hotels in 1999. In pursuing its franchising
strategy, the Company intends to draw upon Mr. DeBoer's experience with the
Residence Inn chain, which included approximately 60 franchised hotels at the
time of its sale to Marriott International, Inc. In addition, the Company
intends to draw on the experience of Doubletree which has developed an
aggressive franchising program and as of June 30, 1996 had franchised 37 hotels.
By accelerating the roll-out of Candlewood hotels through its franchising
program, the Company's objective is to benefit from economies of scale in
management, marketing and purchasing.

The Company believes that several elements of the Candlewood concept should
be attractive to prospective franchisees, including the experience of Mr. DeBoer
in the extended-stay market, the Company's strategic alliance with Doubletree,
the competitive pricing and operating efficiencies of the Candlewood product,
the Company's commitment to direct sales and the potential availability of
financing. The Company intends to make the services and expertise of its real
estate, construction and operations divisions available to its franchisees in
order to ensure high quality facilities and customer service. The Company's real
estate division intends to work with its franchisees to identify sites for
development of franchised hotels. The Company's construction division will
advise on the construction and development of franchised hotels. A
representative of the Company's construction division will visit franchised
hotel sites during the construction phase and will inspect and approve each
franchised Candlewood hotel before it commences operations. In addition, after
commencing operations, all franchised Candlewood hotels will be subject to
periodic inspection and verification that they are in compliance with the
Company's quality control program and maintenance and updating standards. While
the Company may grant franchises in geographic locations where the Company owns
and operates hotels, in such circumstances the Company intends to require that
it manage the hotels owned by its franchisees in order to coordinate direct
sales efforts in the region.

The Company has arranged with a third party lender for financing for the
development of hotels by its franchisees. As part of its financial relationship
with the Company, the third party lender is expected to provide construction
loans of up to 80% of the cost of new Candlewood hotels, upon satisfaction of
various conditions by the franchisee. Following stabilization, franchisees are
expected to be able to convert these construction loans into long-term financing
through the third party lender. Doubletree has agreed to guarantee certain
portions of the loans made to the Company's franchisees pursuant to this
arrangement. Doubletree has agreed to guarantee the amount of such loans in
excess of approximately 56% of the hotel cost. The amount of such loans will not
exceed 75% of the hotel cost, unless Candlewood manages the hotel, in which case
such loans will not exceed 80% of the hotel cost. It is anticipated that the
guarantee will remain in effect until the loan has been repaid. Upon an event of
default, Doubletree will have the option to meet any shortfalls or pay down the
loan principal. In exchange for the guarantee, Doubletree will receive a 5%
interest in the profits and residual value of the hotel and a 0.25-0.50% fee on
the total loan amount outstanding.

The Company believes that through its development agreements it will be
able to expand Candlewood hotels rapidly into multiple geographic areas and
thereby build brand recognition. In June 1996 the Company entered into a
development agreement with SWHDC which grants SWHDC options to obtain franchises
to construct and operate up to 22 hotels in Northern California, Oregon and
Washington. This development agreement grants options to the developer to submit
site approvals and applications and to execute franchise agreements for five
Candlewood hotels in 1996, seven hotels in 1997, seven hotels in 1998 and three
hotels in 1999.

In June 1996 the Company entered into a development agreement with Studio
Ventures, L.L.C. ("Studio Ventures") which granted Studio Ventures the option to
obtain franchises to construct and operate up to 24 Candlewood hotels in
specific communities in Kentucky, North Carolina, Ohio, South Carolina and
Tennessee. Studio Ventures did not submit applications for franchises within the
time frames set forth in the development schedule and the Company subsequently
terminated Studio Ventures' exclusive territorial rights under this development
agreement in October 1996. The Company intends to continue to work with

31
<PAGE> 33

Studio Ventures as a potential franchisee of Candlewood hotels on a site by site
basis and Studio Ventures has currently submitted three franchise applications
to construct and operate Candlewood hotels in Columbus, Ohio, Columbia, South
Carolina and Nashville, Tennessee. The Company is exploring opportunities to
sign franchise and development agreements with several other entities; however,
while it has received additional applications, the Company is not a party to any
additional agreements. The Company has not received franchise application fees
for most of these franchise applications, including those applications received
from Studio Ventures. See "-- Franchise and Development Agreements."

Franchise agreements are executed when the Company and the franchisee agree
on a site and prior to commencement of construction. Pursuant to the development
agreement with SWHDC, the Company has entered into a franchise agreement for the
establishment of a Candlewood hotel in Hillsboro, Oregon. SWHDC commenced
construction of this hotel in August 1996 and expects to commence operations in
the second quarter of 1997. SWHDC is entitled to terminate its franchise
agreement after two years, with a termination fee being required in certain
circumstances. SWHDC has informed the Company that it has raised $30 million of
equity financing for the development of Candlewood hotels in its territory.

Development agreements do not obligate the developer to build or open any
Candlewood hotels. Development agreements establish schedules for the submission
of franchise applications, which must be signed before construction of a
Candlewood hotel is commenced. If a developer fails to franchise any hotels
according to the development schedule, the Company will be entitled to revoke
the developer's exclusive territorial rights. There can be no assurance that the
franchised hotel in Oregon will be opened at the time specified in the
agreement, or at all. There can be no assurance that any additional franchise
agreements will be signed, either pursuant to development agreements or
independently, or that any Candlewood hotels will be opened pursuant to the
terms and the times specified in the development agreements, the franchise
agreements, or at all. See "Risk Factors--Development Risks," "-- Competition
for and Dependence on Franchise Agreements" and "-- Dependence on Development
Agreements."

Management of Franchised Hotels

The Company intends to make its hotel management services available to its
franchisees and anticipates that many franchisees may want to utilize the
Company's experience and expertise to manage their hotels. If in excess of 75%
of the cost of a franchised hotel is financed by the third party lender,
Doubletree will require that the Company manage the franchisee's hotel as a
condition to guaranteeing a portion of the loan. The Company expects to receive
approximately 5% of hotel revenue in exchange for management services. As of the
date of this Prospectus, the Company has not entered into any management
agreements and does not manage any hotels owned by others. See "Franchise and
Development Agreements."

OPERATING STRATEGIES

The Company's primary operating objectives are to provide its guests with
well appointed, high quality lodging at affordable prices, ensure guest
satisfaction through a commitment to excellence in customer service and achieve
above industry-average operating margins through, among other things, direct
sales efforts and implementation of operating efficiencies at each of its
facilities.

The Company has designed Candlewood hotels to provide high quality,
comfortable and attractive accommodations together with the amenities desired by
the extended-stay business traveler. The rooms contain high quality furniture
and fixtures, consistent with those found in upscale full-service hotels, to
achieve the highest level of guest satisfaction and to reduce maintenance cost.
The Company believes that the high quality of its rooms will attract business
travelers in the mid-priced segment of the extended-stay market, which the
Company believes is underserved by the current supply of rooms. The Company also
believes that its design and pricing will result in longer stays, higher
occupancy rates and a more stable revenue stream.

In order to offer the Company's customers daily rates lower than those
offered by most traditional hotels, Candlewood hotels have been designed to
maximize operating efficiencies. The Company expects, following an initial
phase-in period, that six to eight full-time employees and one part-time
employee will staff each property. These employees include a general manager who
lives on site, an assistant general manager, a director of sales, an engineer,
two or more housekeepers and a part-time desk clerk. The Company believes that
cost efficiencies will be achieved in part through the reduction of high-cost
amenities and features such as

32
<PAGE> 34

restaurants. In addition, full maid service will be provided on a weekly rather
than daily basis, no food and beverage services will be provided except for
self-service machines, and most Candlewood hotels will not have pools. Towels
will be changed twice weekly or more often upon request at the reception desk.
Following an initial phase-in period, front desk transactions are expected to be
minimal (approximately 15 - 20 daily) because of the nature and length of
extended-stay. Each Candlewood hotel will be equipped with technology that will
allow most guests to check-in and check-out without the assistance of hotel
employees. Guests can gain access to the room key by entering their name on a
keypad of a personal mailbox. Guests can check-out using a computer program
available through the televisions in their rooms. Candlewood hotels will also
have state-of-the-art energy management systems to maximize energy efficiency.

To ensure quality customer service, every Candlewood general manager and
director of sales will be required to successfully complete classroom courses
and an on-the-job training program covering direct sales, hotel operations,
marketing and maximization of operating efficiencies. Each hotel will have an
on-site general manager who will be responsible for the Company's quality
control standards and procedures which govern management, operations,
maintenance, regulatory compliance, reporting and marketing. The Company's
operations division will conduct periodic inspections of each Candlewood hotel
to ensure compliance with the Company's quality control standards.

The Company's sales and marketing division has begun to target institutions
and employers located in proximity to its hotel in Wichita and its properties in
the Denver and Omaha areas. The sales and marketing division has also developed
a direct mail campaign. In addition, each hotel will have an on-site director of
sales dedicated to marketing and direct sales efforts. Through these direct
sales efforts, the Company believes it can maintain consistently high occupancy
levels and generate longer stays by its guests.

The Company expects to utilize Doubletree's central reservation system to
facilitate reservations at Candlewood hotels. The Company intends to maintain a
toll free telephone number dedicated to Candlewood reservations which it expects
will be answered by operators employed by Doubletree. During business hours, the
Company expects that calls will be forwarded to individual Candlewood hotels who
will book reservations. The Company expects that callers to the toll free
telephone number dedicated to Doubletree reservations will be referred to or
booked at Candlewood hotels only if Doubletree does not have a hotel in a
particular locale or if there are no vacancies at Doubletree hotels in a
particular locale.

FRANCHISE AND DEVELOPMENT AGREEMENTS

Franchise Agreements

General. The Company enters into separate hotel non-exclusive franchise
agreements for the construction of each Candlewood franchised hotel which must
be signed before construction is commenced. The agreements specify the period of
time during which the hotel must be built and the specific site and also give
the Company the right to approve the plans and specifications for the hotel.
Each franchisee is required, however, to bear the cost of the development and
construction of the franchised hotels. The Company's franchise agreement
provides for an initial term of 20 years, with an option exercisable by the
franchisee to renew the agreement for two additional consecutive terms of 10
years, each subject to certain conditions, including the execution of a
commitment agreement which may require the franchisee to upgrade, at its own
expense, the Candlewood hotel to conform to then-current standards and
specifications of the Company.

Fees. Under the current Company franchise agreement, the franchisee is
required to pay an initial franchise fee for a single hotel equal to the greater
of $40,000 or $400 per room, all of which is non-refundable if the application
is not approved by the Company. The Company reserves the right to waive the
payment of franchise application fees. Subsequent to the opening of the tenth
Candlewood hotel, each franchisee will pay 4% of room revenues for two years
beginning in the fiscal period immediately following the opening of the tenth
hotel, and 5% of room revenues thereafter. Franchisees that open a hotel after
the opening of the tenth hotel will pay 4% of such hotel's room revenues for two
years, and 5% of such hotel's room revenues thereafter. Each franchisee may also
be required to contribute 2.5% of its fiscal period room revenues to the
Company's marketing, advertising and direct sales fund which may be established
by the Company, in its sole discretion. If such a fund is established, it will
be administered by the International Association of Candlewood Hotel Owners (the
"IACHO"), an association of Candlewood hotel owners. The marketing fund
contribution

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<PAGE> 35

percentage is subject to adjustment from time to time upon a majority vote of
the members of IACHO. Association dues to be paid by franchisees, if any, will
be determined annually by IACHO.

Services. The Company has prepared comprehensive operations and
development manuals and will provide services to assist each franchisee in
developing and operating Candlewood hotels. The Company will make available to
its franchisees prototype plans and specifications for a standard Candlewood
hotel, consultation and advisory services concerning the construction and
operation of the Candlewood hotel, and an operating manual and training programs
for the franchisee's employees. The Company expects to offer a central
reservation system in cooperation with Doubletree, a property management system,
a Candlewood hotel directory and a marketing resource guide to each of its
franchisees.

Quality Control. To maintain quality and consistency within the Candlewood
hotel system, the current franchise agreement specifies certain management,
operational, maintenance, regulatory compliance, reporting and marketing
standards and procedures with which each franchisee must comply. Each franchisee
is also obligated to obtain and maintain a specified amount of insurance. At the
Company's request, but not more often than once every five years, each
franchisee must also upgrade the hotel at the expense of the franchisee to
conform to certain standards set by the Company. To ensure compliance with the
Company's quality control standards, the Company will conduct periodic
inspections of its franchised facilities.

Termination. The Company has the right to terminate a franchise agreement
for a variety of reasons, including failure to open the franchised hotel within
the time schedule agreed to in the agreement, failure to comply with any
covenant or provision of the agreement, failure to operate the hotel or
knowingly making any false statement in any report or document submitted to the
Company. The franchisee may terminate the agreement only if, after operating the
hotel for two years, it is unable, after acting in good faith and after using
all reasonable and diligent efforts, to operate the franchised hotel at a
profit. Many state franchise laws limit the ability of a franchisor to terminate
or refuse to renew a franchise. See "-- Government Regulation."

Covenants. During the term of the franchise agreement, each franchisee
agrees not to compete or be associated with any business in competition with the
Company and, for a period of two years after any termination of the franchise
agreement, each franchisee agrees not to compete or be associated with any
business that provides lodging accommodations on a daily-stay basis with kitchen
facilities and limited maid service at a moderate to economy price. Many state
franchise laws impose substantive requirements on franchise agreements and may
limit the enforceability or noncompetition provisions therein. See
"-- Government Regulation." Each franchisee also agrees not to divulge any of
the Company's trade secrets or any confidential information received from the
Company's operating and development manuals. A franchisee may not sell any
direct or indirect interest in its franchise without the prior written consent
of the Company.

Development Agreements

The Company has entered and will enter into development agreements with
hotel developers whereby, in exchange for a nominal fee, the Company grants
options to obtain franchises to establish and operate multiple Candlewood
hotels. The standard development agreement provides the developer with an
assigned territory in which the Company agrees not to establish or allow any
other franchisee to establish a Candlewood hotel until the expiration of the
development schedule set forth in the agreement or until an earlier default
under the agreement by the developer. Although by granting exclusive rights in a
territory the Company must rely on the developer to franchise hotels at such
locations as the developer chooses and at such times specified in the
development schedule, by doing so the Company believes it can stimulate rapid
expansion of franchised Candlewood hotels in specific geographic regions while
focusing its development and ownership efforts in other regions. To exercise a
development option, the developer must submit a franchise application, together
with the franchise application fee, a market feasibility study for the site and
such other information or materials as the Company may reasonably require,
including a copy of a letter of intent or other evidence satisfactory to the
Company, which confirm the developer's favorable prospects for obtaining the
site. If the developer fails to comply with the development schedule or any
terms or conditions of a franchise agreement, the Company may terminate the
agreement, reduce the number of options for franchises granted to the developer,
reduce the developer's protected territory or terminate the territorial
exclusivity granted to the

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<PAGE> 36

developer. The Company cannot predict the number of additional development
agreements it will enter into, if any.

PROPERTIES

The Company currently owns the property in Wichita, Kansas on which its 107
room hotel is located. The Company has also purchased properties in the
Cincinnati, Ohio, Denver, Colorado, Louisville, Kentucky, and the Omaha,
Nebraska areas and has commenced construction of Candlewood hotels at those
sites. The hotels in the Denver and Omaha areas, when completed, are each
expected to contain 131 studios and approximately 57,000 square feet. The hotels
in the Cincinnati and Louisville areas, when completed, are each expected to
contain 65 studios, 12 king suites and approximately 39,000 square feet. See
"-- Growth and Development Strategies -- Development and Ownership."

In addition to the properties described above, the Company also maintains
its corporate headquarters in Wichita, Kansas. The Company leases its office
space on a short-term basis. These offices are sufficient to meet the Company's
present needs, and the Company does not anticipate any difficulty in securing
additional office space, as needed, on terms acceptable to the Company. See
"Certain Transactions."

COMPETITION

The lodging industry is highly competitive. Competitive factors within the
industry include room rates, quality of accommodations, name recognition,
service levels, reputation, reservation systems, convenience of location and the
supply and availability of alternative lodging. The Company intends to build
most of its properties in geographic locations where other extended-stay hotels
may be located. The Company expects to compete for guests and development sites
with both traditional lodging facilities and other extended-stay facilities,
including those owned and operated by competing chains and individual
extended-stay facilities. Many of these competitors have greater financial
resources and may have better relationships with prospective franchisees,
representatives of the construction industry and others in the lodging industry.
The number of competitive lodging facilities in a particular area could have a
material adverse effect on occupancy, average daily rate and revenues of the
Candlewood hotels.

The Company anticipates that competition within the extended-stay lodging
market will increase substantially in the foreseeable future. A number of other
lodging chains and developers have developed or are attempting to develop
extended-stay lodging facilities that may compete with the Company's facilities.
In particular, some of these entities target the mid-priced segment of the
extended-stay market in which the Company competes. The Company may compete for
guests and for development sites with certain of these established entities that
have greater financial resources than the Company and better relationships with
lenders and real estate sellers. Further, there can be no assurance that new or
existing competitors will not significantly reduce their rates or offer greater
convenience, services or amenities or significantly expand or improve facilities
in markets in which the Company competes, thereby materially adversely affecting
the Company's business and results of operations.

PROPRIETARY RIGHTS

The Company filed applications to register the service marks "Candlewood,"
"Your Studio Hotel" and the Company's logo as service marks in the United States
and has registered those service marks in the State of Kansas. The Company also
claims the common law rights to the trade name and service marks for various
"Candlewood" products. If the Company is denied protection of its service marks
or is required to change its trademarks, it could result in significant expenses
and have a material adverse effect on the Company's business, financial
condition and results of operations.

GOVERNMENT REGULATION

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<PAGE> 37

conditions and work permit requirements. The Company is also subject to federal
regulations and certain state laws that govern the offer and sale of franchises.
Many state franchise laws impose substantive requirements on franchise
agreements, including limitations on noncompetition provisions and termination
or nonrenewal of a franchise. Some states require that certain materials be
approved before franchises can be offered or sold in that state. The failure to
obtain permits or licenses or approvals to sell franchises, or an increase in
the minimum wage rate, employee benefit costs or other costs associated with
employees, could adversely affect the Company's business and results of
operations. Both at the federal and state level from time to time, there are
proposals under consideration to increase the minimum wage.

Under the Americans With Disabilities Act, all public accommodations are
required to meet certain federal requirements related to access and use by
disabled persons. Although the Company has attempted to satisfy ADA requirements
in the designs for its facilities, no assurance can be given that a material ADA
claim will not be asserted against the Company, which could result in a judicial
order requiring compliance, and the expenditure of substantial sums to achieve
compliance, an imposition of fines, or an award of damages to private litigants.
These and other initiatives could adversely affect the Company as well as the
lodging industry in general. See "Risk Factors -- Government Regulation."

INSURANCE

The Company currently has the types and amounts of insurance coverage that
it considers appropriate for a company of its size in its business. While
management believes that its insurance coverage is adequate, if the Company were
held liable for amounts exceeding the limits of its insurance coverage or for
claims outside of the scope of its insurance coverage, the Company's business,
results of operations, and financial condition could be materially and adversely
affected. See "Certain Transactions."

EMPLOYEES

As of October 15, 1996, the Company and its subsidiaries employed 33
persons, eight of whom were employed at the Company's hotel in Wichita, three of
whom were employed in positions related to the Company's other hotels under
construction and 22 of whom were employed in the Company's corporate
headquarters. The Company expects that it will significantly increase the number
of its employees as it expands its business. The Company's employees are not
subject to any collective bargaining agreements, and management believes that
its relationship with its employees is good.

LEGAL PROCEEDINGS

The Company has not been and is not now a party to any litigation or
claims.

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<PAGE> 38

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information regarding each person
who is a director or executive officer of the Company. Shortly following the
Offering, the Company will add two additional directors, both of whom will be
non-employee or independent directors within the meaning of Rule 16b-3 of the
Exchange Act (the "Independent Directors").

<TABLE>
<CAPTION>
NAME AGE POSITION
---------------------------------- --- ------------------------------------------
<S> <C> <C>
Jack P. DeBoer.................... 65 Chairman of the Board, Chief Executive
Officer and President
Richard J. Ferris................. 60 Director
Peter V. Ueberroth................ 59 Director
Warren D. Fix..................... 58 Director, Executive Vice President, Chief
Financial Officer and Secretary
Larry D. Bowers................... 44 Vice President -- Construction
Kent L. Brown..................... 49 Vice President -- Controller and Assistant
Secretary
Jeffrey F. Hitz................... 51 Vice President -- Real Estate
James E. Korroch.................. 30 Vice President -- Operations
David A. Redfern.................. 30 Vice President -- Sales and Marketing
</TABLE>

Jack P. DeBoer has served as Chairman of the Board, President and Chief
Executive Officer of the Company since its inception. From October 1993 to
September 1995, Mr. DeBoer was self-employed and was engaged in the development
of the Candlewood extended-stay hotel concept. From 1988 to 1993, Mr. DeBoer
co-founded and developed Summerfield Hotel Corporation, an upscale extended-stay
hotel chain. In 1975, Mr. DeBoer founded the Residence Inn Company, an upscale
extended-stay chain which he built to 100 hotels before selling the company to
Marriott Corporation in 1987. Mr. DeBoer has consented to become a member of the
Board of Trustees of Innkeepers USA Trust, a publicly-held lodging real estate
investment trust, following the consummation of its purchase of seven hotels
which are owned by entities affiliated with Mr. DeBoer.

Richard J. Ferris has served as a director of the Company since its
inception. Since June 1992, Mr. Ferris has served as Co-Chairman of Doubletree.
From June 1987 to June 1992, Mr. Ferris was a private investor. Mr. Ferris is
the former Chairman and Chief Executive Officer of UAL Corporation, a position
he held from April 1976 to June 1987. Mr. Ferris serves as a director of The
Procter and Gamble Company, Amoco Corporation, Evanston Hospital Corporation and
as a director and Chairman of the Board of the PGA Tour Policy Board, for which
he serves as Chairman.

Peter V. Ueberroth has served as a director of the Company since its
inception. Since June 1992, Mr. Ueberroth has served as Co-Chairman of
Doubletree. From April 1989 to the present, Mr. Ueberroth has been Managing
Director and a Principal of The Contrarian Group, a business management company.
From March 1984 to March 1989, Mr. Ueberroth served as the sixth Commissioner of
Major League Baseball. Mr. Ueberroth serves as a director of The Coca-Cola
Company, Transamerica Corporation and Ambassadors International, Inc., for which
he serves as Co-Chairman.

Warren D. Fix has served as a director and the Executive Vice President,
Chief Financial Officer and Secretary of the Company since its inception. From
July 1994 to October 1995, Mr. Fix was a Consultant to Doubletree, primarily
developing debt and equity sources of capital for hotel acquisitions and
refinancings. Additionally, Mr. Fix was a partner in The Contrarian Group from
December 1992 to October 1995. From 1989 to December 1992, Mr. Fix served as
President of the Pacific Company, a real estate investment and development
company. From 1964 to 1989, Mr. Fix held numerous positions within The Irvine
Company, including most recently, Chief Financial Officer. Mr. Fix serves on the
boards of directors of El Dorado Bank and Alexander Haagan Properties, Inc.,
both publicly traded companies.

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<PAGE> 39

Larry D. Bowers has served as Vice President of Construction of the Company
since March 1996. From September 1991 to March 1996, Mr. Bowers owned and
operated Bowers Construction & Development, Inc., a general contracting and
consulting company. From February 1984 to September 1991, Mr. Bowers served as a
Division President of Robertson Homes. From November 1981 to February 1984, Mr.
Bowers owned and operated Construction Management Services, a general
contracting company.

Kent L. Brown has served as Vice President -- Controller and Assistant
Secretary of the Company since August 1996. From September 1993 to August 1996,
Mr. Brown held the position of Manager -- Financial Analysis for THORN Americas,
Inc., and from September 1990 to September 1993, he served as Director of
Financial Reporting and Taxes for Foodbrands America, Inc. From September 1982
to September 1990, Mr. Brown served in various positions with the accounting
firm of Ernst & Young, most recently as Senior Manager in the auditing
department. Mr. Brown is a certified public accountant.

Jeffrey F. Hitz has served as Vice President of Real Estate of the Company
since May 1996. From July 1995 to May 1996, Mr. Hitz was a consultant to several
retail chains on site selection and concept development. From October 1994 to
July 1995, Mr. Hitz was Senior Vice President, Operations for EZCorp, Inc., a
publicly traded retail chain. From August 1989 to October 1994, Mr. Hitz held
several positions with THORN Americas, Inc., including most recently, Vice
President, Development. From 1986 to 1989, Mr. Hitz was a multi-unit franchisee
of two restaurant concepts in California and Arizona.

James E. Korroch has served as Vice President of Operations of the Company
since its inception. From April 1990 to June 1995, Mr. Korroch held numerous
sales, marketing and operations positions with Summerfield Hotel Corporation,
most recently as General Manager of the Summerfield Suites Hotel in Schaumburg,
Illinois. Mr. Korroch also served as Chairman of the Committee on Technology and
the Committee on Corporate Communications at Summerfield.

David A. Redfern has served as Vice President of Sales and Marketing of the
Company since December 1995. From August 1994 to December 1995, Mr. Redfern
served as the National Sales Director for the Summerfield Suites Hotel chain.
From June 1993 to January 1995, Mr. Redfern served as a Task Force Manager for
Summerfield Suites. From September 1991 to June 1993, Mr. Redfern attended the
University of California-Irvine, where he received his MBA degree. From January
to June 1993, Mr. Redfern was also employed by Cruttenden & Co., Inc. as a
research analyst. From August 1990 to September 1991, Mr. Redfern served as
Director of Sales for the Summerfield Suites hotel in San Francisco, California.
From 1988 to August 1990, Mr. Redfern was a Sales Manager for the Residence Inn
by Marriott in La Jolla, California.

COMMITTEES OF THE BOARD OF DIRECTORS

Audit Committee. Concurrently with the closing of the Offering, the Board
of Directors will establish an Audit Committee which will consist of two or more
Independent Directors. The Audit Committee will be established to make
recommendations concerning the engagement of independent public accountants,
review with the independent public accountants the plans and results of the
audit engagement, approve professional services provided by the independent
public accountants, review the independence of the independent public
accountants, consider the range of audit and non-audit fees and review the
adequacy of the Company's internal accounting controls.

Compensation Committee. Concurrently with the closing of the Offering, the
Board of Directors will establish a Compensation Committee, which will be
comprised of two or more Independent Directors to the extent required by Rule
16b-3 under the Exchange Act. The Compensation Committee will be established to
determine compensation for the Company's executive officers and determine awards
under the Company's 1996 Equity Plan.

The membership of the committees of the Board of Directors will be
established after the closing of the Offering. The Board of Directors may from
time to time form other committees as circumstances warrant. Such committees
will have authority and responsibility as delegated by the Board of Directors.

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<PAGE> 40

DIRECTOR COMPENSATION

The Company's Independent Directors will receive directors' fees of $4,000
for each Board of Directors meeting attended. In addition, each Independent
Director will receive $1,000 for each committee meeting attended on a day the
Board of Directors is not otherwise meeting. Pursuant to the Company's 1996
Equity Plan, each of the Company's existing directors (other than Messrs. DeBoer
and Fix) is entitled to receive immediately prior to the commencement of the
Offering a grant of non-qualified stock options to purchase 10,000 shares of
Common Stock at the initial public offering price. Messrs. Ueberroth and Ferris
have waived their right to receive such grants. Also pursuant to the 1996 Equity
Plan, each person who becomes a director subsequent to the Offering will receive
a grant of non-qualified stock options to purchase 10,000 shares of Common Stock
at the fair market value of the Common Stock on the date such person becomes a
member of the Board of Directors. Each director may be reimbursed for certain
expenses incurred in connection with attendance at Board and committee meetings.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Prior to the Offering, the Company did not have a Compensation Committee
and all compensation decisions were made by Mr. DeBoer and Mr. Fix, except for
compensation decisions with respect to Messrs. DeBoer and Fix which were made by
Messrs. Ferris and Ueberroth.

The Company has implemented a policy requiring any material transaction or
agreement with a related party to be approved by a majority of the directors not
interested in such transaction or agreement, provided that they determine that
the terms of any such transaction or agreement are no less favorable to the
Company than those that could be obtained from an unaffiliated third party. In
addition, pursuant to the terms of the Stockholders Agreement among the Initial
Stockholders, the Company may not enter into any related party transactions (as
defined therein) without the prior approval of the Initial Stockholders. See
"The Reorganization."

DIRECTORS AND OFFICERS INSURANCE

The Company has applied for directors and officers liability insurance
policy with coverage typical for a public company such as the Company. The
directors and officers liability insurance policy will become operative upon the
effectiveness of the Registration Statement and will insure (i) the directors
and officers of the Company from any claim arising out of an alleged wrongful
act by these persons while acting as directors and officers of the Company, (ii)
the Company to the extent it has indemnified the directors and officers for such
loss and (iii) the Company for losses incurred in connection with claims made
against the Company for covered wrongful acts.

EXECUTIVE COMPENSATION

The following table summarizes the compensation paid to the Company's Chief
Executive Officer during fiscal 1995. No executive officer of the Company
received total compensation greater than $100,000 during fiscal 1995.

<TABLE>
<CAPTION>
NAME AND OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION COMPENSATION
- ---------------------------------------------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Jack P. DeBoer,
President and Chief Executive Officer $24,000(1) -- -- --
</TABLE>

- ---------------
(1) Represents a base salary of $96,000 on an annualized basis.

The Company anticipates that during fiscal 1996 its most highly compensated
executive officers, with estimated base salary amounts listed for each
individual on an annualized basis, will be Mr. DeBoer, $96,000, Mr. Warren D.
Fix, $96,000, and Mr. James D. Korroch, $80,000 (the "Named Executive
Officers"). The Named Executive Officers may be entitled to performance bonuses
pursuant to their employment agreements, if any, or the Company's planned
incentive compensation plan, as determined by the Compensation Committee.
Effective upon the closing of the Offering, the Company intends to grant options
to purchase an aggregate of 345,700 shares of Common Stock to directors,
officers and other employees of the Company. Of

39
<PAGE> 41

these options, Mr. DeBoer is not expected to receive any options, Mr. Fix is
expected to receive options to purchase approximately 50,000 shares of Common
Stock and Mr. Korroch is expected to receive options to purchase approximately
100,000 shares of Common Stock.

EMPLOYMENT AGREEMENT

The Company has entered into an employment agreement with Mr. DeBoer under
which he has agreed, subject to certain conditions, to continue to serve as the
Company's President and Chief Executive Officer until August 1999. Mr. DeBoer
will receive annual cash compensation pursuant to the employment contract, which
is renewable from year to year thereafter. Mr. DeBoer shall be eligible for a
bonus to be set by the Compensation Committee. The contract provides that upon a
change of control of the Company or termination of employment under certain
circumstances, Mr. DeBoer will be entitled to a payment equal to three times his
average annual salary for the previous three years. The contract provides that,
during the term of the contract, except with respect to certain passive
investments in lodging companies and hotel properties and activities related to
properties held at the time of the offering, Mr. DeBoer will not engage in the
acquisition, founding, development, operation or management of any hotel
companies or chains. For two years after Mr. DeBoer's contract ends, subject to
the aforementioned exceptions, Mr. DeBoer will not engage in the acquisition,
founding, development, operation, or management of any new hotel companies or
chains. See "Risk Factors -- Control of Company by Management and Principal
Stockholders; Potential Conflicts of Interest."

COMPENSATION PLANS AND ARRANGEMENTS

1996 Equity Participation Plan

The Company has established the 1996 Equity Participation Plan (the "1996
Equity Plan") to provide an additional incentive for executive officers, other
key employees, Independent Directors and consultants of the Company by
personally benefitting them through the ownership of Company stock. The 1996
Equity Plan is designed to attract and retain executive officers, other key
employees, Independent Directors and consultants of the Company. The 1996 Equity
Plan provides for the award to executive officers, other key employees,
Independent Directors and consultants of the Company of a broad variety of
stock-based compensation alternatives such as nonqualified stock options,
incentive stock options, restricted stock and performance awards. Awards under
the 1996 Equity Plan may provide participants with the right to acquire shares
of Common Stock.

The 1996 Equity Plan will be administered by the Compensation Committee,
which is authorized to select from among the eligible participants the
individuals to whom options, restricted stock purchase rights and performance
awards are to be granted and to determine the number of shares to be subject
thereto and the terms and conditions thereof, including the exercise or sale
price, the number of shares subject to the award and the exercisability thereof.
The Compensation Committee is also authorized to adopt, amend and rescind rules
relating to the administration of the 1996 Equity Plan.

Nonqualified stock options will provide for the right to purchase Common
Stock at a specified price which may be less than fair market value on the date
of grant (but not less than par value), and usually will become exercisable in
installments after the grant date. The term of nonqualified stock options
granted under the 1996 Equity Plan may not exceed ten years.

Incentive stock options will be designed to comply with the provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), and will be subject
to restrictions contained in the Code, including exercise prices equal to at
least 100% of fair market value of the Common Stock on the grant date and a ten
year restriction on their term, but may be subsequently modified to disqualify
them from treatment as an incentive stock option.

Restricted stock may be sold to participants at various prices (but not
below par value) and made subject to such restrictions as may be determined by
the Compensation Committee. Restricted stock, typically, may be repurchased by
the Company at the original purchase price if the conditions or restrictions are
not met. In general, restricted stock may not be sold, or otherwise transferred
or hypothecated, until restrictions are removed or expire. Purchasers of
restricted stock, unlike recipients of options, will have voting rights and may
receive dividends prior to the time when the restrictions lapse.

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<PAGE> 42

Deferred stock may be awarded to participants, typically without payment of
consideration, but subject to vesting conditions based upon a vesting schedule
or performance criteria established by the Compensation Committee. Unlike
restricted stock, deferred stock will not be issued until the deferred stock
award has vested, and recipients of deferred stock generally will have no voting
or dividend rights prior to the time the vesting conditions are satisfied.

Stock appreciation rights may be granted in connection with a stock option
or independently. Stock appreciation rights granted by the Compensation
Committee in connection with a stock option typically will provide for payments
to the holder based upon increases in the price of the Company's Common Stock
over the exercise price of the related option. There are no limitations
specified upon the exercise of stock appreciation rights or upon the amount of
gain realizable from the exercise of stock appreciation rights. The Compensation
Committee may elect to pay stock appreciation rights in cash or in Common Stock
or in a combination of cash and Common Stock.

Performance awards may be granted by the Compensation Committee on an
individual or group basis. Generally, these awards will be based upon specific
agreements and may be paid in cash or in Common Stock or in a combination of
cash and Common Stock. Performance awards may include "phantom" stock awards
that provide for payments based upon increases in the price of the Common Stock
over a predetermined period. Performance awards may also include bonuses which
may be granted by the Compensation Committee on an individual or group basis and
which may be payable in cash or in Common Stock or in a combination of cash and
Common Stock.

Stock payments include payments in the form of shares of Common Stock,
options or other rights to purchase shares of Common Stock, made as part of a
deferred compensation arrangement and in lieu of all or any portion of
compensation that would otherwise be paid to an employee. Stock payments may be
based upon the fair market value, book value, net profits or other measure of
value of the Company's Common Stock or other specific performance criteria
determined appropriate by the Compensation Committee, determined on the date
such stock payment is made or on any date thereafter.

Effective upon the closing of the Offering, the Company anticipates that it
will issue to executive officers, other key employees, Independent Directors and
consultants of the Company options to purchase approximately 345,700
unregistered shares of Common Stock pursuant to the 1996 Equity Plan. The term
of each such option will be ten years from the date of grant. Except as
otherwise described herein, each such option shall vest 25% per year over four
years and will be exercisable at a price per share equal to the initial price
per share of Common Stock sold to the public in the Offering.

A maximum of 900,000 shares have been reserved for issuance under the 1996
Equity Plan.

401(k) Profit Sharing Plan

Effective as of June 1, 1996, the Company adopted the Candlewood Hotel
Company 401(k) Profit Sharing Plan (the "401(k) Plan"). The 401(k) Plan is a
profit sharing plan designed to be qualified under applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code"). The 401(k) Plan covers
all employees of the Company who have attained age 21 and have completed 1,000
hours of service, as that term is defined in the 401(k) Plan, and who have
twelve months of service with the Company. Participants will receive service
credit for employment with the predecessor of the Company.

A participant in the 401(k) Plan may contribute up to 15% of his or her
compensation on a pre-tax basis under the 401(k) Plan. Also, under the 401(k)
Plan, the Company may, in its discretion, make matching contributions based on
the pre-tax contributions of a participant that are not in excess of 6% of
compensation. The matching contributions shall be proportionate to the
participant's pre-tax contributions subject to matching. The Company may make in
its discretion, certain additional contributions that generally will be
allocated to participants in proportion to compensation. Discretionary profit
sharing contributions for any plan year will be allocated to participants who
have been credited with 500 or more hours of service during the plan year and to
participants who terminate employment during the plan year due to death,
disability or retirement. The total annual contribution for each participant may
not exceed the lesser of (a) 25% of the participant's taxable compensation for
such year or (b) the greater of (i) 25% of the defined benefit dollar limitation
then in effect under Section 415(b)(1)(A) of the Code or (ii) $30,000.

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<PAGE> 43

Contributions made by, or on behalf of, a participant, and interest,
earnings, gains or losses on such amounts, are credited to accounts maintained
for the participant under the 401(k) Plan. A participant under the 401(k) Plan
is fully vested in his or her pre-tax contributions accounts. Vesting in a
participant's remaining account is based upon his or her years of service with
the Company. A participant is initially 20% vested after the completion of one
year of service with the Company. A participant's vested percentage increases by
20% for each subsequent year of service with the Company, so that a participant
is 100% vested after the completion of five years of service. In addition, a
participant becomes fully vested in his or her accounts upon retirement due to
permanent disability, attainment of age 65 or death. Finally, the 401(k) Plan
provides that the Company may at any time declare the 401(k) Plan partially or
completely terminated, in which event, the accounts of each participant with
respect to whom the 401(k) Plan is terminated will become fully vested. In
addition, in the event of a termination, partial termination or complete
discontinuance of contributions, the accounts of each affected participant will
become fully vested.

Incentive Compensation Plan

The Company intends to establish an incentive compensation plan for
officers and key employees of the Company after the closing of the Offering.
This plan will provide for the payment of an annual bonus to participating
officers and key employees if certain performance objectives established for
each individual are achieved. Each participant's performance objectives, to be
established at the beginning of the year by the Compensation Committee, will
vary from year to year and may be based on measures of profitability, cash flow
and other measures for the Company and various segments of the Company.

LIMITATION OF LIABILITY AND INDEMNIFICATION AGREEMENTS

The Company's Certificate of Incorporation provides that to the fullest
extent permitted by Delaware Law, a director of the Company shall not be liable
to the Company or its stockholders for monetary damages for breach of fiduciary
duty as a director. Under current Delaware Law, liability of a director may not
be limited (i) for any breach of the director's duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (iii) in respect
of certain unlawful dividend payments or stock redemptions or repurchases and
(iv) for any transaction from which the director derives an improper personal
benefit. The effect of the provision of the Company's Certificate of
Incorporation is to eliminate the rights of the Company and its stockholders
(through stockholders' derivative suits on behalf of the Company) to recover
monetary damages against a director for breach of the fiduciary duty of care as
a director (including breaches resulting from negligent or grossly negligent
behavior), except in the situations described in clauses (i) through (iv) above.
This provision does not limit or eliminate the rights of the Company or any
stockholder to seek nonmonetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care. In addition, the Company's
Certificate of Incorporation provides that the Company shall indemnify its
directors, officers, employees and agents against losses incurred by any such
person by reason of the fact that such person was acting in such capacity.

The Company also contemplates entering into agreements (the
"Indemnification Agreements") with each of the directors and officers of the
Company pursuant to which the Company will agree to indemnify such director or
officer from claims, liabilities, damages, expenses, losses, costs, penalties or
amounts paid in settlement incurred by such director or officer in or arising
out of his capacity as a director, officer, employee and/or agent of the Company
or any other corporation of which he is a director or officer at the request of
the Company to the maximum extent provided by applicable law. In addition, such
director or officer will be entitled to an advance of expenses to the maximum
extent authorized or permitted by law.

To the extent that the Board of Directors or the stockholders of the
Company may in the future wish to limit or repeal the ability of the Company to
provide indemnification as set forth in the Company's Certificate of
Incorporation, such repeal or limitation may not be effective as to directors
and officers who are parties to the Indemnification Agreements, because their
rights to full protection would be contractually assured by the Indemnification
Agreements. It is anticipated that similar contracts may be entered into, from
time to time, with future directors and officers of the Company.

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<PAGE> 44

CERTAIN TRANSACTIONS

The Company leases the office space for its corporate headquarters in
Wichita, Kansas from MSI Building, LLC ("MSI Building"), a limited liability
company. The Company began occupying its office space on February 23, 1996 and
as of August 31, 1996 had paid rent in the amount of $47,077 to MSI Building.
The Company's lease has a term of 5 years. In addition, the Company leases
certain equipment from MSI Building and has reimbursed MSI Building for certain
leasehold improvements for the Company's office space. Such payments for the
eight months ended August 31, 1996 totaled $42,640. There were no such payments
to MSI Building in 1995. Mr. DeBoer is a minority member of MSI Building.

The Company obtains business insurance, such as property, liability,
workers' compensation and group medical coverages, through Manning & Smith
Insurance. The Company believes that the types and amounts are consistent with
those obtained by similar businesses. For the period from October 1, 1995 to
December 31, 1995 and the eight months ended August 31, 1996, the Company had
paid insurance premiums to Manning & Smith for such coverages in the amounts of
$2,072 and $28,882, respectively. Mr. DeBoer owns a minority interest in Manning
and Smith Insurance.

As part of its strategic alliance with Doubletree, Candlewood enjoys the
benefits of Doubletree's bulk phone rates, in-room video and television service
arrangement and bulk purchase of supplies and other goods. The Company expects
to utilize Doubletree's central reservation system and to benefit from
Doubletree's established insurance and benefit programs. As additional
Candlewood hotels commence operations, the Company anticipates that it will
formalize the services to be provided by Doubletree and the cost of certain of
those services. Mr. Richard J. Ferris and Mr. Peter V. Ueberroth, directors of
the Company, are each Co-Chairman of Doubletree. See "Risk Factors -- Control of
Company by Management and Principal Stockholders; Potential Conflicts of
Interest."

The Company has arranged with a third party lender to provide construction
loans and long-term financing for up to 80% of the cost of franchised hotels,
subject to approval by the Company and the lender on an individual property
basis. Doubletree has agreed to guarantee certain portions of the loans made to
the Company's franchisees under this arrangement. Doubletree has agreed to
guarantee the amount of such loans in excess of approximately 56% of the hotel
cost. The amount of such loans will not exceed 75% of the hotel cost, unless
Candlewood manages the hotel, in which case such loans will not exceed 80% of
the hotel cost. It is anticipated that the guarantee will remain in effect until
the loan has been repaid. Upon an event of default, Doubletree will have the
option to meet any shortfalls or pay down the loan principal. In exchange for
the guarantee, Doubletree will receive a 5% interest in the profits and residual
value of the hotel and a 0.25-0.50% fee on the total loan amount outstanding.

The Company has financed its operations to date primarily through capital
provided by Doubletree. As of October 15, 1996, Doubletree had contributed
approximately $12.3 million to Candlewood LLC. Pursuant to the terms of the
Candlewood LLC operating agreement, Doubletree was entitled to a preferred
return on its capital contributions, including priority payments to Doubletree
of any capital distributions by Candlewood LLC and a return on all outstanding
contributions at rates of 7% and 10% for the first and second 12 month periods
following contribution, respectively, and 15% thereafter. In connection with the
Reorganization, a substantial portion of the funds advanced to Candlewood LLC by
Doubletree will be distributed to Doubletree by Candlewood LLC and Doubletree
has agreed to extend to the Company a five-year, $15 million subordinated credit
facility. The credit facility is subordinated to debt incurred in the
development of hotels and will be subordinated to the Company's line of credit,
if any. Amounts outstanding under the credit facility will bear interest at
rates of 7% per annum for the first 12 months following contribution, 10% per
annum for the second 12 months following contribution and 15% per annum
thereafter. In connection with the Reorganization, Doubletree will loan a
substantial portion of the amount which it had previously contributed to
Candlewood LLC to the Company together with the preferred return, which will be
evidenced by a long-term note payable under the credit facility and which will
bear interest at a rate calculated based on the date equivalent amounts were
originally contributed to Candlewood LLC. See "The Reorganization."

43
<PAGE> 45

THE REORGANIZATION

The Company was incorporated in August 1996 to succeed to the business of
Candlewood LLC in anticipation of the Offering. Candlewood LLC was formed in
November 1995 to develop, own, operate and franchise Candlewood extended-stay
hotels. The membership interests in Candlewood LLC are owned 50% by Doubletree,
42.5% by JPD Corporation and 7.5% by the Fix Partnership. Doubletree and the Fix
Partnership each acquired its membership interest in Candlewood LLC through
capital contributions and JPD Corporation acquired its membership interest
through the contribution of certain intangibles, including the development of
the Candlewood hotel concept and rights to the name of the Company, which were
valued in the course of arms length negotiations among the members. Prior to the
Reorganization, each of the Company's five properties will be owned by a
separate limited liability company, the membership interests of each of which
will be owned 98% by Candlewood LLC, 1% by DT Real Estate, Inc., 0.85% by JPD
Corporation, and 0.15% by the Fix Partnership.

Immediately prior to the Offering, Doubletree and the Fix Partnership will
contribute to the Company all of their outstanding membership interests in
Candlewood LLC and their minority interests in Subsidiary LLCs. At the same
time, Mr. DeBoer and the DeBoer Partnership will contribute to the Company 100%
of the stock of JPD Corporation, the assets of which are substantially comprised
of its membership interest in Candlewood LLC. In consideration of such transfer,
each of Doubletree and the Fix Partnership will be issued shares of Common Stock
of the Company in proportion to their ownership interests in Candlewood LLC and
Mr. DeBoer and the DeBoer Partnership, collectively, will be issued shares of
Common Stock of the Company in proportion to JPD Corporation's ownership
interest in Candlewood LLC. As a result, the ownership of the Common Stock of
the Company by Doubletree, the Fix Partnership and the shareholders of JPD
Corporation immediately prior to the Offering will be in the same proportion as
their ownership of Candlewood LLC immediately prior to the Reorganization. Upon
consummation of the Reorganization, Doubletree, the Fix Partnership and the
shareholders of JPD Corporation, including Mr. DeBoer will own 2,587,500,
388,125 and 2,199,375 shares of Common Stock of the Company, respectively.

In addition, prior to the Offering the amount of capital in excess of
$200,100 previously contributed to Candlewood LLC by Doubletree, together with a
preferred return on its capital contribution, will be distributed to Doubletree,
pursuant to the terms of the operating agreement of Candlewood LLC. In
connection with the Reorganization of the Company, Doubletree has agreed to
extend to the Company a $15 million subordinated credit facility. The credit
facility is subordinated to debt incurred in the development of hotels and the
Company's line of credit. Amounts outstanding under the credit facility will
bear interest at rates of seven percent per annum for the first 12 months
following contribution, 10% per annum for the second 12 months following
contribution and 15% per annum thereafter. Prior to the Offering, Doubletree
will loan to the Company the amount of the distribution of capital together with
the preferred return, which will be evidenced by a long-term note payable as
part of the subordinated credit facility. The terms of the distribution to
Doubletree, as well as the subsequent loan by Doubletree to the Company were
determined by members of Candlewood LLC in the course of arms-length
negotiations. Following the Reorganization, JPD Corporation will become a
wholly-owned subsidiary of the Company. In connection therewith, Mr. DeBoer has
agreed to indemnify the Company for any liabilities associated with JPD
Corporation arising out of facts or circumstances existing prior to the
Reorganization. In addition, following the Reorganization, each of the Company's
three hotel properties will be owned by a separate limited liability company,
the members of which will be the Company, Candlewood LLC and JPD Corporation.

Registration Rights Agreement. As part of the Reorganization, the Initial
Stockholders (Doubletree, Mr. DeBoer, the DeBoer Partnership and the Fix
Partnership) entered into an Incorporation and Registration Rights Agreement
(the "Registration Rights Agreement"). The Registration Rights Agreement
provides for the incorporation of the Company and the transfer to the Company of
the membership interests in Candlewood LLC and the Subsidiary LLCs held by the
Initial Stockholders in connection with the Offering.

The Registration Rights Agreement provides the Initial Stockholders with
certain rights with respect to the registration under the Securities Act of
shares of Common Stock issued to them in the Reorganization, including rights
(subject to certain limitations) to include such shares in any registration
under the Securities Act effected for the benefit of the Company or at the
request of another holder. Doubletree has demand

44
<PAGE> 46

registration rights pursuant to which it may require (subject to certain
limitations) the Company to register the shares received in the Reorganization
under the Securities Act. In general, the Company is only required to effect two
such demand registrations. Upon the exercise of a demand registration, the
Company may, at its option and in lieu of effecting such registration, purchase
from Doubletree the shares requested to be registered for a cash amount equal to
the estimated net proceeds (as defined in the Registration Rights Agreement)
Doubletree would have received upon the registered public sale of such shares.
The Company is not required to file a registration statement upon exercise of
these demand registration rights within 180 days following any underwritten
public offering of Common Stock or securities, convertible into or exercisable
or exchangeable for Common Stock. All expenses of any registration relating to
securities as provided in the Registration Rights Agreement (other than
underwriting discounts and commissions and fees and expenses of counsel for
selling stockholders) are to be borne by the Company. The Initial Stockholders
have agreed to waive their rights to include shares of Common Stock in the
Offering.

Stockholders Agreement. The Stockholders Agreement among the Company and
the Initial Stockholders entitles the Initial Stockholders, among other things,
to nominate directors to the Company's Board of Directors. Prior to the
Offering, the Company's Board of Directors consisted of four directors, of which
two were nominated by JPD Corporation and the Fix Partnership and two were
nominated by Doubletree. See "Management -- Directors and Executive Officers."
Pursuant to the Stockholders Agreement, following the completion of the
Offering, the Board of Directors will be expanded to include at least two
directors who are not affiliated with any Initial Stockholder, which individuals
shall be initially appointed by unanimous agreement of the directors then in
office. Each of JPD Corporation and the Fix Partnership, acting jointly, and
Doubletree will be entitled to nominate one-half of the number of directors,
other than the unaffiliated directors. Each of the Initial Stockholders has
agreed to vote its shares of Common Stock in favor of individuals nominated
pursuant to the Stockholders Agreement. Each of these stockholders has agreed to
vote for the removal of a director if the Initial Stockholder that nominated
such director so requests.

The Stockholders Agreement also provides the Initial Stockholders with
certain "veto rights" with respect to specified actions by the Company and its
subsidiaries. In general, without the written approval of the Initial
Stockholders, the Company may not amend its certificate of incorporation or
bylaws or declare or pay any dividends or make any other distributions with
respect to its capital stock, and neither the Company nor any of its
subsidiaries may engage in certain acquisitions or dispositions, or make capital
expenditures, involving consideration in excess of $10 million, purchase or
redeem any of its capital stock, issue or sell any capital stock, options or
similar derivative securities or file any registration statement with respect
thereto, authorize or effect any stock dividend or stock split, incur or assume
any indebtedness in excess of $10 million, engage in any business not
significantly related to the business in which Candlewood LLC was engaged at the
time the Company was incorporated, enter into certain related party
transactions, change accountants or accounting principles or practices,
establish arrangements for compensating officers, directors of employees in
excess of certain levels or enter into other transactions or arrangements not in
the ordinary course of business. In addition, without the written approval of
each of the Initial Stockholders, the Company may not engage in certain
transactions involving a merger, consolidation or liquidation of the Company,
engage in certain acquisitions or dispositions, increase the size of its Board
of Directors or engage in certain transactions involving the liquidation or sale
of certain of its subsidiaries. The Initial Stockholders have consented to the
registration, offer and sale of the shares of Common Stock offered hereby, the
Reorganization, certain organizational matters related to the formation of the
Company and other transactions contemplated hereby.

The Stockholders Agreement also provides to Doubletree certain purchase
rights with respect to future sales of Common Stock or securities convertible
into or exchangeable for Common Stock. In general, if the Company intends to
sell such securities for cash, subject to certain exceptions with respect to
sales to employees, the Company must first offer to sell such securities to
Doubletree in proportion to the number of Subject Shares (as defined therein)
held by Doubletree. Doubletree has agreed to waive its purchase rights as they
relate to the Offering.

The Stockholders Agreement will terminate ten years after the commencement
of the Offering or at such time as the Initial Stockholders hold less than 50%
of the outstanding Common Stock of the Company.

45
<PAGE> 47

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of October 15, 1996 after giving effect to the
Reorganization, and as adjusted to reflect the Offering (i) by each person who
is known by the Company to beneficially own more than five percent of the Common
Stock, (ii) by each of the Company's directors, (iii) by each of the Named
Executive Officers and (iv) by all executive officers and directors as a group.
Except as otherwise indicated, the persons named in the table have sole voting
and investment power with respect to all shares beneficially owned, subject to
community property laws where applicable.

<TABLE>
<CAPTION>
OWNERSHIP PRIOR TO OWNERSHIP AFTER
OFFERING OFFERING
---------------------- ----------------------
NAME AND ADDRESS OF NUMBER OF NUMBER OF
BENEFICIAL OWNER(1) SHARES PERCENTAGE SHARES PERCENTAGE
- --------------------------------------------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Doubletree Corporation............................. 2,587,500 50.0% 2,587,500 28.7%
410 N. 44th Street
Phoenix, Arizona 85008
Warren D. Fix Family Partnership................... 388,125 7.5 388,125 4.3
Jack P. DeBoer(2).................................. 2,199,375 42.5 2,199,375 24.4
Richard J. Ferris(3)............................... -- -- -- --
Peter V. Ueberroth(3).............................. -- -- -- --
Warren D. Fix(4)................................... 388,125 7.5 388,125 4.3
James E. Korroch................................... -- -- -- --
All directors and executive officers as a
group (9 persons)(2)(4).......................... 2,587,500 50.0 2,587,500 28.7
</TABLE>

- ---------------
* Less than one percent

(1) The address of each of the persons listed in the table (other than
Doubletree Corporation) is Lakepoint Office Park, 9342 East Central,
Wichita, Kansas 67206.

(2) Includes 329,906 shares held by the DeBoer Partnership, the general partner
of which is Mr. DeBoer. Mr. DeBoer disclaims beneficial ownership of such
shares, except to the extent of his interest in the DeBoer Partnership.

(3) Excludes 2,587,500 shares held by Doubletree, the Co-Chairmen of which are
Messrs. Ferris and Ueberroth. Messrs. Ferris and Ueberroth disclaim
beneficial ownership of such shares.

(4) Includes 388,125 shares held by Warren D. Fix Family Partnership. Mr. Fix
disclaims beneficial ownership of these shares except to the extent of his
interest in the Fix Partnership.

46
<PAGE> 48

DESCRIPTION OF CAPITAL STOCK

The following description of the Company's capital stock does not purport
to be complete and is subject in all respects to applicable Delaware law and to
the provisions of the Company's Certificate of Incorporation and Bylaws, copies
of which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part.

The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock, par value $.01 per share, and 5,000,000 shares of Preferred
Stock in one or more series. Immediately following the completion of the
Offering (assuming the Underwriters' over-allotment option is not exercised), an
aggregate of 9,025,000 shares of Common Stock will be issued and outstanding,
and no shares of preferred stock will be issued or outstanding.

COMMON STOCK

Holders of Common Stock are entitled to one vote per share on all matters
to be voted upon by the stockholders, including the election of directors. The
Company's Certificate of Incorporation does not provide for cumulative voting in
the election of directors.

Holders of Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the terms of agreements governing the Company's
long-term debt. The Company does not anticipate paying cash dividends in the
foreseeable future. See "Dividend Policy." In the event of liquidation,
dissolution or winding up of the Company, holders of Common Stock are entitled
to share ratably in all assets remaining after payment of liabilities and after
satisfaction of the liquidation preference of any outstanding Preferred Stock.

Holders of Common Stock have no preemptive, conversion or redemption rights
and are not subject to further class or assessments by the Company. Immediately
upon consummation of the Offering, all of the then outstanding shares of Common
Stock will be validly issued, fully paid and nonassessable.

PREFERRED STOCK

The Company's Board of Directors is authorized to issue from time to time,
without stockholder authorization, in one or more designated series, any or all
of the authorized but unissued shares of Preferred Stock with such dividend,
redemption, conversion and exchange provisions as may be provided in the
particular series. Any series of Preferred Stock may possess voting, dividend,
liquidation and redemption rights superior to those of the Common Stock. The
rights of holders of Common Stock will be subject to and may be adversely
affected by the rights of the holders of any Preferred Stock that may be issued
in the future. Issuance of a new series of Preferred Stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of entrenching the Company's Board of
Directors and making it more difficult for a third party to acquire, or
discourage a third party from acquiring, a majority of the outstanding voting
stock of the Company. The Company has no present plans to issue any series of
Preferred Stock.

REGISTRATION RIGHTS

Certain holders of Common Stock have registration rights with respect to
the Common Stock. See "The Reorganization -- Registration Rights Agreement."

CERTAIN PROVISIONS OF DELAWARE LAW

The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law ("Delaware Law"). In general, Section 203
prevents an "interested stockholder" (defined generally as a person owning 15%
or more of a corporation's outstanding voting stock) from engaging in a
"business combination" (as defined) with a Delaware corporation for three years
following the date such person became an interested stockholder unless (i)
before such person became an interested stockholder, the board of directors of
the corporation approved the transaction in which the interested stockholder
became an

47
<PAGE> 49

interested stockholder or approved the business combination, (ii) upon
consummation of the transaction that resulted in the interested stockholder
becoming an interested stockholder, the interested stockholder owns at least 85%
of the voting or stock of the corporation outstanding at the time the
transaction commenced (excluding shares owned by persons who are both officers
and directors of the corporation and shares held by certain employee stock
ownership plans), or (iii) following the transaction in which such person became
an interested stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting of stockholders by the
affirmative vote of the holders of at least two-thirds of the outstanding voting
stock of the corporation not owned by the interested stockholder.

STOCK TRANSFER AGENT AND REGISTRAR

The stock transfer agent and registrar for the Common Stock is American
Stock Transfer & Trust Company.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering and assuming no exercise of the
Underwriters' over-allotment option, the Company will have outstanding 9,025,000
shares of Common Stock. Of these shares, the 3,850,000 shares sold in the
Offering will be available for resale in the public market without restriction
or further registration under the Securities Act, except for shares purchased by
affiliates of the Company. The remaining 5,175,000 outstanding shares (the
"Restricted Shares") of Common Stock are "restricted securities" as that term is
defined under Rule 144 promulgated under the Securities Act and may be sold only
pursuant to registration under the Securities Act or pursuant to an exemption
therefrom, such as that provided by Rule 144.

The Company and each of its directors, officers and existing stockholders
have agreed with the Underwriters that, except under certain circumstances, they
will not issue, sell or dispose of any shares of Common Stock of the Company or
any shares convertible or exchangeable into any shares of Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of the Underwriters.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least two
years, including an "affiliate" of the Company, would be entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of 1% of the then outstanding shares of the Common Stock of the Company
(approximately 90,250 shares after giving effect to the Offering, assuming no
exercise of the Underwriters' over-allotment option and no conversion of the
Company's convertible securities or exercise of outstanding warrants) or the
average weekly trading volume in the Common Stock during the four calendar weeks
immediately preceding the date on which the notice of sale is filed with the
Securities and Exchange Commission, provided certain manner of sale and notice
requirements and requirements as to the availability of current public
information about the Company are satisfied. In addition, "affiliates" of the
Company must comply with the restrictions and requirements of Rule 144, other
than the two-year holding period requirement, in order to sell shares of Common
Stock that are not "restricted securities" (such as shares of Common Stock
acquired by "affiliates" in the Offering). Under Rule 144(k), a holder of
"restricted securities" who is not deemed an "affiliate" of the Company at any
time during the 90 days immediately preceding a sale by such holder, who has
beneficially owned shares for at least three years, would be entitled to sell
such shares under Rule 144(k) without regard to the limitations and requirements
described above. As defined in Rule 144, an "affiliate" of an issuer is a person
that directly, or indirectly through the use of one or more intermediaries,
controls, or is controlled by, or is under common control with, such issuer.

48
<PAGE> 50

UNDERWRITING

The Underwriters named below, represented by Montgomery Securities and
Schroder Wertheim & Co. Incorporated ("the Representatives"), have severally
agreed, subject to the terms and conditions contained in the Underwriting
Agreement, to purchase from the Company the number of shares of Common Stock
indicated below opposite their respective names at the initial public offering
price less the underwriting discount set forth on the cover page of this
Prospectus. The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters are committed to purchase all of the shares, if they purchase any.
In the event of a default by an Underwriter, the Underwriting Agreement provides
that, in certain circumstances, the purchase commitments of the nondefaulting
Underwriters may be increased or the Underwriting Agreement may be terminated.

<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITERS TO BE PURCHASED
--------------------------------------------------------------------- ----------------
<S> <C>
Montgomery Securities................................................
Schroder Wertheim & Co. Incorporated.................................

---------
Total...................................................... 3,850,000
=========
</TABLE>

The Representatives propose initially to offer the Common Stock to the
public at the public offering price set forth on the cover page of this
Prospectus. The Underwriters may allow to selected dealers a concession of not
more than $ per share; and the Underwriters may allow, and such dealers
may reallow, a concession of not more than $ per share to certain other
dealers. The Common Stock is offered subject to receipt and acceptance by the
Underwriters, and to certain other conditions, including the right to reject
orders in whole or in part. After the initial public offering, the public
offering price, allowances, concessions and other selling terms may be changed
by the Representatives.

The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of 577,500 additional shares of Common Stock to cover over-allotments, if any,
at the same price per share as the initial shares to be purchased by the
Underwriters. To the extent that the Underwriters exercise this option, the
Underwriters will be committed, subject to certain conditions, to purchase such
additional shares in approximately the same proportion as set forth in the above
table. The Underwriters may purchase such shares only to cover over-allotments
made in connection with the Offering.

The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or will contribute to payments the Underwriters may be required
to make in respect thereof.

The Company, its directors, executive officers and existing stockholders,
will agree that, except under certain circumstances, for a period of 180 days
after the date of its Prospectus, they will not, without the consent of the
Representatives, issue, sell or dispose of any shares of the Common Stock or any
shares convertible or exchangeable into any shares of Common Stock. See "Shares
Eligible for Future Sale."

Prior to the Offering, there has been no public market for the Common Stock
of the Company. Accordingly, the offering price of the Common Stock will be
determined by negotiations between the Company and the Representatives. Among
the factors to be considered in determining such price will be the history of,
and the prospects for, the industry in which the Company competes, an assessment
of the Company's management, its financial condition, its past and present
operations, its past and present earnings and the trend of such earnings, the
prospects for future earnings of the Company, the general condition of the
economy and the securities markets and the market prices for similar securities
of generally comparable companies at the time of the Offering.

49
<PAGE> 51

The Representatives have informed the Company that they do not expect to
make sales to accounts over which they exercise discretionary authority in
excess of 5% of the number of shares of Common Stock offered hereby.

EXPERTS

The consolidated financial statements of Candlewood Hotel Company L.L.C.
and subsidiaries as of December 31, 1995 and June 30, 1996, and for the period
from October 1, 1995 (date of inception) to December 31, 1995 and for the
six-months ended June 30, 1996, have been included herein in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Latham & Watkins. Certain legal matters relating to the
Offering will be passed upon for the Underwriters by O'Melveny & Myers LLP.

ADDITIONAL INFORMATION

The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus, filed as part of the Registration Statement, does not contain
all of the information included in the Registration Statement and the exhibits
and schedules thereto, certain portions of which have been omitted in accordance
with the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock offered hereby, reference is hereby
made to the Registration Statement, financial statements, exhibits and schedules
filed therewith. Statements contained in this Prospectus by reference as to the
contents of any contract, agreement or other document referred to are not
necessarily complete and in each such instance, reference is made to the copy of
such contract, agreement or other document filed as an exhibit to the
Registration Statement for a more complete description of the matters involved,
and each such statement shall be deemed qualified in its entirety by such
reference. The Registration Statement, including the exhibits and schedules
thereto, may be inspected without charge and copied at the offices of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549; 7 World Trade Center, New York, New York 10048; and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials may be obtained at the prescribed rates from the Commission's Public
Reference Section at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Commission maintains a Web site at
http://www.sec.gov. that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.

As a result of the Offering, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). So long as the Company is subject to the periodic
reporting requirements of the Exchange Act, it will continue to furnish the
reports and other information required thereby to the Commission. The Company
intends to furnish holders of the Common Stock with annual reports containing,
among other information, audited financial statements certified by an
independent public accounting firm and quarterly reports containing unaudited
condensed financial information for the first three quarters of each fiscal
year. The Company also intends to furnish such other reports as it may determine
or as may be required by law.

50
<PAGE> 52

CANDLEWOOD HOTEL COMPANY, L.L.C. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Independent Auditors' Report........................................................... F-2
Consolidated Balance Sheets at December 31, 1995 and June 30, 1996..................... F-3
Consolidated Statements of Operations for the period from October 1, 1995 (Date of
Inception)
to December 31, 1995 and the Six Months Ended June 30, 1996.......................... F-4
Consolidated Statements of Members' Equity for the Period from October 1, 1995 (Date of
Inception) to December 31, 1995 and the Six Months Ended June 30, 1996............... F-5
Consolidated Statements of Cash Flows for the Period from October 1, 1995 (Date of
Inception)
to December 31, 1995 and the Six Months Ended June 30, 1996.......................... F-6
Notes to Consolidated Financial Statements............................................. F-7
</TABLE>

F-1
<PAGE> 53

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Candlewood Hotel Company, L.L.C.:

We have audited the accompanying consolidated balance sheets of Candlewood
Hotel Company, L.L.C. and subsidiaries as of December 31, 1995 and June 30,
1996, and the related consolidated statements of operations, members' equity and
cash flows for the period from October 1, 1995 (date of inception) to December
31, 1995 and for the six months ended June 30, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Candlewood
Hotel Company, L.L.C. and subsidiaries as of December 31, 1995 and June 30,
1996, and the results of their operations and their cash flows for the period
from October 1, 1995 (date of inception) to December 31, 1995 and for the six
months ended June 30, 1996, in conformity with generally accepted accounting
principles.

KPMG Peat Marwick LLP

Wichita, Kansas
August 23, 1996

F-2
<PAGE> 54

CANDLEWOOD HOTEL COMPANY, L.L.C. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND JUNE 30, 1996

<TABLE>
<CAPTION>
PRO FORMA
1996
(NOTE 10)
1995 1996 -----------
---------- ---------- (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............................... $ 123,384 $1,022,492 $ 1,022,492
Accounts receivable..................................... 2,975 55,107 55,107
Pre-opening costs, net of accumulated amortization of
$24,260............................................... -- 88,163 88,163
Prepaid expenses........................................ 945 35,771 35,771
---------- ---------- ----------
Total current assets.......................... 127,304 1,201,533 1,201,533
---------- ---------- ----------
Construction in progress -- hotel property.............. 842,656 1,266,268 1,266,268
Property and equipment, net of accumulated depreciation
of $301 and $37,531, respectively..................... 37,639 3,873,070 3,873,070
Intangible assets, net of accumulated amortization of
$4,324 and $13,593, respectively...................... 239,345 230,438 230,438
Pre-acquisition costs................................... 6,397 294,715 294,715
Other assets............................................ 30,000 163,045 163,045
---------- ---------- ----------
$1,283,341 $7,029,069 $ 7,029,069
========== ========== ==========
LIABILITIES AND MEMBERS' EQUITY
Accounts payable........................................ $ 64,695 $ 329,828 $ 329,828
Accrued expenses........................................ 27,532 82,463 82,463
---------- ---------- ----------
Total current liabilities..................... 92,227 412,291 412,291
---------- ---------- ----------
Note payable............................................ -- -- 7,334,614
Minority interests...................................... 8,427 47,460 --
Members' equity......................................... 1,182,687 6,569,318 --
Stockholders' equity (deficit):
Preferred Stock, par value $.01 per share; 5,000,000
shares authorized; no shares issued and
outstanding........................................ -- -- --
Common Stock, par value $.01 per share; 100,000,000
shares authorized; no shares issued and
outstanding, actual;
5,175,000 shares issued and outstanding, pro
forma.............................................. -- -- 51,750
Additional paid-in capital............................ -- -- 348,450
Retained earnings (accumulated deficit)............... -- -- (1,118,036)
---------- ---------- ----------
Total stockholders' equity (deficit).......... -- -- (717,836)
---------- ---------- ----------
Commitments.............................................
---------- ---------- ----------
$1,283,341 $7,029,069 $ 7,029,069
========== ========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE> 55

CANDLEWOOD HOTEL COMPANY, L.L.C. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM OCTOBER 1, 1995 (DATE OF INCEPTION) TO DECEMBER 31, 1995
AND THE SIX MONTHS ENDED JUNE 30, 1996

<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
REVENUE:
Room revenue......................................................... $ -- $ 116,113
Other revenue........................................................ -- 3,925
--------- ---------
Total revenue.............................................. -- 120,038
--------- ---------
COSTS AND EXPENSES:
Hotel operating expenses............................................. -- 86,195
Corporate operating expenses......................................... 204,361 748,348
Depreciation and amortization........................................ 4,625 70,759
--------- ---------
Total costs and expenses................................... 208,986 905,302
--------- ---------
Loss from operations................................................. (208,986) (785,264)
Interest income...................................................... -- 11,496
--------- ---------
Net loss................................................... $(208,986) $(773,768)
========= =========
Pro forma net loss per share......................................... $ (.04) $ (.15)
========= =========
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE> 56

CANDLEWOOD HOTEL COMPANY, L.L.C. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
FOR THE PERIOD FROM OCTOBER 1, 1995 (DATE OF INCEPTION) TO DECEMBER 31, 1995
AND THE SIX MONTHS ENDED JUNE 30, 1996

<TABLE>
<CAPTION>
WARREN D. FIX
DOUBLETREE JPD FAMILY TOTAL
CORPORATION CORPORATION PARTNERSHIP, L.P. MEMBERS' EQUITY
----------- ----------- ----------------- ---------------
<S> <C> <C> <C> <C>
Balance at October 1, 1995........... $--......... $ -- $ -- $ --
Capital contribution................. 1,191,573 200,000 100 1,391,673
Net loss............................. (104,493) (88,819) (15,674) (208,986)
---------- --------- -------- ----------
Balance at December 31, 1995......... 1,087,080 111,181 (15,574) 1,182,687
Capital contribution................. 6,160,399 -- -- 6,160,399
Net loss............................. (386,884) (328,851) (58,033) (773,768)
---------- --------- -------- ----------
Balance at June 30, 1996............. $ 6,860,595 $ (217,670) $ (73,607) $ 6,569,318
========== ========= ======== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE> 57

CANDLEWOOD HOTEL COMPANY, L.L.C. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM OCTOBER 1, 1995 (DATE OF INCEPTION) TO DECEMBER 31, 1995
AND THE SIX MONTHS ENDED JUNE 30, 1996

<TABLE>
<CAPTION>
1995 1996
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................... $ (208,986) $ (773,768)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization.................................... 4,625 70,759
Change in:
Accounts receivable.............................................. (2,975) (52,132)
Pre-opening costs................................................ -- (112,423)
Prepaid expenses................................................. (945) (34,826)
Other assets..................................................... -- (13,557)
Accounts payable................................................. 64,695 265,133
Accrued expenses................................................. 27,532 54,931
---------- -----------
Net cash used in operating activities............................ (116,054) (595,883)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment............................ (880,596) (4,296,273)
Pre-acquisition costs.............................................. (6,397) (288,318)
Certificates of deposit............................................ (30,000) (119,488)
Expenditures for capitalized intangible assets..................... (43,669) (362)
---------- -----------
Net cash used in investing activities............................ (960,662) (4,704,441)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Members' capital contributions..................................... 1,191,673 6,160,399
Capital contributions to subsidiaries by minority interest
partners......................................................... 8,427 39,033
---------- -----------
Net cash provided by financing activities........................ 1,200,100 6,199,432
---------- -----------
Net increase in cash and cash equivalents.......................... 123,384 899,108
Cash and cash equivalents at beginning of period................... -- 123,384
---------- -----------
Cash and cash equivalents at end of period....................... $ 123,384 $ 1,022,492
========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE> 58

CANDLEWOOD HOTEL COMPANY, L.L.C. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Basis of Presentation

The accompanying consolidated financial statements include the accounts of
Candlewood Hotel Company, L.L.C. ("Candlewood") and its 98% owned subsidiaries,
Candlewood Wichita Northeast, LLC ("Wichita"), Candlewood Omaha, LLC ("Omaha"),
and Candlewood Englewood, LLC ("Englewood"), collectively referred to as the
Company. Candlewood was formed on November 16, 1995 and is owned 50% by
Doubletree Corporation ("Doubletree"), 42.5% by JPD Corporation ("JPD") and 7.5%
by Warren D. Fix Family Partnership, L.P. ("Fix"), collectively referred to as
the "Members". Wichita, Omaha and Englewood are each owned 98% by Candlewood, 1%
by DT Real Estate, Inc., .85% by JPD and .15% by Fix. Candlewood and all of the
subsidiaries are limited liability companies and as such have limited lives
(Candlewood, Omaha and Englewood -- 30 years; Wichita -- 100 years). Certain
expenses applicable to the Company's business which were incurred during the
period from October 1, 1995 to November 16, 1995 and were funded by the Members'
capital contributions have been reflected herein as expenses of the Company. All
significant intercompany balances and transactions have been eliminated.

b. Description of Business

The Company intends to develop, construct, own, operate, manage and
franchise a new nationwide hotel chain under the name Candlewood Hotel. The
hotels will be designed to serve extended stay, value oriented, guests with high
quality, fully equipped studio units. The first hotel commenced operations on
May 5, 1996, and as of June 30, 1996, the Company has one hotel in operation in
Wichita, Kansas, one hotel under construction in Omaha, Nebraska, and one hotel
under construction in Englewood, Colorado. Prior to opening the hotel in
Wichita, the Company was in the development stage.

The Members have entered into a Limited Liability Company Agreement (the
"Agreement") under which Doubletree agrees to contribute up to $15 million to
the Company subject to certain requirements. Net income or loss of the Company
is allocated to the Members in accordance with their respective membership
interests. Cash distributions may be made as agreed to by the Members. Cash
distributions must be made to the Members to the extent the Company has
available cash and Doubletree has not been repaid for all of its capital
contributions, subject to the maintenance of funds and reserves for working
capital, investment in additional hotel properties, capital expenditures and
other cash uses as agreed upon by the Members. Cash distributions will be
allocated among the Members first to provide Doubletree with a preferred return
(as defined) on its capital contributions and, second, to the Members in
proportion to their relative unrepaid capital contributions. The Agreement also
places various restrictions on the sale or transfer of a Member's ownership
interest.

c. Property and Equipment

Property and equipment is stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, ranging
from three to forty years. Maintenance and repairs are charged to operations as
incurred.

d. Intangible Assets

Pursuant to the terms of the Agreement, JPD contributed the ownership
rights, title and interest in the Candlewood Hotel name and logo and certain
other intangibles to the Company at the agreed-upon value of $200,000. Such
amount is included in intangible assets and is being amortized using the
straight-line method over a period of twenty years. Intangible assets also
include certain other organization costs which are being amortized using the
straight-line method over a period of five years.

F-7
<PAGE> 59

CANDLEWOOD HOTEL COMPANY, L.L.C. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

e. Pre-opening Costs

Costs which are incurred prior to the opening of a property and are related
to the hiring and training of hotel personnel, such as compensation, travel and
relocation, are capitalized and amortized, commencing upon the date a property
is opened, over the shorter of the estimated period of benefit or twelve months.

f. Pre-acquisition Costs

The Company incurs various costs related to the acquisition of property
sites. These costs are recorded as pre-acquisition costs until the property is
acquired, at which time the costs are reclassified to construction in
progress -- hotel property. In the event that the acquisition is not
consummated, the costs are charged to operations.

g. Income Taxes

The accompanying financial statements do not include a provision for income
taxes since the Company is not a taxpaying entity. Each Member's proportionate
share of the Company's taxable income or loss is included in the Member's tax
return.

Subsequent to the proposed public offering (see note 9), the Company will
no longer operate as a limited liability company and, accordingly, the Company
will become a taxable entity. Because the Company has incurred losses since
inception, there is no pro forma income tax expense or benefit for the period
from October 1, 1995 (date of inception) to December 31, 1995 and for the
six-months ended June 30, 1996 as the income tax benefit attributable to the pro
forma net operating loss carryforward would be offset by a valuation allowance.

h. Statement of Cash Flows

The Company considers all short-term, highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents. At the
balance sheet date, cash and cash equivalents consist of demand deposit accounts
in a bank. Noncash financing and investing activities for the period from
October 1, 1995 to December 31, 1995 include a capital contribution of $200,000
made by a Member in the form of intangible assets.

i. Use of Estimates

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 such
estimates.

j. Pro Forma Net Loss Per Share

Subsequent to the proposed public offering (see note 9), the Company will
no longer operate as a limited liability company and, accordingly, the Company
will become a taxable entity. Pro forma net loss per share information is
presented as if (i) the Company had operated as a taxable entity (C Corporation)
for the period from October 1, 1995 (date of inception) to December 31, 1995 and
for the six-months ended June 30, 1996 and (ii) the reorganization described in
note 9 had been effective as of October 1, 1995 and the shares of common stock
issued in conjunction with the reorganization had been issued and outstanding
for all periods presented (see note 1g).

k. Revenue Recognition

Room revenue and other revenue are recognized when earned.

F-8
<PAGE> 60

CANDLEWOOD HOTEL COMPANY, L.L.C. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ ----------
<S> <C> <C>
Hotel property and equipment:
Land..................................................... $ -- $ 266,760
Buildings and improvements............................... -- 2,720,638
Furniture, fixtures and equipment........................ -- 653,595
-------- ----------
-- 3,640,993
Less accumulated depreciation......................... -- 24,796
-------- ----------
-- 3,616,197
-------- ----------
Corporate property and equipment:
Furniture, fixtures and equipment........................ 13,295 226,310
Leasehold improvements................................... 24,645 43,298
-------- ----------
37,940 269,608
Less accumulated depreciation......................... 301 12,735
-------- ----------
37,639 256,873
-------- ----------
Total property and equipment..................... $ 37,639 $3,873,070
======== ==========
</TABLE>

3. INTANGIBLE ASSETS

Intangible assets consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ --------
<S> <C> <C>
Operating rights........................................... $200,000 $200,000
Organization costs......................................... 43,669 44,031
-------- --------
243,669 244,031
Less accumulated amortization............................ 4,324 13,593
-------- --------
$239,345 $230,438
======== ========
</TABLE>

4. OTHER ASSETS

Other assets consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ --------
<S> <C> <C>
Certificates of deposit.................................... $ 30,000 $149,488
Loan application fees...................................... -- 10,000
Other...................................................... -- 3,557
-------- --------
Total other assets............................... $ 30,000 $163,045
======== ========
</TABLE>

Certificates of deposit are pledged as collateral for letters of credit on
behalf of the Company in connection with deposits made pursuant to contracts for
the acquisition of real estate.

F-9
<PAGE> 61

CANDLEWOOD HOTEL COMPANY, L.L.C. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. LEASES

The Company leases corporate office space and certain equipment under
operating leases expiring at various dates through May 2001. Rental expense for
the period ended December 31, 1995 and the six months ended June 30, 1996 was
$13,188 and $28,195, respectively.

Future minimum lease payments under noncancelable operating leases having
remaining terms in excess of one year at June 30, 1996 are as follows:

<TABLE>
<S> <C>
December 31, 1996................................................. $ 54,747
December 31, 1997................................................. 109,493
December 31, 1998................................................. 109,493
December 31, 1999................................................. 106,755
December 31, 2000................................................. 102,138
--------
$482,626
========
</TABLE>

6. RELATED PARTY TRANSACTIONS

The Company obtains insurance coverages and leases its corporate office
space and certain equipment from a related party which is partially owned by the
Company's president. Such payments for insurance coverages totaled $14,568 for
the six months ended June 30, 1996 and were not significant for the period ended
December 31, 1995. Such payments for rent of corporate office space and
equipment and reimbursement for leasehold improvements totaled $58,066 for the
six months ended June 30, 1996. Such payments for rent of corporate office space
and equipment totaled $9,984 for the period ended December 31, 1995.

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments, defines the fair value of a financial instrument
as the amount at which the instrument could be exchanged in a current
transaction between willing parties. The carrying values of the Company's
financial instruments, which include cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses, approximate fair values due
to the short maturities of such instruments.

8. EMPLOYEE BENEFITS PLANS

Effective June 1, 1996, the Company established the Candlewood Hotel
Company 401(k) Profit Sharing Plan (the "Plan") for its employees. Generally,
all full-time employees who are over 21 years of age and have completed 12
months of service are eligible to participate in the Plan and are permitted to
contribute up to 15% of their individual compensation, subject to certain
limitations established by the Internal Revenue Service for plans of this type.
The Company may, but is not obligated to, make contributions on behalf of each
participant at the rate of 50% of the participants compensation, not to exceed
6% of the employee's compensation. For the six months ended June 30, 1996, there
were no matching contributions provided by the Company.

9. SUBSEQUENT EVENTS

Public Offering and Reorganization. In August 1996, the Members of the
Company formed Candlewood Hotel Company, Inc. ("Candlewood Inc.") in
anticipation of Candlewood Inc.'s filing a Registration Statement with the
Securities and Exchange Commission for an initial public offering of shares of
its common stock ("Offering"). Immediately prior to the Offering, each of
Doubletree and Fix will contribute its outstanding membership interest in the
Company and the minority interests in the Subsidiaries, and the stockholders of
JPD will contribute 100% of the common stock of JPD (the assets of which are

F-10
<PAGE> 62

CANDLEWOOD HOTEL COMPANY, L.L.C. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

substantially comprised of its membership interests in the Company) to
Candlewood Inc. In consideration for such contributions, each of the
contributors will be issued shares of common stock of Candlewood Inc. in
proportion to their respective ownership interests in the Company immediately
prior to such transfer.

In addition, prior to the Offering, capital in excess of $200,100
previously contributed by Doubletree, together with the preferred return on such
amounts, will be distributed to Doubletree. In connection with the
reorganization, Doubletree has agreed to extend to the Company a $15 million
subordinated credit facility. Prior to the Offering, Doubletree will loan the
amount of the distribution of capital and preferred return to the Company, which
will be evidenced by a long-term note payable as part of the subordinated credit
facility. Amounts due under the facility will mature in five years and will bear
interest at rates of seven percent per annum for the first 12 months following
contribution, 10% per annum for the second 12 months following contribution and
15% per annum thereafter. Interest-only payments will be due each calendar
quarter.

Shareholder Agreements. The Company has entered into an arrangement which
provides that, concurrent with the effective date of the initial public
offering, Candlewood Inc. will enter into an agreement with the initial
stockholders of Candlewood Inc. (the "Stockholders Agreement") which will
entitle the initial stockholders, among other things, to nominate directors to
the Board of Directors of Candlewood Inc. and to exercise certain "veto rights."
The Stockholders Agreement will terminate ten years after the commencement of
the initial public offering or at such time that the shares of common stock
initially issued to the initial stockholders and still held by them represent,
in the aggregate, less than a majority of the total number of shares of common
stock outstanding.

10. PRO FORMA BALANCE SHEET (UNAUDITED)

The unaudited pro forma balance sheet at June 30, 1996 gives effect to
the reorganization as if the reorganization had occurred on that date. Pro
forma adjustments are as follows:

<TABLE>
<S> <C>
Cash
------------------------------------------------------------------------
Proceeds from note payable issued to Doubletree pursuant to $15
million subordinated credit facility............................... $ 7,334,614
Distribution to Doubletree............................................ (7,334,614)
-----------
Net pro forma adjustment.............................................. $ --
===========
Note Payable
------------------------------------------------------------------------
Proceeds from note payable issued to Doubletree pursuant to $15
million subordinated credit facility............................... $ 7,334,614
===========
Minority Interests
------------------------------------------------------------------------
Contribution of minority interests of subsidiaries in conjunction with
the reorganization................................................. $ (47,460)
===========
Members' Equity
------------------------------------------------------------------------
Distribution to Doubletree of its cumulative capital contributions to
Candlewood Hotel Company, L.L.C. in excess of $200,100............. $(7,151,872)
Reclassification of contributed capital to common stock ($51,750) and
additional paid-in capital ($348,450).............................. (400,200)
Reclassification of cumulative losses to accumulated deficit.......... 982,754
-----------
Net pro forma adjustment........................................... $(6,569,318)
===========
</TABLE>

F-11
<PAGE> 63

CANDLEWOOD HOTEL COMPANY, L.L.C. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<S> <C>
Stockholders' Equity (Deficit)
------------------------------------------------------------------------
Reclassification of Members' Equity:
Common stock....................................................... $ 51,750
-----------
Additional paid-in capital......................................... 348,450
-----------
Retained earnings (accumulated deficit):
Reclassification of cumulative losses.............................. (982,754)
Distribution to Doubletree of preferred return on capital
contribution...................................................... (135,282)
-----------
Total pro forma adjustment to retained earnings (accumulated
deficit)..................................................... (1,118,036)
-----------
Net pro forma adjustment to stockholders' equity (deficit).... $ (717,836)
===========
</TABLE>

F-12
<PAGE> 64

- -------------------------------------------------------
- -------------------------------------------------------
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Company or any of the Underwriters. Neither the delivery of
this Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that there has been no change in the affairs of the
Company since the dates as of which information is given in this Prospectus.
This Prospectus does not constitute an offer or solicitation by anyone in any
jurisdiction in which such offer or solicitation is not authorized or in which
the person making such offer or solicitation is not qualified to do so or to any
person to whom it is unlawful to make such offer or solicitation.
----------------------------

TABLE OF CONTENTS
----------------------------

<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 8
Special Note Regarding Forward-Looking
Statements............................ 15
Use of Proceeds......................... 16
Dividend Policy......................... 16
Capitalization.......................... 17
Dilution................................ 18
Selected Historical and Pro Forma
Consolidated Financial Information.... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 20
Business................................ 24
Management.............................. 37
Certain Transactions.................... 43
The Reorganization...................... 44
Principal Stockholders.................. 46
Description of Capital Stock............ 47
Shares Eligible For Future Sale......... 48
Underwriting............................ 49
Experts................................. 50
Legal Matters........................... 50
Additional Information.................. 50
Index to Consolidated Financial
Statements............................ F-1
</TABLE>

Until , 1996 (25 days after the commencement of the Offering), all
dealers effecting transactions in the Common Stock, whether or not participating
in this distribution, may be required to deliver a Prospectus. This requirement
is in addition to the obligation of dealers to deliver a Prospectus when acting
as underwriters or with respect to their unsold allotments or subscriptions.
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
3,850,000 SHARES
LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MONTGOMERY SECURITIES

SCHRODER WERTHEIM & CO.
, 1996
- -------------------------------------------------------
- -------------------------------------------------------
<PAGE> 65

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses payable by the
Company in connection with the issuance and distribution of the Common Stock
being registered (all amounts are estimated except the SEC and NASD registration
fees):

<TABLE>
<S> <C>
SEC registration fee...................................................... $ 21,374
NASDAQ application fee.................................................... 45,000
Blue sky fees and expenses................................................ 50,000
Printing and engraving expenses........................................... 100,000
Legal fees and expenses................................................... 250,000
NASD filing fee........................................................... 6,699
Accounting fees and expenses.............................................. 75,000
Transfer agent............................................................ 15,000
Miscellaneous............................................................. 36,927
--------
Total........................................................... $600,000
========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

As permitted by the Delaware General Corporation Law, the Certificate of
Incorporation of the Company, a copy of which is filed as Exhibit 3.1 hereto,
eliminates the liability of directors to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except to the
extent otherwise required by the Delaware General Corporation Law.

The Certificate of Incorporation provides that the Company will indemnify
each person who was or is made a party to any proceeding by reason of the fact
that such person is or was a director or officer of the Company against all
expense, liability and loss reasonably incurred or suffered by such person in
connection therewith to the fullest extent authorized by the Delaware General
Corporation Law. The Company's Bylaws, a copy of which is filed as Exhibit 3.2
hereto, provide for a similar indemnity to directors and officers of the Company
to the fullest extent authorized by the Delaware General Corporation Law.

Prior to the completion of the Offering, the Company anticipates entering
into indemnification agreements with certain of its Directors and officers that
require the Company to indemnify such Directors and officers to the fullest
extent permitted by applicable provisions of the Delaware General Corporation
Law, provided that any settlement of a third party action against a Director or
officer is approved by the Company, and subject to limitations for actions
initiated by the Director or officer, penalties paid by insurance, and
violations of Section 16(b) of the Securities Exchange Act of 1934 and similar
laws.

The Underwriting Agreement, a copy of which is filed as Exhibit 1.1 hereto,
provides for indemnification by the Underwriters of the Company and its officers
and Directors, and by the Company of the Underwriters, for certain liabilities
arising under the Securities Act or otherwise.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

In October 1996, an aggregate of 5,175,000 shares of common stock will be
issued to Doubletree Corporation and the Fix Partnership in exchange for the
Membership Interests in Candlewood LLC and the Subsidiary LLCs and to the
shareholders of JPD Corporation in exchange for 100% of the stock of JPD
Corporation. This issuance will be effected in reliance upon exemption from
registration under Section 4(2) of the Securities Act as a transaction by an
issuer not involving a public offering.

II-1
<PAGE> 66

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Financial Statements.

(b) Schedules Included in Part II: None

All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation of the Registrant.**
3.2 Bylaws of the Registrant.**
4.1 Specimen Certificate of Common Stock.**
4.2 Form of Stockholder Agreement among Doubletree Corporation, JPD Corporation and the
Warren D. Fix Family Partnership, L.P.
5.1 Opinion of Latham & Watkins regarding legality of shares.
10.1 Form of Indemnification Agreement for executive officers and directors.**
10.2 1996 Equity Participation Plan and form of stock option agreements.
10.3 Employment Agreement between the Registrant and Jack P. DeBoer dated as of
September 1, 1996.**
10.4 Development Agreement between the Registrant and Studio West Hotel Development
Company, L.L.C. dated as of June 11, 1996.***
10.5 Franchise Agreement between the Registrant and Studio West Hotel Development Company,
L.L.C. dated July 25, 1996.**
10.6 Incorporation and Registration Rights Agreement dated as of September 1, 1996 among
Doubletree Corporation, JPD Corporation and the Warren D. Fix Family Partnership,
L.P.**
10.7 Term Loan Agreement by and between NationsBank of Texas, N.A. and Candlewood Wichita
Northeast, L.L.C., dated October 15, 1996.
10.8 Promissory Note from Candlewood Wichita Northeast, L.L.C. to NationsBank of Texas,
N.A., dated October 15, 1996.
10.9 Security Agreement between Candlewood Wichita Northeast, L.L.C. and NationsBank of
Texas, N.A. dated October 15, 1996.
10.10 Guaranty Agreement between the Company and NationsBank of Texas, N.A. dated
October 15, 1996.
11.1 Computation of pro forma net loss per share.**
21.1 Subsidiaries of the Registrant.**
23.1 Consent of Latham & Watkins (contained in Exhibit 5.1).
23.2 Consent of KPMG Peat Marwick LLP.
24.1 Power of Attorney.**
27.1 Financial Data Schedule.**
</TABLE>

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

** Previously filed.

*** Replaces form of agreement previously filed.

II-2
<PAGE> 67

ITEM 17. UNDERTAKINGS

(a) The undersigned Registrant hereby undertakes to provide the
Underwriters at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.

(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to Directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such Director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.

(1) For purposes of determining any liability under the Securities Act
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-3
<PAGE> 68

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Wichita, State of Kansas, on October 30, 1996.

CANDLEWOOD HOTEL COMPANY, INC.
a Delaware corporation

By: /s/ JACK P. DeBOER
-------------------------------
Jack P. DeBoer
President and Chief
Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed below by the following persons
in the capacities and on the dates indicated.

SIGNATURE TITLE
- ------------------------------------- ------------------------------------
<C> <S> <C>
/s/ JACK P. DeBOER President, Chief Executive Officer October 30, 1996
- ------------------------------------- and Chairman of the Board
Jack P. DeBoer (Principal Executive Officer)

/s/ WARREN D. FIX Director, Executive Vice President, October 30, 1996
- ------------------------------------- Chief Financial Officer and
Warren D. Fix Director (Principal Financial and
Principal Accounting Officer)

RICHARD J. FERRIS* Director October 30, 1996
- -------------------------------------
Richard J. Ferris

PETER V. UEBERROTH* Director October 30, 1996
- -------------------------------------
Peter V. Ueberroth

*By: /s/ WARREN D. FIX
- -------------------------------------
Warren D. Fix
Attorney-in-Fact
</TABLE>

II-4
<PAGE> 69

EXHIBIT INDEX

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ------------------------------------------------------------------------ ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement..........................................
3.1 Restated Certificate of Incorporation of the Registrant.**..............
3.2 Bylaws of the Registrant.**.............................................
4.1 Specimen Certificate of Common Stock.**.................................
4.2 Form of Stockholder Agreement among Doubletree Corporation, JPD
Corporation and the Warren D. Fix Family Partnership, L.P...............
5.1 Opinion of Latham & Watkins regarding legality of shares................
10.1 Form of Indemnification Agreement for executive officers and
directors.**............................................................
10.2 1996 Equity Participation Plan and form of stock option agreements......
10.3 Employment Agreement between the Registrant and Jack P. DeBoer dated as
of September 1, 1996.**.................................................
10.4 Development Agreement between the Registrant and Studio West Hotel
Development Company, L.L.C. dated as of June 11, 1996.***...............
10.5 Franchise Agreement between the Registrant and Studio West Hotel
Development Company, L.L.C. dated July 25, 1996.**......................
10.6 Incorporation and Registration Rights Agreement dated as of September 1,
1996 among Doubletree Corporation, JPD Corporation and the Warren D. Fix
Family Partnership, L.P.**..............................................
10.7 Term Loan Agreement by and between NationsBank of Texas, N.A. and
Candlewood Wichita Northeast, L.L.C., dated October 15, 1996............
10.8 Promissory Note from Candlewood Wichita Northeast, L.L.C. to NationsBank
of Texas, N.A., dated October 15, 1996..................................
10.9 Security Agreement between Candlewood Wichita Northeast, L.L.C. and
NationsBank of Texas, N.A. dated October 15, 1996.......................
10.10 Guaranty Agreement between the Company and NationsBank of Texas, N.A.
dated October 15, 1996..................................................
11.1 Computation of pro forma net loss per share.**..........................
21.1 Subsidiaries of the Registrant.**.......................................
23.1 Consent of Latham & Watkins (contained in Exhibit 5.1)..................
23.2 Consent of KPMG Peat Marwick LLP........................................
24.1 Power of Attorney.**....................................................
27.1 Financial Data Schedule.**..............................................
</TABLE>

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

** Previously filed.

*** Replaces form of agreement previously filed.

<PAGE> 1
Exhibit 1.1

4,427,500 Shares

Candlewood Hotel Company, Inc.

Common Stock

UNDERWRITING AGREEMENT

November __, 1996

MONTGOMERY SECURITIES
SCHRODER WERTHEIM & CO. INCORPORATED
As Representatives of the several Underwriters
c/o MONTGOMERY SECURITIES
600 Montgomery Street
San Francisco, California 94111

Dear Sirs:

SECTION 1. Introductory. Candlewood Hotel Company, Inc. a
Delaware corporation (the "Company"), proposes to issue and sell 3,850,000
shares of its authorized but unissued Common Stock (the "Common Stock") to the
several underwriters named in Schedule A annexed hereto (the "Underwriters"),
for whom you are acting as Representatives. Said aggregate of 3,850,000 shares
are herein called the "Firm Common Shares." In addition, the Company proposes to
grant to the Underwriters an option to purchase up to 577,500 additional shares
of Common Stock (the "Optional Common Shares"), as provided in Section 4 hereof.
The Firm Common Shares and, to the extent such option is exercised, the Optional
Common Shares are hereinafter collectively referred to as the "Common Shares."

You have advised the Company that the Underwriters propose to
make a public offering of their respective portions of the Common Shares on the
effective date of the registration statement hereinafter referred to, or as soon
thereafter as in your judgment is advisable.

The Company hereby confirms its agreement with respect to the
purchase of the Common Shares by the Underwriters as follows:

SECTION 2. Representations and Warranties of the Company. The
Company and its Subsidiaries (as defined below) hereby jointly and severally
represent and warrant to the several Underwriters that:

<PAGE> 2
(a) A registration statement on Form S-1 (File No. 333-12021)
with respect to the Common Shares has been prepared by the Company in conformity
in all material respects with the requirements of the Securities Act of 1933, as
amended (the "Act"), and the rules and regulations (the "Rules and Regulations")
of the Securities and Exchange Commission (the "Commission") thereunder, and has
been filed with the Commission. The Company has prepared and has filed or
proposes to file prior to the effective date of such registration statement an
amendment or amendments to such registration statement, which amendment or
amendments have been or will be similarly prepared. There have been delivered to
you two signed copies of such registration statement and amendments, together
with two copies of each exhibit filed therewith. Conformed copies of such
registration statement and amendments (but without exhibits) and of the related
preliminary prospectus have been delivered to you in such reasonable quantities
as you have requested for each of the Underwriters. The Company will next file
with the Commission one of the following: (i) prior to effectiveness of such
registration statement, a further amendment thereto, including the form of final
prospectus, (ii) a final prospectus in accordance with Rules 430A and 424(b) of
the Rules and Regulations or (iii) a term sheet (the "Term Sheet") as described
in and in accordance with Rules 434 and 424(b) of the Rules and Regulations. As
filed, the final prospectus, if one is used, or the Term Sheet and the latest
Preliminary Prospectus sent or given to purchasers of the Common Shares by the
Underwriters prior to or at the same time as the confirmation of such sale, if a
final prospectus is not used, shall include all Rule 430A Information (as
defined) and, except to the extent that you shall agree in writing to a
modification, shall be in all substantive respects in the form furnished to you
prior to the date and time that this Agreement was executed and delivered by the
parties hereto, or, to the extent not completed at such date and time, shall
contain only such specific additional information and other changes (beyond that
contained in the latest Preliminary Prospectus (as defined)) as the Company
shall have previously advised you in writing would be included or made therein.

The term "Registration Statement" as used in this Agreement
shall mean such registration statement at the time such registration statement
becomes effective and, in the event any post-effective amendment thereto becomes
effective prior to the First Closing Date (as defined), shall also mean such
registration statement as so amended; provided, however, that such term shall
also include all Rule 430A Information deemed to be included in such
registration statement at the time such registration statement becomes effective
as provided by Rule 430A of the Rules and Regulations. The term "Preliminary
Prospectus" shall mean any preliminary prospectus referred to in the preceding
paragraph and any preliminary prospectus included in the Registration Statement
at the time it becomes effective that omits Rule 430A Information. The term
"Prospectus" as used in

2
<PAGE> 3
this Agreement shall mean: (i) the prospectus relating to the Common Shares in
the form in which it is first filed with the Commission pursuant to Rule 424(b)
of the Rules and Regulations; (ii) if a Term Sheet is not used and no filing
pursuant to Rule 424(b) of the Rules and Regulations is required, the form of
final prospectus included in the Registration Statement at the time it becomes
effective; or (iii) if a Term Sheet is used, the Term Sheet in the form in which
it is first filed with the Commission pursuant to Rule 424(b) of the Rules and
Regulations, together with the latest Preliminary Prospectus sent or given to
purchasers of the Common Shares by the Underwriters prior to or at the same time
as the confirmation of such sale. The term "Rule 430A Information" means
information with respect to the Common Shares and the offering thereof permitted
to be omitted from the Registration Statement when it becomes effective pursuant
to Rule 430A of the Rules and Regulations.

(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus, and each Preliminary
Prospectus, as of its date, has conformed in all material respects to the
requirements of the Act and the Rules and Regulations and, as of its date, has
not included any untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; at the time the
Registration Statement becomes effective, and at all times subsequent thereto up
to and including each Closing Date hereinafter mentioned, the Registration
Statement and the Prospectus, and any amendments or supplements thereto, will
contain all material statements and information required to be included therein
by the Act and the Rules and Regulations and will in all material respects
conform to the requirements of the Act and the Rules and Regulations, and the
Registration Statement will not include any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, and neither the Prospectus, nor any
amendment or supplement thereto, will include any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading; provided, however, no representation or warranty
contained in this subsection 2(b) shall be applicable to information contained
in or omitted from any Preliminary Prospectus, the Registration Statement, the
Prospectus or any such amendment or supplement that is described in clauses (i)
and (ii) of Section 3 hereof.

(c) As of the First Closing Date, the Company will not own or
control, directly or indirectly, any corporation, association or other entity
that is material, individually or in the aggregate, to the Company's condition
(financial or otherwise), properties, business, results of operation or
prospects, other than the subsidiaries listed in Exhibit 21.1 to

3
<PAGE> 4
the Registration Statement (the "Subsidiaries"). The Company has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation, and each limited liability company
Subsidiary is a duly formed limited liability company and is validly existing as
a limited liability company under the laws of the state of its formation, each
with full power and authority (corporate and other) to own and lease its assets
and properties and conduct its business as now being conducted and as described
in the Registration Statement; as of the First Closing Date, the Company will
own, directly or indirectly, all of the membership interests of the Subsidiaries
free and clear of all claims, liens, charges and encumbrances, other than as
disclosed in the Registration Statement; the Company and each of the
Subsidiaries are in possession of and operating in material compliance with all
authorizations, licenses, permits, consents, certificates and orders material to
the conduct of their respective businesses, all of which are valid and in full
force and effect; the Company and the Subsidiaries are duly qualified to do
business and in good standing as foreign corporations or foreign limited
liability companies, as the case may be, in each jurisdiction in which the
ownership or leasing of properties or the conduct of their respective businesses
requires such qualification, except for jurisdictions in which the failure to so
qualify would not have a material adverse effect upon the Company or the
Subsidiaries, taken as a whole; and no proceeding has been instituted in any
such jurisdiction revoking, limiting or curtailing, or seeking to revoke, limit
or curtail, such power and authority or qualification.

(d) Immediately prior to the First Closing Date, the Company
will have an authorized and outstanding capital stock as set forth under the
heading "Capitalization" in the Prospectus; the issued and outstanding shares of
Common Stock will have been duly authorized and validly issued, will be fully
paid and nonassessable, will have been issued in compliance with all applicable
federal and state securities laws, will not have been issued in violation of or
subject to any preemptive rights or other rights to subscribe for or purchase
securities, and will conform in all material respects to the description thereof
contained in the Prospectus. All membership interests of each Subsidiary have
been duly and validly authorized. Except as disclosed in or contemplated by the
Prospectus and the financial statements of the Company, and the related notes
thereto, included in the Prospectus, the Company, as of the First Closing Date,
will not have, and no Subsidiary has, outstanding any options to purchase, or
any preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or membership interests, as
appropriate or any such options, rights, convertible securities or obligations.
The description of the Company's stock option, stock bonus and other stock plans
or arrangements, and the

4
<PAGE> 5
options or other rights granted and exercised thereunder, set forth in the
Prospectus accurately and fairly presents the information required to be shown
with respect to such plans, arrangements, options and rights.

(e) Immediately prior to the First Closing Date, the Common
Shares to be sold by the Company will have been duly authorized and, when
issued, delivered and paid for in the manner set forth in this Agreement, will
be validly issued, fully paid and nonassessable, and will conform to the
description thereof contained in the Prospectus. Immediately prior to the First
Closing Date, no preemptive rights or other rights to subscribe for or purchase
will exist with respect to the issuance and sale of the Common Shares by the
Company pursuant to this Agreement, except for such rights which have been
waived with respect to the issuance and sale of the Common Shares. Immediately
prior to the Closing Date, no stockholder of the Company will have any right
which will not have been waived to require the Company to register the sale of
any shares owned by such stockholder under the Act in the public offering
contemplated by this Agreement. No further approval or authorization of the
stockholders or the Board of Directors of the Company will be required for the
issuance and sale of the Common Shares to be sold by the Company as contemplated
herein.

(f) The Company has full right, power and authority to enter
into this Agreement and perform the transactions contemplated hereby (including,
without limitation, the Reorganization as described in the Prospectus). This
Agreement has been duly authorized, executed and delivered by the Company, and
it constitutes a valid and binding agreement of the Company enforceable against
the Company in accordance with its terms, except (A) as limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally, (B) that the remedy of specific performance and injunctive and
other forms of equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought and
(C) to the extent that rights to indemnity or contribution under this Agreement
may be limited by federal, state or provincial securities laws or the public
policy underlying such laws. The execution and delivery of this Agreement by the
Company and the consummation of the transactions herein contemplated by the
Company will not violate any provisions of the certificate of incorporation or
bylaws of the Company or the operating agreement of any Subsidiary, and will not
conflict with, result in the breach or violation of, or constitute, either by
itself or upon notice or the passage of time or both, a default under any
franchise agreement to which the Company or any of the Subsidiaries is a party
or any other agreement, mortgage, deed of trust, lease, franchise, license,
indenture, permit or other instrument that has been filed as an Exhibit to the
Registration Statement and to which the Company or any of the Subsidiaries is a
party or by which the Company or any

5
<PAGE> 6
of the Subsidiaries or any of their respective properties may be bound or
affected, any statute or any authorization, judgment, decree, order, rule or
regulation of any court or any regulatory body, administrative agency or other
governmental body applicable to the Company or any of the Subsidiaries or any of
their respective properties. No consent, approval, authorization or other order
of any court, regulatory body, administrative agency or other governmental body
is required for the execution and delivery of this Agreement or the consummation
of the transactions contemplated by this Agreement, except for compliance with
the Act, the Blue Sky laws applicable to the public offering of the Common
Shares by the several Underwriters and the clearance of such offering with the
National Association of Securities Dealers, Inc. (the "NASD") or the
authorization for quotation on the NASDAQ National Market which has been
obtained prior to the date hereof or such other consents or approvals under
state franchise laws which if not received or issued would not be material to
the Company or the Subsidiaries taken as a whole.

(g) KPMG Peat Marwick, who have expressed their opinion with
respect to the financial statements and schedules filed with the Commission as a
part of the Registration Statement and included in the Prospectus, are
independent accountants as required by the Act and the Rules and Regulations.

(h) As of the First Closing Date, the consolidated financial
statements and schedule of the Company and its Subsidiaries, and the related
notes thereto, included in the Registration Statement and the Prospectus will
present fairly the consolidated financial position of the Company and its
Subsidiaries as of the respective dates of such financial statements and
schedule, and the consolidated results of operations, cash flows and the
stockholders' equity and the other information purported to be shown therein of
the Company and its Subsidiaries for the respective periods covered thereby.
Such statements, schedule and related notes have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis as
certified by the independent accountants named in subsection 2(g). The
Registration Statement includes all of the financial statements and schedules
required under the Act to be included in the Registration Statement. Immediately
prior to the First Closing Date, the selected financial data set forth in the
Prospectus under the captions "Summary Consolidated Financial Information,"
"Capitalization" and "Selected Consolidated Financial Information" will present
fairly the information set forth therein on the basis stated in the Registration
Statement.

(i) Except as disclosed in the Prospectus, and except as to
violations, breaches or defaults which individually or in the aggregate would
not be material to the Company and the Subsidiaries taken as a whole, neither
the Company nor any of the

6
<PAGE> 7
Subsidiaries is in violation or default of any provision of its certificate of
incorporation or bylaws or operating agreement,as the case may be, or is in
breach of or default with respect to any provision of any agreement, judgment,
decree, order, mortgage, deed of trust, lease, franchise, license, indenture,
permit or other instrument to which it is a party or by which it or any of its
properties is bound; and there does not exist any state of facts which
constitutes an event of default (as defined in those documents) on the part of
the Company or any such Subsidiary or which, with notice or lapse of time or
both, would constitute such an event of default.

(j) There are no contracts or other documents required to be
described in the Registration Statement or to be filed as exhibits to the
Registration Statement by the Act or by the Rules and Regulations which have not
been described or filed as required. The contracts so described in the
Prospectus are in full force and effect on the date hereof; and neither the
Company nor any of the Subsidiaries, nor to the best of the Company's knowledge
any other party, is in breach of or default under any of such contracts, which
breach or default would have a material adverse effect on the Company and its
Subsidiaries, taken as a whole.

(k) There are no legal or governmental actions, suits or
proceedings pending or, to the best of the Company's knowledge, threatened to
which the Company or any of the Subsidiaries is a party or of which property
owned or leased by the Company or any of the Subsidiaries is the subject,
including actions related to environmental or discrimination matters, which
actions, suits or proceedings might reasonably be expected to, individually or
in the aggregate, prevent or materially and adversely affect the transactions
contemplated by this Agreement or result in a material adverse change in the
condition (financial or otherwise), properties, business, results of operations
or prospects of the Company and the Subsidiaries, taken as a whole; and no labor
disturbance by the employees of the Company or any of the Subsidiaries exists or
is imminent which might reasonably be expected to affect materially and
adversely such condition, properties, business, results of operations or
prospects of the Company and the Subsidiaries, taken as a whole. Neither the
Company nor any of the Subsidiaries is a party or subject to the provisions of
any injunction, judgment, decree or order of any court, regulatory body,
administrative agency or other governmental body which might reasonably be
expected to, individually or in the aggregate, prevent or materially and
adversely affect the transactions contemplated by this Agreement or result in a
material adverse change in the condition (financial or otherwise), properties,
business, results of operations or prospects of the Company and the
Subsidiaries, taken as a whole.

7
<PAGE> 8
(l) The Company and each Subsidiary has good and valid title
to all the properties and assets reflected as owned in the financial statements
hereinabove described or as described elsewhere in the Prospectus, subject to no
lien, mortgage, pledge, charge or encumbrance of any kind except (i) those, if
any, reflected in such financial statements or as described elsewhere in the
Prospectus, and (ii) those which are not material in amount and do not
materially and adversely affect the use made and proposed to be made of such
property and assets by the Company and the Subsidiaries, taken as a whole. The
Company and each Subsidiary holds its leased properties under valid and binding
leases, with such exceptions as are not materially significant in relation to
the business of the Company. Immediately prior to the First Closing Date, except
as disclosed in the Prospectus, the Company and the Subsidiaries will own or
lease all such properties as are necessary to their respective operations as now
conducted.

(m) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, and except as described
in or specifically contemplated by the Prospectus: (i) the Company and the
Subsidiaries have not incurred any material liabilities or obligations,
indirect, direct or contingent, or entered into any material verbal or written
agreement or other transaction which is not in the ordinary course of business
(it being understood that the purchase of real estate and the construction of
hotels are considered to be in the ordinary course of business) or which could
reasonably be expected to result in a material reduction in the future earnings
of the Company and the Subsidiaries, taken as a whole; (ii) the Company and the
Subsidiaries have not sustained any material loss or interference with their
respective businesses or properties from fire, flood, windstorm, accident or
other calamity, whether or not covered by insurance; (iii) the Company has not
paid or declared any dividends or other distributions with respect to its
capital stock and the Company and the Subsidiaries are not in default in the
payment of principal or interest on any outstanding debt obligations; (iv) there
has not been any change in the capital stock (other than upon the sale of the
Common Shares hereunder) or indebtedness material to the Company and the
Subsidiaries, taken as a whole (other than in the ordinary course of business);
and (v) there has not been any material adverse change in the condition
(financial or otherwise), business, properties, results of operations or
prospects of the Company and the Subsidiaries, taken as a whole.

(n) Other than as described in the Registration Statement and
Prospectus, the Company and the Subsidiaries have sufficient trademarks, trade
names, service marks, patent rights, mask works, copyrights, licenses, know-how
and other similar rights and proprietary knowledge (collectively, "Intangibles")
to conduct their respective businesses as now conducted; and the

8
<PAGE> 9
Company has no knowledge of any material infringement by it or the Subsidiaries
of any Intangible of others, and there is no claim being made against the
Company or the Subsidiaries regarding any Intangible which could have a material
adverse effect on the condition (financial or otherwise), business, results of
operations or prospects of the Company and the Subsidiaries, taken as a whole.

(o) The Company has not been advised, and has no reason to
believe, that either it or any Subsidiary is not conducting business in
compliance with all applicable laws, rules and regulations of the jurisdictions
in which it is conducting business, including, without limitation, all
applicable local, state and federal environmental laws and regulations; except
where failure to be so in compliance would not materially and adversely affect
the condition (financial or otherwise), business, results of operations or
prospects of the Company and the Subsidiaries, taken as a whole.

(p) The Company and the Subsidiaries have filed all necessary
federal, state and foreign tax returns and have paid all taxes shown as due
thereon; and the Company has no knowledge of any tax deficiency which has been
or might be asserted or threatened against the Company or the Subsidiaries which
could materially and adversely affect the business, operations or properties of
the Company and the Subsidiaries, taken as a whole.

(q) The Company is not an "investment company" within
the meaning of the Investment Company Act of 1940, as amended.

(r) The Company has not distributed and will not distribute
prior to the First Closing Date any offering material in connection with the
offering and sale of the Common Shares other than any Preliminary Prospectus,
the Prospectus, the Registration Statement and the other materials permitted by
the Act.

(s) The Company, as of the First Closing Date will maintain,
and each of the Subsidiaries maintains, insurance of the types and in the
amounts generally deemed adequate in the extended-stay lodging industry for its
business, including, but not limited to, insurance covering real and personal
property owned or leased by the Company and the Subsidiaries against theft,
damage, destruction, acts of vandalism and all other risks customarily insured
against, all of which insurance is in full force and effect, or in the case of
the Company, will be in full force and effect as of the First Closing Date.

(t) Neither the Company nor any of the Subsidiaries has at any
time during the last five years (i) made any unlawful contribution to any
candidate for foreign office, or failed to disclose fully any contribution in
violation of law, or (ii) made any payment to any federal or state governmental
officer or

9
<PAGE> 10
official, or other person charged with similar public or quasi-public duties,
other than payments required or permitted by the laws of the United States or
any jurisdiction thereof.

(u) The Shares have been duly authorized for quotation on the
NASDAQ National Market.

(v) Neither the Company nor any of its affiliates does
business with the government of Cuba or with any person or affiliate located in
Cuba in violation of Section 517.075 of the Florida Statutes.

(w) To the best knowledge of the Company, the Company and each
Subsidiary have obtained all permits, licenses and other authorizations that are
required under all environmental laws applicable to them, including but not
limited to the Federal Water Pollution Control Act (33 U.S.C. Section 1251 et
seq.), Resource Conservation & Recovery Act (42 U.S.C. Section 6901 et seq.),
Safe Drinking Water Act (21 U.S.C. Section 349, 42 U.S.C. Sections 201,
300f), Toxic Substances Control Act (15 U.S.C. Section 2601 et seq.), Clean Air
Act (42 U.S.C. Section 7401 et seq.), Comprehensive Environmental Response,
Compensation and Liability Act (42 U.S.C. Section 9601 et seq.), other
applicable state and other laws relating to emissions, discharges, releases or
threatened releases of pollutants, contaminants, chemicals or industrial, toxic
or hazardous substances or wastes, or any other applicable regulation, code,
plan, order, decree, judgment, injunction, notice or demand letter issued,
entered, promulgated or approved thereunder (collectively, the "Environmental
Laws"), except to the extent failure to have any such permit, license or
authorization, individually or in the aggregate, would not have a material
adverse effect on the condition (financial or otherwise), business, results of
operations or prospects of the Company and the Subsidiaries, taken as a whole.
Except as described in the Prospectus, the Company and the Subsidiaries are in
compliance with all terms and conditions of any required permits, licenses,
authorizations, limitations, restrictions, conditions, standards, prohibitions,
requirements, obligations, schedules and timetables contained in the
Environmental Laws, except to the extent failure to comply would not have a
material adverse effect on the condition (financial or otherwise), business,
results of operations or prospects of the Company and the Subsidiaries, taken as
a whole.

(x) To the best knowledge of the Company, there are no past or
present events, conditions, circumstances, activities, practices, incidents,
actions or plans relating to the business as presently being conducted by the
Company or any Subsidiary that interfere with or prevent compliance or continued
compliance with the Environmental Laws, or which would be reasonably likely to
give rise to any legal liability (whether statutory or common law) or otherwise
would be reasonably likely to form the basis of any claim, action, demand, suit,
proceeding, hearing, notice of

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<PAGE> 11
violation, study, investigation, remediation or cleanup based on or related to
the generation, manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling, or the emission, discharge, release into the
workplace, the community or the environment of any pollutant, contaminant,
chemical or industrial, toxic, or hazardous substance or waste, except for any
liabilities or any claims, demands or other actions specified above that will
not individually or in the aggregate have a material adverse effect on the
Company and the Subsidiaries, taken as a whole.

SECTION 3. Representations and Warranties of the Underwriters.
The Representatives, on behalf of the several Underwriters, represent and
warrant to the Company that the information set forth (i) on the cover page of
the Prospectus with respect to price, underwriting discounts and commissions and
terms of offering and (ii) under "Underwriting" in the Prospectus was furnished
to the Company by and on behalf of the Underwriters for use in connection with
the preparation of the Registration Statement and the Prospectus and such
information is correct in all material respects. The Representatives represent
and warrant that they have been authorized by each of the other Underwriters as
the Representatives to enter into this Agreement on its behalf and to act for it
in the manner herein provided.

SECTION 4. Purchase, Sale and Delivery of Common Shares. On
the basis of the representations, warranties and agreements herein contained,
but subject to the terms and conditions herein set forth, the Company agrees to
issue and sell to the Underwriters the Firm Common Shares. The Underwriters
agree, severally and not jointly, to purchase from the Company the number of
Firm Common Shares described below. The purchase price per share to be paid by
the several Underwriters to the Company shall be $____ per share.

Delivery of certificates for the Firm Common Shares to be
purchased by the Underwriters and payment therefor shall be made at the offices
of Montgomery Securities, 600 Montgomery Street, San Francisco, California (or
such other place as may be agreed upon by the Company and the Representatives)
at such time and date, not later than the fourth full business day following the
first date that any of the Common Shares are released by you for sale to the
public, as you shall designate by at least 48 hours' prior notice to the Company
(or at such other time and date, not later than one week after such fourth full
business day as may be agreed upon by the Company and the Representatives) (the
"First Closing Date"); provided, however, that if the Prospectus is at any time
prior to the First Closing Date recirculated to the public, the First Closing
Date shall occur upon the later of the third full business day following the
first date that any of the Common Shares are released by you for sale to the
public or the date that is 48 hours after the date that the Prospectus has been
so recirculated.

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<PAGE> 12
Delivery of certificates for the Firm Common Shares shall be
made by or on behalf of the Company to you, for the respective accounts of the
Underwriters against payment by you, for the accounts of the several
Underwriters, of the purchase price therefor by wire transfer payable in same
day funds to the order of the Company. The certificates for the Firm Common
Shares shall be registered in such names and denominations as you shall have
requested at least two full business days prior to the First Closing Date, and
shall be made available for checking and packaging on the business day preceding
the First Closing Date at such location in New York, New York, as may be
designated by you. Time shall be of the essence, and delivery at the time and
place specified in this Agreement is a further condition to the obligations of
the Underwriters.

In addition, on the basis of the representations, warranties
and agreements herein contained, but subject to the terms and conditions herein
set forth, the Company hereby grants an option to the several Underwriters to
purchase, severally and not jointly, up to an aggregate of 577,500 Optional
Common Shares at the purchase price per share to be paid by the Underwriters for
the Firm Common Shares, for use solely in covering any over-allotments made by
you for the account of the Underwriters in the sale and distribution of the Firm
Common Shares. The option granted hereunder may be exercised at any time (but
not more than once) within 30 days after the first date that any of the Common
Shares are released by you for sale to the public, upon notice by you to the
Company setting forth the aggregate number of Optional Common Shares as to which
the Underwriters are exercising the option, the names and denominations in which
the certificates for such shares are to be registered and the time and place at
which such certificates are to be delivered. Such time of delivery (which may
not be earlier than the First Closing Date and being herein referred to as the
"Second Closing Date") shall be determined by you, but if at any time other than
the First Closing Date shall not be earlier than three nor later than five full
business days after delivery of such notice of exercise. The number of Optional
Common Shares to be purchased by each Underwriter shall be determined by
multiplying the number of Optional Common Shares to be sold by the Company
pursuant to such notice of exercise by a fraction, the numerator of which is the
number of Firm Common Shares to be purchased by such Underwriter as set forth
opposite its name in Schedule A and the denominator of which is 3,850,000
(subject to such adjustments to eliminate any fractional share purchases as you
in your discretion may make). Certificates for the Optional Common Shares being
purchased will be made available for checking and packaging on the business day
preceding the Second Closing Date at such location in New York, New York, as may
be designated by you. The manner of payment for and delivery of such Optional
Common Shares shall be the same as for the Firm Common Shares purchased from the
Company as specified in the two preceding paragraphs. At any time before lapse
of the option, you may

12
<PAGE> 13
cancel such option by giving written notice of such cancellation to the Company.
If the option is cancelled or expires unexercised in whole or in part, the
Company will deregister under the Act the number of Optional Common Shares as to
which the option has not been exercised.

You have advised the Company that each Underwriter has
authorized you to accept delivery of its Common Shares, to make payment and to
issue a receipt therefor. You, individually and not as the Representatives of
the Underwriters, may (but shall not be obligated to) make payment for any
Common Shares to be purchased by any Underwriter whose funds shall not have been
received by you by the First Closing Date or the Second Closing Date, as the
case may be, for the account of such Underwriter, but any such payment shall not
relieve such Underwriter from any of its obligations under this Agreement.

Subject to the terms and conditions hereof, the Underwriters
propose to make a public offering of their respective portions of the Common
Shares as soon after the effective date of the Registration Statement as in the
judgment of the Representatives is advisable and at the public offering price
set forth on the cover page of and on the terms set forth in the final
prospectus, if one is used, or on the first page of the Term Sheet, if one is
used.

SECTION 5. Covenants of the Company. The Company covenants and
agrees that:

(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto, to
become effective. If the Registration Statement has become or becomes effective
pursuant to Rule 430A of the Rules and Regulations, or the filing of the
Prospectus is otherwise required under Rule 424(b) of the Rules and Regulations,
the Company will file the Prospectus, properly completed, pursuant to the
applicable paragraph of Rule 424(b) of the Rules and Regulations within the time
period prescribed and will provide evidence satisfactory to you of such timely
filing. The Company will promptly advise you in writing (i) of the receipt of
any comments of the Commission, (ii) of any request of the Commission for
amendment of or supplement to the Registration Statement (either before or after
it becomes effective), any Preliminary Prospectus or the Prospectus or for
additional information, (iii) when the Registration Statement shall have become
effective and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the institution
of any proceedings for that purpose. If the Commission shall enter any such stop
order at any time, the Company will use its best efforts to obtain the lifting
of such order at the earliest possible moment. The Company will not file any
amendment or supplement to the

13
<PAGE> 14
Registration Statement (either before or after it becomes effective), any
Preliminary Prospectus or the Prospectus if you have not been furnished with a
copy a reasonable time prior to such filing, if you reasonably object to the
Company filing such document or if the document to be filed is not in compliance
with the Act and the Rules and Regulations.

(b) The Company will prepare and file with the Commission,
promptly upon your request, any amendments or supplements to the Registration
Statement or the Prospectus which in your judgment may be necessary or advisable
to enable the several Underwriters to continue the distribution of the Common
Shares and will use its best efforts to cause the same to become effective as
promptly as possible. The Company will fully and completely comply with the
provisions of Rule 430A of the Rules and Regulations with respect to information
omitted from the Registration Statement in reliance upon such Rule.

(c) If at any time within the 25-day period referred to in
Rule 174 of the Rules and Regulations, during which a prospectus relating to the
Common Shares is required to be delivered under the Act any event occurs, as a
result of which the Prospectus, including any amendments or supplements, would
include an untrue statement of a material fact, or omit to state any material
fact required to be stated therein or necessary, in light of the circumstances
under which they were made, to make the statements therein not misleading, or if
it is necessary at any such time to amend the Prospectus, including any
amendments or supplements, to comply with the Act or the Rules and Regulations,
the Company will promptly advise you thereof and will promptly prepare and file
with the Commission, at its own expense, an amendment or supplement which will
correct such statement or omission or an amendment or supplement which will
effect such compliance and will use its best efforts to cause the same to become
effective as soon as possible; and, in case any Underwriter is required to
deliver a prospectus after such 25-day period, the Company upon request, but at
the expense of such Underwriter, will promptly prepare such amendment or
amendments to the Registration Statement and such Prospectus or Prospectuses as
may be necessary to permit compliance with the requirements of Section 10(a)(3)
of the Act.

(d) As soon as practicable, but not later than 45 days after
the end of the first quarter ending after the first anniversary of the effective
date of the Registration Statement (as defined in Rule 158(c) of the Rules and
Regulations), the Company will make generally available to its security holders
an earnings statement (which need not be audited) covering a period of 12
consecutive months beginning after the effective date of the Registration
Statement which will satisfy the provisions of the last paragraph of Section
11(a) of the Act.

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<PAGE> 15
(e) As soon as practicable, but no later than the close of
business one business day after the pricing of the Common Shares, the Company
will have delivered to you or to such locations as you may request the
Prospectus, in such reasonable quantities as you may request.

(f) During such period as a prospectus is required by law to
be delivered in connection with sales by an Underwriter or dealer, the Company,
at its expense, but only for the 25-day period referred to in Rule 174 of the
Rules and Regulations, will furnish to you or mail to your order copies of the
Registration Statement, the Prospectus, the Preliminary Prospectus and all
amendments and supplements to any such documents in each case as soon as
available and in such quantities as you may request, for the purposes
contemplated by the Act.

(g) The Company shall cooperate with you and your counsel in
order to qualify or register the Common Shares for sale under (or obtain
exemptions from the application of) the Blue Sky laws of such jurisdictions as
you designate, will comply with such laws and will continue such qualifications,
registrations and exemptions in effect so long as reasonably required for the
distribution of the Common Shares. The Company shall not be required to qualify
as a foreign corporation or to file a general consent to service of process in
any such jurisdiction where it is not presently qualified or where it would be
subject to taxation as a foreign corporation. The Company will advise you
promptly of the suspension of the qualification or registration of (or any such
exemption relating to) the Common Shares for offering, sale or trading in any
jurisdiction or any initiation or threat of any proceeding for any such purpose,
and in the event of the issuance of any order suspending such qualification,
registration or exemption, the Company, with your cooperation, will use its best
efforts to obtain the withdrawal thereof.

(h) During the period of five years hereafter, the Company
will furnish to the Representatives and, upon request of the Representatives, to
each of the other Underwriters: (i) as soon as practicable after the end of each
fiscal year, copies of the Annual Report of the Company containing the balance
sheet of the Company as of the close of such fiscal year and statements of
income, stockholders' equity and cash flows for the year then ended and the
opinion thereon of the Company's independent public accountants; (ii) as soon as
practicable after the filing thereof, copies of each proxy statement and annual
and other report filed by the Company with the Commission, the NASD or any
securities exchange; and (iii) as soon as available, copies of any report or
communication of the Company mailed generally to holders of its Common Stock.

(i) During the period of 180 days after the first date that
any of the Common Shares are released by you for sale to the

15
<PAGE> 16
public, without the prior written consent of the Representatives (which consent
may be withheld at the sole discretion of the Representatives, as the case may
be), the Company will not other than (i) in accordance with the employee benefit
plans described in the Prospectus or (ii) issuances in connection with the
acquisition of another business (provided the persons to whom the stock is
issued agree not to sell any such shares for the remainder of the 180 day
period), issue, offer, sell, grant options to purchase or otherwise dispose of
any of the Company's equity securities or any other securities convertible into
or exchangeable with its Common Stock or other equity security.

(j) The Company will apply the net proceeds of the sale of the
Common Shares sold by it substantially in accordance with its statements under
the caption "Use of Proceeds" in the Prospectus.

(k) The Company will use its best efforts to qualify or
register its Common Stock for sale in non-issuer transactions under (or obtain
exemptions from the application of) the Canadian provincial securities laws,
will comply with such securities laws and will continue such qualifications,
registrations and exemptions in effect for a period of five years after the date
hereof.

(l) On or before the completion of this offering, the Company
will use its best efforts to designate the Common Stock for quotation as a
national market system security on the Nasdaq National Market.

You, on behalf of the Underwriters, may, in your sole
discretion, waive in writing the performance by the Company of any one or more
of the foregoing covenants or extend the time for their performance.

SECTION 6. Payment of Expenses. Whether or not the
transactions contemplated hereunder are consummated or this Agreement becomes
effective or is terminated, the Company agrees to pay all costs, fees and
expenses incurred in connection with the performance of its obligations
hereunder and in connection with the transactions contemplated hereby (except as
set forth herein), including without limiting the generality of the foregoing,
(i) all expenses incident to the issuance and delivery of the Common Shares
(including all printing and engraving costs), (ii) all fees and expenses of the
registrar and transfer agent of the Common Stock, (iii) all necessary issue,
transfer and other taxes in connection with the issuance and sale of the Common
Shares to the Underwriters, (iv) all fees and expenses of the Company's counsel
and the Company's independent accountants, (v) all costs and expenses incurred
in connection with the preparation, printing, filing, shipping and distribution
of the Registration Statement, each Preliminary Prospectus and the Prospectus
(including all exhibits and financial statements) and

16
<PAGE> 17
all amendments and supplements provided for herein, this Agreement, the Master
Agreement Among Underwriters, the Selected Dealers Agreement, the Master
Underwriters' Questionnaire, the Preliminary and the Final Blue Sky Memoranda,
(vi) all filing fees, attorneys' fees and expenses incurred by the Company or
the Underwriters in connection with qualifying or registering (or obtaining
exemptions from the qualification or registration of) all or any part of the
Common Shares for offer and sale under the Canadian provincial securities laws
and U.S. state Blue Sky laws, (vii) the filing fee of the NASD and any fees and
expenses relating to inclusion of the Common Shares on the Nasdaq National
Market, and (viii) all other fees, costs and expenses referred to in Item 13 of
the Registration Statement. Except as provided in this Section 6, Section 8 and
Section 10 hereof, the Underwriters shall pay all of their own expenses,
including the fees and disbursements of their counsel (excluding those relating
to qualification, registration or exemption under the securities and Blue Sky
laws and the Blue Sky Memoranda referred to above).

SECTION 7. Conditions of the Obligations of the Underwriters.
The obligations of the several Underwriters to purchase and pay for the Firm
Common Shares on the First Closing Date and the Optional Common Shares on the
Second Closing Date shall be subject to the accuracy of the representations and
warranties on the part of the Company herein set forth as of the date hereof and
as of the First Closing Date or the Second Closing Date, as the case may be, to
the accuracy of the statements of Company officers made pursuant to the
provisions hereof, to the performance by the Company of its obligations
hereunder, and to the following additional conditions:

(a) The Registration Statement shall have become effective not
later than 5:00 P.M., Washington, D.C. Time, on the date of this Agreement, or
at such later time as shall have been consented to by you; if the filing of the
Prospectus, or any supplement thereto, is required pursuant to Rule 424(b) of
the Rules and Regulations, the Prospectus shall have been filed in the manner
and within the time period required by Rule 424(b) of the Rules and Regulations;
and prior to such Closing Date, no stop order suspending the effectiveness of
the Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or shall be pending or, to the knowledge of
the Company or you, shall be contemplated by the Commission; and any request of
the Commission for inclusion of additional information in the Registration
Statement, or otherwise, shall have been complied with to your satisfaction.

(b) Except as described in or specifically contemplated by the
Prospectus, you shall be satisfied that since the respective dates as of which
information is given in the Registration Statement and Prospectus, (i) there
shall not have been any change in the capital stock other than as provided
herein and in accordance with the employee benefit plans

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<PAGE> 18
described in the Prospectus of the Company or any material change in the
indebtedness (other than in the ordinary course of business) of the Company and
any of the Subsidiaries, taken as a whole, (ii) except as set forth in or
contemplated by the Registration Statement or the Prospectus, no material verbal
or written agreement or other transaction shall have been entered into by the
Company or any of the Subsidiaries, which is not in the ordinary course of
business (it being understood that the purchase of real estate and the
construction of hotels are considered to be in the ordinary course of business)
or which could reasonably be expected to result in a material reduction in the
future earnings of the Company and the Subsidiaries,taken as a whole, (iii) no
loss or damage (whether or not insured) to the property of the Company or any of
the Subsidiaries shall have been sustained which materially and adversely
affects the condition (financial or otherwise), business, properties, results of
operations or prospects of the Company and the Subsidiaries, taken as a whole,
(iv) no legal or governmental action, suit or proceeding affecting the Company
or any of the Subsidiaries which is material to the Company and the
Subsidiaries, taken as a whole, or which affects or may affect the transactions
contemplated by this Agreement shall have been instituted or threatened and (v)
there shall not have been any material adverse change in the condition
(financial or otherwise), business, properties, results of operations or
prospects of the Company and the Subsidiaries, taken as a whole, which makes it
impractical or inadvisable in the judgment of the Representatives to proceed
with the public offering or purchase the Common Shares as contemplated hereby.

(c) There shall have been delivered to you the Firm Common
Shares and, if any Optional Common Shares are then being purchased, such
Optional Common Shares.

(d) The NASD, upon review of the terms of the public offering
of the Common Shares, shall not have objected to the fairness and reasonableness
of the underwriting terms and arrangements as proposed in this Agreement, the
Master Agreement Among Underwriters and the Selected Dealers Agreement.

(e) The representations and warranties of the Company
contained in this Agreement and in the certificates delivered pursuant to
Section 7(f)(iii) shall be true and correct when made and on and as of the First
Closing Date or the Second Closing Date, as the case may be, as if made on such
date and the Company shall have performed all covenants and agreements and
satisfied all the conditions contained in this Agreement required to be
performed or satisfied by it at or before such Closing Date.

(f) There shall have been furnished to you, as Representatives
of the Underwriters, on each Closing Date, in form and substance reasonably
satisfactory to you, except as otherwise expressly provided below:

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<PAGE> 19
(i) An opinion of Latham & Watkins, counsel for the
Company (or as to paragraphs 1, 2 and 4 with respect to entities
organized under the laws of states other than California and Delaware,
counsel to Company for said states), addressed to the Underwriters and
dated the First Closing Date or the Second Closing Date, as the case
may be, to the effect that:

(1) The Company has been duly incorporated
and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation. Each of
the Subsidiaries has been duly formed as a limited liability
company and is validly existing as a limited liability company
under the laws of its jurisdiction of formation.

(2) The Company and each of the Subsidiaries
has full corporate or limited liability company power and
authority to own and lease its assets and properties and
conduct its business as now being conducted and as described
in the Registration Statement.

(3) The authorized, issued and outstanding
capital stock of the Company is as set forth under the caption
"Capitalization" in the Prospectus; all of the issued and
outstanding shares of Common Stock have been duly authorized
and validly issued, are fully paid and nonassessable, have
been issued in transactions that were registered or exempt
from registration under the Act, and were not issued in
violation of or subject to any preemptive rights contained in
any applicable statute or the Company's Certificate of
Incorporation; and the description thereof contained under the
caption entitled "Description of Capital Stock" in the
Prospectus accurately sets forth in all material respects the
information required therein by Form S-1.

(4) All of the membership interests of the
Subsidiaries have been duly and validly authorized and are
owned of record and, directly or indirectly and to the best of
such counsel's knowledge beneficially by the Company.

(5) The certificates evidencing the Common
Shares to be delivered hereunder are in proper form under
Delaware law, have been duly authorized and, when duly
countersigned by the Company's transfer agent and registrar
and delivered to you or upon your order against payment of the
agreed consideration therefor in accordance with the
provisions of this Agreement, the Common Shares represented
thereby will be validly issued, fully paid and nonassessable
and will not have

19
<PAGE> 20
been issued in violation of or subject to any preemptive
rights contained in any applicable statute or the Company's
Certificate of Incorporation.

(6) Except as disclosed in or specifically
contemplated by the Prospectus, to the best of such counsel's
knowledge, there are no outstanding options, warrants or other
rights issued by the Company calling for the issuance of, and
no commitments, plans or arrangements of the Company to issue,
any shares of capital stock of the Company or any security
convertible into or exchangeable for capital stock of the
Company.

(7) (A) The Registration Statement has
become effective under the Act, and, to the best of
such counsel's knowledge, no stop order suspending
the effectiveness of the Registration Statement or
preventing the use of the Prospectus has been issued
and no proceedings for that purpose have been
instituted or are pending or contemplated by the
Commission; and any required filing of the Prospectus
and any supplement thereto pursuant to Rule 424(b) of
the Rules and Regulations has been made in the manner
and within the time period required by such Rule
424(b).

(B) The Registration Statement, the
Prospectus and each amendment or supplement thereto
(except for the financial statements, schedule and
other financial, accounting and statistical
information included therein as to which such counsel
need express no opinion) comply as to form in all
material respects with the requirements of the Act
and the Rules and Regulations; it being understood,
however, that such counsel expresses no opinion with
respect to the financial statements, schedule and
other financial and statistical data included in the
Registration Statement, the Prospectus and each
amendment or supplement thereto.

(C) To the best of such counsel's
knowledge, there are no franchises, leases,
contracts, agreements or documents of a character
required to be described in the Registration
Statement or Prospectus or to be filed as exhibits to
the Registration Statement which are not described or
filed, as required.

(D) To the best of such counsel's
knowledge, there are no legal or governmental
actions, suits or proceedings pending or

20
<PAGE> 21
threatened against the Company which are required
to be described in the Prospectus which are not
described as required.

(8) The Company has the corporate power and
authority to enter into this Agreement and to sell and deliver
the Common Shares to be sold by it to the several
Underwriters; this Agreement has been duly authorized,
executed and delivered by the Company.

(9) No approval, authorization, order,
consent, registration, filing, qualification, license or
permit of or with any federal or California court, regulatory,
administrative or other governmental body that, in such firm's
experience, are normally applicable to transactions of the
type contemplated by this Agreement, is required to be
obtained by the Company for the execution and delivery of this
Agreement by the Company or the sale of the Common Shares to
the several Underwriters, except (i) such as have been
obtained and are in full force and effect under the Act and
(ii) such as may be required under applicable Blue Sky laws in
connection with the purchase and distribution of the Common
Shares by the Underwriters, as to which no opinion is
rendered.

(10) The execution and delivery of this
Agreement by the Company and the sale of the Common Shares to
the several Underwriters will not violate any of the
provisions of the certificate of incorporation or bylaws of
the Company or the operating agreement of any of the
Subsidiaries or cause the Company or any Subsidiary to violate
any federal or California statute, judgment, decree, order,
rule or regulation of any court or governmental body that, in
the firm's experience, are normally applicable to the
execution and delivery of similar agreements, except that no
opinion shall be rendered as to federal securities laws or
applicable Blue Sky laws.

(11) To the best of such counsel's
knowledge, no holders of securities of the Company have
rights, which have not been waived, to the registration of
shares of Common Stock or other securities, because of the
filing of the Registration Statement by the Company or the
offering contemplated hereby.

(12) The Company is not an "investment
company" within the meaning of the Investment Company Act of
1940.

In rendering such opinion, such counsel may
rely on certificates of officers of the Company and of

21
<PAGE> 22
governmental officials, in which case their opinion is to state that they are so
doing and that the Underwriters are justified in relying on such certificates
and copies of said certificates are to be provided to counsel for the
Underwriters. Such counsel shall also include a statement that they have
participated in conferences with officers and other representatives of the
Company, representatives of the independent public accountants for the Company
and your representatives, at which the contents of the Registration Statement
were discussed and, although they are not passing upon, and do not assume any
responsibility for, the accuracy, completeness or fairness of the statements
contained in the Registration Statement and the Prospectus and have not made any
independent check or verification thereof, during the course of such
participation (relying as to materiality to a large extent on the statements of
officers and other representatives of the Company) no facts came to their
attention that caused them to believe that the Registration Statement, at the
time it became effective, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, or that the Prospectus, as of its
date, contained an untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; it being understood
that such counsel expresses no belief with respect to the financial statements,
schedules and other financial and statistical data included in the Registration
Statement or the Prospectus.

(ii) Such opinion or opinions of O'Melveny & Myers LLP,
counsel for the Underwriters, dated the First Closing Date or the
Second Closing Date, as the case may be, with respect to the
incorporation of the Company, the sufficiency of all corporate
proceedings and other legal matters relating to this Agreement, the
validity of the Common Shares, the Registration Statement and the
Prospectus and other related matters as you may reasonably require, and
the Company shall have furnished to such counsel such documents and
shall have exhibited to them such papers and records as they may
reasonably request for the purpose of enabling them to pass upon such
matters. In connection with such opinions, such counsel may rely on
representations or certificates of officers of the Company and
governmental officials.

(iii) A certificate of the Company executed by the
Chairman of the Board and the President and the chief financial officer
of the Company, in their capacities as officers of the Company, dated
the First Closing Date or the Second Closing Date, as the case may be,
to the effect that:

(1) The representations and warranties of
the Company set forth in Section 2 of this Agreement

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<PAGE> 23
were true and correct as of the date of this Agreement and are
true and correct in all material respects as of such Closing
Date, as the case may be, and the Company has complied in all
material respects with all the agreements and satisfied in all
material respects all the conditions on its part to be
performed or satisfied on or prior to such Closing Date.

(2) The Commission has not issued any order
preventing or suspending the use of the Prospectus or any
Preliminary Prospectus filed as a part of the Registration
Statement or any amendment or supplement thereto; no stop
order suspending the effectiveness of the Registration
Statement has been issued; and to the best of the knowledge of
the respective signers, no proceedings for that purpose have
been instituted or are pending or contemplated under the Act.

(iv) On the date before this Agreement is executed and
also on each Closing Date, a letter addressed to you, as
Representatives of the Underwriters, from KPMG Peat Marwick,
independent accountants, the first one to be dated the day before the
date of this Agreement, the second one to be dated the First Closing
Date and the third one (in the event of a second closing hereunder) to
be dated the Second Closing Date, in form and substance reasonably
satisfactory to you.

(v) On or before the First Closing Date, letters from
each holder of the Company's Common Stock and each director and
executive officer of the Company, in form and substance reasonably
satisfactory to you, (i) confirming that for a period of 180 days after
the first date that any of the Common Shares are released by you for
sale to the public, such person will not, directly or indirectly, sell
or offer to sell or otherwise dispose of any shares of Common Stock or
any right to acquire such shares without the prior written consent of
Montgomery Securities, which consent may be withheld at the sole
discretion of the Representatives; provided that any such holder,
director or officer may transfer Common Shares to one or more
affiliates (including partners of any partnership) or one or more
members of such person's immediate family, or a trust, the sole
beneficiaries of which are members of such individual's immediate
family, if the transferee agrees in writing to be bound by this
provision and (ii) waiving any registration rights and rights to
purchase with respect to the public offering contemplated hereunder.

All such opinions, certificates, letters and documents shall
be in compliance with the provisions hereof only if they are reasonably
satisfactory to you and to O'Melveny & Myers LLP, counsel for the Underwriters.
The Company shall furnish you with

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<PAGE> 24
such manually signed or conformed copies of such opinions, certificates, letters
and documents as you request. Any certificate signed by any officer of the
Company and delivered to the Representatives or to counsel for the Underwriters
shall be deemed to be a representation and warranty by the Company to the
Underwriters as to the statements made therein.

If any condition to the Underwriters' obligations hereunder to
be satisfied prior to or at the First Closing Date is not so satisfied, this
Agreement at your election will terminate upon notification by you as
Representatives to the Company without liability on the part of any Underwriter
or the Company except for the expenses to be paid or reimbursed by the Company
pursuant to Sections 6 and 8 hereof and except to the extent provided in Section
10 hereof.

SECTION 8. Reimbursement of Underwriters' Expenses.
Notwithstanding any other provisions hereof, if this Agreement shall be
terminated by you pursuant to Section 7 or Section 13, or if the sale to the
Underwriters of the Common Shares at the First Closing Date is not consummated
because of any refusal, inability or failure on the part of the Company to
perform any agreement herein or to comply with any provision hereof, the Company
agrees to reimburse you and the other Underwriters upon demand for all
out-of-pocket expenses that shall have been reasonably incurred by you and them
in connection with the proposed purchase and the sale of the Common Shares,
including but not limited to reasonable fees and disbursements of counsel,
printing expenses, travel expenses, postage and telephone charges relating
directly to the offering contemplated by the Prospectus. Any such termination
shall be without liability of any party to any other party except that the
provisions of this Section , Section 6 and Section 10 shall at all times be
effective and shall apply.

SECTION 9. Effectiveness of Registration Statement. You and
the Company will use your and its best efforts to cause the Registration
Statement to become effective, to prevent the issuance of any stop order
suspending the effectiveness of the Registration Statement and, if such stop
order be issued, to obtain as soon as possible the lifting thereof.

SECTION 10. Indemnification and Contribution.

(a) The Company and each of the Subsidiaries, jointly and
severally, agree to (i) indemnify and hold harmless each Underwriter and each
person, if any, who controls any Underwriter within the meaning of the Act
against any losses, claims, damages, liabilities or expenses, joint or several,
to which such Underwriter or such controlling person may become subject, under
the Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
or other federal or state statutory law or regulation, or at common law or
otherwise (including in

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<PAGE> 25
settlement of any litigation, if such settlement is effected with the written
consent of the Company), insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof as contemplated below) arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state in any of them a material fact
required to be stated therein or necessary (with respect to the Prospectus or
any Preliminary Prospectus, in light of the circumstances under which they were
made) to make the statements in any of them not misleading, or arise out of or
are based in whole or in part on any inaccuracy in the representations and
warranties of the Company contained in Section 2 herein or any failure of the
Company to perform its obligations hereunder or under law; and (ii) reimburse
each Underwriter and each such controlling person for any legal and other
expenses as such expenses are reasonably incurred by such Underwriter or such
controlling person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or
action; provided, however, that the Company will not be liable in any such case
to the extent that any such loss, claim, damage, liability or expense arises out
of or is based upon an untrue statement or alleged untrue statement or omission
or alleged omission made in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto in reliance
upon and in conformity with the information furnished to the Company pursuant to
Section 3 hereof; and provided further that the indemnification provisions
contained in this paragraph (a) with respect to any Preliminary Prospectus shall
not inure to the benefit of any Underwriter (or to the benefit of any person
controlling such Underwriter) on account of any such loss, claim, damage,
liability or expense arising from the sale of any Common Shares by such
Underwriter to any person if a copy of the Prospectus shall not have been
delivered or sent to such person within the time required by the Act and the
regulations thereunder and the untrue statement or alleged untrue statement or
omission or alleged omission of a material fact contained in such Preliminary
Prospectus was corrected in the Prospectus. In addition to its other obligations
under this Section 10(a), the Company agrees that, as an interim measure during
the pendency of any claim, action, investigation, inquiry or other proceeding
arising out of or based upon any untrue statement or omission, or any alleged
untrue statement or omission, or any inaccuracy in the representations and
warranties of the Company herein or any failure to perform its obligations, all
as described in this Section 10(a), it will reimburse each Underwriter on a
quarterly basis for all reasonable legal or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the Company's
obligation to

25
<PAGE> 26
reimburse each Underwriter for such expenses and the possibility that such
payments might later be held to have been improper by a court of competent
jurisdiction. To the extent that any such interim reimbursement payment is so
held to have been improper, each Underwriter shall promptly return it to the
Company, together with interest, compounded daily, determined on the basis of
the prime rate (or other commercial lending rate for borrowers of the highest
credit standing) announced from time to time by Bank of America NT&SA, San
Francisco, California (the "Prime Rate"). Any such interim reimbursement
payments which are not made to an Underwriter within 30 days of a request for
reimbursement, shall bear interest at the Prime Rate from the date of such
request. This indemnity agreement will be in addition to any liability which the
Company may otherwise have.

(b) Each Underwriter agrees to severally indemnify and hold
harmless the Company, each of its directors, each of its officers who signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Act, against any losses, claims, damages, liabilities or
expenses to which the Company, or any such director, officer or controlling
person may become subject, under the Act, the Exchange Act, or other federal or
state statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the written
consent of such Underwriter), insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof as contemplated below)
arise out of or are based upon any untrue or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary (with respect to the
Prospectus or any Preliminary Prospectus, in light of the circumstances under
which they were made) to make the statements in any of them not misleading, in
each case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, in reliance upon and in conformity with the
information furnished to the Company pursuant to Section 3 hereof or arise out
of or are based in whole or in part on any inaccuracy in the representations and
warranties of the Underwriters contained herein or any failure of the
Underwriters to perform their respective obligations hereunder or under law; and
will reimburse the Company, or any such director, officer or controlling person
for any legal and other expense reasonably incurred by the Company, or any such
director, officer or controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action. In addition to its other obligations under this
Section 10(b), each Underwriter severally agrees that, as an

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<PAGE> 27
interim measure during the pendency of any claim, action, investigation, inquiry
or other proceeding arising out of or based upon any statement or omission, or
any alleged statement or omission, described in this Section 10(b) which relates
to information furnished to the Company pursuant to Section 3 hereof, it will
reimburse the Company (and, to the extent applicable, each officer, director or
controlling person) on a quarterly basis for all reasonable legal or other
expenses incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the absence
of a judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company (and, to the extent
applicable, each officer, director or controlling person) for such expenses and
the possibility that such payments might later be held to have been improper by
a court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company (and, to the
extent applicable, each officer, director or controlling person) shall promptly
return it to the Underwriters, together with interest, compounded daily,
determined on the basis of the Prime Rate. Any such interim reimbursement
payments which are not made to the Company within 30 days of a request for
reimbursement, shall bear interest at the Prime Rate from the date of such
request. This indemnity agreement will be in addition to any liability which
such Underwriter may otherwise have.

(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against an indemnifying party
under this Section, notify the indemnifying party in writing of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise than
under the indemnity agreement contained in this Section or to the extent it is
not prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it may wish, jointly
with all other indemnifying parties similarly notified, to assume the defense
thereof with counsel reasonably satisfactory to such indemnified party;
provided, however, if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be a conflict between the positions of
the indemnifying party and the indemnified party in conducting the defense of
any such action or that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the

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<PAGE> 28
defense of such action on behalf of such indemnified party or parties. Upon
receipt of notice from the indemnifying party to such indemnified party of its
election so to assume the defense of such action and approval by the indemnified
party of counsel, the indemnifying party will not be liable to such indemnified
party under this Section for any legal or other expenses subsequently incurred
by such indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed such counsel in connection with the
assumption of legal defenses in accordance with the proviso to the next
preceding sentence (it being understood, however, that the indemnifying party
shall not be liable for the expenses of more than one separate counsel, approved
by the Representatives in the case of paragraph (a), representing the
indemnified parties who are parties to such action) or (ii) the indemnifying
party shall not have employed counsel reasonably satisfactory to the indemnified
party to represent the indemnified party within a reasonable time after notice
of commencement of the action, in each of which cases the reasonable fees and
expenses of counsel shall be at the expense of the indemnifying party. An
indemnifying party shall not be liable for any settlement of any action, suit,
proceeding or claim effected without its written consent, which will not be
unreasonably withheld.

(d) If the indemnification provided for in this Section 10 is
required by its terms but is for any reason held to be unavailable to hold
harmless an indemnified party under paragraphs (a) or (b) in respect of any
losses, claims, damages, liabilities or expenses referred to herein, then each
applicable indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of any losses, claims, damages, liabilities
or expenses referred to herein (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company and the Underwriters from
the offering of the Common Shares or (ii) if the allocation provided by clause
(i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company and the Underwriters in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The respective relative benefits received by the
Company and the Underwriters shall be deemed to be in the same proportion, in
the case of the Company as the total price paid to the Company for the Common
Shares sold by it to the Underwriters (net of underwriting commissions but
before deducting expenses), and in the case of the Underwriters as the
underwriting commissions received by them, bears to the total of such amounts
paid to the Company and received by the Underwriters as underwriting
commissions. The relative fault of the Company and the Underwriters shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a

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<PAGE> 29
material fact relates to information supplied by the Company or the Underwriters
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The amount paid or
payable by a party as a result of the losses, claims, damages, liabilities and
expenses referred to above shall be deemed to include, subject to the
limitations set forth in paragraph (c) of this Section 10, any legal or other
fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim.

The provisions set forth in paragraph (c) of this Section 10
with respect to notice of commencement of any action shall apply if a claim for
contribution is to be made under this paragraph (d); provided, however, that no
additional notice shall be required with respect to any action for which notice
has been given under such paragraph (c) for purposes of indemnification. The
Company and the Underwriters agree that it would not be just and equitable if
contribution pursuant to this Section 10 were determined solely by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 10, no Underwriter shall be
required to contribute any amount in excess of the amount of the total
underwriting commissions received by such Underwriter in connection with the
Common Shares underwritten by it. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to this
Section 10 are several in proportion to their respective underwriting
commitments and not joint.

(e) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in Sections 10(a)
and 10(b) hereof, including the amounts of any requested reimbursement payments
and the method of determining such amounts, shall be settled by arbitration
conducted under the provisions of the Constitution and Rules of the Board of
Governors of the New York Stock Exchange, Inc. or pursuant to the Code of
Arbitration Procedure of the NASD. Any such arbitration must be commenced by
service of a written demand for arbitration or written notice of intention to
arbitrate, therein selecting the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Such an arbitration would be limited to the operation of
the interim reimbursement provisions contained in Sections 10(a) and 10(b)
hereof and would not resolve the ultimate propriety or enforceability of the
obligation to reimburse expenses which is

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<PAGE> 30
created by the provisions of such Sections 10(a) and 10(b) hereof.

SECTION 11. Default of Underwriters. It shall be a condition
to this Agreement and the obligation of the Company to sell and deliver the
Common Shares hereunder, and of each Underwriter to purchase the Common Shares
in the manner as described herein, that, except as hereinafter in this paragraph
provided, each of the Underwriters shall purchase and pay for all the Common
Shares agreed to be purchased by such Underwriter hereunder upon tender to the
Representatives of all such shares in accordance with the terms hereof. If any
Underwriter or Underwriters default in their obligations to purchase Common
Shares hereunder on either the First or Second Closing Date and the aggregate
number of Common Shares which such defaulting Underwriter or Underwriters agreed
but failed to purchase on such Closing Date does not exceed 10% of the total
number of Common Shares which the Underwriters are obligated to purchase on such
Closing Date, the non-defaulting Underwriters shall be obligated severally, in
proportion to their respective commitments hereunder, to purchase the Common
Shares which such defaulting Underwriters agreed but failed to purchase on such
Closing Date. If any Underwriter or Underwriters so default and the aggregate
number of Common Shares with respect to which such default occurs is more than
the above percentage and arrangements satisfactory to the Representatives and
the Company for the purchase of such Common Shares by other persons are not made
within 48 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter or the Company except
for the expenses to be paid by the Company pursuant to Section 6 hereof and
except to the extent provided in Section 10 hereof.

If Common Shares to which a default relates are to be
purchased by the non-defaulting Underwriters or by another party or parties, the
Representatives or the Company shall have the right to postpone the First or
Second Closing Date, as the case may be, for not more than five business days in
order that the necessary changes in the Registration Statement, Prospectus, this
Agreement and any other documents, as well as any other arrangements, may be
effected. As used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this Section. Nothing herein will relieve a
defaulting Underwriter from liability for its default.

SECTION 12. Effective Date. This Agreement shall become
effective immediately as to Sections 6, 8, 10, 13 and 14 and, as to all other
provisions, (i) if at the time of execution of this Agreement the Registration
Statement has not become effective, at 2:00 P.M., California time, on the first
full business day following the effectiveness of the Registration Statement, or
(ii) if at the time of execution of this Agreement the Registration Statement
has been declared effective, at 2:00 P.M., California time, on the first full
business day following

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<PAGE> 31
the date of execution of this Agreement; but this Agreement shall nevertheless
become effective at such earlier time after the Registration Statement becomes
effective as you may determine on and by notice to the Company or by release of
any of the Common Shares for sale to the public. For the purposes of this
Section 12, the Common Shares shall be deemed to have been so released upon the
release for publication of any newspaper advertisement relating to the Common
Shares or upon the release by you of notices (i) advising your sales personnel
that the Common Shares are released for public offering, or (ii) offering the
Common Shares for sale to securities dealers, whichever may occur first.

SECTION 13. Termination. Without limiting the right to
terminate this Agreement pursuant to any other provision

hereof:

(a) This Agreement may be terminated by the Company by notice
to you or by you by notice to the Company at any time prior to the time this
Agreement shall become effective as to all its provisions, and any such
termination shall be without liability on the part of the Company to any
Underwriter (except for the expenses to be paid or reimbursed by the Company
pursuant to Sections 6 and 8 hereof and except to the extent provided in Section
10 hereof) or of any Underwriter to the Company (except to the extent provided
in Section 10 hereof).

(b) This Agreement may also be terminated by you prior to the
First Closing Date by notice to the Company (i) if material governmental
restrictions, not in force and effect on the date hereof, shall have been
imposed upon trading in securities generally or minimum or maximum prices shall
have been generally established on the New York Stock Exchange or on the
American Stock Exchange or in the over the counter market by the NASD, or
trading in securities generally shall have been suspended on either such
Exchange or in the over the counter market by the NASD, or a general banking
moratorium shall have been established by federal, New York or California
authorities, (ii) if an outbreak of major hostilities or other national or
international calamity or any substantial change in political, financial or
economic conditions shall have occurred or shall have accelerated or escalated
to such an extent, as, in the reasonable judgment of the Representatives, to
affect materially and adversely the marketability of the Common Shares, (iii) if
any adverse event shall have occurred or shall exist which makes untrue or
incorrect in any material respect any statement or information contained in the
Registration Statement or the Prospectus or which is not reflected in the
Registration Statement or the Prospectus but should be reflected therein in
order to make the statements or information contained therein not misleading in
any material respect or (iv) if there shall be any action, suit or proceeding
pending or threatened, or there shall have been any development or prospective
development involving

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<PAGE> 32
particularly the business or properties or securities of the Company or any of
the Subsidiaries or the transactions contemplated by this Agreement, which, in
the reasonable judgment of the Representatives, may materially and adversely
affect the Company's business or earnings and makes it impracticable or
inadvisable to offer or sell the Common Shares. Any termination pursuant to this
paragraph (b) shall be without liability on the part of any Underwriter to the
Company or on the part of the Company to any Underwriter (except for expenses to
be paid or reimbursed by the Company pursuant to Sections 6 and 8 hereof and
except to the extent provided in Section 10 hereof.

(c) This Agreement shall also terminate at 5:00 P.M.,
California Time, on the tenth full business day after the Registration Statement
shall have become effective if the initial public offering price of the Common
Shares shall not then as yet have been determined as provided in Section 4
hereof. Any termination pursuant to this subsection (c) shall be without
liability on the part of any Underwriter to the Company or on the part of the
Company to any Underwriter (except for expenses to be paid or reimbursed by the
Company pursuant to Sections 6 and 8 hereof and except to the extent provided in
Section 10 hereof.

SECTION 14. Representations and Indemnities to Survive
Delivery. The respective indemnities, agreements, representations, warranties
and other statements of the Company, of its officers and of the several
Underwriters set forth in or made pursuant to this Agreement will remain in full
force and effect, regardless of any investigation made by or on behalf of any
Underwriter or the Company or any of its or their partners, officers or
directors or any controlling person, as the case may be, and will survive
delivery of and payment for the Common Shares sold hereunder and any termination
of this Agreement.

SECTION 15. Notices. All communications hereunder shall be in
writing and, if sent to the Representatives shall be mailed, delivered or
telecopied and confirmed to you at 600 Montgomery Street, San Francisco,
California 94111, Attention: Mr. Karl Matthies, FAX: (415) 249-5513, with a copy
to O'Melveny & Myers LLP, 1999 Avenue of the Stars, Suite 700, Los Angeles,
California 90067, Attention: Kendall R. Bishop, Esq., FAX: (310) 246-6779; and
if sent to the Company shall be mailed, delivered or telecopied and confirmed to
the Company at Lakepoint Office Park, 9342 East Central, Wichita, Kansas
67206-2555 Attention: Jack DeBoer, FAX: (316) 631-1333, with a copy to Latham &
Watkins, 650 Town Center Drive, 20th Floor, Costa Mesa, California 92626,
Attention: Charles Ruck, Esq., FAX: (714) 755- 8290. The Company or you may
change the address for receipt of communications hereunder by giving notice to
the others.

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SECTION 16. Successors. This Agreement will inure to the
benefit of and be binding upon the parties hereto, including any substitute
Underwriters pursuant to Section 11 hereof, and to the benefit of the officers
and directors and controlling persons referred to in Section 10, and in each
case their respective successors, personal representatives and assigns, and no
other person will have any right or obligation hereunder. No such assignment
shall relieve any party of its obligations hereunder. The term "successors"
shall not include any purchaser of the Common Shares as such from any of the
Underwriters merely by reason of such purchase.

SECTION 17. Representatives of Underwriters. You will act as
Representatives for the several Underwriters in connection with all dealings
hereunder, and any action under or in respect of this Agreement taken by you
jointly or by Montgomery Securities, as Representatives, will be binding upon
all the Underwriters.

SECTION 18. Partial Unenforceability. The invalidity or
unenforceability of any Section , paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section , paragraph or
provision hereof. If any Section , paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.

SECTION 19. Applicable Law. This Agreement shall be governed
by and construed in accordance with the internal laws (and not the laws
pertaining to conflicts of laws) of the State of California.

SECTION 20. General. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in
several counterparts, each one of which shall be an original, and all of which
shall constitute one and the same document.

In this Agreement, the masculine, feminine and neuter genders
and the singular and the plural include one another. The Section headings in
this Agreement are for the convenience of the parties only and will not affect
the construction or interpretation of this Agreement. This Agreement may be
amended or modified, and the observance of any term of this Agreement may be
waived, only by a writing signed by the Company and you.

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<PAGE> 34
If the foregoing is in accordance with your understanding of
our agreement, kindly sign and return to us the enclosed copies hereof,
whereupon it will become a binding agreement between the Company and the several
Underwriters including you, all in accordance with its terms.

Very truly yours,

Candlewood Hotel Company, Inc.

By: _______________________________

By: _______________________________
Subsidiary A

By: _______________________________
Subsidiary B

By: _______________________________
Subsidiary C

The foregoing Underwriting Agreement is
hereby confirmed and accepted by us in
San Francisco, California as of the date
first above written.

MONTGOMERY SECURITIES

SCHRODER WERTHEIM & CO. INCORPORATED

Acting as Representatives of the several
Underwriters named in the attached
Schedule A.

By MONTGOMERY SECURITIES

By: _________________________________
Managing Director

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SCHEDULE A

Number of Firm
Common Shares
Name of Underwriter to be Purchased
- ------------------- ---------------

MONTGOMERY SECURITIES ________
SCHRODER WERTHEIM & CO. INCORPORATED ________

TOTAL UNDERWRITERS (__) 3,850,000

A-1

<PAGE> 1
Exhibit 4.2

STOCKHOLDERS AGREEMENT

STOCKHOLDERS AGREEMENT (this "Agreement") dated as of
September 30, 1996 among Doubletree Corporation, a Delaware corporation
(together with its subsidiaries, "Doubletree"), Jack P. DeBoer ("DeBoer"), an
individual, the DeBoer Family Partnership, a Kansas general partnership (the
"DeBoer Partnership") (DeBoer and the DeBoer Partnership constituting the
shareholders of JPD Corporation ,a Kansas corporation ("JPD Corporation")) and
the Warren D. Fix Family Partnership, L.P., a Kansas limited partnership (the
"Fix Partnership")(collectively, the "Initial Stockholders").

W I T N E S S E T H:

WHEREAS, the membership interests in Candlewood Hotel Company,
LLC, a Delaware limited liability Company ("Candlewood LLC") and certain
subsidiary limited liability companies and the stock of JPD Corporation are
proposed to be transferred and assumed by Candlewood Hotel Company, Inc., a
Delaware corporation ("Candlewood" or the "Company") (the "Initial
Reorganization");

WHEREAS, in connection with the Initial Reorganization,
Doubletree, JPD Corporation and the Fix Partnership entered into an
Incorporation and Registration Rights Agreement dated as of September 1, 1996
(the "Registration Rights Agreement") providing, among other things, the
parties with certain rights, including the right, under certain
circumstances to transfer their respective interests in Candlewood LLC and JPD
Corporation to Candlewood in exchange for shares of common stock of Candlewood
and to register their respective shares of common stock of Candlewood so
acquired pursuant to the Securities Act of 1933, as amended (the "Securities
Act);

WHEREAS, pursuant to the Registration Rights Agreement, the
Members of Candlewood LLC have approved the Reorganization and the filing by the
Company of a registration statement under the Securities Act, as a result of
which (a) the Company has been incorporated having authorized capital stock
consisting of 100,000,000 shares of Common Stock, par value $.01 per share (the
"Candlewood Common Stock") , and 5,000,000 shares of Preferred Stock, par value
$.01 per share, (b) 5,175,000 shares of Candlewood Common Stock will be issued
and outstanding, of which 2,587,500 shares will be owned of record and
beneficially by Doubletree, 1,869,469 shares will be owned of record and
beneficially by DeBoer, 329,906 shares will be owned of record and beneficially
by the DeBoer Partnership and 388,125 shares will be owned of record and
beneficially by the Fix Partnership;

WHEREAS, the Registration Rights Agreement, as amended,
requires that the Initial Stockholders execute and deliver a stockholders
agreement in the form hereof;

NOW, THEREFORE, in consideration of the premises and
undertakings hereinafter set forth, the parties hereto agree as follows:
<PAGE> 2
ARTICLE I. DEFINITIONS AND INTERPRETATION

Section 1.1. Definitions. As used in this Agreement:

"Affiliate" of a Holder means any Person, other than
Candlewood, controlling, controlled by or under common control with such Holder.

"Annual Election" means the annual election of Directors held
in accordance with the By-laws, including any such election by stockholders'
consent.

"Board" means the Board of Directors of Candlewood.

"By-laws" mean the By-laws of Candlewood.

"Candlewood Entity" means Candlewood and each of its
Subsidiaries.

"Certificate of Incorporation" means the Restated Certificate
of Incorporation of Candlewood in the form filed with the Delaware Secretary of
State on October 16, 1996.

"DeBoer/Fix Director" means each Initial DeBoer/Fix Director
and each Person nominated by the DeBoer/Fix Holders pursuant to Section 2 and
elected as a Director.

"DeBoer/Fix Holders" means DeBoer, the DeBoer Partnership and
the Fix Partnership (so long as they are each a Holder) and each Permitted
Transferee, other than Candlewood, who becomes a Holder by acquiring any
DeBoer/Fix Shares in compliance with Section 4.8.

"DeBoer/Fix Shares" means the shares of Candlewood Common
Stock owned of record and beneficially by DeBoer, the DeBoer Partnership and
the Fix Partnership on the Effective Date.

"DeBoer Holders" means DeBoer and the DeBoer Partnership (so
long as they are each a Holder) and each Permitted Transferee of DeBoer, other
than Candlewood, who becomes a Holder by acquiring any DeBoer Shares in
compliance with Section 4.8.

"DeBoer Shares" means the shares of Candlewood Common Stock
owned of record and beneficially by DeBoer and the DeBoer Partnership on the
Effective Date.

"Director" means a director of Candlewood.

"Disposition" has the meaning given to such term in
Section 3.1.
"Doubletree Director" means any Person nominated by the
Doubletree Holders and elected as a Director.

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<PAGE> 3
"Doubletree Holders" means Doubletree (so long as it is a
Holder) and each Permitted Transferee of Doubletree, other than Candlewood, who
becomes a Holder by acquiring any Doubletree Shares in compliance with Section
4.8.

"Doubletree Shares" means the Shares of Candlewood Common
Stock owned of record and beneficially by Candlewood on the Effective Date.

"Effective Date" means the date on which the Doubletree
Shares, the DeBoer Shares and the Fix Partnership Shares were issued to
Doubletree, DeBoer, the DeBoer Partnership and the Fix Partnership.

"Fix Partnership Holders" means the Fix Partnership (so long
as it is a Holder) and each Permitted Transferee of the Fix Partnership, other
than Candlewood, who becomes a Holder by acquiring any Fix Partnership Shares in
compliance with Section 4.8.

"Fix Partnership Shares" means the shares of Candlewood Common
Stock owned of record and beneficially by the Fix Partnership on the Effective
Date.

"Holder" means a record and beneficial owner of any Subject
Shares.

"Initial Doubletree Directors" means Richard Ferris and Peter
Ueberroth.

"Initial DeBoer/Fix Directors" means Jack DeBoer and Warren
Fix.

"Permitted Transferee" of a Holder means (i) a successor to
such Holder by operation of law pursuant to a statutory merger, consolidation,
dissolution or liquidation, (ii) a purchaser of all or substantially all of such
Holder's assets, or (iii) a Person owning, directly or indirectly, a majority of
the Voting securities or other comparable equity interests of such Holder, a
Person under common control with such Person or a Person of which such Holder
owns, directly or indirectly, a majority of the outstanding Voting Securities or
other comparable equity interests; provided, however, that in each case the
successor, purchaser or Person referred to in Clauses (i), (ii) or (iii) of this
definition was an Affiliate of such Holder prior to such merger, consolidation,
dissolution, liquidation, purchase of assets or acquisition of Voting Securities
or other comparable equity interests and, in each case referred to in this
definition, the Permitted Transferee has become a party to and bound by this
Agreement as to all Subject Shares then being transferred to it in compliance
with by Section 4.8. "Permitted Transferee" includes successive transferees in
transactions described in the preceding sentence.

"Person" means an individual, partnership, corporation,
unincorporated organization or association, trust, government or department,
unit or political subdivision of a government, or other entity.

"Public Sale" means a sale of Candlewood Common Stock by
Candlewood and/or by one or more Holders of Subject Shares to one or more
underwriters for distribution pursuant

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<PAGE> 4
to an effective registration statement under the Securities Act in accordance
with the Registration Rights Agreement.

"Reorganization" means any merger or consolidation of
Candlewood with or into any other Person, any recapitalization or
reclassification of capital stock or other equity interests of Candlewood or any
sale of all or substantially all of the assets of Candlewood in any one or
series of related transactions other than in connection with the Initial
Reorganization.

"Subject Shares" means the Doubletree Shares, the DeBoer
Shares and the Fix Partnership Shares; provided, however, that at all times,
such term shall include all Subject shares that have been transferred by a
Holder to a Permitted Transferee of such Holder. Notwithstanding the foregoing,
upon (A) the Disposition of any Subject Shares pursuant to a Public Sale to any
Person or (B) the Disposition of any Subject Shares other than pursuant to a
Public Sale after the termination of Section 3.1 (as provided in Section 4.7(a))
to any Person other than a Permitted Transferee of the Holder thereof, the
shares so cancelled or disposed of shall cease to be Subject Shares and
thereafter shall not be subject to any of the terms and conditions of this
Agreement (other than Section 4.1(d)).

"Subsidiaries" means each corporation, partnership, joint
venture or other entity in which Candlewood owns, directly or indirectly, more
than 50% of the outstanding Voting Securities.

"Voting Securities" means shares of capital stock or equity
interests the holders of which are at the time entitled to elect a majority of
the issuer's board of directors or other comparable body.

Additional terms are defined where used in this Agreement.

Section 1.2. Interpretation. Each definition in this Agreement
includes the singular and the plural, and references to the neuter gender
include the masculine and feminine whenever appropriate. References to any
statute mean such statute as amended at the time and include any successor
legislation, and references to a business day mean any day other than Saturday,
Sunday or legal holiday where Candlewood's principal office is located. The
words "herein", "hereof" and "hereunder" refer to this Agreement as a whole. The
headings of the Articles and Sections are for convenience of reference only and
shall not affect the meaning or interpretation of this Agreement. Unless the
context otherwise requires, references to Articles, Sections and Subsections
mean the Articles, Sections and Subsections of this Agreement.

Section 1.3. Changes in Candlewood Common Stock. If during the
term of this Agreement the outstanding shares of Candlewood Common Stock shall
be changed into a different number of shares or a different class or classes of
shares by reason of any split-up, combination, reclassification or other
recapitalization, or if a stock dividend shall be declared on shares of
Candlewood Common Stock with a record date during such term, the terms of this
Agreement (including its definitions) shall be appropriately modified to give
effect to such occurrence.

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<PAGE> 5
Section 1.4. Partial Invalidity. Each provision of this
Agreement shall be interpreted so as to render it valid and enforceable under
applicable law. A finding that any such provision is invalid or unenforceable in
any jurisdiction or in any particular circumstance shall not affect its validity
or enforceability under the laws of any other jurisdiction or in any other
circumstances.

Section 1.5. Governing Law. This Agreement shall be governed
by and construed in accordance with the laws of the State of Delaware applicable
to agreements made and to be performed entirely in such State.

ARTICLE II. VOTING OF SUBJECT SHARES AND GOVERNANCE

Section 2.1. Composition of Board. (a) On the Effective Date
and until the completion of a Public Sale, the number of Directors shall be
four, of which two shall be Doubletree Directors and two shall be DeBoer/Fix
Directors.

(b) From and after the initial Public Sale, the following
provisions shall be applicable:

(i) The number of Directors comprising the whole Board shall
initially be four, subject to increase as provided in Section
2.1(b)(ii). Commencing with the first Annual Election after the initial
Public Sale, the number of Directors comprising the whole Board shall
be determined as provided in the By-laws.

(ii) Not later than December 31, 1996, the number of Directors
comprising the whole Board shall be increased-to at least 6 Directors,
at least two of whom shall be individuals who are not nominated as
provided in Sections 2.3 through 2.4, inclusive, and are not otherwise
affiliated with any Holder (the "Unaffiliated Directors"). The initial
Unaffiliated Directors shall be elected by unanimous vote of the
Directors who are then in office; and each Holder shall use its
reasonable best efforts to recruit suitable candidates for election as
the initial Unaffiliated Directors as soon as practicable. Any
successor Unaffiliated Directors shall be recruited by the Holders in
the same manner, approved by unanimous vote of the Directors who are
then in office and elected at an Annual Election in accordance with
this Agreement or, if the election occurs at any time other than an
Annual Election, elected by unanimous vote of the Directors who are
then in office.

(iii) The number of Doubletree Directors shall be the product
of the number of Directors comprising the whole Board who are not
Unaffiliated Directors (the "Affiliated Directors") multiplied by
one-half.

(iv) The number of DeBoer/Fix Directors shall be the product
of the number of Affiliated Directors multiplied by one-half.

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<PAGE> 6
(vi) Notwithstanding the immediately preceding clauses (iii)
and (iv) if there shall be a number of Affiliated Directors which is
not evenly divisible by two, the Doubletree Holders and the DeBoer/Fix
Holders shall agree upon and jointly nominate the additional director.

(c) Each of the Doubletree Holders, DeBoer Holders and Fix
Partnership Holders, agrees to vote its Subject Shares (or sign written consents
in lieu thereof) at each Annual Election, and at all other times when required
to fill a vacancy on the Board, however arising, and to take all such other
action as may be reasonably necessary (including, without limitation, causing
one or more of the Directors nominated by it to be removed or resign promptly
after any change in ownership of Subject Shares), so that the Board shall be
constituted as provided in Section 2.1(a) or (b), as applicable, and to the
extent herein provided shall consist of the appropriate numbers in accordance
with this Section 2.1 of Doubletree Directors and DeBoer/Fix Directors nominated
in accordance with Sections 2.3, and 2.4, as applicable, and (not later than
December 31, 1996) Unaffiliated Directors nominated in accordance with Section
2.1(b)(ii).

Section 2.2. Election of Initial Board. (a) Each of
Doubletree, the Fix Partnership, DeBoer and the DeBoer Partnership hereby
authorize, consent to and approve the election of each of the Initial Directors
and the DeBoer/Fix Directors as Directors to serve until their respective
successors have been duly elected pursuant to this Agreement, the Certificate
of Incorporation, the By-laws and applicable law.

Section 2.3. Changes in Doubletree Directors. (a) The
Doubletree Holders may designate the individual to fill any vacancy on the Board
resulting from the death, resignation or removal of any Doubletree Director by
giving written notice to Candlewood (which shall promptly forward a copy of such
notice to each Holder). Within not more than 10 days after the notice described
in the preceding sentence is so forwarded, the Holders will use their best
efforts to cause the election to the Board of the nominee named in such notice.

(b) The Doubletree Holders may nominate the individual to
succeed any Doubletree Director who will not stand for re-election, and may
change any such nomination, at any Annual Election by giving written notice to
Candlewood of its nominees as Doubletree Directors not less than 45 days (or, in
the case of unforeseen circumstances, such shorter period as may be permitted by
law) prior to the date fixed for any Annual Election which is scheduled to occur
after the initial Public Sale. If the notice specified in the preceding sentence
is not given within the time required, the incumbent Doubletree Directors shall
be deemed to be the nominees for election as Doubletree Directors at such Annual
Election.

Section 2.4. Changes in DeBoer/Fix Directors. (a) The
DeBoer/Fix Holders may designate the individual to fill any vacancy on the Board
resulting from the death, resignation or removal of any DeBoer/Fix Director by
giving written notice to Candlewood (which shall promptly forward a copy of such
notice to each Holder). Within not more than 10 days after the notice described
in the preceding sentence is so forwarded, the Holders will use their best
efforts to cause the election to the Board of the nominee named in such notice.

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(b) The DeBoer/Fix Holders may nominate the individual to
succeed any DeBoer/Fix Director who will not stand for re-election, and may
change any such nomination, at any Annual Election by giving written notice to
Candlewood of its nominee as DeBoer/Fix Director not less than 45 days (or, in
the case of unforeseen circumstances, such shorter period as may be permitted by
law) prior to the date fixed for any Annual Election which is scheduled to occur
after the initial Public Sale. If the Notice specified in the preceding sentence
is not given within the time required, the incumbent DeBoer/Fix Directors shall
be deemed to be the nominee for election as DeBoer/Fix Directors at such Annual
Election.

Section 2.5. Removal of Directors. A Doubletree Director may
not be removed from the Board except by delivery to Candlewood and all Holders
of a written notice of such removal signed by the Doubletree Holders. A
DeBoer/Fix Director may not be removed from the Board except by delivery to
Candlewood and all Holders of a written notice of such removal signed by the
DeBoer/Fix Holders. Within not more than 10 days after such notice is given,
each of the Holders shall execute and deliver to Candlewood its written consent
to the removal specified in such notice or, if requested by whichever of the
Doubletree Holders or the DeBoer/Fix Holders, shall have given such notice in
accordance with this Section 2.5, shall vote its Subject Shares in favor of such
removal.

Section 2.6. Approvals Required for Certain Corporate Actions.
Subject to Section 4.5, the parties agree that without the written approval of
the Doubletree Holders and the DeBoer/Fix Holders:

(a) Neither the Certificate of Incorporation nor the By-laws
shall be amended (except in accordance with the reasonable
recommendations of the managing underwriter for the initial Public Sale
pursuant to the Registration Rights Agreement, as amended);

(b) No Candlewood Entity shall acquire, directly or indirectly
(through a stock or asset purchase or otherwise), any assets, in one or
a series of related transactions with the same or related sellers, for
an aggregate purchase price in excess of $10,000,000;

(c) No Candlewood Entity shall sell, transfer or otherwise
dispose of, directly or indirectly (through a stock or asset sale or
otherwise), any assets outside the ordinary course of business, in one
or a series of related transactions, for an aggregate sale price in
excess of $10,000,000;

(d) No Candlewood Entity shall make any capital expenditure,
or any series of related capital expenditures, in excess of an
aggregate of $10,000,000;

(e) No Candlewood Entity shall purchase, redeem or repurchase
any Subject Shares, any shares of its capital stock or any of its
partnership interests or any shares of capital stock or partnership
interests of any other Candlewood Entity, except for (a) any redemption
or repurchase by a Subsidiary directly or indirectly wholly-owned by
Candlewood of shares of capital stock or partnership interests issued
by such Subsidiary,

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<PAGE> 8
or (b) except for a repurchase of Subject Shares pursuant to Section
2(d) of the Registration Rights Agreement.

(f) Candlewood shall not declare or pay any dividend or
declare or make any other distribution in respect of its capital stock;

(g) No Candlewood Entity shall issue, sell or grant additional
shares of its capital stock or membership interests or options or
warrants exercisable for or securities or other rights convertible into
or exchangeable for shares of its capital stock or partnership
interests, or issue or agree to issue any phantom stock rights, or file
any registration statement (other than pursuant to the demand
registration rights provided in Section 2 of the Registration Rights
Agreement) with respect to the proposed sale of any of the foregoing;

(h) Neither Candlewood nor any Subsidiary not directly or
indirectly wholly-owned by Candlewood shall authorize or consummate any
stock dividend or stock split (except in accordance with the reasonable
recommendations of the managing underwriter for the initial Public Sale
pursuant to the Registration Rights Agreement);

(i) No Candlewood Entity shall incur or assume any
indebtedness for borrowed money, other than indebtedness incurred
solely to refund indebtedness existing on the Effective Date and other
than pursuant to Candlewood's line of credit with GMAC and borrowings
from Doubletree, in excess of $10,000,000 in the aggregate;

(j) No Candlewood Entity shall loan its funds to any other
Person or extend its credit to any other Person other than in the
ordinary course of business;

(k) No Candlewood Entity shall guarantee the obligations of
any other Person, other than guarantees not in excess of $10,000,000
executed in the ordinary course of business;

(l) No Candlewood Entity shall enter into any joint venture
that involves an aggregate investment or receipt of proceeds in excess
of $10,000,000;

(m) No Candlewood Entity shall engage in any business which is
not significantly related to the business that Candlewood is conducting
on the Effective Date;

(n) No Candlewood Entity shall enter into (A) any transaction
or other arrangement not in the ordinary and proper course of business
on an arm's length basis with Doubletree, Mr. Jack DeBoer, Mr. Warren
Fix, JPD Corporation, the DeBoer Partnership or the Fix Partnership, or
any entity in which any of them or their respective Affiliates has a
greater than 5% interest or has a control relationship or (B) any loan
to or management, employment or consulting agreement with any of the
foregoing;

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(o) No Candlewood Entity shall change its accounting
principles or practices (except as required by generally accepted
accounting principles) or hire a firm other than KPMG Peat Marwick to
act as its independent public accountants;

(p) No Candlewood Entity shall establish compensation payable
to any manager, officer, director, employee or other agent if such
compensation as to any one of the foregoing, in the aggregate, would
exceed $500,000 in any year, or establish compensation for Mr. Jack
DeBoer or Mr. Warren Fix if such compensation as to either of them, in
the aggregate, would exceed $300,000 in any year.

(q) No Candlewood Entity shall enter into any other
transaction or other arrangement not in the ordinary course of
business; and

(r) Candlewood shall not consolidate or amalgamate with, or
merge with or into, or acquire all or substantially all of the assets
or control of, any other business organization other than in the course
of the Initial Reorganization; provided, however, that, in the case of
Doubletree, such approval shall not be unreasonably withheld;

(s) No Candlewood Entity shall dissolve, liquidate or wind up
its affairs;

(t) There shall be no increase in the number of members of the
Board, either by amendment to the Certificate of Incorporation, the
By-laws or otherwise, except as provided in Section 2.1.

(u) Candlewood shall not cause or permit any Subsidiary
holding assets representing all or substantially all the assets of
Candlewood and its Subsidiaries, on a consolidated basis (the "Group")
or any group of Subsidiaries holding all or substantially all of such
assets to (A) consolidate or amalgamate with, or merge into, any entity
that is not a member of the Group, (B) sell (in a single transaction or
a series of related transactions) all or substantially all of such
assets to an entity that is not a member of the Group or (C) dissolve,
liquidate or wind up its (or their) affairs; or

(v) No Candlewood Entity shall permit or obligate any
Candlewood Entity or otherwise agree, either individually or as a
consolidated group, to make any decision, or take any action, described
in items (a) through (q) above;

(w) Provided, however, that if at any time either Doubletree
Holders or the DeBoer/Fix Holders, as the case may be, shall own less
than 20% of the outstanding shares of Candlewood Common Stock, all
rights of the Doubletree Holders or the DeBoer/Fix Holders, as the case
may be, under this Section 2.6 shall terminate and be of no further
force or effect.

Section 2.7 Purchase Rights. In furtherance and not by way of
limitation of Section 2.6, additional shares of Common Stock of Candlewood, or
securities convertible into or exchangeable for such shares, if such shares or
securities are to be sold for cash, shall be first

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<PAGE> 10
offered to the Holders of then outstanding Subject Shares in proportion to the
number of such Subject Shares held by them, respectively, which offer shall be
outstanding for a period of not less than 30 days from receipt of written notice
thereof; provided, however, that Candlewood shall have the right to issue such
additional shares or such securities, without first offering them to such
Holders, if such additional shares or securities are to be sold for cash through
an offering to its employees or to the employees of any Subsidiary for such
consideration and upon such terms and conditions as shall be approved by the
Doubletree Holders and the DeBoer/Fix Holders pursuant to clause (g) of Section
2.6, so long as applicable, and by the Board; and provided, further, that,
except as aforesaid, no Holder shall have any preemptive or other right to
subscribe for or acquire any shares of capital stock or other securities issued
by Candlewood.

Section 2.8. Agent for Affiliated Holders. If a portion or all
of the Subject Shares held by Doubletree, DeBoer, the DeBoer Partnership or the
Fix Partnership shall be transferred to one or more Permitted Transferees,
resulting in the Subject Shares which were theretofore held by such Holder being
held by more than one Holder, then Doubletree, DeBoer, the DeBoer Partnership or
the Fix Partnership, as the case may be, shall: (i) act, or shall cause one of
such Holders to act, as agent and proxy for all purposes of this Agreement
(including without limitation the voting of Subject Shares, the nomination of
Directors, the giving of consents, the approval of amendments, the receipt of
notices, etc.) for all of the Doubletree Holders, DeBoer Holders or the Fix
Partnership Holders, as the case may be, and (ii) specify in writing to the
other parties that it (or such other Holder) is to act as such agent and proxy,
and thereafter the other parties shall be entitled to look solely to, and to
deal solely with, the person so specified for all purposes of this Agreement as
if such Holder held all the Subject Shares held by the party providing such
notice and its Permitted Transferees.

Section 2.9. Irrevocable Proxy. The Fix Partnership Holders
and the DeBoer Partnership hereby appoint DeBoer as its and their proxy to
exercise in DeBoer's sole discretion all rights of the Fix Partnership Holders
and the DeBoer Partnership to nominate and/or remove each DeBoer/Fix Director
and to exercise all rights pursuant to Section 2.6 hereof. This proxy is coupled
with an interest in Candlewood and shall be irrevocable. Except as set forth
below in this paragraph, this proxy may be invoked by DeBoer at any time by
notice to the other Holders but, unless and until invoked, such rights may be
exercised by the Fix Partnership Holders and the DeBoer Partnership; provided,
however, that upon the death of Warren D. Fix all such rights shall
automatically vest in DeBoer which shall thereafter have the sole right to
exercise all such rights of the Fix Partnership Holders. Notwithstanding the
foregoing, this proxy may not be invoked or exercised after the death of Jack
DeBoer.

ARTICLE III. RESTRICTIONS ON TRANSFERS OF SUBJECT SHARES; VOTING
AGREEMENTS; AND LIQUIDATION AGREEMENT

Section 3.1. Dispositions Prior to Initial Public Sale. Until
the termination of the provisions of this Section 3.1, no Holder shall (a) sell,
assign, transfer by operation of law or otherwise, pledge, hypothecate, grant
any security interest or other lien in or otherwise dispose of any of its
Subject Shares, or make or permit any indirect transfer of such Subject Shares
through an issuance of such Holder's capital stock or other equity interests
resulting in a direct or indirect

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change in the beneficial ownership-of a majority of its Voting Securities or
other equity interests (a "Disposition"), or (b) agree or otherwise become
obligated to take any action referred to in clause (a) of this Section 3.1;
provided, however, that, subject to Section 4.8, the restrictions set forth in
such clauses (a) and (b) shall not apply to a Disposition of Subject Shares: (A)
to a Permitted Transferee of such Holder, whether pursuant to a Reorganization
or otherwise, (B) in a Public Sale or (C) sold by Doubletree pursuant to Section
2(d) of the Registration Rights Agreement.

ARTICLE IV. GENERAL PROVISIONS

Section 4.1. Legend on Share Certificates for Subject Shares.
(a) All certificates for Subject Shares which are subject to the terms and
provisions of Article II and/or Article III shall bear the following legend:

The shares represented by this certificate (the "Shares") have
not been registered under the Securities Act of 1933, as
amended, and no sale, transfer or other disposition may be
made of the Shares unless they have been so registered or
Candlewood Hotel Company, Inc. (the "Company") has been
furnished with a legal opinion from a nationally recognized
law firm satisfactory to it that such registration is not
required. The Shares are also subject to certain restrictions
on transfer and requirements as to voting contained in the
Stockholders Agreement dated as of September 30, 1996 among
the Company, the registered holder of the Shares and certain
other stockholders, a copy of which is on file with the
Secretary of the Company.

(b) Upon the termination of this Agreement pursuant to Section
4.5(a), each Holder shall be entitled to receive, in exchange for any
certificate for Candlewood Common Stock bearing the legend set forth in
subsection (a) of this Section 4.1, a certificate bearing a legend containing
only the first sentence of such legend, unless Candlewood shall have determined
(based upon the advice of legal counsel) that such legend is then no longer
required.

(c) The restrictions on transfer of the Subject Shares
provided in this Agreement shall also be noted in the Candlewood stock register.

(d) If any shares of Candlewood Common Stock shall cease to be
Subject Shares in accordance with this Agreement, any Person acquiring such
shares shall be entitled to receive, in exchange for any certificate for such
shares bearing the legend set forth in subsection (a) of this Section 4.1, a
certificate bearing a legend containing only the first sentence of such legend,
unless Candlewood shall have determined (based upon the advice of legal counsel)
that such legend is then no longer required.

Section 4.2. Notices. All notices, requests or demands
required or permitted by this Agreement: (i) shall be in writing; (ii) shall be
deemed to have been given, forwarded, made

11
<PAGE> 12
or delivered: (x) if delivered in person or by overnight courier service, when
received, (y) if transmitted by telefax, when so transmitted if evidence of
completed transmission is received, and (z) if sent by prepaid registered or
certified mail, return receipt requested, on the earlier of the date of receipt
or the seventh day after it is mailed; and (iii) shall be addressed: if to
Candlewood, at Lakepoint Office Park, 9342 East Central, Wichita, Kansas 67206,
Attention: President (or to such other address as Candlewood shall furnish by
notice given to each Holder), and if to any Holder, at such Holder's address
appearing on the Holder List (as hereinafter defined).

Section 4.3. Holder List. Candlewood shall maintain a list
(the "Holder List") of the name and address of each Holder and the number of
Subject Shares held by it. Each Holder shall give prompt notice to Candlewood of
any change in the information pertaining to it in the Holder List, but in the
absence of such notice Candlewood and each other Holder may treat the
information reflected in the current Holder List as correct. Candlewood shall
furnish a copy of the Holder List to any Holder upon request.

Section 4.4. Amendments, Waivers and Consents. This Agreement
may be amended only by a document executed (which may be in counterparts) by
Candlewood and all of the Holders. Any Holder may waive the benefit of any
provision of this Agreement, either in a specific instance or generally, by
delivering to Candlewood and each other Holder a consent to such waiver. All
consents required or permitted by this Agreement shall be in writing and signed
by the party to be charged therewith.

Section 4.5. Termination. (a) All provisions of this Agreement
shall terminate as to all Subject Shares on the close of business on the day
before the tenth anniversary of the Effective Date. In the event of a Public
Sale prior to such tenth anniversary, the provisions of Section 3.1 shall
terminate on the date on which such Public Sale is completed. All provisions of
this Agreement shall terminate (prior to such tenth anniversary) on the first
day on which the Subject Shares shall comprise less than a majority of the total
number of shares of Candlewood Common Stock then outstanding. This Agreement or
any provision hereof may be terminated by a document executed in the manner
provided in Section 4.4 for amendments to this Agreement with the same force and
effect as provided therein. Candlewood shall give prompt written notice of any
termination under this Section 4.5(a) to all Holders.

(b) The termination of this Agreement or any provision hereof
shall not affect any action taken or agreement entered into prior to such
termination or any liability under any obligation previously incurred under this
Agreement, all of which shall survive such termination.

Section 4.6. Equitable Remedies; Submission to Arbitration.
(a) Each Holder, by becoming a party to this Agreement, acknowledges and agrees
that its breach or nonperformance of any provision of this Agreement in
accordance with the specific terms hereof would result in irreparable harm to
Candlewood and to each other Holder for which money damages would not provide an
adequate remedy. Accordingly, each Holder (i) agrees that Candlewood and each
other Holder shall be entitled to specific performance or injunctive or other
equitable relief against such Holder in the event of its breach or other
non-performance of any of

12
<PAGE> 13

the provisions of this Agreement; and (ii) waives any requirement for the
securing or posting of any bond in connection with such remedy.

(b) EXCEPT AS OTHERWISE PROVIDED IN SECTION 4.6(a), EACH
HOLDER IRREVOCABLY AGREES THAT ALL DISPUTES IN ANY WAY, MANNER OR RESPECT
ARISING OUT OF OR FROM OR RELATED TO THIS AGREEMENT OR ANY OTHER AGREEMENT
CONTEMPLATED HEREBY SHALL BE RESOLVED BY ARBITRATION IN THE CITY OF LOS ANGELES,
STATE OF CALIFORNIA, UNDER THE RULES OF THE AMERICAN ARBITRATION ASSOCIATION.
The arbitrator to resolve any such dispute shall be selected by the Holders who
are involved in the dispute, shall have expertise and experience in the
resolution of disputes similar to the dispute to be resolved and shall not be an
Affiliate of any Holder. If such Holders are unable to agree on such selection,
each such Holder shall select one arbitrator and such arbitrators shall select
an arbitrator meeting the criteria set forth in the immediately preceding
sentence to resolve such dispute. The fees and expenses of any arbitrator
selected by any Holder shall be paid by such Holder; the fees and expenses of
any other arbitrators shall be shared equally by the Holders who are involved in
the dispute. All other expenses of such arbitration shall be paid by the Holder
incurring the same.

Section 4.7. Successors and Assigns. This Agreement shall
inure to the benefit of and be binding upon the permitted successors and assigns
of Candlewood and each Holder; provided, however, that Candlewood may not assign
this Agreement except by operation of law or to a purchaser of all or
substantially all of its business and assets; and provided further, that no
Holder may assign this Agreement except in connection with a transfer of Subject
Shares by such transferring Holder to another Person which thereupon becomes a
Holder with respect to such Subject Shares, all in accordance with Section 3.1
and Section 4.8.

Section 4.8. Counterparts; Additional Parties. This Agreement
(a) may be executed in counterparts, all of which together shall constitute a
single agreement, and (b) shall become effective on the Effective Date. Prior to
any Disposition of Subject Shares to a Permitted Transferee, without regard to
whether or not Section 3.1 is then in effect, the Holder effecting such
Disposition shall cause such Permitted Transferee to execute and deliver to
Candlewood and all of the Holders a supplemental agreement to this Agreement, in
form and substance reasonably satisfactory to each of them, whereby such
Permitted Transferee shall agree to become a party to and be bound by all of the
terms and conditions of this Agreement applicable to a Holder of Subject Shares
and confirm that all of the Subject Shares to be acquired by such Permitted
Transferee in such shall continue to be subject to this. As promptly as
practicable, Candlewood shall cause a fully executed counterpart of this
Agreement or any supplemental agreement referred to in this Section 4.8 to be
delivered to each Holder.

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<PAGE> 14
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.

DOUBLETREE CORPORATION

a Delaware corporation

By:
---------------------------------
David L. Stivers
Senior Vice President, General
Counsel and Secretary

THE WARREN D. FIX FAMILY

PARTNERSHIP, a Kansas limited partnership

By:
---------------------------------
Warren D. Fix, General Partner

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

JACK P. DEBOER

THE DEBOER FAMILY PARTNERSHIP,
a Kansas general partnership

By:
---------------------------------
Jack P. DeBoer, General Partner

<PAGE> 1
Exhibit 5.1
[LATHAM & WATKINS LETTERHEAD]

October 28, 1996

Candlewood Hotel Company, Inc.
Lakepoint Office Park
9342 East Central
Wichita, Kansas 67206

Re: Registration Statement on Form S-1
4,427,500 Shares of Common Stock
--------------------------------

Ladies and Gentlemen:

In connection with the registration of 4,427,500 shares of
Common Stock, par value $.01 per share (the "Shares"), of Candlewood Hotel
Company, Inc., a Delaware corporation (the "Company"), under the Securities Act
of 1933, as amended (the "Act"), by the Company on Form S-1 filed with the
Securities and Exchange Commission (the "Commission") on September 13, 1996
(File No. 333-12021), as amended by Amendment No. 1 filed with the Commission on
October 17, 1996 and Amendment No. 2 to be filed with the Commission on October
30, 1996 (collectively, the "Registration Statement"), you have requested our
opinion with respect to the matters set forth below.

In our capacity as your counsel in connection with such
registration, we are familiar with the proceedings taken and proposed to be
taken by the Company in connection with the authorization, issuance and sale of
the Shares, and for the purposes of this opinion, have assumed such proceedings
will be timely completed in the manner presently proposed. In addition, we have
made such legal and factual examinations and inquiries, including an examination
of originals or copies certified or otherwise identified to our satisfaction of
such documents, corporate records and instruments, as we have deemed necessary
or appropriate for purposes of this opinion.
<PAGE> 2
Candlewood Hotel Company, Inc.
October 28, 1996
Page 2

In our examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals, and
the conformity to authentic original documents of all documents submitted to us
as copies.

We are opining herein as to the effect on the subject
transaction only of the General Corporation Law of the State of Delaware, and we
express no opinion with respect to the applicability thereto, or the effect
thereon, of the laws of any other jurisdiction or as to any matters of municipal
law or the laws of any other local agencies within the State of Delaware.

Subject to the foregoing, it is our opinion that as of the
date hereof the Shares have been duly authorized, and, upon issuance, delivery
and payment therefor in the manner contemplated by the Registration Statement,
will be validly issued, fully paid and nonassessable.

We consent to your filing this opinion as an exhibit to the
Registration Statement and to the reference to our firm contained under the
heading "Legal Matters."

Very truly yours,

LATHAM & WATKINS

<PAGE> 1
Exhibit 10.2

THE 1996 EQUITY PARTICIPATION PLAN
OF
CANDLEWOOD HOTEL COMPANY, INC.

Candlewood Hotel Company, Inc., a Delaware corporation, has
adopted The 1996 Equity Participation Plan of Candlewood Hotel Company, Inc.
(the "Plan"), effective September 30, 1996, for the benefit of its eligible
employees, consultants and directors. The Plan consists of two plans, one for
the benefit of key Employees (as such term is defined below) and consultants and
one for the benefit of Independent Directors (as such term is defined below).

The purposes of this Plan are as follows:

(1) To provide an additional incentive for directors, key
Employees and consultants to further the growth, development and financial
success of the Company by personally benefiting through the ownership of Company
stock and/or rights which recognize such growth, development and financial
success.

(2) To enable the Company to obtain and retain the services of
directors, key Employees and consultants considered essential to the long range
success of the Company by offering them an opportunity to own stock in the
Company and/or rights which will reflect the growth, development and financial
success of the Company.

ARTICLE I

DEFINITIONS

1.1 General. Wherever the following terms are used in this
Plan they shall have the meaning specified below, unless the context clearly
indicates otherwise.

1.2 Award Limit. "Award Limit" shall mean 500,000 shares of
Common Stock.

1.3 Board. "Board" shall mean the Board of Directors of the
Company.

1.4 Change in Control. "Change in Control" shall mean a change
in ownership or control of the Company effected through either of the following
transactions:

(a) any person or related group of persons (other than the
Company or a person that directly or indirectly controls, is controlled
by, or is under common control with, the Company) directly or
indirectly acquires beneficial ownership (within the meaning of Rule
13d-3 under the Exchange Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Company's
outstanding

<PAGE> 2

securities pursuant to a tender or exchange offer made directly to the
Company's stockholders which the Board does not recommend such
stockholders to accept; or

(b) there is a change in the composition of the Board over a
period of thirty-six (36) consecutive months (or less) such that a
majority of the Board members (rounded up to the nearest whole number)
ceases, by reason of one or more proxy contests for the election of
Board members, to be comprised of individuals who either (i) have been
Board members continuously since the beginning of such period or (ii)
have been elected or nominated for election as Board members during
such period by at least a majority of the Board members described in
clause (i) who were still in office at the time such election or
nomination was approved by the Board.

1.5 Code. "Code" shall mean the Internal Revenue Code of 1986,
as amended.

1.6 Committee. "Committee" shall mean the Compensation
Committee of the Board, or another committee, or a subcommittee of the Board,
appointed as provided in Section 9.1.

1.7 Common Stock. "Common Stock" shall mean the common stock
of the Company, par value $.01 per share, and any equity security of the Company
issued or authorized to be issued in the future, but excluding any preferred
stock and any warrants, options or other rights to purchase Common Stock. Debt
securities of the Company convertible into Common Stock shall be deemed equity
securities of the Company.

1.8 Company. "Company" shall mean Candlewood Hotel Company,
Inc., a Delaware corporation.

1.9 Corporate Transaction. "Corporate Transaction" shall mean
any of the following stockholder-approved transactions to which the Company is a
party:

(a) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of
which is to change the State in which the Company is incorporated, form
a holding company or effect a similar reorganization as to form
whereupon this Plan and all Options are assumed by the successor
entity;

(b) the sale, transfer, exchange or other disposition of all
or substantially all of the assets of the Company, in complete
liquidation or dissolution of the Company in a transaction not covered
by the exceptions to clause (a), above; or

(c) any reverse merger in which the Company is the surviving
entity but in which securities possessing more than fifty percent (50%)
of the total combined voting power of the Company's outstanding
securities are transferred to a person or persons different from those
who held such securities immediately prior to such merger.

2
<PAGE> 3

1.10 Deferred Stock. "Deferred Stock" shall mean Common Stock
awarded under Article VII of this Plan.

1.11 Director. "Director" shall mean a member of the Board.

1.12 Dividend Equivalent. "Dividend Equivalent" shall mean a
right to receive the equivalent value (in cash or Common Stock) of dividends
paid on Common Stock, awarded under Article VII of this Plan.

1.13 Employee. "Employee" shall mean any officer or other
employee (as defined in accordance with Section 3401(c) of the Code) of the
Company, or of any corporation which is a Subsidiary.

1.14 Exchange Act. "Exchange Act" shall mean the Securities
Exchange Act of 1934, as amended.

1.15 Fair Market Value. "Fair Market Value" of a share of
Common Stock as of a given date shall be (i) the closing price of a share of
Common Stock on the principal exchange on which shares of Common Stock are then
trading, if any (or as reported on any composite index which includes such
principal exchange), on the trading day previous to such date, or if shares were
not traded on the trading day previous to such date, then on the next preceding
date on which a trade occurred, or (ii) if Common Stock is not traded on an
exchange but is quoted on NASDAQ or a successor quotation system, the mean
between the closing representative bid and asked prices for the Common Stock on
the trading day previous to such date as reported by NASDAQ or such successor
quotation system; or (iii) if Common Stock is not publicly traded on an exchange
and not quoted on NASDAQ or a successor quotation system, the Fair Market Value
of a share of Common Stock as established by the Committee (or the Board, in the
case of Options granted to Independent Directors) acting in good faith.

1.16 Grantee. "Grantee" shall mean an Employee or consultant
granted a Performance Award, Dividend Equivalent, Stock Payment or Stock
Appreciation Right, or an award of Deferred Stock, under this Plan.

1.17 Incentive Stock Option. "Incentive Stock Option" shall
mean an option which conforms to the applicable provisions of Section 422 of the
Code and which is designated as an Incentive Stock Option by the Committee.

1.18 Independent Director. "Independent Director" shall mean a
member of the Board who is not an Employee of the Company.

1.19 Non-Qualified Stock Option. "Non-Qualified Stock Option"
shall mean an Option which is not designated as an Incentive Stock Option by the
Committee.

1.20 Option. "Option" shall mean a stock option granted under
Article III of this Plan. An Option granted under this Plan shall, as determined
by the Committee, be

3
<PAGE> 4

either a Non-Qualified Stock Option or an Incentive Stock Option; provided,
however, that Options granted to Independent Directors and consultants shall be
Non-Qualified Stock Options.

1.21 Optionee. "Optionee" shall mean an Employee, consultant
or Independent Director granted an Option under this Plan.

1.22 Performance Award. "Performance Award" shall mean a cash
bonus, stock bonus or other performance or incentive award that is paid in cash,
Common Stock or a combination of both, awarded under Article VII of this Plan.

1.23 Plan. "Plan" shall mean The 1996 Equity Participation
Plan of Candlewood Hotel Company, Inc.

1.24 QDRO. "QDRO" shall mean a qualified domestic relations
order as defined by the Code or Title I of the Employee Retirement Income
Security Act of 1974, as amended, or the rules thereunder.

1.25 Restricted Stock. "Restricted Stock" shall mean Common
Stock awarded under Article VI of this Plan.

1.26 Restricted Stockholder. "Restricted Stockholder" shall
mean an Employee or consultant granted an award of Restricted Stock under
Article VI of this Plan.

1.27 Rule 16b-3. "Rule 16b-3" shall mean that certain Rule
16b-3 under the Exchange Act, as such Rule may be amended from time to time.

1.28 Stock Appreciation Right. "Stock Appreciation Right"
shall mean a stock appreciation right granted under Article VIII of this Plan.

1.29 Stock Payment. "Stock Payment" shall mean (i) a payment
in the form of shares of Common Stock, or (ii) an option or other right to
purchase shares of Common Stock, as part of a deferred compensation arrangement,
made in lieu of all or any portion of the compensation, including without
limitation, salary, bonuses and commissions, that would otherwise become payable
to a key Employee or consultant in cash, awarded under Article VII of this Plan.

1.30 Subsidiary. "Subsidiary" shall mean any corporation in an
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain then owns
stock possessing 50 percent or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.

1.31 Termination of Consultancy. "Termination of Consultancy"
shall mean the time when the engagement of an Optionee, Grantee or Restricted
Stockholder as a consultant to the Company or a Subsidiary is terminated for any
reason, with or without cause, including, but not by way of limitation, by
resignation, discharge, death or retirement; but excluding terminations where
there is a simultaneous commencement of employment with the Company

4
<PAGE> 5

or any Subsidiary. The Committee, in its absolute discretion, shall determine
the effect of all matters and questions relating to Termination of Consultancy,
including, but not by way of limitation, the question of whether a Termination
of Consultancy resulted from a discharge for good cause, and all questions of
whether particular leaves of absence constitute Terminations of Consultancy.
Notwithstanding any other provision of this Plan, the Company or any Subsidiary
has an absolute and unrestricted right to terminate a consultant's service at
any time for any reason whatsoever, with or without cause, except to the extent
expressly provided otherwise in writing.

1.32 Termination of Directorship. "Termination of
Directorship" shall mean the time when an Optionee who is an Independent
Director ceases to be a Director for any reason, including, but not by way of
limitation, a termination by resignation, failure to be elected, death or
retirement. The Board, in its sole and absolute discretion, shall determine the
effect of all matters and questions relating to Termination of Directorship with
respect to Independent Directors.

1.33 Termination of Employment. "Termination of Employment"
shall mean the time when the employee-employer relationship between an Optionee,
Grantee or Restricted Stockholder and the Company or any Subsidiary is
terminated for any reason, with or without cause, including, but not by way of
limitation, a termination by resignation, discharge, death, disability or
retirement; but excluding (i) terminations where there is a simultaneous
reemployment or continuing employment of an Optionee, Grantee or Restricted
Stockholder by the Company or any Subsidiary, (ii) at the discretion of the
Committee, terminations which result in a temporary severance of the
employee-employer relationship, and (iii) at the discretion of the Committee,
terminations which are followed by the simultaneous establishment of a
consulting relationship by the Company or a Subsidiary with the former employee.
The Committee, in its absolute discretion, shall determine the effect of all
matters and questions relating to Termination of Employment, including, but not
by way of limitation, the question of whether a Termination of Employment
resulted from a discharge for good cause, and all questions of whether
particular leaves of absence constitute Terminations of Employment; provided,
however, that, with respect to Incentive Stock Options, a leave of absence,
change in status from an employee to an independent contractor or other change
in the employee-employer relationship shall constitute a Termination of
Employment if, and to the extent that, such leave of absence, change in status
or other change interrupts employment for the purposes of Section 422(a)(2) of
the Code and the then applicable regulations and revenue rulings under said
Section. Notwithstanding any other provision of this Plan, the Company or any
Subsidiary has an absolute and unrestricted right to terminate an Employee's
employment at any time for any reason whatsoever, with or without cause, except
to the extent expressly provided otherwise in writing.

5
<PAGE> 6

ARTICLE II

SHARES SUBJECT TO PLAN

2.1 Shares Subject to Plan.

(a) The shares of stock subject to Options, awards of
Restricted Stock, Performance Awards, Dividend Equivalents, awards of Deferred
Stock, Stock Payments or Stock Appreciation Rights shall be Common Stock,
initially shares of the Company's Common Stock, par value $.01 per share. The
aggregate number of such shares which may be issued upon exercise of such
options or rights or upon any such awards under the Plan shall not exceed
[___________]. The shares of Common Stock issuable upon exercise of such options
or rights or upon any such awards may be either previously authorized but
unissued shares or treasury shares.

(b) The maximum number of shares which may be subject to
options or Stock Appreciation Rights granted under the Plan to any individual in
any calendar year shall not exceed the Award Limit. To the extent required by
Section 162(m) of the Code, shares subject to Options which are canceled
continue to be counted against the Award Limit and if, after grant of an Option,
the price of shares subject to such Option is reduced, the transaction is
treated as a cancellation of the Option and a grant of a new Option and both the
Option deemed to be canceled and the Option deemed to be granted are counted
against the Award Limit. Furthermore, to the extent required by Section 162(m)
of the Code, if, after grant of a Stock Appreciation Right, the base amount on
which stock appreciation is calculated is reduced to reflect a reduction in the
Fair Market Value of the Company's Common Stock, the transaction is treated as a
cancellation of the Stock Appreciation Right and a grant of a new Stock
Appreciation Right and both the Stock Appreciation Right deemed to be canceled
and the Stock Appreciation Right deemed to be granted are counted against the
Award Limit.

2.2 Add-back of Options and Other Rights. If any Option, or
other right to acquire shares of Common Stock under any other award under this
Plan, expires or is canceled without having been fully exercised, or is
exercised in whole or in part for cash as permitted by this Plan, the number of
shares subject to such Option or other right but as to which such Option or
other right was not exercised prior to its expiration, cancellation or exercise
may again be optioned, granted or awarded hereunder, subject to the limitations
of Section 2.1. Furthermore, any shares subject to Options or other awards which
are adjusted pursuant to Section 10.3 and become exercisable with respect to
shares of stock of another corporation shall be considered cancelled and may
again be optioned, granted or awarded hereunder, subject to the limitations of
Section 2.1. Shares of Common Stock which are delivered by the Optionee or
Grantee or withheld by the Company upon the exercise of any Option or other
award under this Plan, in payment of the exercise price thereof, may again be
optioned, granted or awarded hereunder, subject to the limitations of Section
2.1. If any share of Restricted Stock is forfeited by the Grantee or repurchased
by the Company pursuant to Section 6.6 hereof, such share may again be optioned,
granted or awarded hereunder, subject to the limitations of Section 2.1.
Notwithstanding the provisions of this Section 2.2, no shares of Common Stock
may again be optioned, granted or awarded if such action would cause an

6
<PAGE> 7

Incentive Stock Option to fail to qualify as an incentive stock option under
Section 422 of the Code.

ARTICLE III

GRANTING OF OPTIONS

3.1 Eligibility. Any Employee or consultant selected by the
Committee pursuant to Section 3.4(a)(i) shall be eligible to be granted an
Option. Each Independent Director of the Company shall be eligible to be granted
Options at the times and in the manner set forth in Section 3.4(d).

3.2 Disqualification for Stock Ownership. No person may be
granted an Incentive Stock Option under this Plan if such person, at the time
the Incentive Stock Option is granted, owns stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company or any then existing Subsidiary or parent corporation (within the
meaning of Section 422 of the Code) unless such Incentive Stock Option conforms
to the applicable provisions of Section 422 of the Code.

3.3 Qualification of Incentive Stock Options. No Incentive
Stock Option shall be granted unless such Option, when granted, qualifies as an
"incentive stock option" under Section 422 of the Code. No Incentive Stock
Option shall be granted to any person who is not an Employee.

3.4 Granting of Options

(a) The Committee shall from time to time, in its absolute
discretion, and subject to applicable limitations of this Plan:

(i) Determine which Employees are key Employees and
select from among the key Employees or consultants (including Employees
or consultants who have previously received Options or other awards
under this Plan) such of them as in its opinion should be granted
Options;

(ii) Subject to the Award Limit, determine the number
of shares to be subject to such Options granted to the selected key
Employees or consultants;

(iii) Determine whether such Options are to be
Incentive Stock Options or Non-Qualified Stock Options and whether such
Options are to qualify as performance-based compensation as described
in Section 162(m)(4)(C) of the Code; and

(iv) Determine the terms and conditions of such
Options, consistent with this Plan; provided, however, that the terms
and conditions of Options intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code shall
include, but not be limited to, such terms and conditions as may be
necessary to meet the applicable provisions of Section 162(m) of the
Code.

7
<PAGE> 8

(b) Upon the selection of a key Employee or consultant to be
granted an Option, the Committee shall instruct the Secretary of the Company to
issue the Option and may impose such conditions on the grant of the Option as it
deems appropriate. Without limiting the generality of the preceding sentence,
the Committee may, in its discretion and on such terms as it deems appropriate,
require as a condition on the grant of an Option to an Employee or consultant
that the Employee or consultant surrender for cancellation some or all of the
unexercised Options, awards of Restricted Stock or Deferred Stock, Performance
Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments or
other rights which have been previously granted to him under this Plan or
otherwise. An Option, the grant of which is conditioned upon such surrender, may
have an option price lower (or higher) than the exercise price of such
surrendered Option or other award, may cover the same (or a lesser or greater)
number of shares as such surrendered Option or other award, may contain such
other terms as the Committee deems appropriate, and shall be exercisable in
accordance with its terms, without regard to the number of shares, price,
exercise period or any other term or condition of such surrendered Option or
other award.

(c) Any Incentive Stock Option granted under this Plan may be
modified by the Committee to disqualify such option from treatment as an
"incentive stock option" under Section 422 of the Code.

(d) During the term of the Plan, each person who is an
Independent Director as of the date of the consummation of the initial public
offering of Common Stock automatically shall be granted an Option to purchase
10,000 shares of Common Stock (subject to adjustment as provided in Section
10.3) on the date of such initial public offering. During the term of the Plan,
a person who is initially elected to the Board after the consummation of the
initial public offering of Common Stock and who is an Independent Director at
the time of such initial election automatically shall be granted an Option to
purchase 10,000 shares of Common Stock (subject to adjustment as provided in
Section 10.3) on the date of such initial election. Members of the Board who are
employees of the Company who subsequently retire from the Company and remain on
the Board will not receive an initial Option grant pursuant to the preceding
sentence. All the foregoing Option grants authorized by this Section 3.4(d) are
subject to stockholder approval of the Plan.

ARTICLE IV

TERMS OF OPTIONS

4.1 Option Agreement. Each Option shall be evidenced by a
written Stock Option Agreement, which shall be executed by the Optionee and an
authorized officer of the Company and which shall contain such terms and
conditions as the Committee (or the Board, in the case of Options granted to
Independent Directors) shall determine, consistent with this Plan. Stock Option
Agreements evidencing Options intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code shall contain such
terms and conditions as may be necessary to meet the applicable provisions of
Section 162(m) of the Code.

8
<PAGE> 9

Stock Option Agreements evidencing Incentive Stock Options shall contain such
terms and conditions as may be necessary to meet the applicable provisions of
Section 422 of the Code.

4.2 Option Price. The price per share of the shares subject to
each Option shall be set by the Committee; provided, however, that such price
shall be no less than the par value of a share of Common Stock, unless otherwise
permitted by applicable state law, and (i) in the case of Incentive Stock
Options and Options intended to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code, such price shall not be less than
100% of the Fair Market Value of a share of Common Stock on the date the Option
is granted; (ii) in the case of Incentive Stock Options granted to an individual
then owning (within the meaning of Section 424(d) of the Code) more than 10% of
the total combined voting power of all classes of stock of the Company or any
Subsidiary or parent corporation thereof (within the meaning of Section 422 of
the Code) such price shall not be less than 110% of the Fair Market Value of a
share of Common Stock on the date the Option is granted; and (iii) in the case
of Options granted to Independent Directors, such price shall equal 100% of the
Fair Market Value of a share of Common Stock on the date the Option is granted;
provided, however, that the price of each share subject to each Option granted
to Independent Directors on the date of the initial public offering of Common
Stock shall equal the initial public offering price (net of underwriting
discounts and commissions) per share of Common Stock.

4.3 Option Term. The term of an Option shall be set by the
Committee in its discretion; provided, however, that, (i) in the case of Options
granted to Independent Directors, the term shall be ten (10) years from the date
the Option is granted, without variation or acceleration hereunder, but subject
to Section 5.7, and (ii) in the case of Incentive Stock Options, the term shall
not be more than ten (10) years from the date the Incentive Stock Option is
granted, or five (5) years from such date if the Incentive Stock Option is
granted to an individual then owning (within the meaning of Section 424(d) of
the Code) more than 10% of the total combined voting power of all classes of
stock of the Company or any Subsidiary or parent corporation thereof (within the
meaning of Section 422 of the Code). Except as limited by requirements of
Section 422 of the Code and regulations and rulings thereunder applicable to
Incentive Stock Options, the Committee may extend the term of any outstanding
Option in connection with any Termination of Employment or Termination of
Consultancy of the Optionee, or amend any other term or condition of such Option
relating to such a termination.

4.4 Option Vesting

(a) The period during which the right to exercise an Option in
whole or in part vests in the Optionee shall be set by the Committee and the
Committee may determine that an Option may not be exercised in whole or in part
for a specified period after it is granted; provided, however, that, unless the
Committee otherwise provides in the terms of the Option or otherwise, no Option
shall be exercisable by any Optionee within the period ending six months and one
day after the date the Option is granted; and provided, further, that Options
granted to Independent Directors shall become exercisable in cumulative annual
installments of 25% on each of the first, second, third and fourth anniversaries
of the date of Option grant, without variation or acceleration hereunder except
as provided in Section 10.3(b). At any time after grant of an Option, the
Committee may, in its sole and absolute discretion and subject to

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whatever terms and conditions it selects, accelerate the period during which an
Option (except an Option granted to an Independent Director) vests.

(b) No portion of an Option which is unexercisable at
Termination of Employment, Termination of Directorship or Termination of
Consultancy, as applicable, shall thereafter become exercisable, except as may
be otherwise provided by the Committee in the case of Options granted to
Employees or consultants either in the Stock Option Agreement or by action of
the Committee following the grant of the Option.

(c) To the extent that the aggregate Fair Market Value of
stock with respect to which "incentive stock options" (within the meaning of
Section 422 of the Code, but without regard to Section 422(d) of the Code) are
exercisable for the first time by an Optionee during any calendar year (under
the Plan and all other incentive stock option plans of the Company and any
Subsidiary) exceeds $100,000, such Options shall be treated as Non-Qualified
Options to the extent required by Section 422 of the Code. The rule set forth in
the preceding sentence shall be applied by taking Options into account in the
order in which they were granted. For purposes of this Section 4.4(c), the Fair
Market Value of stock shall be determined as of the time the Option with respect
to such stock is granted.

4.5 Consideration. In consideration of the granting of an
Option, the Optionee shall agree, in the written Stock Option Agreement, to
remain in the employ of (or to consult for or to serve as an Independent
Director of, as applicable) the Company or any Subsidiary for a period of at
least one year (or such shorter period as may be fixed in the Stock Option
Agreement or by action of the Committee following grant of the Option) after the
Option is granted (or until the next annual meeting of stockholders of the
Company, in the case of an Independent Director). Nothing in this Plan or in any
Stock Option Agreement hereunder shall confer upon any Optionee any right to
continue in the employ of, or as a consultant for, the Company or any
Subsidiary, or as a director of the Company, or shall interfere with or restrict
in any way the rights of the Company and any Subsidiary, which are hereby
expressly reserved, to discharge any Optionee at any time for any reason
whatsoever, with or without good cause.

ARTICLE V

EXERCISE OF OPTIONS

5.1 Partial Exercise. An exercisable Option may be exercised
in whole or in part. However, an Option shall not be exercisable with respect to
fractional shares and the Committee (or the Board, in the case of Options
granted to Independent Directors) may require that, by the terms of the Option,
a partial exercise be with respect to a minimum number of shares.

5.2 Manner of Exercise. All or a portion of an exercisable
Option shall be deemed exercised upon delivery of all of the following to the
Secretary of the Company or his office:

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<PAGE> 11

(a) A written notice complying with the applicable rules
established by the Committee (or the Board, in the case of Options granted to
Independent Directors) stating that the Option, or a portion thereof, is
exercised. The notice shall be signed by the Optionee or other person then
entitled to exercise the Option or such portion;

(b) Such representations and documents as the Committee (or
the Board, in the case of Options granted to Independent Directors), in its
absolute discretion, deems necessary or advisable to effect compliance with all
applicable provisions of the Securities Act of 1933, as amended, and any other
federal or state securities laws or regulations. The Committee or Board may, in
its absolute discretion, also take whatever additional actions it deems
appropriate to effect such compliance including, without limitation, placing
legends on share certificates and issuing stop-transfer notices to agents and
registrars;

(c) In the event that the Option shall be exercised pursuant
to Section 10.1 by any person or persons other than the Optionee, appropriate
proof of the right of such person or persons to exercise the Option; and

(d) Full cash payment to the Secretary of the Company for the
shares with respect to which the Option, or portion thereof, is exercised.
However, the Committee (or the Board, in the case of Options granted to
Independent Directors), may in its discretion (i) allow a delay in payment up to
thirty (30) days from the date the Option, or portion thereof, is exercised;
(ii) allow payment, in whole or in part, through the delivery of shares of
Common Stock owned by the Optionee, duly endorsed for transfer to the Company
with a Fair Market Value on the date of delivery equal to the aggregate exercise
price of the Option or exercised portion thereof; (iii) allow payment, in whole
or in part, through the surrender of shares of Common Stock then issuable upon
exercise of the Option having a Fair Market Value on the date of Option exercise
equal to the aggregate exercise price of the Option or exercised portion
thereof; (iv) allow payment, in whole or in part, through the delivery of
property of any kind which constitutes good and valuable consideration; (v)
allow payment, in whole or in part, through the delivery of a full recourse
promissory note bearing interest (at no less than such rate as shall then
preclude the imputation of interest under the Code) and payable upon such terms
as may be prescribed by the Committee or the Board; (vi) allow payment, in whole
or in part, through the delivery of a notice that the Optionee has placed a
market sell order with a broker with respect to shares of Common Stock then
issuable upon exercise of the Option, and that the broker has been directed to
pay a sufficient portion of the net proceeds of the sale to the Company in
satisfaction of the Option exercise price; or (vii) allow payment through any
combination of the consideration provided in the foregoing subparagraphs (ii),
(iii), (iv), (v) and (vi). In the case of a promissory note, the Committee (or
the Board, in the case of Options granted to Independent Directors) may also
prescribe the form of such note and the security to be given for such note. The
Option may not be exercised, however, by delivery of a promissory note or by a
loan from the Company when or where such loan or other extension of credit is
prohibited by law.

5.3 Conditions to Issuance of Stock Certificates. The Company
shall not be required to issue or deliver any certificate or certificates for
shares of stock purchased upon the exercise of any Option or portion thereof
prior to fulfillment of all of the following conditions:

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<PAGE> 12

(a) The admission of such shares to listing on all stock
exchanges on which such class of stock is then listed;

(b) The completion of any registration or other qualification
of such shares under any state or federal law, or under the rulings or
regulations of the Securities and Exchange Commission or any other governmental
regulatory body which the Committee or Board shall, in its absolute discretion,
deem necessary or advisable;

(c) The obtaining of any approval or other clearance from any
state or federal governmental agency which the Committee (or Board, in the case
of Options granted to Independent Directors) shall, in its absolute discretion,
determine to be necessary or advisable;

(d) The lapse of such reasonable period of time following the
exercise of the Option as the Committee (or Board, in the case of Options
granted to Independent Directors) may establish from time to time for reasons of
administrative convenience; and

(e) The receipt by the Company of full payment for such
shares, including payment of any applicable withholding tax.

5.4 Rights as Stockholders. The holders of Options shall not
be, nor have any of the rights or privileges of, stockholders of the Company in
respect of any shares purchasable upon the exercise of any part of an Option
unless and until certificates representing such shares have been issued by the
Company to such holders.

5.5 Ownership and Transfer Restrictions. The Committee (or
Board, in the case of Options granted to Independent Directors), in its absolute
discretion, may impose such restrictions on the ownership and transferability of
the shares purchasable upon the exercise of an Option as it deems appropriate.
Any such restriction shall be set forth in the respective Stock Option Agreement
and may be referred to on the certificates evidencing such shares. The Committee
may require the Employee to give the Company prompt notice of any disposition of
shares of Common Stock acquired by exercise of an Incentive Stock Option within
(i) two years from the date of granting such Option to such Employee or (ii) one
year after the transfer of such shares to such Employee. The Committee may
direct that the certificates evidencing shares acquired by exercise of an Option
refer to such requirement to give prompt notice of disposition.

5.6 Limitations on Exercise of Options Granted to Independent
Directors. No Option granted to an Independent Director may be exercised to any
extent by anyone after the first to occur of the following events:

(a) The expiration of twelve (12) months from the date of the
Optionee's death;

(b) the expiration of twelve (12) months from the date of the
Optionee's Termination of Directorship by reason of his permanent and total
disability (within the meaning of Section 22(e)(3) of the Code);

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<PAGE> 13

(c) the expiration of three (3) months from the date of the
Optionee's Termination of Directorship for any reason other than such Optionee's
death or his permanent and total disability, unless the Optionee dies within
said three-month period; or

(d) The expiration of ten years from the date the Option was
granted.

ARTICLE VI

AWARD OF RESTRICTED STOCK

6.1 Award of Restricted Stock

(a) The Committee may from time to time, in its absolute
discretion:

(i) Select from among the key Employees or
consultants (including Employees or consultants who have previously
received other awards under this Plan) such of them as in its opinion
should be awarded Restricted Stock; and

(ii) Determine the purchase price, if any, and other
terms and conditions applicable to such Restricted Stock, consistent
with this Plan.

(b) The Committee shall establish the purchase price, if any,
and form of payment for Restricted Stock; provided, however, that such purchase
price shall be no less than the par value of the Common Stock to be purchased,
unless otherwise permitted by applicable state law. In all cases, legal
consideration shall be required for each issuance of Restricted Stock.

(c) Upon the selection of a key Employee or consultant to be
awarded Restricted Stock, the Committee shall instruct the Secretary of the
Company to issue such Restricted Stock and may impose such conditions on the
issuance of such Restricted Stock as it deems appropriate.

6.2 Restricted Stock Agreement. Restricted Stock shall be
issued only pursuant to a written Restricted Stock Agreement, which shall be
executed by the selected key Employee or consultant and an authorized officer of
the Company and which shall contain such terms and conditions as the Committee
shall determine, consistent with this Plan.

6.3 Consideration. As consideration for the issuance of
Restricted Stock, in addition to payment of any purchase price, the Restricted
Stockholder shall agree, in the written Restricted Stock Agreement, to remain in
the employ of, or to consult for, the Company or any Subsidiary for a period of
at least one year after the Restricted Stock is issued (or such shorter period
as may be fixed in the Restricted Stock Agreement or by action of the Committee
following grant of the Restricted Stock). Nothing in this Plan or in any
Restricted Stock Agreement hereunder shall confer on any Restricted Stockholder
any right to continue in the employ of, or as a consultant for, the Company or
any Subsidiary or shall interfere with or restrict in any way the rights of the
Company and any Subsidiary, which are hereby expressly

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<PAGE> 14

reserved, to discharge any Restricted Stockholder at any time for any reason
whatsoever, with or without good cause.

6.4 Rights as Stockholders. Upon delivery of the shares of
Restricted Stock to the escrow holder pursuant to Section 6.7, the Restricted
Stockholder shall have, unless otherwise provided by the Committee, all the
rights of a stockholder with respect to said shares, subject to the restrictions
in his Restricted Stock Agreement, including the right to receive all dividends
and other distributions paid or made with respect to the shares; provided,
however, that in the discretion of the Committee, any extraordinary
distributions with respect to the Common Stock shall be subject to the
restrictions set forth in Section 6.5.

6.5 Restriction. All shares of Restricted Stock issued under
this Plan (including any shares received by holders thereof with respect to
shares of Restricted Stock as a result of stock dividends, stock splits or any
other form of recapitalization) shall, in the terms of each individual
Restricted Stock Agreement, be subject to such restrictions as the Committee
shall provide, which restrictions may include, without limitation, restrictions
concerning voting rights and transferability and restrictions based on duration
of employment with the Company, Company performance and individual performance;
provided, however, that, unless the Committee otherwise provides in the terms of
the Restricted Stock Agreement or otherwise, no share of Restricted Stock
granted to a person subject to Section 16 of the Exchange Act shall be sold,
assigned or otherwise transferred until at least six months and one day have
elapsed from the date on which the Restricted Stock was issued, and provided,
further, that by action taken after the Restricted Stock is issued, the
Committee may, on such terms and conditions as it may determine to be
appropriate, remove any or all of the restrictions imposed by the terms of the
Restricted Stock Agreement. Restricted Stock may not be sold or encumbered until
all restrictions are terminated or expire. Unless provided otherwise by the
Committee, if no consideration was paid by the Restricted Stockholder upon
issuance, a Restricted Stockholder's rights in unvested Restricted Stock shall
lapse upon Termination of Employment or, if applicable, upon Termination of
Consultancy with the Company.

6.6 Repurchase of Restricted Stock. The Committee shall
provide in the terms of each individual Restricted Stock Agreement that the
Company shall have the right to repurchase from the Restricted Stockholder the
Restricted Stock then subject to restrictions under the Restricted Stock
Agreement immediately upon a Termination of Employment or, if applicable, upon a
Termination of Consultancy between the Restricted Stockholder and the Company,
at a cash price per share equal to the price paid by the Restricted Stockholder
for such Restricted Stock; provided, however, that provision may be made that no
such right of repurchase shall exist in the event of a Termination of Employment
or Termination of Consultancy without cause, or following a change in control of
the Company or because of the Restricted Stockholder's retirement, death or
disability, or otherwise.

6.7 Escrow. The Secretary of the Company or such other escrow
holder as the Committee may appoint shall retain physical custody of each
certificate representing Restricted Stock until all of the restrictions imposed
under the Restricted Stock Agreement with respect to the shares evidenced by
such certificate expire or shall have been removed.

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6.8 Legend. In order to enforce the restrictions imposed upon
shares of Restricted Stock hereunder, the Committee shall cause a legend or
legends to be placed on certificates representing all shares of Restricted Stock
that are still subject to restrictions under Restricted Stock Agreements, which
legend or legends shall make appropriate reference to the conditions imposed
thereby.

ARTICLE VII

PERFORMANCE AWARDS, DIVIDEND EQUIVALENTS,
DEFERRED STOCK, STOCK PAYMENTS

7.1 Performance Awards. Any key Employee or consultant
selected by the Committee may be granted one or more Performance Awards. The
value of such Performance Awards may be linked to the market value, book value,
net profits or other measure of the value of Common Stock or other specific
performance criteria determined appropriate by the Committee, in each case on a
specified date or dates or over any period or periods determined by the
Committee, or may be based upon the appreciation in the market value, book
value, net profits or other measure of the value of a specified number of shares
of Common Stock over a fixed period or periods determined by the Committee. In
making such determinations, the Committee shall consider (among such other
factors as it deems relevant in light of the specific type of award) the
contributions, responsibilities and other compensation of the particular key
Employee or consultant.

7.2 Dividend Equivalents. Any key Employee or consultant
selected by the Committee may be granted Dividend Equivalents based on the
dividends declared on Common Stock, to be credited as of dividend payment dates,
during the period between the date an Option, Stock Appreciation Right, Deferred
Stock or Performance Award is granted, and the date such Option, Stock
Appreciation Right, Deferred Stock or Performance Award is exercised, vests or
expires, as determined by the Committee. Such Dividend Equivalents shall be
converted to cash or additional shares of Common Stock by such formula and at
such time and subject to such limitations as may be determined by the Committee.
With respect to Dividend Equivalents granted with respect to Options intended to
be qualified performance-based compensation for purposes of Section 162(m), such
Dividend Equivalents shall be payable regardless of whether such Option is
exercised.

7.3 Stock Payments. Any key Employee or consultant selected by
the Committee may receive Stock Payments in the manner determined from time to
time by the Committee. The number of shares shall be determined by the Committee
and may be based upon the Fair Market Value, book value, net profits or other
measure of the value of Common Stock or other specific performance criteria
determined appropriate by the Committee, determined on the date such Stock
Payment is made or on any date thereafter.

7.4 Deferred Stock. Any key Employee or consultant selected by
the Committee may be granted an award of Deferred Stock in the manner determined
from time to time by the Committee. The number of shares of Deferred Stock shall
be determined by the Committee and may be linked to the market value, book
value, net profits or other measure of

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<PAGE> 16

the value of Common Stock or other specific performance criteria determined to
be appropriate by the Committee, in each case on a specified date or dates or
over any period or periods determined by the Committee. Common Stock underlying
a Deferred Stock award will not be issued until the Deferred Stock award has
vested, pursuant to a vesting schedule or performance criteria set by the
Committee. Unless otherwise provided by the Committee, a Grantee of Deferred
Stock shall have no rights as a Company stockholder with respect to such
Deferred Stock until such time as the award has vested and the Common Stock
underlying the award has been issued.

7.5 Performance Award Agreement, Dividend Equivalent
Agreement, Deferred Stock Agreement, Stock Payment Agreement. Each Performance
Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment shall
be evidenced by a written agreement, which shall be executed by the Grantee and
an authorized Officer of the Company and which shall contain such terms and
conditions as the Committee shall determine, consistent with this Plan.

7.6 Term. The term of a Performance Award, Dividend
Equivalent, award of Deferred Stock and/or Stock Payment shall be set by the
Committee in its discretion.

7.7 Exercise Upon Termination of Employment. A Performance
Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment is
exercisable or payable only while the Grantee is an Employee or consultant;
provided that the Committee may determine that the Performance Award, Dividend
Equivalent, award of Deferred Stock and/or Stock Payment may be exercised or
paid subsequent to Termination of Employment or Termination of Consultancy
without cause, or following a change in control of the Company, or because of
the Grantee's retirement, death or disability, or otherwise.

7.8 Payment on Exercise. Payment of the amount determined
under Section 7.1 or 7.2 above shall be in cash, in Common Stock or a
combination of both, as determined by the Committee. To the extent any payment
under this Article VII is effected in Common Stock, it shall be made subject to
satisfaction of all provisions of Section 5.3.

7.9 Consideration. In consideration of the granting of a
Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock
Payment, the Grantee shall agree, in a written agreement, to remain in the
employ of, or to consult for, the Company or any Subsidiary for a period of at
least one year after such Performance Award, Dividend Equivalent, award of
Deferred Stock and/or Stock Payment is granted (or such shorter period as may be
fixed in such agreement or by action of the Committee following such grant).
Nothing in this Plan or in any agreement hereunder shall confer on any Grantee
any right to continue in the employ of, or as a consultant for, the Company or
any Subsidiary or shall interfere with or restrict in any way the rights of the
Company and any Subsidiary, which are hereby expressly reserved, to discharge
any Grantee at any time for any reason whatsoever, with or without good cause.

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ARTICLE VIII

STOCK APPRECIATION RIGHTS

8.1 Grant of Stock Appreciation Rights. A Stock Appreciation
Right may be granted to any key Employee or consultant selected by the
Committee. A Stock Appreciation Right may be granted (i) in connection and
simultaneously with the grant of an Option, (ii) with respect to a previously
granted Option, or (iii) independent of an Option. A Stock Appreciation Right
shall be subject to such terms and conditions not inconsistent with this Plan as
the Committee shall impose and shall be evidenced by a written Stock
Appreciation Right Agreement, which shall be executed by the Grantee and an
authorized officer of the Company. The Committee, in its discretion, may
determine whether a Stock Appreciation Right is to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code and Stock
Appreciation Right Agreements evidencing Stock Appreciation Rights intended to
so qualify shall contain such terms and conditions as may be necessary to meet
the applicable provisions of section 162(m) of the Code. Without limiting the
generality of the foregoing, the Committee may, in its discretion and on such
terms as it deems appropriate, require as a condition of the grant of a Stock
Appreciation Right to an Employee or consultant that the Employee or consultant
surrender for cancellation some or all of the unexercised Options, awards of
Restricted Stock or Deferred Stock, Performance Awards, Stock Appreciation
Rights, Dividend Equivalents or Stock Payments, or other rights which have been
previously granted to him under this Plan or otherwise. A Stock Appreciation
Right, the grant of which is conditioned upon such surrender, may have an
exercise price lower (or higher) than the exercise price of the surrendered
Option or other award, may cover the same (or a lesser or greater) number of
shares as such surrendered Option or other award, may contain such other terms
as the Committee deems appropriate, and shall be exercisable in accordance with
its terms, without regard to the number of shares, price, exercise period or any
other term or condition of such surrendered Option or other award.

8.2 Coupled Stock Appreciation Rights

(a) A Coupled Stock Appreciation Right ("CSAR") shall be
related to a particular Option and shall be exercisable only when and to the
extent the related Option is exercisable.

(b) A CSAR may be granted to the Grantee for no more than the
number of shares subject to the simultaneously or previously granted Option to
which it is coupled.

(c) A CSAR shall entitle the Grantee (or other person entitled
to exercise the Option pursuant to this Plan) to surrender to the Company
unexercised a portion of the Option to which the CSAR relates (to the extent
then exercisable pursuant to its terms) and to receive from the Company in
exchange therefor an amount determined by multiplying the difference obtained by
subtracting the Option exercise price from the Fair Market Value of a share of
Common Stock on the date of exercise of the CSAR by the number of shares of
Common Stock with respect to which the CSAR shall have been exercised, subject
to any limitations the Committee may impose.

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8.3 Independent Stock Appreciation Rights

(a) An Independent Stock Appreciation Right ("ISAR") shall be
unrelated to any Option and shall have a term set by the Committee. An ISAR
shall be exercisable in such installments as the Committee may determine. An
ISAR shall cover such number of shares of Common Stock as the Committee may
determine; provided, however, that unless the Committee otherwise provides in
the terms of the ISAR or otherwise, no ISAR granted to a person subject to
Section 16 of the Exchange Act shall be exercisable until at least six months
have elapsed from (but excluding) the date on which the Option was granted. The
exercise price per share of Common Stock subject to each ISAR shall be set by
the Committee. An ISAR is exercisable only while the Grantee is an Employee or
consultant; provided that the Committee may determine that the ISAR may be
exercised subsequent to Termination of Employment or Termination of Consultancy
without cause, or following a change in control of the Company, or because of
the Grantee's retirement, death or disability, or otherwise.

(b) An ISAR shall entitle the Grantee (or other person
entitled to exercise the ISAR pursuant to this Plan) to exercise all or a
specified portion of the ISAR (to the extent then exercisable pursuant to its
terms) and to receive from the Company an amount determined by multiplying the
difference obtained by subtracting the exercise price per share of the ISAR from
the Fair Market Value of a share of Common Stock on the date of exercise of the
ISAR by the number of shares of Common Stock with respect to which the ISAR
shall have been exercised, subject to any limitations the Committee may impose.

8.4 Payment and Limitations on Exercise

(a) Payment of the amount determined under Section 8.2(c) and
8.3(b) above shall be in cash, in Common Stock (based on its Fair Market Value
as of the date the Stock Appreciation Right is exercised) or a combination of
both, as determined by the Committee. To the extent such payment is effected in
Common Stock it shall be made subject to satisfaction of all provisions of
Section 5.3 above pertaining to Options.

(b) Grantees of Stock Appreciation Rights may be required to
comply with any timing or other restrictions with respect to the settlement or
exercise of a Stock Appreciation Right, including a window-period limitation, as
may be imposed in the discretion of the Board or Committee.

8.5 Consideration. In consideration of the granting of a Stock
Appreciation Right, the Grantee shall agree, in the written Stock Appreciation
Right Agreement, to remain in the employ of, or to consult for, the Company or
any Subsidiary for a period of at least one year after the Stock Appreciation
Right is granted (or such shorter period as may be fixed in the Stock
Appreciation Right Agreement or by action of the Committee following grant of
the Restricted Stock). Nothing in this Plan or in any Stock Appreciation Right
Agreement hereunder shall confer on any Grantee any right to continue in the
employ of, or as a consultant for, the Company or any Subsidiary or shall
interfere with or restrict in any way the rights of the Company and any
Subsidiary, which are hereby expressly reserved, to discharge any Grantee at any
time for any reason whatsoever, with or without good cause.

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ARTICLE IX

ADMINISTRATION

9.1 Compensation Committee. Prior to the Company's initial
registration of Common Stock under Section 12 of the Exchange Act, the
Compensation Committee shall consist of the entire Board. Following such
registration, The Compensation Committee (or another committee or a subcommittee
of the Board assuming the functions of the Committee under this Plan) shall
consist solely of two or more Independent Directors appointed by and holding
office at the pleasure of the Board, each of whom is both a "non-employee
director" as defined by Rule 16b-3 and an "outside director" for purposes of
Section 162(m) of the Code. Appointment of Committee members shall be effective
upon acceptance of appointment. Committee members may resign at any time by
delivering written notice to the Board. Vacancies in the Committee may be filled
by the Board.

9.2 Duties and Powers of Committee. It shall be the duty of
the Committee to conduct the general administration of this Plan in accordance
with its provisions. The Committee shall have the power to interpret this Plan
and the agreements pursuant to which Options, awards of Restricted Stock or
Deferred Stock, Performance Awards, Stock Appreciation Rights, Dividend
Equivalents or Stock Payments are granted or awarded, and to adopt such rules
for the administration, interpretation, and application of this Plan as are
consistent therewith and to interpret, amend or revoke any such rules.
Notwithstanding the foregoing, the full Board, acting by a majority of its
members in office, shall conduct the general administration of the Plan with
respect to Options granted to Independent Directors. Any such grant or award
under this Plan need not be the same with respect to each Optionee, Grantee or
Restricted Stockholder. Any such interpretations and rules with respect to
Incentive Stock Options shall be consistent with the provisions of Section 422
of the Code. In its absolute discretion, the Board may at any time and from time
to time exercise any and all rights and duties of the Committee under this Plan
except with respect to matters which under Rule 16b-3 or Section 162(m) of the
Code, or any regulations or rules issued thereunder, are required to be
determined in the sole discretion of the Committee.

9.3 Majority Rule; Unanimous Written Consent. The Committee
shall act by a majority of its members in attendance at a meeting at which a
quorum is present or by a memorandum or other written instrument signed by all
members of the Committee.

9.4 Compensation; Professional Assistance; Good Faith Actions.
Members of the Committee shall receive such compensation for their services as
members as may be determined by the Board. All expenses and liabilities which
members of the Committee incur in connection with the administration of this
Plan shall be borne by the Company. The Committee may, with the approval of the
Board, employ attorneys, consultants, accountants, appraisers, brokers, or other
persons. The Committee, the Company and the Company's officers and Directors
shall be entitled to rely upon the advice, opinions or valuations of any such
persons. All actions taken and all interpretations and determinations made by
the Committee or the Board in good faith shall be final and binding upon all
Optionees, Grantees, Restricted Stockholders, the Company and all other
interested persons. No members of the

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Committee or Board shall be personally liable for any action, determination or
interpretation made in good faith with respect to this Plan, Options, awards of
Restricted Stock or Deferred Stock, Performance Awards, Stock Appreciation
Rights, Dividend Equivalents or Stock Payments, and all members of the Committee
and the Board shall be fully protected by the Company in respect of any such
action, determination or interpretation.

ARTICLE X

MISCELLANEOUS PROVISIONS

10.1 Not Transferable. Options, Restricted Stock awards,
Deferred Stock awards, Performance Awards, Stock Appreciation Rights, Dividend
Equivalents or Stock Payments under this Plan may not be sold, pledged,
assigned, or transferred in any manner other than by will or the laws of descent
and distribution or pursuant to a QDRO, unless and until such rights or awards
have been exercised, or the shares underlying such rights or awards have been
issued, and all restrictions applicable to such shares have lapsed. No Option,
Restricted Stock award, Deferred Stock award, Performance Award, Stock
Appreciation Right, Dividend Equivalent or Stock Payment or interest or right
therein shall be liable for the debts, contracts or engagements of the Optionee,
Grantee or Restricted Stockholder or his successors in interest or shall be
subject to disposition by transfer, alienation, anticipation, pledge,
encumbrance, assignment or any other means whether such disposition be voluntary
or involuntary or by operation of law by judgment, levy, attachment, garnishment
or any other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect, except to
the extent that such disposition is permitted by the preceding sentence.

During the lifetime of the Optionee or Grantee, only he may
exercise an Option or other right or award (or any portion thereof) granted to
him under the Plan, unless it has been disposed of pursuant to a QDRO. After the
death of the Optionee or Grantee, any exercisable portion of an Option or other
right or award may, prior to the time when such portion becomes unexercisable
under the Plan or the applicable Stock Option Agreement or other agreement, be
exercised by his personal representative or by any person empowered to do so
under the deceased Optionee's or Grantee's will or under the then applicable
laws of descent and distribution.

10.2 Amendment, Suspension or Termination of this Plan. Except
as otherwise provided in this Section 10.2, this Plan may be wholly or partially
amended or otherwise modified, suspended or terminated at any time or from time
to time by the Board or the Committee. However, without approval of the
Company's stockholders given within twelve months before or after the action by
the Board or the Committee, no action of the Board or the Committee may, except
as provided in Section 10.3, increase the limits imposed in Section 2.1 on the
maximum number of shares which may be issued under this Plan or modify the Award
Limit, and no action of the Committee may be taken that would otherwise require
stockholder approval as a matter of applicable law, regulation or rule. No
amendment, suspension or termination of this Plan shall, without the consent of
the holder of Options, Restricted Stock awards, Deferred Stock awards,
Performance Awards, Stock Appreciation Rights, Dividend

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<PAGE> 21

Equivalents or Stock Payments, alter or impair any rights or obligations under
any Options, Restricted Stock awards, Deferred Stock awards, Performance Awards,
Stock Appreciation Rights, Dividend Equivalents or Stock Payments theretofore
granted or awarded, unless the award itself otherwise expressly so provides. No
Options, Restricted Stock, Deferred Stock, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments may be granted or
awarded during any period of suspension or after termination of this Plan, and
in no event may any Incentive Stock Option be granted under this Plan after the
first to occur of the following events:

(a) The expiration of ten years from the date the Plan is
adopted by the Board; or

(b) The expiration of ten years from the date the Plan is
approved by the Company's stockholders under Section 10.4.

10.3 Changes in Common Stock or Assets of the Company,
Acquisition or Liquidation of the Company and Other Corporate Events.

(a) Subject to Section 10.3(d), in the event that the
Committee (or the Board, in the case of Options granted to Independent
Directors)determines that any dividend or other distribution (whether in the
form of cash, Common Stock, other securities, or other property),
recapitalization, reclassification, stock split, reverse stock split,
reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase, liquidation, dissolution, or sale, transfer, exchange or other
disposition of all or substantially all of the assets of the Company (including,
but not limited to, a Corporate Transaction), or exchange of Common Stock or
other securities of the Company, issuance of warrants or other rights to
purchase Common Stock or other securities of the Company, or other similar
corporate transaction or event, in the Committee's sole discretion (or in the
case of Options granted to Independent Directors, the Board's sole discretion),
affects the Common Stock such that an adjustment is determined by the Committee
to be appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan or with respect
to an Option, Restricted Stock award, Performance Award, Stock Appreciation
Right, Dividend Equivalent, Deferred Stock award or Stock Payment, then the
Committee (or the Board, in the case of Options granted to Independent
Directors) shall, in such manner as it may deem equitable, adjust any or all of

(i) the number and kind of shares of Common Stock (or
other securities or property) with respect to which Options,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents or
Stock Payments may be granted under the Plan, or which may be granted
as Restricted Stock or Deferred Stock (including, but not limited to,
adjustments of the limitations in Section 2.1 on the maximum number and
kind of shares which may be issued and adjustments of the Award Limit),

(ii) the number and kind of shares of Common Stock
(or other securities or property) subject to outstanding Options,
Performance Awards, Stock

21
<PAGE> 22

Appreciation Rights, Dividend Equivalents, or Stock Payments, and in
the number and kind of shares of outstanding Restricted Stock or
Deferred Stock, and

(iii) the grant or exercise price with respect to any
Option, Performance Award, Stock Appreciation Right, Dividend
Equivalent or Stock Payment.

(b) Subject to Sections 10.3(b)(vii) and 10.3(d), in the event
of any Corporate Transaction or other transaction or event described in Section
10.3(a) or any unusual or nonrecurring transactions or events affecting the
Company, any affiliate of the Company, or the financial statements of the
Company or any affiliate, or of changes in applicable laws, regulations, or
accounting principles, the Committee (or the Board, in the case of Options
granted to Independent Directors) in its discretion is hereby authorized to take
any one or more of the following actions whenever the Committee (or the Board,
in the case of Options granted to Independent Directors) determines that such
action is appropriate in order to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under the Plan or
with respect to any option, right or other award under this Plan, to facilitate
such transactions or events or to give effect to such changes in laws,
regulations or principles:

(i) In its sole and absolute discretion, and on such
terms and conditions as it deems appropriate, the Committee (or the
Board, in the case of Options granted to Independent Directors) may
provide, either by the terms of the agreement or by action taken prior
to the occurrence of such transaction or event and either automatically
or upon the optionee's request, for either the purchase of any such
Option, Performance Award, Stock Appreciation Right, Dividend
Equivalent, or Stock Payment, or any Restricted Stock or Deferred Stock
for an amount of cash equal to the amount that could have been attained
upon the exercise of such option, right or award or realization of the
optionee's rights had such option, right or award been currently
exercisable or payable or fully vested or the replacement of such
option, right or award with other rights or property selected by the
Committee (or the Board, in the case of Options granted to Independent
Directors) in its sole discretion;

(ii) In its sole and absolute discretion, the
Committee (or the Board, in the case of Options granted to Independent
Directors) may provide, either by the terms of such Option, Performance
Award, Stock Appreciation Right, Dividend Equivalent, or Stock Payment,
or Restricted Stock or Deferred Stock or by action taken prior to the
occurrence of such transaction or event that it cannot be exercised
after such event;

(iii) In its sole and absolute discretion, and on
such terms and conditions as it deems appropriate, the Committee (or
the Board, in the case of Options granted to Independent Directors) may
provide, either by the terms of such Option, Performance Award, Stock
Appreciation Right, Dividend Equivalent, or Stock Payment, or
Restricted Stock or Deferred Stock or by action taken prior to the
occurrence of such transaction or event, that for a specified period of
time prior to such transaction or event, such option, right or award
shall be exercisable as to all shares covered thereby, notwithstanding
anything to the contrary in (i) Section 4.4 or (ii) the provisions of
such

22
<PAGE> 23

Option, Performance Award, Stock Appreciation Right, Dividend
Equivalent, or Stock Payment, or Restricted Stock or Deferred Stock;

(iv) In its sole and absolute discretion, and on such
terms and conditions as it deems appropriate, the Committee (or the
Board, in the case of Options granted to Independent Directors) may
provide, either by the terms of such Option, Performance Award, Stock
Appreciation Right, Dividend Equivalent, or Stock Payment, or
Restricted Stock or Deferred Stock or by action taken prior to the
occurrence of such transaction or event, that upon such event, such
option, right or award be assumed by the successor or survivor
corporation, or a parent or subsidiary thereof, or shall be substituted
for by similar options, rights or awards covering the stock of the
successor or survivor corporation, or a parent or subsidiary thereof,
with appropriate adjustments as to the number and kind of shares and
prices; and

(v) In its sole and absolute discretion, and on such
terms and conditions as it deems appropriate, the Committee (or the
Board, in the case of Options granted to Independent Directors) may
make adjustments in the number and type of shares of Common Stock (or
other securities or property) subject to outstanding Options,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents, or
Stock Payments, and in the number and kind of outstanding Restricted
Stock or Deferred Stock and/or in the terms and conditions of
(including the grant or exercise price), and the criteria included in,
outstanding options, rights and awards and options, rights and awards
which may be granted in the future.

(vi) In its sole and absolute discretion, and on such
terms and conditions as it deems appropriate, the Committee may provide
either by the terms of a Restricted Stock award or Deferred Stock award
or by action taken prior to the occurrence of such event that, for a
specified period of time prior to such event, the restrictions imposed
under a Restricted Stock Agreement or a Deferred Stock Agreement upon
some or all shares of Restricted Stock or Deferred Stock may be
terminated, and, in the case of Restricted Stock, some or all shares of
such Restricted Stock may cease to be subject to repurchase under
Section 6.6 or forfeiture under Section 6.5 after such event.

(vii) None of the foregoing discretionary terms of
this Section 10.3(b) shall be permitted with respect to Options granted
under Section 3.4(d) to Independent Directors to the extent that such
discretion would be inconsistent with the applicable exemptive
conditions of Rule 16b-3. In the event of a Change in Control or a
Corporate Transaction, to the extent that the Board does not have the
ability under Rule 16b-3 to take or to refrain from taking the
discretionary actions set forth in Section 10.3(b)(iii) above, each
Option granted to an Independent Director shall be exercisable as to
all shares covered thereby upon such Change in Control or during the
five days immediately preceding the consummation of such Corporate
Transaction and subject to such consummation, notwithstanding anything
to the contrary in Section 4.4 or the vesting schedule of such Options.
In the event of a Corporate Transaction, to the extent that the Board
does not have the ability under Rule 16b-3 to take or to refrain from
taking the discretionary actions set forth in Section 10.3(b)(ii)
above, no Option granted to an

23
<PAGE> 24

Independent Director may be exercised following such Corporate
Transaction unless such Option is, in connection with such Corporate
Transaction, either assumed by the successor or survivor corporation
(or parent or subsidiary thereof) or replaced with a comparable right
with respect to shares of the capital stock of the successor or
survivor corporation (or parent or subsidiary thereof).

(c) Subject to Section 10.3(d) and 10.8, the Committee (or the
Board, in the case of Options granted to Independent Directors) may, in its
discretion, include such further provisions and limitations in any Option,
Performance Award, Stock Appreciation Right, Dividend Equivalent, or Stock
Payment, or Restricted Stock or Deferred Stock agreement or certificate, as it
may deem equitable and in the best interests of the Company.

(d) With respect to Incentive Stock Options and Options and
Stock Appreciation Rights intended to qualify as performance-based compensation
under Section 162(m), no adjustment or action described in this Section 10.3 or
in any other provision of the Plan shall be authorized to the extent that such
adjustment or action would cause the Plan to violate Section 422(b)(1) of the
Code or would cause such option or stock appreciation right to fail to so
qualify under Section 162(m), as the case may be, or any successor provisions
thereto. Furthermore, no such adjustment or action shall be authorized to the
extent such adjustment or action would result in short-swing profits liability
under Section 16 or violate the exemptive conditions of Rule 16b-3 unless the
Committee (or the Board, in the case of Options granted to Independent
Directors) determines that the option or other award is not to comply with such
exemptive conditions. The number of shares of Common Stock subject to any
option, right or award shall always be rounded to the next whole number.

10.4 Approval of Plan by Stockholders. This Plan will be
submitted for the approval of the Company's stockholders within twelve months
after the date of the Board's initial adoption of this Plan. Options,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock
Payments may be granted and Restricted Stock or Deferred Stock may be awarded
prior to such stockholder approval, provided that such Options, Performance
Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments shall
not be exercisable and such Restricted Stock or Deferred Stock shall not vest
prior to the time when this Plan is approved by the stockholders, and provided
further that if such approval has not been obtained at the end of said
twelve-month period, all Options, Performance Awards, Stock Appreciation Rights,
Dividend Equivalents or Stock Payments previously granted and all Restricted
Stock or Deferred Stock previously awarded under this Plan shall thereupon be
canceled and become null and void.

10.5 Tax Withholding. The Company shall be entitled to require
payment in cash or deduction from other compensation payable to each Optionee,
Grantee or Restricted Stockholder of any sums required by federal, state or
local tax law to be withheld with respect to the issuance, vesting or exercise
of any Option, Restricted Stock, Deferred Stock, Performance Award, Stock
Appreciation Right, Dividend Equivalent or Stock Payment. The Committee (or the
Board, in the case of Options granted to Independent Directors) may in its
discretion and in satisfaction of the foregoing requirement allow such Optionee,
Grantee or Restricted Stockholder to elect to have the Company withhold shares
of Common Stock

24
<PAGE> 25

otherwise issuable under such Option or other award (or allow the return of
shares of Common Stock) having a Fair Market Value equal to the sums required to
be withheld.

10.6 Loans. The Committee may, in its discretion, extend one
or more loans to key Employees in connection with the exercise or receipt of an
Option, Performance Award, Stock Appreciation Right, Dividend Equivalent or
Stock Payment granted under this Plan, or the issuance of Restricted Stock or
Deferred Stock awarded under this Plan. The terms and conditions of any such
loan shall be set by the Committee.

10.7 Forfeiture Provisions. Pursuant to its general authority
to determine the terms and conditions applicable to awards under the Plan, the
Committee (or the Board, in the case of Options granted to Independent
Directors) shall have the right (to the extent consistent with the applicable
exemptive conditions of Rule 16b-3) to provide, in the terms of Options or other
awards made under the Plan, or to require the recipient to agree by separate
written instrument, that (i) any proceeds, gains or other economic benefit
actually or constructively received by the recipient upon any receipt or
exercise of the award, or upon the receipt or resale of any Common Stock
underlying such award, must be paid to the Company, and (ii) the award shall
terminate and any unexercised portion of such award (whether or not vested)
shall be forfeited, if (a) a Termination of Employment, Termination of
Consultancy or Termination of Directorship occurs prior to a specified date, or
within a specified time period following receipt or exercise of the award, or
(b) the recipient at any time, or during a specified time period, engages in any
activity in competition with the Company, or which is inimical, contrary or
harmful to the interests of the Company, as further defined by the Committee (or
the Board, as applicable).

10.8 Limitations Applicable to Section 16 Persons and
Performance-Based Compensation. Notwithstanding any other provision of this
Plan, this Plan, and any Option, Performance Award, Stock Appreciation Right,
Dividend Equivalent or Stock Payment granted, or Restricted Stock or Deferred
Stock awarded, to any individual who is then subject to Section 16 of the
Exchange Act, shall be subject to any additional limitations set forth in any
applicable exemptive rule under Section 16 of the Exchange Act (including any
amendment to Rule 16b-3 of the Exchange Act) that are requirements for the
application of such exemptive rule. To the extent permitted by applicable law,
the Plan, Options, Performance Awards, Stock Appreciation Rights, Dividend
Equivalents, Stock Payments, Restricted Stock and Deferred Stock granted or
awarded hereunder shall be deemed amended to the extent necessary to conform to
such applicable exemptive rule. Furthermore, notwithstanding any other provision
of this Plan, any Option or Stock Appreciation Right intended to qualify as
performance-based compensation as described in Section 162(m)(4)(C) of the Code
shall be subject to any additional limitations set forth in Section 162(m) of
the Code (including any amendment to Section 162(m) of the Code) or any
regulations or rulings issued thereunder that are requirements for qualification
as performance-based compensation as described in Section 162(m)(4)(C) of the
Code, and this Plan shall be deemed amended to the extent necessary to conform
to such requirements.

10.9 Effect of Plan Upon Options and Compensation Plans. The
adoption of this Plan shall not affect any other compensation or incentive plans
in effect for the Company or any Subsidiary. Nothing in this Plan shall be
construed to limit the right of the Company

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<PAGE> 26

(i) to establish any other forms of incentives or compensation for Employees,
Directors or Consultants of the Company or any Subsidiary or (ii) to grant or
assume options or other rights otherwise than under this Plan in connection with
any proper corporate purpose including but not by way of limitation, the grant
or assumption of options in connection with the acquisition by purchase, lease,
merger, consolidation or otherwise, of the business, stock or assets of any
corporation, partnership, firm or association.

10.10 Compliance with Laws. This Plan, the granting and
vesting of Options, Restricted Stock awards, Deferred Stock awards, Performance
Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments under
this Plan and the issuance and delivery of shares of Common Stock and the
payment of money under this Plan or under Options, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments granted or
Restricted Stock or Deferred Stock awarded hereunder are subject to compliance
with all applicable federal and state laws, rules and regulations (including but
not limited to state and federal securities law and federal margin requirements)
and to such approvals by any listing, regulatory or governmental authority as
may, in the opinion of counsel for the Company, be necessary or advisable in
connection therewith. Any securities delivered under this Plan shall be subject
to such restrictions, and the person acquiring such securities shall, if
requested by the Company, provide such assurances and representations to the
Company as the Company may deem necessary or desirable to assure compliance with
all applicable legal requirements. To the extent permitted by applicable law,
the Plan, Options, Restricted Stock awards, Deferred Stock awards, Performance
Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments
granted or awarded hereunder shall be deemed amended to the extent necessary to
conform to such laws, rules and regulations.

10.11 Titles. Titles are provided herein for convenience only
and are not to serve as a basis for interpretation or construction of this Plan.

10.12 Governing Law. This Plan and any agreements hereunder
shall be administered, interpreted and enforced under the internal laws of the
State of California without regard to conflicts of laws thereof.

* * *

I hereby certify that the foregoing Plan was duly adopted by
the Board of Directors of Candlewood Hotel Company, Inc. on September 30, 1996.

Executed on this 7th day of October, 1996.

/s/ Warren D. Fix
-----------------------------------
Warren D. Fix
Secretary

26
<PAGE> 27
INCENTIVE STOCK OPTION AGREEMENT

THIS AGREEMENT, dated __________, 1996, is made by and between
Candlewood Hotel Company, Inc., a Delaware corporation, hereinafter referred to
as the "Company," and ____________, an Employee of the Company, a Parent
Corporation or Subsidiary of the Company, hereinafter referred to as "Optionee."

WHEREAS, the Company wishes to afford the Optionee the
opportunity to purchase shares of its $.01 par value common stock; and

WHEREAS, the Company wishes to carry out The 1996 Equity
Participation Plan of Candlewood Hotel Company, Inc. (the "Plan") (the terms of
which are hereby incorporated by reference and made a part of this Agreement);
and

WHEREAS, the Committee appointed to administer the Plan has
determined that it would be to the advantage and best interest of the Company
and its shareholders to grant the Incentive Stock Option (the "Option") provided
for herein to the Optionee as an inducement to enter into or remain in the
service of the Company or its Subsidiaries and as an incentive for increased
efforts during such service, and has advised the Company thereof and instructed
the undersigned officer to issue said Option;

NOW, THEREFORE, in consideration of the mutual covenants
herein contained and other good and valuable consideration, the receipt of which
is hereby acknowledged, the parties hereto do hereby agree as follows:

ARTICLE I

DEFINITIONS

1.1 General. Wherever the following terms are used in this
Agreement they shall have the meanings specified below, unless the context
clearly indicates otherwise.

1.2 Board. "Board" shall mean the Board of Directors of the
Company.

1.3 Cause. "Cause" shall mean (i) the Optionee's failure or
refusal to perform specific and lawful directions with respect to the Optionee's
employment with the Company, a Parent Corporation or a Subsidiary, (ii) the
commission by the Optionee of a felony or the perpetration by the Optionee of an
act of fraud, dishonesty, or misrepresentation against, or breach of fiduciary
duty toward, the Company, a Parent Corporation or a Subsidiary or (iii) any
willful act or omission by the Optionee which is injurious in any material
respect to the financial condition or business reputation of the Company, a
Parent Corporation or a Subsidiary.

1.4 Code. "Code" shall mean the Internal Revenue Code of 1986,
as amended.
<PAGE> 28
1.5 Committee. "Committee" shall mean the Stock Option
Committee of the Board, or a subcommittee of the Board, appointed as provided in
Section 9.1 of the Plan.

1.6 Common Stock. "Common Stock" shall mean the common stock
of the Company, par value $.01 per share.

1.7 Company. "Company" shall mean Candlewood Hotel Company,
Inc., a Delaware corporation.

1.8 Director. "Director" shall mean a member of the Board.

1.9 Employee. "Employee" shall mean any officer or other
employee (as defined in accordance with Section 3401(c) of the Code) of the
Company, or of any corporation which is a Parent Corporation or Subsidiary.

1.10 Exchange Act. "Exchange Act" shall mean the Securities
Exchange Act of 1934, as amended.

1.11 Fair Market Value. "Fair Market Value" of a share of
Common Stock as of a given date shall be (i) the mean between the highest and
lowest selling price of a share of Common Stock on the principal exchange on
which shares of Common Stock are then trading, if any, on such date, or if
shares were not traded on such date, then on the closest preceding date on which
a trade occurred, or (ii) if Common Stock is not traded on an exchange, the mean
between the closing representative bid and asked prices for the Common Stock on
such date as reported by NASDAQ or, if NASDAQ is not then in existence, by its
successor quotation system; or (iii) if Common Stock is not publicly traded, the
fair market value of a share of Common Stock as established by the Committee
acting in good faith.

1.12 Incentive Stock Option. "Incentive Stock Option" shall
mean an option which conforms to the applicable provisions of Section 422 of the
Code and which is designated as an Incentive Stock Option by the Committee.

1.13 Option. "Option" shall mean the Incentive Stock Option to
purchase Common Stock of the Company granted under this Agreement and Article
III of the Plan.

1.14 Optionee. "Optionee" shall mean the Employee granted the
Option under this Agreement and the Plan.

1.15 Parent Corporation. "Parent Corporation" shall mean any
corporation in an unbroken chain of corporations ending with the Company if each
of the corporations other than the Company then owns stock possessing 50% or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.

1.16 Plan. "Plan" shall mean The 1996 Equity Participation
Plan of Candlewood Hotel Company, Inc.

2
<PAGE> 29
1.17 Rule 16b-3. "Rule 16b-3" shall mean that certain Rule
16b-3 under the Exchange Act, as such Rule may be amended from time to time.

1.18 Secretary. "Secretary" shall mean the Secretary of the
Company.

1.19 Securities Act. "Securities Act" shall mean the
Securities Act of 1933, as amended.

1.20 Subsidiary. "Subsidiary" shall mean any corporation in an
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain then owns
stock possessing 50% or more of the total combined voting power of all classes
of stock in one of the other corporations in such chain.

1.21 Termination of Employment. "Termination of Employment"
shall mean the time when the employee-employer relationship between an Optionee
and the Company, any Parent Corporation or any Subsidiary is terminated for any
reason, including, but not by way of limitation, a termination by resignation,
discharge, death, disability or retirement; but excluding (i) a termination
where there is a simultaneous reemployment or continuing employment of the
Optionee by the Company, any Parent Corporation or any Subsidiary, and (ii) at
the discretion of the Committee, a termination which results in a temporary
severance of the employee-employer relationship. The Committee, in its absolute
discretion, shall determine the effect of all matters and questions relating to
Termination of Employment, including, but not by way of limitation, the question
of whether a Termination of Employment resulted from a discharge for Cause, and
all questions of whether particular leaves of absence constitute Terminations of
Employment; provided, however, that, with respect to Incentive Stock Options, a
leave of absence or other change in the employee-employer relationship shall
constitute a Termination of Employment if, and to the extent that, such leave of
absence or other change interrupts employment for the purposes of Section
422(a)(2) of the Code and the then applicable regulations and revenue rulings
under Section 422(a)(2). Notwithstanding any other provision of this Agreement
and the Plan, the Company, any Parent Corporation or any Subsidiary has an
absolute and unrestricted right to terminate an Employee's employment at any
time for any reason whatsoever, with or without Cause, except to the extent
expressly provided otherwise in writing.

ARTICLE II

GRANT OF OPTION

2.1 Grant of Option. In consideration of the Optionee's
agreement to remain in the employ of the Company, a Parent Corporation or its
Subsidiaries and for other good and valuable consideration, on the date hereof
the Company irrevocably grants to the Optionee an Option to purchase any part or
all of an aggregate of ________ shares of Common Stock upon the terms and
conditions set forth in this Agreement. The Option shall be an Incentive Stock
Option.

3
<PAGE> 30
2.2 Purchase Price. The purchase price of the shares of Common
Stock subject to the Option shall be $____ per share without commission or other
charge; provided, however, that the price per share of the shares subject to the
Option shall not be less than the greater of (i) 100% of the Fair Market Value
of a share of Common Stock on the date the Option is granted, or (ii) 110% of
the Fair Market Value of a share of Common Stock on the date the Option is
granted in the case of an Optionee then owning (within the meaning of Section
424(d) of the Code) more than 10% of the total combined voting power of all
classes of stock of the Company, any Parent Corporation or any Subsidiary.

2.3 Consideration to the Company. In consideration of the
granting of this Option by the Company, the Optionee agrees to render faithful
and efficient services to the Company, any Parent Corporation or any Subsidiary,
with such duties and responsibilities as the Company shall from time to time
prescribe. Nothing in the Plan or this Agreement shall confer upon the Optionee
any right to continue in the employ of the Company, any Parent Corporation or
any Subsidiary or shall interfere with or restrict in any way the rights of the
Company, any Parent Corporation and any Subsidiary, which are hereby expressly
reserved, to discharge the Optionee at any time for any reason whatsoever, with
or without Cause.

2.4 Adjustments in the Option.

(a) In the event that the outstanding shares of Common Stock
are changed into or exchanged for cash or a different number or kind of shares
or other securities of the Company, by reason of merger, consolidation,
recapitalization, reclassification, stock split-up, stock dividend or
combination of shares, the Committee shall make an appropriate and equitable
adjustment in the number and kind of shares as to which the Option, or portions
thereof then unexercised, shall be exercisable, with the intent that after such
event the Optionee's proportionate interest shall be maintained as before the
occurrence of such event. Such adjustment in the Option may include a necessary
or appropriate corresponding adjustment in the Option exercise price, but shall
be made without change in the total price applicable to the unexercised portion
of the Option (except for any change in the aggregate price resulting from
rounding-off of share quantities or prices) and with any necessary corresponding
adjustment in the Option price per share; provided, however, that each such
adjustment shall be made in such manner as not to constitute a "modification"
within the meaning of Section 424(h)(3) of the Code. Any such adjustment made by
the Committee shall be final and binding upon the Optionee, the Company and all
other interested persons.

(b) Notwithstanding the foregoing, in the event of such a
reorganization, merger, consolidation, recapitalization, reclassification, stock
split-up, stock dividend or combination, or other adjustment or event which
results in shares of Common Stock being exchanged for or converted into cash,
securities or other property, the Company will have the right to terminate the
Plan as of the date of the exchange or conversion, in which case all Options
under the Plan shall become the right to receive such cash, securities or other
property, net of any applicable exercise price.

(c) In the event of a "spin-off" or other substantial
distribution of assets of the Company which has a material diminutive effect
upon the Fair Market Value of the Common

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<PAGE> 31
Stock, the Committee may in its discretion make an appropriate and equitable
adjustment to the Option to reflect such diminution; provided, however, that
each such adjustment shall be made in such manner as not to constitute a
"modification" within the meaning of Section 424(h)(3) of the Code.

ARTICLE III

PERIOD OF EXERCISABILITY

3.1 Commencement of Exercisability.

(a) Subject to Sections 3.4 and 5.6, the Option shall become
exercisable in such amounts and at such times as are set forth on Exhibit A
hereto.

(b) No portion of the Option which is unexercisable at
Termination of Employment shall thereafter become exercisable, except as may be
otherwise provided by the Committee.

3.2 Duration of Exercisability. The installments provided for
in Section 3.1(a) and Exhibit A hereto are cumulative. Each such installment
which becomes exercisable pursuant to Section 3.1 shall remain exercisable until
it becomes unexercisable under Section 3.3.

3.3 Expiration of Option. The Option may not be exercised to
any extent by anyone after the first to occur of the following events:

(a) The expiration of ten (10) years from the date the Option
was granted; or

(b) If the Optionee owned (within the meaning of Section
424(d) of the Code), at the time the Option was granted, more than ten percent
(10%) of the total combined voting power of all classes of stock of the Company,
any Parent Corporation or any Subsidiary, the expiration of five (5) years from
the date the Option was granted; or

(c) The time of the Optionee's Termination of Employment
unless such Termination of Employment results from the Optionee's death,
retirement, disability (within the meaning of Section 22(e)(3) of the Code) or
the Optionee's being discharged other than for Cause; or

(d) The expiration of three (3) months from the date of the
Optionee's Termination of Employment by reason of the Optionee's retirement or
the Optionee's being discharged other than for Cause, unless the Optionee dies
within said three-month period; or

(e) The expiration of one (1) year from the date of the
Optionee's Termination of Employment by reason of his disability (within the
meaning of Section 22(e)(3) of the Code); or

(f) The expiration of one (1) year from the date of the
Optionee's death; or

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<PAGE> 32
(g) The effective date of either the merger or consolidation
of the Company with or into another corporation, the exchange of all or
substantially all of the assets of the Company for the securities of another
corporation, the acquisition by another corporation or person of all or
substantially all of the Company's assets or eighty percent (80%) or more of the
Company's then outstanding voting stock, or the liquidation or dissolution of
the Company, unless the Committee waives this provision in connection with such
transaction. At least twenty (20) days prior to the effective date of such
merger, consolidation, exchange, acquisition, liquidation or dissolution, the
Committee shall give the Optionee notice of such event if the Option has then
neither been fully exercised nor become unexercisable under this Section 3.3.

3.4 Acceleration of Exercisability. In the event of the merger
or consolidation of the Company with or into another corporation, the exchange
of all or substantially all of the assets of the Company for the securities of
another corporation, the acquisition by another corporation or person of all or
substantially all of the Company's assets or eighty percent (80%) or more of the
Company's then outstanding voting stock, or the liquidation or dissolution of
the Company, the Committee may, in its absolute discretion and upon such terms
and conditions as it deems appropriate, provide by resolution, adopted prior to
such event and incorporated in the notice referred to in Section 3.3(g), that at
some time prior to the effective date of such event the Option shall be
exercisable as to all the shares covered hereby, notwithstanding that the Option
may not yet have become fully exercisable under Section 3.1(a) and Exhibit A
hereto; provided, however, that this acceleration of exercisability shall not
take place if:

(a) The Option becomes unexercisable under Section 3.3 prior
to said effective date; or

(b) In connection with such an event, provision is made for an
assumption of the Option or a substitution therefor of a new option by an
employer corporation, or a parent or subsidiary of such corporation, so that
such assumption or substitution complies with the provisions of Section 424(a)
of the Code;

provided, further, that nothing in this Section 3.4 shall make the Option
exercisable if it is otherwise unexercisable by reason of Section 5.6.

The Committee may make such determinations and adopt such
rules and conditions as it, in its absolute discretion, deems appropriate in
connection with such acceleration of exercisability, including, but not by way
of limitation, provisions to ensure that any such acceleration and resulting
exercise shall be conditioned upon the consummation of the contemplated
corporate transaction, and determinations regarding whether provisions for
assumption or substitution have been made as defined in subsection (b) above.

None of the foregoing discretionary terms of this Section
shall be permitted to the extent that such discretion would be inconsistent with
the requirements of Rule 16b-3.

3.5 Special Tax Consequences. The Optionee acknowledges that,
to the extent that the aggregate fair market value of stock with respect to
which "incentive stock options" (within the meaning of Section 422 of the
Code, but without regard to Section 422(d) of the

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<PAGE> 33
Code), including the Option, are exercisable for the first time by the Optionee
during any calendar year (under the Plan and all other incentive stock option
plans of the Company, any Parent Corporation and any Subsidiary Corporation)
exceeds $100,000, such options shall be treated as not qualifying under Section
422 of the Code but rather shall be taxed as non-qualified stock options. The
Optionee further acknowledges that the rule set forth in the preceding sentence
shall be applied by taking options into account in the order in which they were
granted. For purposes of these rules, the fair market value of stock shall be
determined as of the time the option with respect to such stock is granted.

ARTICLE IV

EXERCISE OF OPTION

4.1 Person Eligible to Exercise. During the lifetime of the
Optionee, only the Optionee may exercise the Option or any portion thereof.
After the death of the Optionee, any exercisable portion of the Option may,
prior to the time when the Option becomes unexercisable under Section 3.3, be
exercised by any beneficiary designated by the Optionee, the Optionee's personal
representative or by any person empowered to do so under the Optionee's will or
under the then applicable laws of descent and distribution.

4.2 Partial Exercise. Any exercisable portion of the Option or
the entire Option, if then wholly exercisable, may be exercised in whole or in
part at any time prior to the time when the Option or portion thereof becomes
unexercisable under Section 3.3; provided, however, that each partial exercise
shall be for not less than one hundred (100) shares (or the minimum installment
set forth in Exhibit A hereto, if a smaller number of shares) and shall be for
whole shares only.

4.3 Manner of Exercise. The Option, or any exercisable portion
thereof, may be exercised solely by delivery to the Secretary or the Secretary's
office of all of the following prior to the time when the Option or such portion
becomes unexercisable under Section 3.3:

(a) Notice in writing signed by the Optionee or the other
person then entitled to exercise the Option or portion thereof, stating that the
Option or portion thereof is thereby exercised, such notice complying with all
applicable rules established by the Committee; and

(b) (i) Full payment (in cash or by check) for the shares with
respect to which such Option or portion thereof is exercised; and

(ii) With the consent of the Committee, shares of
Common Stock owned by the Optionee duly endorsed for transfer to the
Company, or, subject to the timing requirements of Section 4.4, shares
of Common Stock issuable to the Optionee upon exercise of the Option,
with a Fair Market Value on the date of Option exercise equal to the
aggregate purchase price of the shares with respect to which the Option
or portion thereof is exercised; or

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<PAGE> 34
(iii) With the consent of the Committee, a full
recourse promissory note bearing interest (at no less than such rate as
shall then preclude the imputation of interest under the Code or
successor provision) and payable upon such terms as may be prescribed
by the Committee. The Committee may also prescribe the form of such
note and the security to be given for such note. The Option may not be
exercised, however, by delivery of a promissory note or by a loan from
the Company when or where such loan or other extension of credit is
prohibited by law; or

(iv) With the consent of the Committee, any
combination of the consideration provided in the foregoing
subparagraphs (i), (ii) and (iii); and

(c) A bona fide written representation and agreement, in a
form satisfactory to the Committee, signed by the Optionee or other person then
entitled to exercise such Option or portion thereof, stating that the shares of
Common Stock are being acquired for the Optionee's own account, for investment
and without any present intention of distributing or reselling said shares or
any of them except as may be permitted under the Securities Act and then
applicable rules and regulations thereunder, and that the Optionee or other
person then entitled to exercise such Option or portion thereof will indemnify
the Company against and hold it free and harmless from any loss, damage, expense
or liability resulting to the Company if any sale or distribution of the shares
by such person is contrary to the representation and agreement referred to
above. The Committee may, in its absolute discretion, take whatever additional
actions it deems appropriate to ensure the observance and performance of such
representation and agreement and to effect compliance with the Securities Act
and any other federal or state securities laws or regulations. Without limiting
the generality of the foregoing, the Committee may require an opinion of counsel
acceptable to it to the effect that any subsequent transfer of shares acquired
on an Option exercise does not violate the Securities Act, and may issue
stop-transfer orders covering such shares. Share certificates evidencing Common
Stock issued on exercise of the Option shall bear an appropriate legend
referring to the provisions of this subsection c) and the agreements herein. The
written representation and agreement referred to in the first sentence of this
subsection c) shall, however, not be required if the shares to be issued
pursuant to such exercise have been registered under the Securities Act, and
such registration is then effective in respect of such shares; and

(d) Full payment to the Company (or other employer
corporation) of all amounts which, under federal, state or local tax law, it is
required to withhold upon exercise of the Option; with the consent of the
Committee, (i) shares of Common Stock owned by the Optionee duly endorsed for
transfer or (ii) subject to the timing requirements of Section 4.4, shares of
Common Stock issuable to the Optionee upon exercise of the Option, having a Fair
Market Value at the date of Option exercise equal to the sums required to be
withheld, may be used to make all or part of such payment; and

(e) In the event the Option or portion shall be exercised
pursuant to Section 4.1 by any person or persons other than the Optionee,
appropriate proof of the right of such person or persons to exercise the Option.

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<PAGE> 35
4.4 Certain Timing Requirements. Shares of the Company's
Common Stock issuable to the Optionee upon exercise of the Option may be used to
satisfy the Option price or the tax withholding consequences of such exercise,
in the case of persons subject to Section 16 of the Exchange Act, only (i) uring
the period beginning on the third business day following the date of release of
the quarterly or annual summary statement of sales and earnings of the Company
and ending on the twelfth business day following such date or (ii) ursuant to an
irrevocable written election by the Optionee to use shares of the Company's
Common Stock issuable to the Optionee upon exercise of the Option to pay all or
part of the Option price or the withholding taxes (subject to the approval of
the Committee) made at least six (6) months prior to the payment of such Option
price or withholding taxes.

4.5 Conditions to Issuance of Stock Certificates. The shares
of Common Stock deliverable upon the exercise of the Option, or any portion
thereof, may be either previously authorized but unissued shares or issued
shares which have then been reacquired by the Company. Such shares shall be
fully paid and nonassessable. The Company shall not be required to issue or
deliver any certificate or certificates for shares of Common Stock purchased
upon the exercise of the Option or portion thereof prior to fulfillment of all
of the following conditions:

(a) The admission of such shares to listing on all stock
exchanges on which such Common Stock is then listed; and

(b) The completion of any registration or other qualification
of such shares under any state or federal law or under rulings or regulations of
the Securities and Exchange Commission or of any other governmental regulatory
body, which the Committee shall, in its absolute discretion, deem necessary or
advisable; and

(c) The obtaining of any approval or other clearance from any
state or federal governmental agency which the Committee shall, in its absolute
discretion, determine to be necessary or advisable; and

(d) The receipt by the Company of full payment for such
shares, including payment of all amounts which, under federal, state or local
tax law, it is required to withhold upon exercise of the Option; and

(e) The lapse of such reasonable period of time following the
exercise of the Option as the Committee may from time to time establish for
reasons of administrative convenience.

4.6 Rights as Shareholder. The holder of the Option shall not
be, nor have any of the rights or privileges of, a shareholder of the Company in
respect of any shares purchasable upon the exercise of any part of the Option
unless and until certificates representing such shares shall have been issued by
the Company to such holder.

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<PAGE> 36
ARTICLE V

OTHER PROVISIONS

5.1 Administration. The Committee shall have the power to
interpret the Plan and this Agreement and to adopt such rules for the
administration, interpretation and application of the Plan as are consistent
therewith and to interpret, amend or revoke any such rules. All actions taken
and all interpretations and determinations made by the Committee in good faith
shall be final and binding upon the Optionee, the Company and all other
interested persons. No member of the Committee shall be personally liable for
any action, determination or interpretation made in good faith with respect to
the Plan, this Agreement or the Option. In its absolute discretion, the Board
may at any time and from time to time exercise any and all rights and duties of
the Committee under the Plan and this Agreement except with respect to matters
which under Rule 16b-3 are required to be determined in the sole discretion of
the Committee.

5.2 Option Not Transferable. Neither the Option nor any
interest or right therein or part thereof shall be liable for the debts,
contracts or engagements of the Optionee or the Optionee's successors in
interest or shall be subject to disposition by transfer, alienation,
anticipation, pledge, encumbrance, assignment or any other means whether such
disposition be voluntary or involuntary or by operation of law by judgment,
levy, attachment, garnishment or any other legal or equitable proceedings
(including bankruptcy), and any attempted disposition thereof shall be null and
void and of no effect; provided, however, that this Section 5.2 shall not
prevent (i) transfers by will or by the applicable laws of descent and
distribution, or (ii) the designation by the Optionee of a beneficiary to
exercise the Optionee's Option (or any portion thereof) under this Agreement
after the Optionee's death.

5.3 Shares to Be Reserved. The Company shall at all times
during the term of the Option reserve and keep available such number of shares
of Common Stock as will be sufficient to satisfy the requirements of this
Agreement.

5.4 Notices. Any notice to be given under the terms of this
Agreement to the Company shall be addressed to the Company in care of its
Secretary, and any notice to be given to the Optionee shall be addressed to the
Optionee at the address given beneath the Optionee's signature hereto. By a
notice given pursuant to this Section 5.4, either party may hereafter designate
a different address for notices to be given to that party. Any notice which is
required to be given to the Optionee shall, if the Optionee is then deceased, be
given to the Optionee's personal representative if such representative has
previously informed the Company of such representative's status and address by
written notice under this Section 5.4. Any notice shall be deemed duly given
when enclosed in a properly sealed envelope or wrapper addressed as aforesaid,
deposited (with postage prepaid) in a post office or branch post office
regularly maintained by the United States Postal Service.

5.5 Titles. Titles are provided herein for convenience only
and are not to serve as a basis for interpretation or construction of this
Agreement.

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<PAGE> 37
5.6 Shareholder Approval. The Plan will be submitted for
approval by the Company's shareholders within twelve (12) months after the date
the Plan was initially adopted by the Board. The Option may not be exercised to
any extent by anyone prior to the time when the Plan is approved by the
shareholders, and if such approval has not been obtained by the end of said
twelve-month period, the Option shall thereupon be canceled and become null and
void.

5.7 Notification of Disposition. The Optionee shall give
prompt notice to the Company of any disposition or other transfer of any shares
of stock acquired under this Agreement if such disposition or transfer is made
(a) within two (2) years from the date of granting the Option with respect to
such shares or (b) within one (1) year after the transfer of such shares to him.
Such notice shall specify the date of such disposition or other transfer and the
amount realized, in cash, other property, assumption of indebtedness or other
consideration, by the Optionee in such disposition or other transfer.

5.8 Construction. This Agreement shall be administered,
interpreted and enforced under the laws of the State of California.

5.9 Conformity to Securities Laws. The Optionee acknowledges
that the Plan is intended to conform to the extent necessary with all provisions
of the Securities Act and the Exchange Act and any and all regulations and rules
promulgated by the Securities and Exchange Commission thereunder, including
without limitation Rule 16b-3. Notwithstanding anything herein to the contrary,
the Plan shall be administered, and the Option is granted and may be exercised,
only in such a manner as to conform to such laws, rules and regulations. To the
extent permitted by applicable law, the Plan and this Agreement shall be deemed
amended to the extent necessary to conform to such laws, rules and regulations.

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<PAGE> 38
5.10 Amendments, etc. This Agreement may not be modified,
amended or terminated except by an instrument in writing, signed by the Optionee
or such other person as may be permitted to exercise the Option pursuant to
Section 4.1 and by a duly authorized representative of the Company.

IN WITNESS WHEREOF, this Agreement has been executed and
delivered by the parties hereto.

CANDLEWOOD HOTEL COMPANY, INC.

By
--------------------------------

Its
--------------------------------

- ----------------------------------
Optionee

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

- ----------------------------------
Address

Optionee's Social Security Number:

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

12
<PAGE> 39
EXHIBIT A

INCENTIVE STOCK OPTION AGREEMENT

dated _________, 1996,
by and between
Candlewood Hotel Company, Inc.
and ______________

In accordance with Section 3.1(a) of the Agreement and subject
to shareholder approval of the Plan, the Option shall become exercisable in four
(4) cumulative installments as follows:

(a) The first installment shall consist of twenty-five percent
(25%) of the shares covered by the Option and shall become exercisable on the
first anniversary of the date the Option is granted;

(b) The second installment shall consist of twenty-five
percent (25%) of the shares covered by the Option and shall become exercisable
on the second anniversary of the date the Option is granted;

(c) The third installment shall consist of twenty-five percent
(25%) of the shares covered by the Option and shall become exercisable on the
third anniversary of the date the Option is granted;

(d) The fourth installment shall consist of twenty-five
percent (25%) of the shares covered by the Option and shall become exercisable
on the fourth anniversary of the date the Option is granted.

- -------------------------------------
Optionee

- -------------------------------------
Date
<PAGE> 40
NON-QUALIFIED STOCK OPTION AGREEMENT

THIS AGREEMENT, dated _____________, 19___, is made by and
between Candlewood Hotel Company, Inc., a Delaware corporation, hereinafter
referred to as the "Company," and ________________, an Employee, Independent
Director or consultant of the Company, a Parent Corporation or a Subsidiary of
the Company, hereinafter referred to as "Optionee."

WHEREAS, the Company wishes to afford the Optionee the
opportunity to purchase shares of its $.01 par value Common Stock; and

WHEREAS, the Committee appointed to administer the Plan has
determined that it would be to the advantage and best interest of the Company
and its shareholders to grant the Non-Qualified Stock Option ("Option") provided
for herein to the Optionee as an inducement to enter into or remain in the
service of the Company, any Parent Corporation or its Subsidiaries and as an
incentive for increased efforts during such service, and has advised the Company
thereof and instructed the undersigned officers to issue said Option;

NOW, THEREFORE, in consideration of the mutual covenants
herein contained and other good and valuable consideration, receipt of which is
hereby acknowledged, the parties hereto do hereby agree as follows:

ARTICLE I

DEFINITIONS

1.1 General. Wherever the following terms are used in this
Plan they shall have the meanings specified below, unless the context clearly
indicates otherwise.

1.2 Board "Board" shall mean the Board of Directors of the
Company.

1.5 Committee. "Committee" shall mean the Stock Option
Committee of the Board, or a subcommittee of the Board, appointed as provided in
Section 9.1 of the Plan.

1.6 Common Stock. "Common Stock" shall mean the common stock
of the Company, par value $.01 per share.

1.7 Company. "Company" shall mean Candlewood Hotel Company,
Inc., a Delaware corporation.

1.8 Director. "Director" shall mean a member of the Board.

1.10 Exchange Act. "Exchange Act" shall mean the Securities
Exchange Act of 1934, as amended.

1.11 Fair Market Value. "Fair Market Value" of a share of
Common Stock as of a given date shall be (i) the mean between the highest and
lowest selling price of a share of Common Stock on the principal exchange on
which shares of Common Stock are then trading, if any, on such date, or if
shares were not traded on such date, then on the closest preceding date on which
a trade occurred, or (ii) if Common Stock is not traded on an exchange, the mean
between the closing representative bid and asked prices for the Common Stock on
such date as reported by NASDAQ or, if NASDAQ is not then in existence, by its
successor quotation system; or (iii) if Common Stock is not publicly traded, the
Fair Market Value of a share of Common Stock as established by the Committee
acting in good faith.

1.12 Independent Director. "Independent Director" shall mean a
Director who is not an Employee.

1.13 Option. "Option" shall mean a non-qualified stock option
granted under this Agreement and Article III of the Plan.

1.14 Optionee. "Optionee" shall mean an Independent Director,
Employee or consultant granted an Option under this Agreement and the Plan.

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<PAGE> 42
1.16 Plan. "Plan" shall mean The 1996 Equity Participation
Plan of Candlewood Hotel Company, Inc.

1.17 Rule 16b-3. "Rule 16b-3" shall mean that certain Rule
16b-3 under the Exchange Act, as such Rule may be amended from time to time.

1.18 Secretary. "Secretary" shall mean the Secretary of the
Company.

1.19 Securities Act. "Securities Act" shall mean the
Securities Act of 1933, as amended.

1.21 Termination of Consultancy or Directorship. "Termination
of Consultancy or Directorship" shall mean the time when the engagement of
Optionee as a consultant, Director or Independent Director to the Company, a
Parent Corporation or a Subsidiary is terminated for any reason, with or without
Cause, including without limitation, resignation, discharge, death or
retirement; but excluding terminations where there is a simultaneous
commencement of employment with the Company, any Parent Corporation or any
Subsidiary. The Committee, in its absolute discretion, shall determine the
effect of all matters and questions relating to Termination of Consultancy or
Directorship, including, but not by way of limitation, the question of whether a
Termination of Consultancy or Directorship resulted from a discharge for Cause,
and all questions of whether particular leaves of absence constitute
Terminations of Consultancy or Directorship. Notwithstanding any other provision
of the Plan, the Company, any Parent Corporation or any Subsidiary has an
absolute and unrestricted right to terminate a consultant's service at any time
for any reason whatsoever, with or without Cause, except to the extent expressly
provided otherwise in writing.

1.22 Termination of Employment. "Termination of Employment"
shall mean the time when the employee-employer relationship between the Optionee
and the Company, any Parent Corporation or any Subsidiary is terminated for any
reason, including, but not by way of limitation, a termination by resignation,
discharge, death, disability or retirement; but excluding (i) a termination
where there is a simultaneous reemployment or continuing employment of the
Optionee by the Company, any Parent Corporation or any Subsidiary, (ii) at the
discretion of the Committee, a termination which results in a temporary
severance of the employee-employer relationship, and (iii) at the discretion of
the Committee, a termination which is followed by the simultaneous establishment
of a consulting relationship by the Company, a Parent Corporation or a
Subsidiary with the former employee. The Committee, in its absolute discretion,
shall determine the effect of all matters and questions relating to Termination
of Employment, including, but not by way of limitation, the question of whether
a Termination of Employment resulted from a discharge for Cause, and all
questions of whether particular leaves of absence constitute Terminations of
Employment. Notwithstanding any other provision of this Plan, the Company, any
Parent Corporation or any Subsidiary has an absolute and unrestricted right to

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<PAGE> 43
terminate an Employee's employment at any time for any reason whatsoever, with
or without cause.

ARTICLE II

GRANT OF OPTION

2.1 Grant of Option. For good and valuable consideration, on
the date hereof the Company irrevocably grants to the Optionee the option to
purchase any part or all of an aggregate of _________ shares of its $.01 par
value Common Stock upon the terms and conditions set forth in this Agreement.

2.2 Purchase Price. The purchase price of the shares of Common
Stock covered by the Option shall be $____ per share without commission or other
charge.

2.3 Consideration to Company. In consideration of the granting
of this Option by the Company, the Optionee agrees to render faithful and
efficient services as an Employee of the Company or any Subsidiary.

2.4 Adjustments in Option.

(a) In the event that the outstanding shares of the stock
subject to the Option are changed into or exchanged for cash or a different
number or kind of shares or other securities of the Company, or of another
corporation, by reason of merger, consolidation, recapitalization,
reclassification, stock split-up, stock dividend, combination of shares, or any
other similar adjustment or event, the Committee shall make an appropriate and
equitable adjustment in the number and kind of shares as to which the Option, or
portions thereof then unexercised, shall be exercisable, to the end that after
such event the Optionee's proportionate interest shall be maintained as before
the occurrence of such event. Such adjustment in the Option may include any
necessary corresponding adjustment in the Option price per share, but shall be
made without change in the total price applicable to the unexercised portion of
the Option (except for any change in the aggregate price resulting from
rounding-off of share quantities or prices). Any such adjustment made by the
Committee shall be final and binding upon the Optionee, the Company and all
other interested persons.

(b) Notwithstanding the foregoing, in the event of such a
reorganization, merger, consolidation, recapitalization, reclassification, stock
split-up, stock dividend or combination, or any other similar adjustment or
event which results in shares of stock subject to the option being exchanged for
or converted into cash, securities or other property, the Company will have the
right to terminate the Plan as of the date of the exchange or conversion, in
which case all options, rights and other awards under this Option shall become
the right to receive such cash, securities or other property, net of any
applicable exercise price.

(c) In the event of a "spin-off" or other substantial distribution of assets of
the Company which has a material diminutive effect upon the Fair Market Value of
the Company's Common

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<PAGE> 44
Stock, the Committee may in its discretion make an appropriate and equitable
adjustment to the Option to reflect such diminution.

ARTICLE III

PERIOD OF EXERCISABILITY

3.1 Commencement of Exercisability.

(a) Subject to Section 5.6, the Option shall become
exercisable as set forth in Exhibit A hereto.

(b) No portion of the Option which is unexercisable at
Termination of Employment shall thereafter become exercisable, except as may be
otherwise provided by the Committee.

3.2 Duration of Exercisability. The installments provided for
in Exhibit A hereto are cumulative. Each such installment which becomes
exercisable pursuant to Section 3.1 shall remain exercisable until it becomes
unexercisable under Section 3.3.

3.3 Expiration of Option. The Option may not be exercised to
any extent by anyone after the first to occur of the following events:

(a) The expiration of ten (10) years from the date the Option
was granted; or

(b) The time of the Optionee's Termination of Employment,
unless such termination results from the Optionee's death, retirement or
disability, or the Optionee's being discharged other than for Cause; or

(c) The expiration of three (3) months from the date of the
Optionee's Termination of Employment by reason of the Optionee's being
discharged other than for Cause, unless the Optionee dies within said
three-month period; or

(d) The expiration of one (1) year from the date of the
Optionee's Termination of Employment by reason of the Optionee's disability or
retirement; or

(e) The expiration of one (1) year from the date of the
Optionee's death; or

(f) The effective date of either the merger or consolidation
of the Company with or into another corporation, the exchange of all or
substantially all of the assets of the Company for the securities of another
corporation, the acquisition by another corporation or person of all or
substantially all of the Company's assets or eighty percent (80%) or more of the
Company's then outstanding voting stock, or the liquidation or dissolution of
the Company, unless the Committee waives this provision in connection with such
transaction. At least twenty (20) days prior to the effective date of such
merger, consolidation, exchange, acquisition, liquidation or dissolution, the
Committee shall give the Optionee notice of such event if the Option has then
neither been fully exercised nor become unexercisable under this Section 3.3.

5
<PAGE> 45
3.4 Acceleration of Exercisability. In the event of the merger
or consolidation of the Company with or into another corporation, the exchange
of all or substantially all of the assets of the Company for the securities of
another corporation, the acquisition by another corporation or person of all or
substantially all of the Company's assets or eighty percent (80%) or more of the
Company's then outstanding voting stock, or the liquidation or dissolution of
the Company, the Committee may, in its absolute discretion and upon such terms
and conditions as it deems appropriate, provide by resolution, adopted prior to
such event and incorporated in the notice referred to in Section 3.3(f), that at
some time prior to the effective date of such event (the "Acceleration Date")
this Option shall be exercisable as to all the shares covered hereby,
notwithstanding that this Option may not yet have become fully exercisable under
Section 3.1(a); provided, however, that this acceleration of exercisability
shall not take place if:

(a) This Option becomes unexercisable under Section 3.3 prior
to the Acceleration Date; or

(b) In connection with such an event, provision is made for an
assumption of this Option or a substitution therefor of a new option by an
employer corporation or a parent or subsidiary of such corporation; and

provided, further, that nothing in this Section 3.4 shall make this Option
exercisable unless the requirements of Section 5.6 have been satisfied.

None of the foregoing discretionary terms of this Section
shall be permitted to the extent that such discretion would be inconsistent with
the requirements of Rule 16b-3.

ARTICLE IV

EXERCISE OF OPTION

4.1 Person Eligible to Exercise. During the lifetime of the
Optionee, only the Optionee may exercise the Option or any portion thereof.
After the death of the Optionee, any exercisable portion of the Option may,
prior to the time when the Option becomes unexercisable under Section 3.3, be
exercised by a beneficiary designated by the Optionee, the Optionee's personal
representative or by any person empowered to do so under the Optionee's will or
under the then applicable laws of descent and distribution.

4.2 Partial Exercise. Any exercisable portion of the Option or
the entire Option, if then wholly exercisable, may be exercised in whole or in
part at any time prior to the

6
<PAGE> 46
time when the Option or portion thereof becomes unexercisable under Section 3.3;
provided, however, that each partial exercise shall be for not less than one
hundred (100) shares (or the minimum installment set forth in Exhibit A hereto,
if a smaller number of shares) and shall be for whole shares only.

(b) (i) Full payment (in cash or by check) for the
shares with respect to which such Option or portion thereof is exercised;

(ii) With the consent of the Committee, (A) shares of
the Company's Common Stock owned by the Optionee duly endorsed for
transfer to the Company or (B) subject to the timing requirements of
Section 4.4, shares of the Company's Common Stock issuable to the
Optionee upon exercise of the Option, with a Fair Market Value on the
date of Option exercise equal to the aggregate purchase price of the
shares with respect to which such Option or portion thereof is
exercised; or

(iii) With the consent of the Committee, a full
recourse promissory note bearing interest (at no less than such rate as
shall then preclude the imputation of interest under the Code or
successor provision) and payable upon such terms as may be prescribed
by the Committee. The Committee may also prescribe the form of such
note and the security to be given for such note. The Option may not be
exercised, however, by delivery of a promissory note or by a loan from
the Company when or where such loan or other extension of credit is
prohibited by law; or

(iv)) With the consent of the Committee, any
combination of the consideration provided in the foregoing
subparagraphs (i), (ii) and (iii); and

7
<PAGE> 47
compliance with the Securities Act and any other federal or state securities
laws or regulations. Without limiting the generality of the foregoing, the
Committee may require an opinion of counsel acceptable to it to the effect that
any subsequent transfer of shares acquired on an Option exercise does not
violate the Securities Act, and may issue stop-transfer orders covering such
shares. Share certificates evidencing stock issued on exercise of this Option
shall bear an appropriate legend referring to the provisions of this subsection
(c) and the agreements herein. The written representation and agreement referred
to in the first sentence of this subsection (c) shall, however, not be required
if the shares to be issued pursuant to such exercise have been registered under
the Securities Act, and such registration is then effective in respect of such
shares; and

(d) Full payment to the Company (or other employer
corporation) of all amounts which, under federal, state or local tax law, it is
required to withhold upon exercise of the Option; with the consent of the
Committee, (i) shares of the Company's Common Stock owned by the Optionee duly
endorsed for transfer, or (ii) subject to the timing requirements of Section
4.4, shares of the Company's Common Stock issuable to the Optionee upon exercise
of the Option, having a Fair Market Value at the date of Option exercise equal
to the sums required to be withheld, may be used to make all or part of such
payment; and

(e) In the event the Option or portion thereof shall be
exercised pursuant to Section 4.1 by any person or persons other than the
Optionee, appropriate proof of the right of such person or persons to exercise
the Option.

4.4 Certain Timing Requirements. At the discretion of the
Committee, shares of Common Stock issuable to the Optionee upon exercise of the
Option may be used to satisfy the Option price or the tax withholding
consequences of such exercise, in the case of persons subject to Section 16 of
the Exchange Act, only (i) during the period beginning on the third business day
following the date of release of the quarterly or annual summary statement of
sales and earnings of the Company and ending on the twelfth business day
following such date or (ii) pursuant to an irrevocable written election by the
Optionee to use shares of Common Stock issuable to the Optionee upon exercise of
the Option to pay all or part of the Option price or the withholding taxes,
provided, however, that such irrevocable written election must be made at least
six months prior to the payment of such Option price or withholding taxes.

4.5. Conditions to Issuance of Stock Certificates. The shares
of stock deliverable upon the exercise of the Option, or any portion thereof,
may be either previously authorized but unissued shares or issued shares which
have then been reacquired by the Company. Such shares shall be fully paid and
nonassessable. The Company shall not be required to issue or deliver any
certificate or certificates for shares of stock purchased upon the exercise of
the Option or portion thereof prior to fulfillment of all of the following
conditions:

(a) The admission of such shares to listing on all stock
exchanges on which such class of stock is then listed; and

(b) The completion of any registration or other qualification
of such shares under any state or federal law or under rulings or regulations of
the Securities and Exchange

8
<PAGE> 48
Commission or of any other governmental regulatory body, which the Committee
shall, in its absolute discretion, deem necessary or advisable; and

(c) The obtaining of any approval or other clearance from any
state or federal governmental agency which the Committee shall, in its absolute
discretion, determine to be necessary or advisable; and

(e) The lapse of such reasonable period of time following the
exercise of the Option as the Committee may from time to time establish for
reasons of administrative convenience.

4.6 Rights as Shareholder. The holder of the Option shall not be, nor have any
of the rights or privileges of, a shareholder of the Company in respect of any
shares purchasable upon the exercise of any part of the Option unless and until
certificates representing such shares shall have been issued by the Company to
such holder.

ARTICLE V

OTHER PROVISIONS

5.1 Administration. The Committee shall have the power to
interpret the Plan and this Agreement and to adopt such rules for the
administration, interpretation and application of the Plan as are consistent
therewith and to interpret, amend or revoke any such rules. All actions taken
and all interpretations and determinations made by the Committee in good faith
shall be final and binding upon the Optionee, the Company and all other
interested persons. No member of the Committee shall be personally liable for
any action, determination or interpretation made in good faith with respect to
the Plan or the Option. In its absolute discretion, the Board may at any time
and from time to time exercise any and all rights and duties of the Committee
under the Plan and this Agreement except with respect to matters which under
Rule 16b-3 are required to be determined in the sole discretion of the
Committee.

5.2 Option Not Transferable. Neither the Option nor any
interest or right therein or part thereof shall be liable for the debts,
contracts or engagements of the Optionee or the Optionee's successors in
interest or shall be subject to disposition by transfer, alienation,
anticipation, pledge, encumbrance, assignment or any other means whether such
disposition be voluntary or involuntary or by operation of law by judgment,
levy, attachment, garnishment or any other legal or equitable proceedings
(including bankruptcy), and any attempted disposition thereof shall be null and
void and of no effect; provided, however, that this Section 5.2 shall not
prevent (i) transfers by will or by the applicable laws of descent and
distribution, (ii) the designation by the Optionee of a beneficiary to exercise
the Optionee's Option (or any portion thereof) under this Agreement after the
Optionee's death, or (iii) transfers in accordance with

9
<PAGE> 49
such requirements as are prescribed by the Committee and in accordance with the
Code and applicable regulations.

5.3 Shares to Be Reserved. The Company shall at all times
during the term of the Option reserve and keep available such number of shares
of stock as will be sufficient to satisfy the requirements of this Agreement.

5.5 Titles. Titles are provided herein for convenience only
and are not to serve as a basis for interpretation or construction of this
Agreement.

5.6 Shareholder Approval. The Plan will be submitted for
approval by the Company's shareholders within twelve (12) months after the date
the Plan was initially adopted by the Board. This Option may not be exercised to
any extent by anyone prior to the time when the Plan is approved by the
shareholders, and if such approval has not been obtained by the end of said
twelve-month period, this Option shall thereupon be canceled and become null and
void.

5.7 Construction. This Agreement shall be administered,
interpreted and enforced under the laws of the State of California.

5.8 Conformity to Securities Laws. The Optionee acknowledges
that the Plan is intended to conform to the extent necessary with all provisions
of the Securities Act and the Exchange Act and any and all regulations and rules
promulgated by the Securities and Exchange Commission thereunder, including
without limitation Rule 16b-3. Notwithstanding anything herein to the contrary,
the Plan shall be administered, and the Option is granted and may be exercised,
only in such a manner as to conform to such laws, rules and regulations. To the
extent permitted by applicable law, the Plan and this Agreement shall be deemed
amended to the extent necessary to conform to such laws, rules and regulations.

10
<PAGE> 50
5.9 Amendments, etc.. This Agreement may not be modified,
amended, or terminated except by an instrument in writing, signed by the
Optionee or such other person as may be permitted to exercise the Option
pursuant to Section 4.1 and by a duly authorized representative of the Company.

IN WITNESS WHEREOF, this Agreement has been executed and
delivered by the parties hereto.

CANDLEWOOD HOTEL COMPANY, INC.

By
----------------------------------

Title
----------------------------------

Optionee
- -------------------------------

Address
- -------------------------------

Optionee's Social Security Number:

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

11
<PAGE> 51
EXHIBIT A
---------
NON-QUALIFIED STOCK OPTION AGREEMENT
DATED __________, 1996,
BY AND BETWEEN
CANDLEWOOD HOTEL COMPANY, INC.
AND ___________________

In accordance with Section 3.1(a) of the Agreement and subject
to shareholder approval of the Plan, the Option shall become exercisable in four
(4) cumulative installments as follows:

(a) The first installment shall consist of twenty-five percent
(25%) of the shares covered by the Option and shall become exercisable on the
first anniversary of the date the Option is granted;

(b) The second installment shall consist of twenty-five
percent (25%) of the shares covered by the Option and shall become exercisable
on the second anniversary of the date the Option is granted;

(c) The third installment shall consist of twenty-five percent
(25%) of the shares covered by the Option and shall become exercisable on the
third anniversary of the date the Option is granted; and

(d) The fourth installment shall consist of twenty-five
percent (25%) of the shares covered by the Option and shall become exercisable
on the fourth anniversary of the date the Option is granted;

- -----------------------------------
Optionee

- -----------------------------------
Date

<PAGE> 1
EXHIBIT 10.4

CANDLEWOOD HOTEL COMPANY, L.L.C.

DEVELOPMENT AGREEMENT

<PAGE> 2

CANDLEWOOD HOTEL COMPANY, L.L.C.

DEVELOPMENT AGREEMENT

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page No.
--------

<S> <C>
Recitals ..................................................................................................... 1

Article 1 Grant of Options............................................................................ 1
Article 2 Development Fee; Franchise Application Fees................................................. 3
Article 3 Development Schedule and Manner of Exercising Options....................................... 3
Article 4 Term and Right of First Refusal............................................................. 4
Article 5 Duties of the Parties....................................................................... 5
Article 6 Default..................................................................................... 6
Article 7 Transferability............................................................................. 7
Article 8 Covenants................................................................................... 7
Article 9 Notices..................................................................................... 8
Article 10 Independent Contractor and Indemnification.................................................. 8
Article 11 Approvals................................................................................... 9
Article 12 Non-Waiver.................................................................................. 9
Article 13 Severability and Construction............................................................... 10
Article 14 Entire Agreement - Applicable Law........................................................... 10
Article 15 Remedies and Disputes....................................................................... 11
Article 16 Developer Acknowledgments................................................................... 13

Guaranty...................................................................................................... 15
Attachment A Assigned Area .............................................................................. A-1
Attachment B Development Sch dule ....................................................................... B-1
Attachment C Franchise Application....................................................................... C-1
Attachment D Franchise Agreement ........................................................................ D-1
</TABLE>

<PAGE> 3

CANDLEWOOD HOTEL COMPANY, L.L.C.

DEVELOPMENT AGREEMENT

THIS DEVELOPMENT AGREEMENT (the or this "Agreement") made and entered
into at Wichita, Kansas this 11 day of JUNE, 1996, by and between CANDLEWOOD
HOTEL COMPANY, L.L.C., a Delaware limited liability company (hereinafter
referred to as "CHC"), and Studio West Hotel Development Company, L.L.C.
(hereinafter referred to as "Developer"), whose principal business address is
101 Larkspur Landing, Suite 318, Larkspur, California 94939.

RECITALS

A. CHC has developed and owns a concept and distinctive system
(hereinafter, the "System") for the design, establishment, and operation of
hotels under the name "Candlewood Hotel" and "Candlewood/A Studio Hotel" (such
names and any other trade names, service marks, trademarks, logos, emblems, or
other indication of origin as are now or hereafter designated by CHC as part of
the System are hereinafter referred to as the "Proprietary Marks").

B. Developer wishes to obtain certain options for the development of
Candlewood Hotels in the area described in this Agreement.

C. CHC is relying upon the business skill, financial capacity, and
character of Developer and its principals, and the guarantee by the principals
of Developer's obligations, if applicable, as attached to this Agreement.

NOW, THEREFORE, in consideration of the foregoing and of the promises
contained herein, the parties agree as follows:

ARTICLE 1. GRANT OF OPTIONS.

A. CHC hereby grants to Developer, pursuant to the terms and conditions
of this Agreement, options to obtain franchises to establish and operate _______
Candlewood Hotels (the "Hotels") under the System within the area described in
Attachment A to this Agreement (hereinafter "Assigned Area").

- 1 -

<PAGE> 4
B. Except as otherwise provided in this Agreement, CHC shall not
establish, nor franchise another to establish, any Candlewood Hotel under the
System (a "System Hotel") in the Assigned Area prior to the earlier of the
expiration of the development schedule set forth in Attachment B hereto (the
"Development Schedule") or Developer's default under this Agreement.

C. If at anytime prior to the earlier of the expiration of the
Development Schedule or Developer's default under this Agreement, CHC acquires
any hotels in the Assigned Area which it desires to convert to System Hotels
(hereinafter, whether one or more, "Conversion Hotels"), CHC shall provide
written notice to Developer within a reasonable time of its intent to convert
the Conversion Hotels into System Hotels. Such notice shall provide Developer
with a right of first refusal to acquire such Conversion Hotels from CHC on the
terms provided below if the sale by CHC of such hotels to Developer is allowed
by applicable law. Subject to the foregoing, Developer shall have the right and
option, exercisable within 30 days after receipt of such written notification,
to provide written notice to CHC that Developer desires to purchase the
Conversion Hotels and to convert all of such hotels to Hotels under the System.
In the event Developer elects to purchase and convert the Conversion Hotels,
Developer must close on such purchase and execute a Franchise Agreement in the
form attached hereto as Attachment D (which shall require payment of the initial
franchise fee) within 60 days from the date of notice to CHC of Developer's
election to purchase and convert. The purchase price to be paid by Developer for
the Conversion Hotels shall be the cash equivalent of the fair value to CHC for
each of the Conversion Hotels, as determined by an independent appraiser
selected and retained by CHC in CHC's sole discretion. In the event Developer
does not elect to purchase and convert the Conversion Hotels as provided in this
Paragraph, Developer shall have no further right or option to acquire such
Conversion Hotels, and CHC may sell such Conversion Hotels to another franchisee
under the System or Franchisor or its affiliates may own and operate the
Conversion Hotels under the System.

D. Notwithstanding Paragraph B and Paragraph C of this Article,
Developer acknowledges and agrees that CHC's members and the subsidiaries and
affiliates, shareholders, and owners of CHC and its members including without
limitation Doubletree Corporation, a Delaware corporation, and its affiliates
(hereinafter, the "Affiliated Companies") have and retain the right to develop,
acquire, participate in, and operate and license others to develop, acquire,
participate in, and operate hotels, lodging facilities, or other business
operations of any type whatsoever, including locations within the Assigned Area
and locations adjacent, adjoining, or proximate to the Assigned Area, including,
without limitation, hotels using any of the Proprietary Marks or any other trade
name including, but not limited to, any of the following specific trade names:
Doubletree, Doubletree Guest Suites, Club Hotels by Doubletree, Residence Inn by
Marriott, and The Residence Inn. Notwithstanding anything to the contrary in
the foregoing CHC may operate within the Assigned Area any hotel, motel, or
other business that provides lodging accommodations on a daily-stay basis with
kitchen facilities and limited (not on a daily basis) maid service at a moderate
to economy price when an option has been declined by Developer under Paragraph C
of

- 2 -

<PAGE> 5
Article 1 or Paragraph B of Article 4, or as otherwise provided in this
Agreement. Developer also agrees that CHC and the Affiliated Companies are not
restricted from using the System or engaging in or licensing any business
activity including System Hotels or other hotels at any location not within the
Assigned Area. Developer understands that such business operations may compete
with and adversely affect the operation of any Hotels developed by Developer
pursuant to this Agreement. Developer agrees that CHC and the Affiliated
Companies may exercise any and all such rights from time to time without notice
to Developer and Developer covenants that it shall not take any action,
including a cause of action in a court of law or equity, which may interfere
with the exercise of such rights by either CHC or any of the Affiliated
Companies.

ARTICLE 2. DEVELOPMENT FEE; FRANCHISE APPLICATION FEES.

In consideration of the development rights granted herein, Developer
shall pay to CHC upon execution of this Agreement a development fee of $1.00.
For each Hotel developed pursuant to this Agreement, Developer shall pay by
certified check a franchise application fee equal to the greater of (a) $40,000
or (b) $400 times the number of rooms of the Hotel as specified in the Franchise
Application for the Hotel. Upon payment by Developer of the franchise
application fee upon submission of the Franchise Application, the initial
franchise fee for the Hotel set forth in Section 4.1.A of the Franchise
Agreement shall be deemed paid in full, unless the number of rooms of the Hotel
specified in Exhibit A to the Franchise Agreement exceeds the number of rooms of
the Hotel specified in the Franchise Application for the Hotel, and in such
case, the balance of the initial franchise fee shall be paid to CHC by Developer
contemporaneously with Developer's execution and delivery of the Franchise
Agreement for the Hotel.

ARTICLE 3. DEVELOPMENT SCHEDULE AND MANNER OF EXERCISING OPTIONS.

A. Developer shall exercise each development option granted hereunder
in the manner specified in Paragraph B below. Recognizing that time is of the
essence, Developer agrees to exercise its options in accordance with the
Development Schedule set forth in Attachment B hereto. Any failure by Developer
to exercise any option within the time specified for such option in the
Development Schedule shall constitute a material default under this Agreement
allowing CHC to terminate this Agreement under Article 6 and to exercise the
remedies for default described in Article 6.C, but CHC shall not have a right of
action against Developer for money damages for failure to exercise options to
develop Hotels in compliance with the times established in the Development
Schedule.

B. To exercise a development option for a site in the Assigned Area,
Developer shall submit to CHC for its approval a Franchise Application, in the
form attached hereto as Attachment

- 3 -

<PAGE> 6
C, together with a market feasibility study for the site as described in the
Franchise Application, and such other information or materials as CHC may
reasonably require, including, but not limited to, a copy of a letter of intent
or other evidence satisfactory to CHC which confirms Developer's favorable
prospects for obtaining the site. The Franchise Application shall also be
accompanied by the franchise application fee for the Hotel. CHC shall have 30
days after receipt of the Franchise Application and all other such information
and materials required by CHC to approve or disapprove the Franchise Application
for any reason. If CHC rejects the Franchise Application, CHC shall retain
$5,000 of the franchise application fee to compensate CHC for its administrative
and other expenses in reviewing the Franchise Application, and shall return the
balance of the franchise application fee to Developer and Developer shall have
90 days to submit and obtain approval of another Franchise Application for the
exercise of that option. If a second Franchise Application is submitted, it will
be subject to the same terms and conditions stated above, including payment of
the full Franchise Application Fee, and will be approved or disapproved under
the same terms and conditions described above. Franchisor shall have no
obligation to consider more than two Franchise Applications for any hotel
required by the development schedule. No extensions under this Paragraph shall
extend any other time periods specified in the Development Schedule for the
exercise of options by Developer. Within ten days of obtaining CHC's approval of
the Franchise Application, Developer shall provide CHC an originally executed
Franchise Agreement in the form of Attachment D hereto for the site approved in
the Franchise Application. Developer acknowledges that CHC's approval of the
Franchise Application and the site does not in any way guarantee that the site
will become a profitable Hotel. Developer expressly acknowledges that CHC's
approval of the Franchise Application and the site shall not be deemed to be or
construed as a warranty or guarantee, express or implied, as to the potential
volume, profits, or success of the Hotel to be located on the site.

C. CHC agrees that the personal guaranty referenced in Recital C is
not applicable to this Agreement so long as Developer submits to CHC with each
Franchise Application satisfactory evidence that Developer has received equity
capital contributions of at least $2 million dollars for each Hotel for which a
Franchise Application is submitted or has irrevocable commitments for
contributions of that amount in installments due to be paid in full not later
than completion of construction of such Hotel. This requirement shall terminate
when Developer has submitted evidence satisfactory to CHC that Franchisee has
received cash or cash-equivalent, non-refundable, equity capital contributions
totaling $15 million. If Developer does not maintain compliance with the
capital requirements stated in this paragraph, Franchisor will not be obligated
to consider any further Franchise Applications unless Developer submits a
Guaranty in the form included in the Candlewood Uniform Franchise Offering
Circular dated April 29, 1996, executed and delivered by Karl K. Hoagland, III
and Peter B. Mulligan. This paragraph does not release Mr. Hoagland and Mr.
Mulligan from being required to sign a Covenant Agreement upon request pursuant
to Section 11.7 of the Candlewood Franchise Agreement.

- 4 -

<PAGE> 7
D. CHC has under purchase contract a proposed Hotel site in Hillsboro,
Oregon (the Hillsboro Property), which is within Developer's Assigned Area.
Developer shall have the option to purchase the Hillsboro Property on the terms
stated herein. If Developer fails to purchase the Hillsboro Property, the
Candlewood Hotel at this location will be excluded from, and may be developed
and operated without violating, Developer's rights in the Assigned Area under
the Development Agreement.

The terms of purchase of the Hillsboro, Oregon Property shall be as
follows:

(1) Closing shall occur on or before the close of business on July 15,
1996.

(2) The consideration for the purchase shall consist of (a)
reimbursing CHC for every item of expense incurred in acquiring the property for
hotel development, including all purchase money, title costs, attorneys fees,
recording fees, permits, architects, engineers, environmental, and other
expenses directly related to the development and construction of the Hotel
(including time and compensation of CHC employees in connection with the
Hillsboro Property determined by multiplying the hourly cost to CHC of the
employees, compensation and benefits times the hours spent in connection with
the Hillsboro Property, plus interest at the rate of 10% per annum from the
date of CHC's expenditures through the closing date of sale to Developer), and
(b) assuming sole liability for all obligations due or to become due under any
outstanding contracts relating to acquisition and construction of the Hotel on
the Hillsboro Property, including professional contracts, construction
contracts, and other types of agreements customarily associated with such a
real estate development and construction project. Developer shall have the
right, prior to and as a condition of, its obligation to close, to conduct such
inspections of the Hillsboro Property as it deems appropriate, and to review
all contracts and records of CHC pertaining the Hillsboro Property.

(3) Conveyance of the Hillsboro Property from CHC to Developer shall
be by nonrecourse assignment of its rights under the purchase contract and/or
by quitclaim deed. CHC will make no representations or warranties of any
nature, it being understood that Developer will assume the same rights and
liabilities with respect to the Hillsboro Property as if it had been the
contracting party and/or real estate owner continuously from the date that CHC
acquired any right or title in the Hillsboro Property.

ARTICLE 4. TERM AND RIGHT OF FIRST REFUSAL.

A. Unless sooner terminated in accordance with the terms of this
Agreement, the term of this Agreement and all rights granted hereunder (except
for the right of first refusal provided in Paragraph B of this Article) shall
expire on the date of CHC's acceptance and execution of a

- 5 -

<PAGE> 8
Franchise Agreement for the last of the Hotels to be established pursuant to
the Development Schedule.

B. If at any time within 5 years following the expiration of the
Development Schedule, CHC determines that it is desirable to establish
additional Hotels under the System in the Assigned Area, and provided that
Developer has opened all of the Hotels described in the Development Schedule and
is then in compliance with all terms and conditions of all Franchise Agreements
between Developer and CHC, Developer shall have a right of first refusal to
purchase the options to establish such additional Hotels upon CHC's then-current
terms and conditions. In that event, CHC shall submit to Developer a development
agreement offering such options, which agreement shall supersede in all
respects this Agreement, and Developer shall have 30 days after receipt to
execute and return the agreement to CHC. In the event that Developer does not
exercise this right of first refusal, CHC may thereafter elect to establish
additional Hotels itself or grant options to others to do so in the Assigned
Area.

C. In addition to the number of Hotels included in the Development
Schedule, Developer may develop additional Hotels in the Assigned Area by
submitting applications, paying franchise fees, obtaining approvals, and
executing Franchise Agreements for additional Hotels in the manner provided in
Article 3 of the Development Agreement. The Development Schedule shall not be
deemed to have expired for purposes of the territorial protection provided in
Article 1 of the Development Agreement so long as Developer exercises an option
for at least one additional Hotel in the Territory in the manner provided in
Article 3 of the Development Agreement every six months after the expiration of
the initial Development Schedule.

Notwithstanding the time limitations stated in Articles 1.C and 4.B of
the Development Agreement, Developer shall continue to have first refusal
rights on all Conversion Hotels and additional Hotels in Developer's Assigned
Area for a period of five years after Developer has been offered and has
declined to exercise first refusal rights for an additional Hotel on three (3)
occasions (each being an "Occasion"). An Occasion may occur only once per
six-month period and only in a period when Developer has not exercised an
option for an additional Hotel. An Occasion shall not be deemed to have
occurred unless CHC or its designee in fact develops such additional Hotel. In
addition to the first refusal procedures provided in Article 4.B of the
Development Agreement, CHC agrees that the offer of first refusal rights must
include reasonably specific identification of the location of the proposed
additional Hotel, together with evidence that real estate is available for
acquisition by sale or lease for the additional Hotel. Developer will have sixty
(60) days in which to execute a Franchise Agreement for the additional Hotel.

The parties further agree that the option price to Developer under
Article 1.C for the purchase of Conversion Hotels acquired by CHC as a single
hotel with readily determinable cost, or a group of hotels with a readily
determinable cost all within Developer's territory, shall be

- 6 -

<PAGE> 9
CHC's cost plus interest at 10% per annum from the date CHC incurred such costs
until the closing date of developer's purchase of such Conversion Hotel or
Hotels.

ARTICLE 5. DUTIES OF THE PARTIES.

A. CHC shall furnish to Developer the following:

1. A Development Manual, on loan, setting forth site selection
guidelines, and containing a set of prototype plans and specifications
(not for construction) for a System Hotel.

2. On-site evaluation as CHC deems advisable in response to
Developer's request for site approval; provided, however, the CHC shall
not provide on-site evaluation for any proposed site prior to its
receipt from Developer of a market feasibility study for such site
prepared by Developer pursuant to Paragraph B of Article 3 of this
Agreement.

B. Developer accepts the following obligations:

1. Developer shall comply with all terms and conditions set
forth in this Agreement.

2. Developer shall at all times preserve in confidence the
Development Manual and any and all materials and information furnished
or disclosed to Developer by CHC and designated by CHC as confidential,
and Developer shall disclose such information or materials only to such
of its employees or agents who must have access to it in connection
with their employment. Developer shall not at any time, without CHC's
prior written consent, copy, duplicate, record, or otherwise reproduce
the Development Manual or other materials or information, in whole or
in part, nor otherwise make the same available to any unauthorized
person.

3. Developer shall comply with all requirements of federal,
state, and local laws, rules, ordinances, and regulations.

4. Developer shall comply with all terms and conditions set
forth in any Franchise Agreement, and any other related agreement or
instrument entered into by Developer in connection with any Hotel.

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<PAGE> 10
ARTICLE 6. DEFAULT.

A. The options and territorial rights granted to Developer in this
Agreement have been granted in reliance on Developer's representations and
assurances, among others, that the Development Schedule set forth in Attachment
B to this Development Agreement will be met by Developer in a timely manner.

B. Developer shall be deemed in default under this Agreement, and all
rights granted herein shall automatically terminate without notice, if Developer
is adjudicated a bankrupt, becomes insolvent, suffers temporary or permanent
count-appointed receivership of substantially all of Developer's property, makes
a general assignment for the benefit of creditors or suffers the filing of a
voluntary or involuntary bankruptcy petition which is not dismissed within 90
days after filing.

C. If Developer fails to comply with (i) the Development Schedule, (ii)
any terms and conditions of any Franchise Agreement, (iii) any other terms and
conditions of this Agreement, (iv) or any other agreement between Developer and
CHC or the Affiliated Companies, such action shall constitute a default under
this Agreement. Upon such default, CHC, in its discretion, may, without giving
Developer prior notice or the right to cure any such default, do any one or more
of the following:

1. Terminate this Agreement and all rights granted hereunder
without affording Developer any opportunity to cure the default,
effective immediately upon Developer's receipt of written notice from
CHC;

2. Reduce the number of options granted Developer in Article 1
of this Agreement;

3. Reduce the territory described in Article 1 of this
Agreement;

4. Terminate the territorial exclusivity granted Developer in
Article 1 of this Agreement.

D. Upon termination of this Agreement by Developer's default, all
remaining options shall be null and void. Developer shall have no right to
establish or operate any Hotel for which a Franchise Agreement has not been
executed by CHC. Default under this Development Agreement shall not constitute a
default under any existing Franchise Agreement between the parties hereto.

E. No right or remedy herein conferred upon or reserved to CHC is
exclusive of any other right or remedy provided or permitted by law or equity.

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<PAGE> 11
ARTICLE 7. TRANSFERABILITY.

A. CHC shall have the right to transfer all or any part of its rights
or obligations herein to any person or legal entity.

B. Developer understands and acknowledges that the rights and duties
set forth in this Agreement are personal to Developer and are granted in
reliance upon the personal qualifications of Developer. Developer has
represented to CHC that Developer is entering into this Agreement with the
intention of complying with its terms and conditions and not for the purpose of
resale of the developmental rights hereunder. Neither Developer nor any partner,
member, or shareholder thereof shall, without CHC's prior written consent (which
consent shall not be unreasonably withheld), directly or indirectly, sell,
assign, transfer, convey, give away, pledge, mortgage, or otherwise encumber any
interest in this Agreement or in Developer. Any such proposed assignment
occurring by operation of law or otherwise, including any assignment by the
trustee in bankruptcy, without CHC's prior written consent (which consent shall
not be unreasonably withheld) shall be a material default of this Agreement.
CHC's consent to a transfer of any interest in this Agreement or in Developer
shall be subject to the terms and conditions set forth in Article 13 of the
Franchise Agreement (Attachment C hereto); provided, however, if a proposed
transfer hereunder would trigger the requirements of Section 13.2 of the
Franchise Agreement, the transferee, in lieu of complying with subsections F
through I of Section 13.2 of the Franchise Agreement, shall execute this
Agreement and any ancillary agreements and pay to CHC a transfer fee of $5,000.
Notwithstanding any provision to the contrary contained in this Article,
Developer may transfer not more than an aggregate of 25% of the outstanding
voting shares or ownership interest of a Developer operating as a corporation,
partnership, or limited liability company to employees of Developer who are
actively engaged in Developer's Hotel operations, if such transfers, alone or
together with other previous, simultaneous, or proposed transfers, do not have
the effect of transferring a controlling interest (as reasonably determined by
CHC) in the Developer. The ownership of such shares or ownership interest by
such employees will be subject to all of the terms and conditions set forth in
this Agreement and the Franchise Agreement, including, without limitation,
Articles 11 and 13 of the Franchise Agreement. Developer shall provide CHC with
written notice of any such proposed transfer and all pertinent information
regarding the same not later than 30 days prior to the proposed date of
transfer.

C. Notwithstanding the provisions of Article 7.B of the Development
Agreement and the provisions of the Franchise Agreement referred to therein,
the parties agree that equity ownership interests in Developer owned by passive
investors may be transferred in amounts not exceeding 10% of the outstanding
equity interests in Developer without prior notice to or approval from CHC. For
purposes of this Agreement, "passive investor" shall mean any natural or legal
person who (a) owns in the aggregate not more than 10% of the outstanding
equity interests in

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<PAGE> 12
Developer; (b) is not engaged directly, or indirectly through agents or
employees, in management or operations of the Developer as an officer,
director, manager, general partner, employee, consultant, or other similar or
analogous capacity; (c) has no agreements or understandings of any nature,
directly, or indirectly, to act in concert with any other person to participate
in management or act in concert in the purchase or sale or voting of equity
interests in Developer; and (d) is not related by blood or adoption to any
nonpassive investor or officer, director or manager of Developer as a parent,
child, grandparent, grandchild, brother or sister or by marriage to any person
of such degree of kinship. Notwithstanding this paragraph, Developer agrees to
provide to CHC at any reasonable time upon CHC's request the names, addresses,
and ownership interests of Developer's equity owners, and CHC shall have the
right to inspect Developer's stock ledgers or other ownership records at any
reasonable time upon request. Passive investors shall not be required to sign
CHC Covenant Agreements, provided, however, that their participation in any
business that would be prohibited by a CHC Covenant Agreement shall be limited
to activities that would satisfy the definition of "Passive Investor" as stated
above.

D. Developer agrees that it will not make a public offering of
securities unless and until (a) CHC has first made a public offering of its
securities or three years after the date of this Agreement, whichever is
sooner, and (b) Franchisee has opened and is operating at least five Candlewood
Hotels, and CHC agrees that it will not unreasonably withhold its consent to a
public offering by Developer at any time after these conditions are satisfied.

ARTICLE 8. COVENANTS.

Developer covenants that, except as otherwise approved in writing by
CHC, Developer shall not do or engage in any act prohibited by Article 11 of the
Franchise Agreement (Attachment D). Developer further covenants that during the
term of this Agreement Developer shall not compete, or be associated, directly
or indirectly as an owner, shareholder, officer, director, employee, consultant,
manager, or otherwise, in any business in competition with the System, and, for
a period of two years after any transfer or termination of this Agreement for
any reason, Developer shall not compete, or be associated, directly or
indirectly as an owner, shareholder, officer, director, employee, consultant,
manager, or otherwise, in any hotel, motel, or any other business, that provides
lodging accommodations on a daily-stay basis with kitchen facilities and limited
(not on a daily basis) maid service at a moderate to economy price, anywhere in
the world, which shall expressly include, but shall not be limited to, the
United States of America and all its territories and possessions, and all other
countries in North America. Unless the context otherwise requires, the term
"Developer" as used in this Article shall include, individually and
collectively, all partners, officers, directors, and managers of Developer and
holders, directly or indirectly (and any partners, officers or directors of any
such holder), of five percent or more of the beneficial interest in Developer.

- 10 -

<PAGE> 13
ARTICLE 9. NOTICES.

Any and all notices required or permitted under this Agreement shall be
in writing and shall be personally delivered or mailed by certified mail, return
receipt requested, to the respective parties at the following addresses unless
and until a different address has been designated by written notice to the other
party:

Notices to CHC: Candlewood Hotel Company, L.L.C.
9342 East Central
Wichita, Kansas 67206
Attn: Franchise Department

Notices to Developer: Studio West Hotel Development
Company, L.L.C.
101 Larkspur Landing
Suite 318
Larkspur, California 94939

Attn: Karl K. Hoagland, III

Any notice by certified mail shall be deemed to have been given at the
date and time of mailing.

ARTICLE 10. INDEPENDENT CONTRACTOR AND INDEMNIFICATION.

A. It is understood and agreed by the parties hereto that this
Agreement does not create a fiduciary relationship between them, that nothing in
this Development Agreement is intended to constitute either party an agent,
legal representative, subsidiary, joint venturer,

partner, employee, or servant of the other for any purpose whatsoever. Each
party to this Agreement is an independent contractor, and neither shall be
responsible for the obligations, debts, or liabilities incurred by the other.

B. Developer shall hold itself out to the public to be an independent
contractor operating pursuant to this Agreement. Developer agrees to take such
reasonable actions as shall be necessary to that end.

C. Developer understands and agrees that nothing in this Development
Agreement authorizes Developer to make any contract, agreement, warranty or
representation on CHC's behalf, or to incur any debt or other obligation in
CHC's name; and that CHC assumes no liability for, nor shall be deemed liable by
reason of, any act or omission of Developer in Developer's

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<PAGE> 14
conduct under this Development Agreement, or any claim or judgment arising
therefrom. Developer shall indemnify and hold CHC and the Affiliated Companies
and CHC's and the Affiliated Companies' officers, directors, employees,
shareholders, owners, managers, agents, representatives, and affiliates harmless
against any and all such claims directly or indirectly from, as a result of, or
in connection with Developer's operations hereunder, as well as the costs,
including attorneys' fees, of defending against them.

ARTICLE 11. APPROVALS.

A. Whenever this Development Agreement requires the prior approval or
consent of CHC, Developer shall make a timely written request to CHC therefor;
and, except as otherwise provided herein, any approval or consent granted shall
be in writing.

B. CHC makes no warranties or guarantees upon which Developer may rely
and assumes no liability or obligation to Developer or any third party to which
it would not otherwise be subject, by providing any waiver, approval, advice,
consent, or services to Developer in connection with this Development Agreement,
or by reason of any neglect, delay, or denial of any request therefor.

ARTICLE 12. NON-WAIVER.

No failure of CHC to exercise any power reserved to it in this
Agreement or to insist upon compliance by Developer with any obligation or
condition in this Development Agreement, and no custom or practice of the
parties at variance with the terms hereof, shall constitute a waiver of CHC's
rights to demand exact compliance with the terms of this Agreement. Waiver by
CHC of any particular default shall not affect or impair CHC's right in respect
to any subsequent default of the same or of a different nature, nor shall any
delay, forbearance, or omission of CHC to exercise any power or right arising
out of any breach or default by Developer of any of the terms, provisions, or
covenants of this Agreement, affect or impair CHC's rights, nor shall such
constitute a waiver by CHC of any rights hereunder or rights to declare any
subsequent breach or default.

ARTICLE 13. SEVERABILITY AND CONSTRUCTION.

A. Should any one or more parts of this Agreement be declared invalid
for any reason by a court of competent jurisdiction, such decision shall not
affect the validity of any remaining portions of the Agreement, which shall
remain in full force and effect as if the Agreement had been executed without
such invalid parts, except to the extent the absence of the provisions

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<PAGE> 15
invalidated would frustrate or make it impossible to achieve the purposes for
which the Agreement was made. Should the requirements of any applicable law or
regulation change or modify the terms of this Agreement or conflict with its
provisions, such change or modification shall not be applicable to this
Agreement unless such change is lawfully mandated by the authority making the
same, in which case only the provisions affected by such law or regulation shall
be affected, and the Agreement shall otherwise remain in full force and effect,
as modified to be consistent with such law or regulation.

B. Nothing in this Agreement shall confer upon any person or legal
entity other than CHC or Developer and such of their respective successors and
assigns as may be contemplated by Article 7 of this Agreement, any rights or
remedies under or by reason of this Agreement.

C. All captions in this Agreement are intended solely for the
convenience of the parties, and none shall be deemed to affect the meaning or
construction of any provision hereof. Time is of the essence of this Agreement
in all respects.

D. All references herein to gender and number shall be construed to
include such other gender and number as the context may require, and all
acknowledgments, promises, covenants, agreements and obligations herein made or
undertaken by Developer shall be deemed jointly and severally undertaken by all
those executing this Agreement on behalf of Developer.

E. This Agreement may be executed in several parts, and each copy so
executed shall be deemed an original.

ARTICLE 14. ENTIRE AGREEMENT - APPLICABLE LAW.

This Agreement, the documents referred to herein, and the Attachments
attached hereto constitute the entire, full, and complete agreement between CHC
and Developer concerning the subject matter hereof and supersede any and all
prior agreements. No amendment, change, or variance from this Agreement shall
be binding on either party unless executed in writing. This Agreement shall be
governed by the laws of the State of Kansas.

ARTICLE 15. REMEDIES AND DISPUTES.

A. Developer and CHC agree to submit, prior to arbitration, all
unsettled claims, disputes, controversies, and other matters in question between
them arising out of or relating to this Agreement (including but not limited to
any claim that the Agreement or any of its provisions

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<PAGE> 16
is invalid, illegal, or otherwise voidable or void), the dealings or
relationship between Developer and CHC, or Developer's development of any Hotel
("Disputes") to mediation in Wichita, Kansas and in accordance with the
Commercial Mediation Rules of the American Arbitration Association currently in
effect. Demand for mediation shall be made within a reasonable time, not to
exceed thirty (30) days, after cessation of negotiations between Developer and
CHC.

1. Mediation shall be private, voluntary, and nonbinding. Any
party may withdraw from the mediation at any time before signing a
settlement agreement upon written notice to each other party and to the
mediator. The mediator shall be neutral and impartial. The mediator's
fees shall be shared equally by the parties. The mediator shall be
disqualified as a witness, consultant, expert, or counsel for either
party with respect to the matters in Dispute and any related matters.

2. Unless the parties agree otherwise, the entire mediation
process shall be confidential and without prejudice. The parties and
the mediator shall not disclose any information, documents, statements,
positions, or terms of settlement. Nothing said or done or provided by
the parties in the course of mediation shall be reported or recorded
or, except as ordered by a court of competent jurisdiction, placed in
any legal proceeding or construed for any purpose as an admission
against interest. Nevertheless, evidence otherwise discoverable or
admissible is not excluded from discovery or admission as a result of
its use in mediation.

If a Dispute cannot be resolved through mediation, the parties agree to submit
the Dispute to arbitration, subject to the terms and conditions of this Article.

B. Subject to Paragraph A of this Article, all Disputes between
Developer and CHC will be submitted for binding arbitration to the American
Arbitration Association on demand of either party. Such arbitration proceeding
will be conducted in Wichita, Kansas and, except as otherwise provided in this
Agreement, will be heard by one arbitrator in accordance with the Commercial
Arbitration Rules of the American Arbitration Association then in effect. All
matters relating to arbitration will be governed by the federal Arbitration Act
(9 U.S.C. Sections 1 et.seq.) and not by any state arbitration law.

1. The arbitrator will have the right to award or include in
his award any relief which he deems proper under the circumstances,
including, without limitation, money damages (with interest on unpaid
amounts from the date due), specific performance, injunctive relief,
and attorneys' fees and costs, provided that the arbitrator will not
have the right to declare any of CHC's proprietary marks, generic or
otherwise, invalid or to award exemplary or punitive damages. The award
and decision of the arbitrator will be conclusive and binding upon all
parties hereto, and judgment upon the award may be entered in any court
of competent jurisdiction.

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<PAGE> 17
2. Developer and CHC agree to be bound by the provisions of
any limitation on the period of time in which claims must be brought
under applicable law. Developer and CHC further agree that, in
connection with any such arbitration proceeding, each must submit or
file any claim which would constitute a compulsory counterclaim (as
defined by Rule 13 of the Federal Rules of Civil Procedure) within the
same proceeding as the claim to which it relates. Any such claim which
is not submitted or filed as described above will be forever barred.

3. Developer and CHC agree that arbitration will be conducted
on an individual, not a class-wide, basis, and that an arbitration
proceeding between Developer and CHC may not be consolidated with any
other arbitration proceeding involving Developer or CHC and another
party.

C. Notwithstanding anything to the contrary contained in this Article,
Developer and CHC each have the right in a proper case to obtain temporary
restraining orders and temporary or preliminary injunctive relief from a court
of competent jurisdiction; provided, however, that Developer and CHC must
contemporaneously submit the Dispute for non-binding mediation under Paragraph A
of this Article and then for arbitration under Paragraph B of this Article on
the merits as provided herein if such Dispute cannot be resolved through
mediation. Developer acknowledges that a proper case to obtain temporary
restraining orders and temporary or permanent injunctive relief from a court of
competent jurisdiction contemporaneously with submitting the Dispute to
mediation and then to arbitration shall include, but not be limited to, the
following:

1. Any Dispute involving actual or threatened disclosure or
misuse of the contents of the Development Manual or any other
confidential information or trade secrets of CHC;

2. Any Dispute involving the ownership, validity, use of, or
right to use or license CHC's marks;

3. Any action by CHC to enforce the covenants set forth in
Article 7 and Article 8 of the Agreement; and

4. Any action by CHC to stop or prevent any threat or danger
to public health or safety resulting from the construction of a Hotel.

The provisions of Paragraphs A and B of this Article are intended to benefit and
bind certain third party non-signatories and will continue in full force and
effect subsequent to and notwithstanding the expiration or termination of this
Agreement.

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<PAGE> 18
D. In the event that Developer commences any action against CHC with
respect to any Dispute, such action shall be brought only in a federal or state
court sitting within Sedgwick County, Kansas. Developer consents to the exercise
of jurisdiction by courts within Sedgwick County, Kansas over any claims or
counterclaims against Developer.

E. In the event CHC incurs legal fees or costs or other expenses to
enforce any obligation of Developer under this Agreement, or to defend against
any claim, demand, action or proceeding by reason of Developer's failure to
perform or observe any obligation imposed upon Developer by this Agreement, then
CHC shall be entitled to recover from Developer the amount of all legal fees,
costs and expenses, including reasonable attorneys' fees, whether incurred prior
to, in preparation for, or contemplation of the filing of any claim, demand,
action, or proceeding or in connection with the prosecution or defense thereof.

F. Nothing contained in this Article shall bar CHC's right to obtain
injunctive relief against threatened conduct that will cause it loss or damage,
under the usual equity rules, including the applicable rules for obtaining
restraining orders and preliminary injunctions.

ARTICLE 16. DEVELOPER ACKNOWLEDGMENTS.

A. Developer acknowledges that the success of the business venture
contemplated by this Agreement involves substantial business risks and will be
largely dependent upon the ability of Developer as an independent business
person. CHC expressly disclaims the making of, and Developer acknowledges
Developer has not received, any warranty or guarantee, express or implied, as to
the potential volume, profits, or success of the business venture contemplated
by this Agreement.

B. Developer acknowledges that Developer received a copy of this
Agreement, the attachments thereto, if any, and agreements relating thereto, if
any at least five business days prior to the date this Agreement was executed;
and that CHC has accorded Developer ample time and opportunity to consult with
advisors of Developer's own choosing about the potential benefits and risks of
entering into this Agreement. Developer further acknowledged that Developer has
received a copy of CHC's franchise offering disclosure document required by the
trade regulation rule of the Federal Trade Commission at least ten business days
prior to the date this Agreement was executed.

C. The parties acknowledge that Developer has indicated that it may
wish to apply for a second Development Agreement for an additional Assigned
Area ant that CHC has indicated that it would consider such application when
and if made. Such statements are nonbinding expressions of present intent, and
CHC has no obligation to reserve territory for Developer,

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<PAGE> 19
except for the Assigned Area designated in this Agreement, and may reserve any
other area for itself or grant franchise rights to others in any other area
without obligation to Developer.

IN WITNESS WHEREOF, the parties hereto have duly executed, sealed, and
delivered this Agreement as of the day and year first above written.

CANDLEWOOD HOTEL COMPANY, L.L.C.

DATED: By: /s/ JACK P. DeBOER
---------------------------------
Jack P. DeBoer
Its: President and Chairman

"CHC"

STUDIO WEST HOTEL DEVELOPMENT
COMPANY, L.L.C.

By /s/ KARL K. HOAGLAND III
----------------------------------
Karl K. Hoagland III
Its: Chairman and CEO

By /s/ PETER B. MULLIGAN
----------------------------------
Peter B. Mulligan
Its: President and COO

"Developer"

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<PAGE> 1
Exhibit 10.7

TERM LOAN AGREEMENT

BY AND BETWEEN

NATIONSBANK OF TEXAS, N.A.
"LENDER"

AND

CANDLEWOOD WICHITA NORTHEAST, L.L.C.
"BORROWER"

OCTOBER 15, 1996

<PAGE> 2
TERM LOAN AGREEMENT

BY AND BETWEEN

NATIONSBANK OF TEXAS, N.A.
AND
CANDLEWOOD WICHITA NORTHEAST, L.L.C.

ARTICLE 1 - DEFINITIONS AND USE OF TERMS . . . . . . . . . . . . . . . . . 1
Section 1.1. Certain Definitions . . . . . . . . . . . . . . . 1
Section 1.2. Number and Gender of Words . . . . . . . . . . . 8
Section 1.3. Money . . . . . . . . . . . . . . . . . . . . . . 8
Section 1.4. Articles, Sections and Exhibits . . . . . . . . . 8

ARTICLE 2 - THE LOAN . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 2.1. Commitment to Lend . . . . . . . . . . . . . . . 9
Section 2.2. The Note . . . . . . . . . . . . . . . . . . . . 9
Section 2.3. Funding . . . . . . . . . . . . . . . . . . . . . 9
Section 2.4. Renewal Option. . . . . . . . . . . . . . . . . . 9
Section 2.5. Loan-To-Value Requirement. . . . . . . . . . . . 10

ARTICLE 3 - GENERAL TERMS OF ADVANCE . . . . . . . . . . . . . . . . . . . 10
Section 3.1. Conditions to Advance . . . . . . . . . . . . . . 10
Section 3.2. Use of Insurance and Condemnation Proceeds . . . 10
Section 3.3. No Waiver . . . . . . . . . . . . . . . . . . . . 11
Section 3.4. Conditions Precedent for the Benefit of Lender . 11
Section 3.5. Subordination . . . . . . . . . . . . . . . . . . 11

ARTICLE 4 - LEASING AND TENANT MATTERS . . . . . . . . . . . . . . . . . . 11
Section 4.1. Approved Leases . . . . . . . . . . . . . . . . . 11
Section 4.2. Approved Lease Modifications . . . . . . . . . . 11

ARTICLE 5 - REPRESENTATIONS AND WARRANTIES OF BORROWER . . . . . . . . . . 11
Section 5.1. Financial Statements . . . . . . . . . . . . . . 11
Section 5.2. Suits, Actions, Etc . . . . . . . . . . . . . . . 11
Section 5.3. Status of Borrower; Valid and Binding Obligation 12
Section 5.4. Title to the Property . . . . . . . . . . . . . . 12
Section 5.5. Disclosure . . . . . . . . . . . . . . . . . . . 12
Section 5.6. System Compliance . . . . . . . . . . . . . . . . 12
Section 5.7. Submittals . . . . . . . . . . . . . . . . . . . 12
Section 5.8. Utility and Access Availability . . . . . . . . . 12
Section 5.9. Taxes . . . . . . . . . . . . . . . . . . . . . . 13
Section 5.10. Plans . . . . . . . . . . . . . . . . . . . . . . 13
Section 5.11. Labor Controversies . . . . . . . . . . . . . . . 13
Section 5.12. Violations . . . . . . . . . . . . . . . . . . . 13
Section 5.13. Environmental . . . . . . . . . . . . . . . . . . 13
Section 5.14. Compliance with Restrictions and Agreements . . . 13
Section 5.15. Other Lands . . . . . . . . . . . . . . . . . . . 14
Section 5.16. Development Rights . . . . . . . . . . . . . . . 14
Section 5.17. Leases . . . . . . . . . . . . . . . . . . . . . 14
Section 5.18. Regulation U . . . . . . . . . . . . . . . . . . 14
Section 5.19. ERISA . . . . . . . . . . . . . . . . . . . . . . 14
Section 5.20. Insider . . . . . . . . . . . . . . . . . . . . . 14
Section 5.21. Principal Office, Etc . . . . . . . . . . . . . . 14
Section 5.22. Business Loan . . . . . . . . . . . . . . . . . . 14

(i)

<PAGE> 3

Section 5.23. Not a Foreign Person . . . . . . . . . . . . . . . 14
Section 5.24. Certain Approvals . . . . . . . . . . . . . . . . . 15
Section 5.25. Management Agreement . . . . . . . . . . . . . . . 15
Section 5.28. Inducement to Lender . . . . . . . . . . . . . . . 15

ARTICLE 6 - COVENANTS AND AGREEMENTS OF BORROWER . . . . . . . . . . . . . 15
Section 6.1. Compliance with Governmental Requirements . . . . 15
Section 6.2. Contracts . . . . . . . . . . . . . . . . . . . . . 15
Section 6.3. Correction of Defects . . . . . . . . . . . . . . . 16
Section 6.4. Inspection of the Property . . . . . . . . . . . . 16
Section 6.5. Insurance . . . . . . . . . . . . . . . . . . . . . 16
Section 6.6. Existence, Franchises and Permits . . . . . . . . . 16
Section 6.7. Notice to Lender . . . . . . . . . . . . . . . . . 16
Section 6.8. Costs and Expenses . . . . . . . . . . . . . . . . 17
Section 6.9. Further Assurances . . . . . . . . . . . . . . . . 17
Section 6.10. Inspection of Books and Records . . . . . . . . . . 17
Section 6.11. No Liability of Lender . . . . . . . . . . . . . . 17
Section 6.12. No Conditional Sale Contracts, Etc. . . . . . . . . 18
Section 6.13. Defense of Actions . . . . . . . . . . . . . . . . 18
Section 6.14. Assignment of Permanent Commitment . . . . . . . . 18
Section 6.15. Prohibition on Assignment of Borrower's Interest. . 18
Section 6.16. Payment of Claims . . . . . . . . . . . . . . . . . 18
Section 6.17. Restrictions and Annexation . . . . . . . . . . . . 18
Section 6.18. Current Financial Statements . . . . . . . . . . . 18
Section 6.19. Tax Receipts . . . . . . . . . . . . . . . . . . . 19
Section 6.20. Loan Participations . . . . . . . . . . . . . . . . 19
Section 6.21. Indemnification . . . . . . . . . . . . . . . . . . 19
Section 6.22. Disclaimer of Permanent Financing . . . . . . . . . 20
Section 6.23. Appraisals . . . . . . . . . . . . . . . . . . . . 20
Section 6.24. Estoppel Certificate . . . . . . . . . . . . . . . 20
Section 6.25. Vouchers . . . . . . . . . . . . . . . . . . . . . 20
Section 6.26. Security Deposits . . . . . . . . . . . . . . . . . 20
Section 6.27. Environmental . . . . . . . . . . . . . . . . . . . 20
Section 6.28. Maintenance of the Property . . . . . . . . . . . . 21
Section 6.29. Management Agreement . . . . . . . . . . . . . . . 21
Section 6.30. Operating Deficit Reserve Account . . . . . . . . . 21
Section 6.31. Reserve Account. . . . . . . . . . . . . . . . . . 22
Section 6.32. Reservation System . . . . . . . . . . . . . . . . 22

ARTICLE 7 - DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 7.1. Events of Default . . . . . . . . . . . . . . . . . 23
(a) Failure to Pay Indebtedness . . . . . . . . . . . . 23
(b) Nonperformance of Covenants . . . . . . . . . . . . 23
(c) Representations . . . . . . . . . . . . . . . . . . 23
(d) Injunction . . . . . . . . . . . . . . . . . . . . 23
(e) Bankruptcy or Insolvency . . . . . . . . . . . . . 23
(f) Transfer of the Property . . . . . . . . . . . . . 24
(g) Transfer or Encumbrance of Ownership of Borrower. . 24
(h) Grant of Easement, Etc . . . . . . . . . . . . . . 24
(i) Default Under Other Lien . . . . . . . . . . . . . 24
(j) Destruction . . . . . . . . . . . . . . . . . . . . 24
(k) Condemnation . . . . . . . . . . . . . . . . . . . 24
(l) Liquidation, Etc . . . . . . . . . . . . . . . . . 25
(m) Material Adverse Change . . . . . . . . . . . . . . 25
(n) Enforceability; Priority . . . . . . . . . . . . . 25
(o) Other Loan Documents . . . . . . . . . . . . . . . 25
(p) Abandonment . . . . . . . . . . . . . . . . . . . . 25
(q) Encumbrance of the Property . . . . . . . . . . . . 25
Section 7.2. Notice and Cure . . . . . . . . . . . . . . . . . . 25

(ii)

<PAGE> 4

ARTICLE 8 - RIGHTS AND REMEDIES OF LENDER . . . . . . . . . . . . . . . . . 26
Section 8.1. Certain Remedies . . . . . . . . . . . . . . . . 26
Section 8.2. Other Rights, etc . . . . . . . . . . . . . . . . 26
Section 8.3. Performance by Lender on Borrower's Behalf . . . 26
Section 8.4. Remedies Cumulative . . . . . . . . . . . . . . . 26

ARTICLE 9 - GENERAL TERMS AND CONDITIONS . . . . . . . . . . . . . . . . . 27
Section 9.1. Loan Documents . . . . . . . . . . . . . . . . . 27
Section 9.2. Conditions for the Benefit of Lender . . . . . . 27
Section 9.3. Borrower in Control . . . . . . . . . . . . . . . 27
Section 9.4. Waiver by Lender . . . . . . . . . . . . . . . . 27
Section 9.5. Acts Not Constituting Waiver by Lender . . . . . 28
Section 9.6. Place of Payment; Forum . . . . . . . . . . . . . 28
Section 9.7. Compliance with Usury Laws . . . . . . . . . . . 28
Section 9.8. Notices . . . . . . . . . . . . . . . . . . . . . 29
Section 9.9. Invalidity of Certain Provisions . . . . . . . . 29
Section 9.10. Lender's Consent . . . . . . . . . . . . . . . . 29
Section 9.11. Execution; Counterparts . . . . . . . . . . . . . 29
Section 9.12. Successors and Assigns . . . . . . . . . . . . . 29
Section 9.13. Modification or Termination . . . . . . . . . . . 29
Section 9.14. No Partnership, etc . . . . . . . . . . . . . . . 29
Section 9.15. Time of Essence . . . . . . . . . . . . . . . . . 30
Section 9.16. Applicable Law . . . . . . . . . . . . . . . . . 30
Section 9.17. Capital Requirements and Yield Maintenance . . . 30
Section 9.18. Arbitration. . . . . . . . . . . . . . . . . . . 30
Section 9.19. Loan Agreement Governs . . . . . . . . . . . . . 31
Section 9.20. Payments Set Aside . . . . . . . . . . . . . . . 31
Section 9.21. Disclaimer of Financing . . . . . . . . . . . . . 31
Section 9.22. Evidence of Satisfaction . . . . . . . . . . . . 31
Section 9.23. Jointly Drafted . . . . . . . . . . . . . . . . . 31
Section 9.24. Entire Agreement . . . . . . . . . . . . . . . . 32

EXHIBITS

EXHIBIT "A" - Legal Description of Land
EXHIBIT "B" - Conditions to Advance
EXHIBIT "C" - Certified Budget
EXHIBIT "D" - Various Requirements

(iii)

<PAGE> 5

TERM LOAN AGREEMENT

THIS TERM LOAN AGREEMENT, dated October 15, 1996, is made by and
between NationsBank of Texas, N.A., a national banking association ("Lender"),
and Candlewood Wichita Northeast, L.L.C., a Kansas limited liability company
("Borrower"), in respect of a loan in the principal amount of THREE MILLION AND
NO/100 DOLLARS ($3,000,000.00). For good and valuable consideration, the receipt
and adequacy of which are hereby acknowledged, the parties agree as follows:

ARTICLE 1 - DEFINITIONS AND USE OF TERMS

Section 1.1. Certain Definitions. For purposes of this Loan Agreement,
the following terms shall have the respective meanings assigned to them.

"Advance" means the advance of the proceeds of the Loan on the Closing
Date made by Lender to Borrower pursuant to the terms and conditions of this
Agreement.

"Affiliate" of any person means any person which, directly or
indirectly, controls, is controlled by, or is under common control with, such
person. For the purposes of this definition, "control" (including, with
correlative meanings, the terms "controlled by" and "under common control
with"), as used with respect to any person, shall mean the possession, directly
or indirectly, of the power (a) to vote more than fifty percent (50%) of the
securities having ordinary voting power for the election of directors of the
controlled person, or (b) to direct or cause the direction of the management and
policies of the controlled person, whether through the ownership of voting
shares or by contract or otherwise.

"Agreement" means this Loan Agreement, as from time to time amended or
supplemented.

"Amortization Date" means June 1, 1997.

"Approved Lease" means any tenant lease of space in the Improvements
approved by Lender under Section 4.1.

"Borrower" means Candlewood Wichita Northeast, L.L.C., a Kansas limited
liability company.

"Business Day" means (a) for all purposes other than as covered by
clause (b) of this definition, any day of the week, other than Saturday, Sunday
or other day on which national banks in Dallas, Texas, are authorized or
required to be closed, or Lender is required or authorized by law or executive
order to close, and (b) with respect to all requests, notices and determinations
in connection with LIBOR Rate Portions (as defined in the Note), a day which is
a Business Day described in clause (a) of this definition and which is a day for
trading by and between banks for Dollar deposits in the London interbank market.

"Candlewood" has the meaning set forth in the definition of "Guarantor"
contained in this Section 1.1.

"Candlewood, Inc." has the meaning set forth in the definition of
"Guarantor" contained in this Section 1.1.

"Closing Date" means the date of this Agreement.

"Commitment Fee" means the $30,000 nonrefundable Commitment Fee, to be
paid to Lender in consideration of the commitment of Lender to make the proceeds
of the Loan available to Borrower from time to time during the term of, and as
provided in, this Agreement. Borrower and Lender acknowledge and agree that the
Commitment Fee is a bona fide commitment fee and is intended as reasonable
compensation to Lender for committing to make funds available to Borrower as
described herein and for no other purpose.

TERM LOAN AGREEMENT (Candlewood Wichita Northeast) Page 1

<PAGE> 6

"Current Date" means a date within thirty (30) days prior to the
Closing Date.

"Debtor Relief Laws" means any applicable liquidation, conservatorship,
bankruptcy, moratorium, rearrangement, insolvency, reorganization, or similar
laws, domestic or foreign, including but not limited to those in Title 11 of the
United States Code, affecting the rights or remedies of creditors generally, as
in effect from time to time.

"Default" has the meaning set forth in Article 7, whether or not used
herein with its initial letter capitalized.

"Development Documents" means, collectively, all plats, instruments
granting, creating or otherwise containing restrictive covenants, easements or
similar encumbrances and all other documents, instruments and agreements
recorded in the real property records in the county in which the Land is
located.

"Doubletree Agreement" means a written agreement with Doubletree
Corporation, ("Doubletree"), whereby Doubletree has agreed to provide the
reservation system for the operation of the Property, which agreement is subject
to Lender's prior approval.

"Englewood" has the meaning set forth in the definition of "Guarantor"
contained in this Section 1.1.

"Englewood Hard Costs" means Hard Costs for the construction of the
improvements on the Englewood Property as defined in the Construction Loan
Agreement which evidences the Englewood Loan.

"Englewood Loan" means the $4,029,500.00 loan by Lender to Englewood
for the construction of improvements on the Englewood Property which loan is to
be evidenced by a Construction Loan Agreement (the "Englewood Loan Agreement")
in form and substance satisfactory to Lender.

"Englewood Loan Agreement" has the meaning as set forth in the
definition of Englewood Loan contained in this Section 1.1.

"Englewood Property" means the land, together with all improvements to
be constructed thereon with the proceeds of the Englewood Loan, which is located
in Englewood, Colorado, which is owned by Englewood and which is to secure the
Englewood Loan, the Omaha Loan and this Loan.

"Environmental Claim" means any investigative, enforcement, cleanup,
removal, containment, remedial or other private or governmental or regulatory
action at any time threatened, instituted or completed pursuant to any
applicable Environmental Requirement, against Borrower or against or with
respect to the Property or any condition, use or activity on the Property,
whether past or present (including any such action against Lender), and any
claim at any time threatened or made by any person against Borrower or against
or with respect to the Property or any condition, use or activity on the
Property (including any such claim against Lender), relating to damage,
contribution, cost recovery, compensation, loss or injury resulting from or in
any way arising in connection with any Hazardous Material or any Environmental
Requirement.

"Environmental Damages" means all claims, demands, liabilities
(including strict liability), losses, damages (including consequential damages),
causes of action, judgments, penalties, fines, costs and expenses (including
fees, costs and expenses of attorneys, consultants, contractors, experts and
laboratories), of any and every kind or character, contingent or otherwise,
matured or unmatured, known or unknown, foreseeable or unforeseeable, made,
incurred, suffered, brought, or imposed at any time and from time to time,
whether before or after the Release Date, caused by or related to any Hazardous
Material or the violation of any Environmental Requirement, and regardless of
whether any of the foregoing was caused by Borrower or Borrower's tenant or
subtenant, or a prior owner of the Property or its tenant or subtenant, or any
third party, including but not limited to (a) injury or damage to any person,
property or natural resource occurring on or off of the Property, including but
not limited to the cost of demolition and rebuilding of any improvements on real
property; (b) the investigation

TERM LOAN AGREEMENT (Candlewood Wichita Northeast) Page 2

<PAGE> 7

or remediation of any such Hazardous Material or violation of Environmental
Requirement; (c) the investigation and defense of any claim, whether or not such
claim is ultimately defeated; and (d) the settlement of any claim or judgment.

"Environmental Requirement" means any agreement or restriction
pertaining to any Hazardous Material or the environment or any federal, state or
local law, statute, ordinance, code, rule, regulation, license, authorization,
decision, order, injunction, decree, or rule of common law, and any judicial
interpretation of any of the foregoing, which pertains to any Hazardous
Material, or the environment (including but not limited to ground or air or
water or noise pollution or contamination, and underground or above ground
tanks) and shall include without limitation, the Solid Waste Disposal Act, 42
U.S.C. Section 6901 et seq.; the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, 42 U.S.C. Section 9601 et seq., as
amended by the Superfund Amendments and Reauthorization Act of 1986; the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801 et seq.; the
Federal Water Pollution Control Act, 33 U.S.C. Section 1251 et seq.; the Clean
Air Act, 42 U.S.C. Section 7401 et seq.; the Toxic Substances Control Act, 15
U.S.C. Section 2601 et seq.; the Safe Drinking Water Act, 42 U.S.C. Section 300f
et seq.; and any other state or federal environmental statutes, and all rules,
regulations, orders and decrees now or hereafter promulgated under any of the
foregoing, as any of the foregoing now exist or may be changed or amended or
come into effect in the future.

"Extended Maturity Date" means April 15, 2000.

"Financial Statements" means such balance sheets (including disclosure
of all contingent liabilities), profit and loss statements, reconciliations of
capital and surplus, changes in financial condition, schedules of sources and
uses of funds, statements of cash flow, operating statements with respect to the
Property, pro forma schedules of sources and uses of funds for ensuing
twelve-month periods, and other financial information of Borrower and each
Guarantor as shall be required by Lender, from time to time, or as required
under any Loan Document, which statements shall be certified as true and correct
in all material respects by the party submitting such statements or, if required
under any Loan Document or if reasonably required by Lender, including, without
limitation, as a result of a request made by an auditor or examiner in
connection with an audit or examination of Lender (but not more than once in
each year), such statements of Borrower (if Borrower owns any assets other than
the Property) and each Guarantor shall be audited and/or certified by an
independent certified public accountant.

"Financing Statements" means the financing statements perfecting the
security interests securing the Loan, to be filed with the appropriate offices
for the perfection of a security interest in any of the Property.

"Future Borrower" means any Person whether now existing or hereafter
organized which is a wholly owned subsidiary of Candlewood, Inc. formed for the
purpose of constructing and operating an extended stay hotel comparable to the
Project.

"Future Loan" means any loan by Lender to a Future Borrower for the
construction of an extended-stay hotel; provided, that, nothing herein is
intended to, nor shall it, obligate Lender to provide a commitment for, or agree
to fund, any such Future Loan.

"Governmental Authority" means the United States of America, the state,
the county, the city, or any other political subdivision in which the Property
is located, and any court or political subdivision, agency, or instrumentality
having or exercising jurisdiction over Borrower, any Guarantor or the Property,
including, without limitation, any of the foregoing whose consent or approval is
required as a prerequisite to the operation and occupancy of the Improvements or
the Project or to the performance of any act or obligation or the observance of
any agreement, provision or condition contained in this Agreement.

"Governmental Requirements" means all laws, ordinances, codes, rules,
regulations, orders, writs, injunctions or decrees of any Governmental Authority
applicable to Borrower, any Guarantor, or the Property.

"Guarantor" means, collectively, Candlewood Hotel Company, Inc., a
Delaware corporation ("Candlewood, Inc."), Candlewood Hotel Company, L.L.C., a
Delaware limited liability company ("Candlewood"), Candlewood Omaha, L.L.C., a
Delaware limited liability

TERM LOAN AGREEMENT (Candlewood Wichita Northeast) Page 3

<PAGE> 8

company ("Omaha"), Candlewood Englewood, L.L.C., a Delaware limited liability
company ("Englewood"), and any other person now or hereafter liable for payment
of any Indebtedness or performance of any obligations of Borrower under the Loan
Documents, whether one or more, and if more than one, each one individually.

"Guaranty" means a continuing guaranty (whether one or more) of payment
of the Loan principal, interest and expenses under and pursuant to the Loan
Documents (subject to any limitations or reductions in liability therein
contained), executed by each Guarantor in favor of Lender, as it may from time
to time be renewed, extended, amended or restated.

"Hazardous Material" means any substance, whether solid, liquid or
gaseous: which is listed, defined or regulated as a "hazardous substance",
"hazardous waste" or "solid waste", or otherwise classified as hazardous or
toxic, in or pursuant to any Environmental Requirement; or which is or contains
asbestos, radon, any polychlorinated biphenyl, urea formaldehyde foam
insulation, explosive or radioactive material, or motor fuel or other petroleum
hydrocarbons; or which causes or poses a threat to cause a contamination or
nuisance on the Property or any adjacent property or a hazard to the environment
or to the health or safety of persons on the Property.

"Improvements" means the improvements which were constructed on the
Land as described in the Plans and the Development Documents submitted to and
approved by Lender, which include an extended stay hotel which has been
constructed on approximately 3.109 acres of land located at K-96 and Webb Road
in Northeast Wichita, Sedgwick County, Kansas, and consisting of 107 units
averaging 338 square feet each. The Project includes approximately 107 parking
spaces, but in no event less than the number required under applicable law.

"Indebtedness" means any and all of the indebtedness to Lender
evidenced, governed or secured by or arising under the Note, the Mortgage, this
Agreement, or any other Loan Document.

"Indemnified Matters" means:

(a) any and all claims, demands, liabilities (including strict
liability), losses, damages (including consequential damages), causes of action,
judgments, penalties, fines, costs and expenses (including without limitation,
reasonable fees and expenses of attorneys and other professional consultants and
experts, and of the investigation and defense of any claim, whether or not such
claim is ultimately defeated, and the settlement of any claim or judgment
including all value paid or given in settlement) of every kind, known or
unknown, foreseeable or unforeseeable, which may be imposed upon, asserted
against or incurred or paid by Lender or any other Indemnified Party at any time
and from time to time, whenever imposed, asserted or incurred, because of,
resulting from, in connection with, or arising out of any transaction, act,
omission, event or circumstance in any way connected with (i) the Project or the
Property and occurring or arising at any time on or before the Release Date or
(ii) this Agreement or any other Loan Document, including, without limitation,
(1) disbursement of the Loan proceeds, (2) the condition of the Property, (3)
any bodily injury or death or property damage occurring in or upon or in the
vicinity of the Property through any cause whatsoever at any time on or before
the Release Date, (4) any act performed or omitted to be performed hereunder or
under any other Loan Document, (5) any Default or Potential Default, and (6) any
claim under or with respect to any lease; and

(b) to the extent not covered in clause (a) immediately above, Environmental
Damages.

"Indemnified Party" has the meaning set forth in Section 6.21.

"Initial Appraisal" means an appraisal of the Property prepared at
Borrower's expense, to be received by Lender prior to the Closing Date. Such
appraisal shall (a) be prepared by a third-party appraiser satisfactory to
Lender, (b) indicate a fair market value of the Property upon stabilization of
at least $4,285,715.00, as approved by Lender and (c) be otherwise satisfactory
to Lender.

"Insurance Policies" means:

TERM LOAN AGREEMENT (Candlewood Wichita Northeast) Page 4

<PAGE> 9

(a) All-risk insurance as determined by Lender, in the amount of at
least one hundred percent (100%) of the replacement cost of such
Improvements or in such additional amounts as Lender may reasonably
require, providing all-risk coverage on the Improvements, and including
the perils of collapse, damage resulting from error in design or faulty
workmanship or materials, water damage, to include business
interruption (covering loss of income by reason of any hazard covered
under such insurance, covering loss from use of the Property due to
loss or damage to insured property on-site, off-site or in transit, in
an amount sufficient to avoid any coinsurance penalty but in any event
an amount equal to the sum of the following for a period of not less
than six (6) months from the date business is first interrupted: (i)
required installments of principal (if any) and interest on the Loan
(assuming an annual Loan interest rate equal to 9.0%), (ii) real estate
taxes, special assessments and utility charges for the Property, and
(iii) premiums for all required insurance, whether payable by Borrower
hereunder or by Borrower and tenants under any lease of the Property),
and, if requested by Lender, to include the perils of flood,
earthquake, boiler/machinery coverage and other risks;

(b) Comprehensive General Liability Insurance for owners and
contractors, including blanket contractual liability, products and
completed operations, personal injury (including employees),
independent contractors, explosion, collapse and underground hazards
for not less than Two Million Dollars ($2,000,000), together with
umbrella coverage for not less than Ten Million Dollars ($10,000,000),
arising out of any one occurrence or in any increased amount reasonably
required by Lender; and

All Insurance Policies shall be "occurrence" based policies, issued on
forms and by companies satisfactory to Lender and shall be delivered to Lender
at the following address: NationsBank Plaza, 901 Main Street, 51st Floor,
Dallas, Texas 75202, Attn: Real Estate Loan Administration. All-risk Insurance
Policies shall have a standard mortgagee clause (without contribution)
satisfactory to Lender. Comprehensive General Liability, Comprehensive
Automobile Liability and Workers' Compensation coverages shall have a provision
giving Lender thirty (30) days' prior notice of cancellation or material change
of the coverage.

"IRC" has the meaning set forth in Section 5.23.

"JAMS" has the meaning set forth in Section 9.18.

"Land" means the real estate described in Exhibit "A".

"Lender" means NationsBank of Texas, N.A., a national banking
association, and its successors and assigns, in whole or in part.

"Loan" means the loan by Lender to Borrower, in the maximum amount set
forth in the first paragraph of this Agreement.

"Loan Documents" means this Agreement, the Mortgage, the Note, the
Security Agreement, the Guaranty, the Financing Statements, and such other
documents evidencing, securing or pertaining to the Loan, the Omaha Loan or the
Englewood Loan as shall, from time to time, be executed and delivered by
Borrower, any Guarantor, or any other party to Lender pursuant to this
Agreement, and any future modifications, amendments, restatements or supplements
to any of the foregoing.

"Management Agreement" means that certain Management Agreement dated
November 20, 1995, by and between Borrower and Manager, which Management
Agreement is subject to Lender's prior approval and which shall provide for
termination by Borrower or its assigns without cause upon not more than thirty
(30) days notice.

"Manager" means Candlewood.

TERM LOAN AGREEMENT (Candlewood Wichita Northeast) Page 5

<PAGE> 10

"Material Adverse Effect" means an effect resulting from any
circumstance or event of whatever nature (including but not limited to the
filing of, or any adverse determination or development in, any litigation,
arbitration or governmental investigation or proceeding) which (a) could have
any adverse effect whatsoever upon the validity or enforceability of any Loan
Document, (b) in the reasonable judgment of Lender is considered to be material
and adverse to the Property or the financial condition of Borrower or any
Guarantor and could impair the ability of Borrower or any Guarantor to fulfill
any material obligation under the Loan Documents, or (c) causes a default or any
event which, with notice or lapse of time, or both, could become a default.

"Maturity Date" means either (a) the Original Maturity Date, or (b) the
Extended Maturity Date, if the Renewal Option has been exercised.

"Mortgage" means the Mortgage, Assignment, Security Agreement and
Financing Statement of even date herewith, executed by Borrower in favor of
Lender, securing the payment of the Indebtedness, the Omaha Loan, the Englewood
Loan and the payment and performance of all obligations specified in the
Mortgage, the Security Agreement, this Agreement and the other Loan Documents,
and evidencing a valid and enforceable first priority lien, security interest
and assignment of rents and proceeds covering the Property, as it may from time
to time be renewed, extended, amended or supplemented.

"Net Insurance or Condemnation Proceeds" has the meaning set forth in
Section 3.2.

"Note" means the Promissory Note of even date herewith made by Borrower
payable to the order of Lender in the principal amount of and evidencing the
Loan, and all renewals, amendments and replacements thereof.

"Omaha" has the meaning set forth in the definition of Guarantor
contained in this Section 1.1.

"Omaha Hard Costs" means Hard Costs for the construction of the
Improvements on the Omaha Property as is defined in the Construction Loan
Agreement which evidences the Omaha Loan.

"Omaha Loan" means the $4,075,000.00 loan by Lender to Omaha for the
construction of improvements on the Omaha Property which loan is to be evidenced
by a Construction Loan Agreement (the "Omaha Loan Agreement") in form and
substance satisfactory to Lender.

"Omaha Loan Agreement" has the meaning as set forth in the definition
of Omaha Loan contained in this Section 1.1.

"Omaha Property" means the land, together with all improvements to be
constructed thereon with the proceeds of the Omaha Loan, which is located in
Omaha, Nebraska, which is owned by Omaha and which is to secure the Omaha Loan,
the Englewood Loan and this Loan.

"Operating Deficit" means the difference between (a) the revenue
generated from the applicable property from whatever source during a defined
period minus (b) the actual expenses incurred in connection with such property
during such period, including, without limitation, payments of principal and
interest under either this Loan, the Omaha Loan, the Englewood Loan, or any
Future Loan, as applicable, if such difference is a negative number.

"Operating Deficit Reserve Account" means a joint demand deposit
account with Lender in the name of Borrower, Omaha and Englewood and, if
applicable, any Future Borrower into which the amounts indicated in Section 6.30
are to be deposited.

"Original Maturity Date" means April 15, 1999.

"Permanent Commitment" has the meaning set forth in Section 6.14.

"Plans" means the final plans and specifications submitted to and
approved by Lender related to the construction of the Improvements.

TERM LOAN AGREEMENT (Candlewood Wichita Northeast) Page 6

<PAGE> 11

"Potential Default" means any event or circumstance of which Borrower
has been notified by Lender and which event or circumstance shall constitute a
default if not cured pursuant to Section 7.1(b), whether or not used with its
initial letters capitalized.

"Prime Rate" means the variable rate of interest established from time
to time by Lender, or its successors, as its "prime rate" of interest, which
rate is not necessarily the lowest or best rate of interest that Lender charges
to any customer or a favored rate, each change in the Lender's Prime Rate to
become effective without notice to Borrower on the effective date of each such
change.

"Project" means the acquisition of the Land and the operation of the
Improvements.

"Project NOI" means (a) the actual cash income derived from the
Property, which amount shall be adjusted, if necessary, to reflect a thirty
percent (30%) vacancy and collection loss if the actual vacancy and collection
loss for the Project is less than thirty percent (30%) (room rental income plus
ancillary income but excluding income other than rental income in excess of one
percent (1%) of gross room rental receipts, security deposits, and other charges
deemed by Lender to be of a non-recurring nature)(hereinafter "Actual Income")
less (b) the greater of (x) $7,100 per room (on an annual basis) or (y) the
actual cash operating expenses relating to the Property, other than payments of
principal and interest hereunder. The cash operating expenses will be adjusted
to include (i) a management fee of not less than 5% of gross room rental income,
(ii) appropriate accruals for one time annual operating expenses such as
property taxes and insurance, (iii) reserves equal to the greater of (A) four
percent (4%) of gross rental income or (B) $500 per room (on an annual basis)
for customary repairs and replacements relating to ordinary wear and tear such
as carpeting, painting and equipment replacement, and (iv) the costs related to
a national marketing and reservation system fee of not less than four percent
(4%) of gross rental income.

"Property" means the Land, the Improvements and all other property
constituting the "Mortgaged Property," as defined in the Mortgage, or subject to
a right, lien or security interest to secure the Loan pursuant to any other Loan
Document.

"Reduction Rate" means an interest rate per annum equal to the greatest
of (a) 9.0%, (b) 3.25% plus the rate of interest per annum (as of the date of
determination) on U.S. Treasury Notes having a maturity of seven (7) years as
shown in the seven-year listing in the "this week" column under the heading
"Treasury Constant Maturities" of the Federal Reserve statistical release Form
H.15 or, if such published rate of interest is not available for any reason at
least ten (10) Business Days prior to the date of determination, such other
comparable rate of interest determined by Lender, in its reasonable discretion,
or (c) the Prime Rate on the day which is ten (10) Business Days prior to the
Original Maturity Date plus one-half of one percent (0.5%).

"Release Date" means the earlier of: (a) the date on which the
Indebtedness has been paid in full and the Mortgage has been released, or (b)
the date on which the lien of the Mortgage is fully and finally foreclosed or a
conveyance by deed in lieu of such foreclosure is fully and finally effective,
and possession of the Property has been given to the purchaser or grantee free
of occupancy and claims to occupancy by Borrower and Borrower's heirs, devisees,
representatives, successors and assigns (other than tenants); provided, that if
such payment, performance, release, foreclosure or conveyance is challenged, in
bankruptcy proceedings or otherwise, the Release Date shall be deemed not to
have occurred until such challenge is rejected, dismissed or withdrawn with
prejudice.

"Renewal Option" has the meaning set forth in Section 2.4.

"Reserve Account" means a demand deposit account with Lender in the
name of Borrower into which the amounts indicated in Section 6.31 are to be
deposited.

"Required Debt Service Coverage" means, at the time of determination,
that for a period of twelve (12) consecutive calendar months preceding the
Original Maturity Date, the annualized Project NOI, as verified by Lender, is
not less than 150% of (i) the annual payments of principal and interest which
would be required if the Loan were amortized in level payments of principal and
interest over twenty-five (25) years at the Reduction Rate, and (ii) the actual
payments of

TERM LOAN AGREEMENT (Candlewood Wichita Northeast) Page 7

<PAGE> 12

principal and interest paid under the Loan for the twelve (12) month period
immediately preceding the Original Maturity Date.

"Security Agreement" means the Security Agreement of even date herewith
executed by Borrower in favor of Lender, securing the payment of the
Indebtedness and the payment and performance of all obligations specified in the
Security Agreement, the Mortgage, this Agreement, and the other Loan Documents,
and evidencing a valid and enforceable first priority lien and security interest
covering the collateral described therein, as it may from time to time be
renewed, extended, amended or supplemented.

"Special Rules" has the meaning set forth in Section 9.18.

"Survey" means a current certified "as-built" survey of the Property
satisfying the requirements set forth in Exhibit "D".

"Title Company" means The Security Abstract & Title Company, Inc.,
acting as agent for Title Insurer.

"Title Insurance" means one or more title insurance commitments and
policies, as Lender may require, issued by Title Insurer in the maximum amount
of the Loan, insuring or committing to insure that the Mortgage constitutes a
valid lien covering the Land and all improvements thereon having the priority
required by Lender and subject only to those exceptions and encumbrances which
Lender may approve in writing, together with such endorsements as Lender may
require.

"Title Insurer" means Chicago Title Insurance Company.

"UCC" means the Uniform Commercial Code of the State of Texas or of any
other state having jurisdiction with respect to any of the rights of Lender
under the Loan Documents.

"Upfront Equity" means the sum of $1,184,339.00, which amount
represents funds to be advanced by persons other than Lender, for the purposes
of acquisition of the Land and construction of the Improvements, the funding of
which is a condition to the Advance.

Section 1.2. Number and Gender of Words. Whenever herein the singular
number is used, the same shall include the plural where appropriate, and words
of any gender shall include each other gender where appropriate. Reference
herein to Borrower or to any Guarantor shall mean, jointly and severally, each
person comprising same. Words used herein importing persons shall include firms,
associations, partnerships (including limited partnerships), joint ventures,
trusts, corporations and other legal entities, including public or governmental
bodies, agencies or instrumentalities, as well as natural persons.

Section 1.3. Money. Unless stipulated otherwise, all references herein
or in any of the Loan Documents to "Dollars," "$," "money," "payments" or other
similar financial or monetary terms are references to lawful money of the United
States of America.

Section 1.4. Articles, Sections and Exhibits. All references herein to
Articles and Sections are, unless specified otherwise, references to articles
and sections of this Agreement. All references herein to an "Exhibit," "Annex"
or "Schedule" are references to exhibits, annexes or schedules attached hereto,
all of which are made a part hereof for all purposes, the same as if set forth
herein verbatim, it being understood that if any exhibit, annex or schedule
attached hereto which is to be executed and delivered contains blanks, the same
shall be completed correctly and in accordance with this Agreement prior to or
at the time of the execution and delivery thereof. The words "herein," "hereof,"
"hereunder" and other similar compounds of the word "here" when used in this
Agreement shall refer to the entire Agreement and not to any particular
provision or section.

TERM LOAN AGREEMENT (Candlewood Wichita Northeast) Page 8

<PAGE> 13

ARTICLE 2 - THE LOAN

Section 2.1. Commitment to Lend. Subject to and upon the terms,
covenants and conditions of this Agreement, Lender will make the Loan in one
Advance on the Closing Date to Borrower in accordance with this Agreement in an
aggregate amount not to exceed the principal face amount of the Note. Lender's
commitment to make the Advance hereunder (a) shall expire and terminate
automatically on the Original Maturity Date; (b) may be terminated by Lender by
notice to Borrower if all conditions to the Advance have not been satisfied on
or before the thirtieth (30th) day after the Closing Date; and (c) shall
automatically terminate if the Note is prepaid in full. The Loan is not
revolving and an amount repaid may not be reborrowed.

Section 2.2. The Note. The Loan is and shall be evidenced by the Note.
Interest on the Loan, at the rate or rates specified in the Note, shall be
computed on the unpaid principal balance which exists from time to time. The
outstanding principal balance of the Note shall be due and payable in monthly
installments as provided in the Note commencing on the Amortization Date, and
continuing on the first day of each successive month thereafter, until the
Maturity Date, when any remaining outstanding principal balance of the Loan,
together with all accrued and unpaid interest, shall be due and payable in full.
The unpaid amount of the Loan as set forth on the books and records of the
holder of the Note maintained in the ordinary course of its business shall be
presumptive evidence of the principal amount thereof owing and unpaid, but the
failure to record any such amount on the books and records shall not limit or
affect the obligations of Borrower hereunder or under the Note to make payments
of principal and interest on the Loan when due.

Section 2.3. Funding. The Advance shall be funded by Lender into a
special account established by Borrower with Lender.

Section 2.4. Renewal Option. Borrower shall have the option to extend
the maturity of the Loan (the "Renewal Option") from the Original Maturity Date
to the Extended Maturity Date. The Renewal Option is exercisable only as
provided below and subject to satisfaction of the following conditions:

(a) Lender shall have received written notice of the exercise
of the Renewal Option at least thirty (30) days, but not more than ninety (90)
days, prior to the Original Maturity Date;

(b) At the time of such written notice from Borrower and at the
commencement of each such extension, (i) the maturity of the Loan has not been
accelerated and there is under the Loan Documents no Default or potential
default which has occurred and is continuing, (ii) no Material Adverse Effect
has occurred, (iii) none of Borrower nor any Guarantor shall be party to any
litigation against Lender or any Affiliate of Lender and (iv) Lender shall be
reasonably satisfied with the financial condition of Borrower and each
Guarantor;

(c) The outstanding principal balance of, and all other amounts
owed with respect to, the Loan, including, without limitation, any amounts which
have been expended by Lender pursuant to Section 8.3 or any other similar
provision of any Loan Document which has not been repaid by Borrower shall not
exceed 70% of the then appraised value of the Property as determined pursuant to
an appraisal in form acceptable to Lender and prepared by a third party
appraiser selected by Lender;

(d) Prior to the commencement of such extension, (i) Borrower
shall pay to Lender a fee in an amount equal to one-fourth of one percent (.25%)
of the then outstanding balance of the Loan, and all costs and expenses incurred
by Lender in connection therewith, including without limitation the fees of
Lender's counsel, (ii) if requested by Lender, Borrower and each Guarantor shall
execute, deliver and record a renewal, extension and modification agreement
containing terms and provisions consistent with this Section 2.4 and
satisfactory to Lender in form, substance and content, and (iii) if requested by
Lender, Borrower shall cause to be delivered to Lender at Borrower's expense any
endorsements to the Title Insurance

TERM LOAN AGREEMENT (Candlewood Wichita Northeast) Page 9

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requested by Lender insuring the continuing first priority of the Mortgage
subject only to such exceptions as Lender has approved in writing; and

(e) Prior to such extension, (i) the Project shall have
achieved at a minimum the Required Debt Service Coverage for the twelve-month
period ending on the Original Maturity Date, or (ii) the outstanding principal
balance of, and all other amounts owed with respect to, the Loan including,
without limitation, any amounts which have been expended by Lender pursuant to
Section 8.3 or any other similar provision of any Loan Document which has not
been repaid by Borrower, shall be reduced to an amount which would permit the
Project to have achieved the Required Debt Service Coverage if such reduction
had been made at the commencement of the twelve-month period; and

(f) Such extension shall be governed by the same terms,
covenants and conditions contained in the Loan Documents which remain in effect,
including but not limited to monthly principal amortization pursuant to Section
2.2 and monthly payments of accrued interest, with the unpaid principal due and
payable in full at the Extended Maturity Date.

Section 2.5. Loan-To-Value Requirement. In the event that at any time
during the term of the Loan the then outstanding principal amount of the Loan is
more than 70% of the value of the Property, as indicated in any appraisal of the
Property performed pursuant to Section 6.23, Borrower shall within fifteen (15)
Business Days after the written request of Lender cause such then outstanding
principal amount, to be less than or equal to 70% of such value by effectuating
one or a combination of the following actions: (i) reducing the outstanding
principal amount of the Loan; or (ii) granting to Lender a lien and/or security
interest in additional collateral acceptable to Lender and of sufficient value,
in Lender's sole discretion, the grant of such additional collateral to be
evidenced by such documents, instruments and agreements as Lender shall require
in its sole discretion (each of which documents, instruments and agreements
shall be acceptable to Lender and shall constitute a "Loan Document", as that
term is used and defined in this Agreement).

ARTICLE 3 - GENERAL TERMS OF ADVANCE

Section 3.1. Conditions to Advance. As conditions precedent to the
Advance hereunder: (a) there shall then exist no default nor shall there have
occurred any event which with the giving of notice or the lapse of time, or
both, could become a default; (b) the representations and warranties made in the
Loan Documents shall be true and correct on and as of the date of such Advance,
with the same effect as if made on that date; and (c) Borrower must satisfy the
conditions required hereby and execute and deliver to, procure for and deposit
with, and pay to Lender and, if appropriate, record in the proper records with
all filing and recording fees paid, the documents, certificates, agreements and
other items listed in Exhibit "B" that are noted by "(X)", together with such
other documents, certificates, agreements and other items as Lender may
reasonably require. Except as otherwise specifically provided in Exhibit "B" or
elsewhere herein or agreed in writing by Lender, all such documents,
certificates, agreements and other items shall bear a Current Date.

Section 3.2. Use of Insurance and Condemnation Proceeds. In the event
that the Improvements, or any portion thereof, are ever demolished, destroyed or
damaged by fire or other casualty, or in the event that all or any portion of
the Property is ever taken by an action in eminent domain or sold in lieu
thereof, or in the event that any Property is ever damaged by public works or
construction on or near the Property, then Borrower shall promptly give Lender
written notice of such destruction, taking, sale or damage, and Lender shall be
entitled at its election either to cause such proceeds to be applied against the
Loan or to require Borrower to repair and restore the Improvements. In the event
that Lender elects to require Borrower to repair and restore the Improvements,
any amounts that may become payable or awarded to Borrower with respect thereto,
less reasonable expenses incurred in collecting such sums (referred to herein as
"Net Insurance or Condemnation Proceeds") shall be delivered to Lender, to be
applied to such repair, rebuilding or restoration in accordance with the plans
and specifications therefor approved by Lender, such amounts to be disbursed as
determined by Lender in its sole and absolute discretion. Net Insurance or
Condemnation Proceeds held by Lender after the payment of all costs and expenses
incurred in repairing, rebuilding and restoring

TERM LOAN AGREEMENT (Candlewood Wichita Northeast) Page 10

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the Property in accordance with this Section 3.2 shall be applied to the
reduction of the Indebtedness in such order and manner as Lender shall
determine.

In the event that the Net Insurance or Condemnation Proceeds are not
applied to the repair, rebuilding or restoration of the Property pursuant to the
provisions of this Section 3.2, then such Net Insurance or Condemnation Proceeds
shall be applied to the reduction of the Indebtedness in such order and manner
as Lender shall determine and, to the extent that any portion of the
Indebtedness then remains unpaid, Lender may, at its option, declare the
outstanding Indebtedness to be immediately due and payable.

Section 3.3. No Waiver. The Advance shall not constitute an approval or
acceptance by Lender of any construction work or a waiver of any condition
precedent to the obligation of Lender to make the Advance or preclude Lender
from thereafter declaring the failure of Borrower to satisfy such condition
precedent to be a default. No waiver by Lender of any condition precedent to the
Advance shall preclude Lender from thereafter declaring the failure of Borrower
to satisfy such condition precedent to be a default hereunder, unless the
written waiver by Lender of any such condition precedent specifically provides
otherwise.

Section 3.4. Conditions Precedent for the Benefit of Lender. All
conditions precedent to the obligation of Lender to make the Advance are imposed
hereby solely for the benefit of Lender, and no other party may require
satisfaction of any such condition precedent or be entitled to assume that
Lender will refuse to make the Advance in the absence of strict compliance with
such conditions precedent. Any requirement of this Agreement may be waived, in
whole or in part, in a specific written waiver intended for that purpose and
signed by Lender. Any requirement herein of submission of evidence of the
existence or nonexistence of a fact means that the fact shall exist or not
exist, as the case may be, and without waiving any condition or any obligation
of Borrower, Lender may at all times independently establish to its satisfaction
such existence or nonexistence.

Section 3.5. Subordination. Lender shall not be obligated to make, nor
shall Borrower be entitled to, the Advance until such time as Lender shall have
received final lien waivers, to the extent requested by Lender, from all persons
who furnished labor, materials or services for the design or construction of the
Improvements.

ARTICLE 4 - LEASING AND TENANT MATTERS

Section 4.1. Approved Leases. In the event there exists leasable space
in the Improvements, Borrower shall lease such space only pursuant to a lease
that is approved by Lender from time to time (an "Approved Lease").

Section 4.2. Approved Lease Modifications. Borrower shall not modify or
amend any Approved Lease without the prior written consent of Lender, which
Lender may grant or withhold in its sole discretion.

ARTICLE 5 - REPRESENTATIONS AND WARRANTIES OF BORROWER

To induce Lender to make the Loan, Borrower hereby represents and
warrants as follows:

Section 5.1. Financial Statements. The Financial Statements are true,
correct, and complete in all material respects as of the dates specified therein
and fully and accurately present, in all material respects, the financial
condition of Borrower and of each Guarantor as of the dates specified. No
Material Adverse Effect has occurred in the financial condition of Borrower or
any Guarantor since the dates of the most recent Financial Statements, nor,
except as heretofore disclosed in writing to Lender, has Borrower or any
Guarantor incurred any material liability, direct or indirect, fixed or
contingent. Borrower and each Guarantor are solvent after giving effect to all
borrowings contemplated in this Agreement.

Section 5.2. Suits, Actions, Etc. There are no actions, suits,
investigations or proceedings pending or to the knowledge of Borrower threatened
in any court or before or by

TERM LOAN AGREEMENT (Candlewood Wichita Northeast) Page 11

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any Governmental Authority against or affecting the Property, or involving the
validity, enforceability, or priority of any of the Loan Documents, at law or in
equity nor, except as heretofore disclosed in writing to Lender, any such
action, suit, investigation or proceeding which would result in a Material
Adverse Effect. The consummation of the transactions contemplated hereby, and
the performance of any of the terms and conditions hereof and of the other Loan
Documents, will not cause Borrower or any Guarantor to be in violation of or in
default with respect to any Governmental Requirement, or result in a breach of,
or constitute a default (or provide cause for acceleration of indebtedness)
under any mortgage, deed of trust, lease, promissory note, loan agreement,
credit agreement, partnership agreement, or other agreement or restriction to
which Borrower or any Guarantor is a party or by which Borrower or any Guarantor
may be bound or affected. Neither Borrower nor any Guarantor is in default under
the terms of any order of any court or any requirement of any Governmental
Authority or under the terms of any material indebtedness or obligation.

Section 5.3. Status of Borrower; Valid and Binding Obligation. If
Borrower is a corporation, partnership or other legal entity, Borrower is and
shall until the Indebtedness is fully paid continue to be (a) duly organized and
validly existing and in good standing under the laws of the state of its
organization, and in good standing under Texas law; (b) in compliance with all
conditions prerequisite to its lawfully doing business in Texas; and (c)
possessed of all power and authority necessary to own the Property, to construct
and operate the Improvements, to enter into and perform Borrower's obligations
under the Loan Documents and to make the borrowings contemplated hereby. All of
the Loan Documents, and all other documents referred to herein to which Borrower
or any Guarantor is a party, upon execution and delivery will constitute valid
and binding obligations of Borrower or any Guarantor, as the case may be,
enforceable in accordance with their terms except as the enforcement thereof may
be limited by Debtor Relief Laws.

Section 5.4. Title to the Property. Borrower holds full legal and
equitable title to the Property in fee simple absolute, subject only to the
Permitted Encumbrances specified in the Mortgage.

Section 5.5. Disclosure. There is no material fact (excluding
conditions of the economy or the real estate industry in general) of which
Borrower has knowledge and that Borrower has not disclosed to Lender in writing
that could materially adversely affect the Property or the property, business or
financial condition of Borrower or any Guarantor.

Section 5.6. System Compliance. To the best of Borrower's knowledge,
after due investigation, the storm and sanitary sewer system, water system, all
mechanical systems of the Property and other parts of the Improvements do (or
when constructed will) comply with all applicable environmental, pollution
control and ecological laws, ordinances, rules and regulations, and all
Governmental Authorities having jurisdiction of the Property have issued (or if
not issued are subject to being issued with only payment of the applicable fees
being required) all permits, licenses or other authorizations for the
construction, occupancy, operation, and use of the Improvements (specifically
including the named systems) which are required by such Governmental Authorities
to be issued prior to or for the construction of the Improvements.

Section 5.7. Submittals. The Loan Documents and all Financial
Statements, Plans, budgets, schedules, opinions, certificates, confirmations,
contractor's statements, applications, rent rolls, affidavits, agreements, and
all other materials submitted to Lender by or on behalf of Borrower or any
Guarantor in connection with the Loan Documents fairly state the matters with
which they purport to deal, and neither misstate any material fact, nor,
separately or in the aggregate, fail to state any material fact necessary to
make the statements made not misleading.

Section 5.8. Utility and Access Availability. All utility and municipal
services required for the occupancy and operation of the Improvements,
including, but not limited to, water supply, storm and sanitary sewer systems,
gas, electric and telephone facilities, are connected to the Improvements and
are available in sufficient amounts for the normal and intended use of the
Improvements. All rights-of-way for streets, alleys and easements necessary to
serve the Project for the uses represented by Borrower to Lender have been
dedicated to and accepted by the applicable Governmental Authorities.

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Section 5.9. Taxes. To the extent required by applicable law, Borrower
has filed all necessary tax returns and reports and has paid all taxes and
governmental charges thereby shown to be owing except any such taxes or charges
that are being contested in good faith by appropriate proceedings which have
been disclosed to Lender in writing and for which adequate reserves have been
set aside on its books in accordance with generally accepted accounting
principles, consistently applied.

Section 5.10. Plans. The Improvements have been constructed in strict
compliance with the Plans. To the best of Borrower's knowledge, after due
investigation, the Plans comply with all applicable restrictive covenants
(including, without limitation, those described on Exhibit B to the Mortgage),
Governmental Requirements and all standards and regulations of appropriate
supervising boards of fire underwriters and similar agencies, and the
engineering specifications are within applicable environmental standards.

Section 5.11. Labor Controversies. To Borrower's knowledge there are no
labor controversies pending or threatened against Borrower involved in the
operation of the Improvements which have not been disclosed in writing to Lender
and which would constitute or result in a Material Adverse Effect.

Section 5.12. Violations. Borrower has no knowledge of and has received
no notices of any material violations of any Governmental Requirement, which
violations in any way relate to or affect the Property and which remain
unresolved.

Section 5.13. Environmental. During the period of Borrower's ownership
of the Property, the Property has not been used for industrial or manufacturing
purposes, for landfill, dumping or other waste disposal activities or
operations, for generation, storage, use, sale, treatment, processing, recycling
or disposal of any Hazardous Material (except for any such Hazardous Material of
a type and only in a quantity used in the normal course of the business of
Borrower or in the normal course of household use by any tenant under an
Approved Lease, which Hazardous Material is being held, stored, and used in
strict compliance with Environmental Requirements), for underground or
aboveground storage tanks, or for any other use that could give rise to the
release of any Hazardous Material on the Property; to the best of Borrower's
knowledge, no such use of the Property (except for any such Hazardous Material
of a type and only in a quantity used in the normal course of the business of
Borrower or in the normal course of household use by any tenant under an
Approved Lease, which Hazardous Material is being held, stored, and used in
strict compliance with Environmental Requirements) occurred at any time prior to
the period of Borrower's ownership of the Property; and to the best of
Borrower's knowledge, no such use (except for any such Hazardous Material of a
type and only in a quantity used in the normal course of the business of
Borrower or in the normal course of household use by any tenant under an
Approved Lease, which Hazardous Material is being held, stored, and used in
strict compliance with Environmental Requirements) on any adjacent property
occurred at any time prior to the date hereof. To the best of Borrower's
knowledge, there is no Hazardous Material (except for any such Hazardous
Material of a type and only in a quantity used in the normal course of the
business of Borrower or in the normal course of household use by any tenant
under an Approved Lease, which Hazardous Material is being held, stored, and
used in strict compliance with Environmental Requirements), storage tank (or
similar vessel) whether underground or otherwise, sump or well currently on the
Property; and, Borrower has received no notice and has no knowledge of any
Environmental Claim regarding the Property or any adjacent property. The use of
the Property which Borrower makes and intends to make (and which each tenant and
subtenant, if any, is allowed to make under an Approved Lease) complies and will
comply with all applicable Environmental Requirements; and neither Borrower, nor
to Borrower's knowledge, any tenant or subtenant, has obtained or is required to
obtain any permit or other authorization to construct, occupy, operate, use or
conduct any activity on any of the Property by reason of any Environmental
Requirement. The Property does not appear on the National Priorities List or, to
Borrower's best knowledge, any other list or database of properties maintained
by any local, state or federal agency or department showing properties which are
known to contain or which are suspected of containing a Hazardous Material.
Borrower has never applied for and been denied environmental impairment
liability insurance coverage relating to the Property.

Section 5.14. Compliance with Restrictions and Agreements. To the best
of Borrower's knowledge, after due investigation, the use of the Property by
Borrower complies with all

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applicable easements, restrictive covenants (including, without limitation,
those described on Exhibit B to the Mortgage), Governmental Requirements and all
standards and regulations of appropriate supervising boards of fire underwriters
and similar agencies and with the terms of all agreements affecting the
Property.

Section 5.15. Other Lands. The Land is not part of a larger tract of
land owned by Borrower or its Affiliate or any Guarantor and is not otherwise
included under any unity of title or similar covenant with other lands not
encumbered by the Mortgage, or if so, then Borrower has obtained all
authorizations, variances, releases and consents required for the conveyance and
development of the Land separately from such other lands. Borrower has obtained
(or is diligently pursuing the obtaining of) a separate tax lot or lots with a
separate tax assessment or assessments for the Land and Improvements,
independent of any other lands or improvements. The Land and Improvements comply
with all subdivision and platting requirements and would so comply if the Land
and Improvements were conveyed as a separate parcel.

Section 5.16. Development Rights. Borrower has not directly or
indirectly conveyed, assigned or otherwise disposed of or transferred (or agreed
to do so) any development rights, air rights or other similar rights, privileges
or attributes with respect to the Property, including those arising under any
zoning or land use ordinance or other Governmental Requirement.

Section 5.17. Leases. Borrower has delivered to Lender true and correct
copies of all leases which Lender has requested be delivered, together with an
accurate and complete rent roll for the Project, and no such lease contains any
option to purchase all or any portion of the Property or any interest therein or
contains any right of first refusal relating to any sale of the Property or any
portion thereof or interest therein.

Section 5.18. Regulation U. The proceeds of the Loan are not being used
and shall not be used to purchase or carry any "margin stock" within the meaning
of Regulation "U" of the Board of Governors of the Federal Reserve System, nor
to extend credit to others for that purpose.

Section 5.19. ERISA. Borrower and each Guarantor is in compliance in
all material respects with all applicable provisions of the Employee Retirement
Income Security Act of 1974, as amended, and neither Borrower nor any Guarantor
has incurred any liability to the Pension Benefit Guaranty Corporation or any
entity succeeding to any or all of its functions thereunder.

Section 5.20. Insider. Neither Borrower nor any Guarantor is, nor is
any Person having "control" (as that term is defined in 12 U.S.C Section 375b
(5) or in regulations promulgated pursuant thereto) of Borrower or any Guarantor
is, or is a "related interest" of an "executive officer", "director", or person
who "directly or indirectly, or acting through or in concert with one or more
persons, owns, controls, or has the power to vote more than 10 percent of any
class of voting securities" or other "insider" (as those terms are defined in 12
U.S.C. Section 375b (5) or in regulations promulgated pursuant thereto) of (a)
Lender, (b) a bank holding company of which Lender is a subsidiary, (c) any
subsidiary of a bank holding company of which Lender is a subsidiary, (d) any
bank at which Lender maintains a correspondent account, or (e) any bank which
maintains a correspondent account with Lender.

Section 5.21. Principal Office, Etc. The principal office, chief
executive office and principal place of business of Borrower, and the place
where Borrower maintains its principal records and books, is at Borrower's
address for notices as specified in this Agreement.

Section 5.22. Business Loan. The Loan is solely for business purposes,
and is not for personal, family, household or agricultural purposes. The Loan is
a "business loan" within the meaning of K.S.A. 16-207(f).

Section 5.23. Not a Foreign Person. Neither Borrower nor any Guarantor
is a "foreign person" within the meaning of the Internal Revenue Code of 1986,
as amended ("IRC"), Sections 1445 and 7701 (i.e. Borrower and each Guarantor is
not a non-resident alien, foreign corporation, foreign partnership, foreign
trust or foreign estate as those terms are defined in the IRC and any
regulations promulgated thereunder).

TERM LOAN AGREEMENT (Candlewood Wichita Northeast) Page 14

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Section 5.24. Certain Approvals. All approvals required under the
Development Documents and/or Borrower's formation agreement as of the Closing
Date, including, without limitation, approval of the Plans, have been obtained
from the appropriate persons and written evidence thereof has been delivered to
Lender.

Section 5.25. Management Agreement. The copy of the Management
Agreement delivered by Borrower to Lender is a true and correct copy thereof,
together with all amendments or modifications thereto. The Management Agreement
is in full force and effect and there has not occurred a default by Borrower or
Manager thereunder.

Section 5.26. Ownership of Affiliates. The owners, ownership
percentages and all other rights and obligations of all persons that own an
interest in Borrower are identical to that of Omaha and Englewood.

Section 5.27. Cost Breakdown. The cost breakdown contained in the
budget for the construction of the Improvements which is attached hereto as
Exhibit "C" is true and correct and represents the actual amounts expended by or
on behalf of Borrower in the construction of the Improvements.

Section 5.28. Inducement to Lender. The representations and warranties
contained in the Loan Documents are made by Borrower as an inducement to Lender
to make the Loan. Borrower understands that Lender is relying on such
representations and warranties and that such representations and warranties
shall survive any (a) bankruptcy proceedings involving Borrower, any Guarantor
or the Property, or (b) foreclosure of the Mortgage, or (c) conveyance of title
to the Property in lieu of foreclosure of the Mortgage. Acceptance of the
Advance constitutes reaffirmation, as of the date of such acceptance, of the
representations and warranties of Borrower in the Loan Documents, on which
Lender shall rely in making such Advance.

ARTICLE 6 - COVENANTS AND AGREEMENTS OF BORROWER

Borrower hereby covenants and agrees as follows:

Section 6.1. Compliance with Governmental Requirements. Borrower shall
timely comply with all Governmental Requirements and promptly deliver to Lender
evidence thereof, including, without limitation, copies of all permits, licenses
or other authorizations required by any Governmental Authority having
jurisdiction over the Property. Borrower assumes full responsibility for the
compliance of the Plans and the Property with the Development Documents, all
Governmental Requirements and with sound building and engineering practices,
and, notwithstanding any approvals by Lender, Lender shall have no obligation or
responsibility whatsoever for the Plans or any other matter incident to the
Property or the construction of the Improvements. Immediately upon Borrower's
receipt of any notice from a Governmental Authority of noncompliance with any
Governmental Requirements, Borrower shall provide Lender with written notice
thereof.

Section 6.2. Contracts. Borrower shall become party to no contract, for
the performance of any work on the Property or for the supplying of any labor,
materials, or services for the continued full ownership, operation, maintenance
and enjoyment of the Property for amounts in excess of $25,000 and the term of
which is longer than one year, except upon such terms and with such parties as
shall be approved in writing by Lender. Borrower shall not suffer or permit any
breach or default to occur in any of the obligations of Borrower under any
contract necessary for the continued full ownership, operation, maintenance and
enjoyment of the Property, nor shall Borrower suffer or permit the same to
terminate by reason of any failure of Borrower to meet any requirements thereof
whatsoever. Without Lender's prior written consent, Borrower shall not enter
into any such contract that is not unconditionally terminable by Borrower or any
successor owner without penalty on not more than thirty (30) days notice to the
other party thereunder. Borrower shall execute all documents reasonably
necessary for the consummation of the transactions contemplated thereby, shall
promptly notify Lender of any material default thereunder, and shall not
terminate or cancel any such contract except in good faith after default by the
other party thereto.

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Section 6.3. Correction of Defects. Borrower shall correct or cause to
be corrected promptly (a) any material defect in the Improvements; (b) any
material departure in the construction of the Improvements from the Plans, the
Development Documents, Governmental Requirements, or the requirements of any
lease, if applicable; or (c) any encroachment by any part of the Improvements,
or any structure located on the Property, on any building setback line,
easement, property line or restricted area. In addition to the above, within
ninety (90) days after the Closing Date, Borrower shall do the following and
provide evidence satisfactory to Lender that the following actions have been
completed: (i) have the elevators located on the Property repaired or adjusted
to eliminate vibrations; (ii) have the parking lot at the Property properly
graded to eliminate the occurrence of standing water thereon, and (iii) have the
exterior wall of the Improvements repaired to remedy reinforcing fabric which
was not adequately covered.

Section 6.4. Inspection of the Property. Borrower shall permit Lender,
any Governmental Authority, and their agents and representatives, to enter upon
the Property for the purpose of inspection of the Property at all reasonable
times. Any inspection or audit of the Property or the books and records of
Borrower, or the procuring of documents and financial and other information, by
or on behalf of Lender shall be for Lender's protection only, and shall not
constitute any assumption of responsibility to Borrower or anyone else with
regard to the condition, maintenance or operation of the Property nor Lender's
approval of any certification given to Lender nor relieve Borrower of any of
Borrower's obligations. Lender shall have no duty of care to Borrower or any
other person to protect against, or inform Borrower or any other person of the
existence of negligent, faulty, inadequate or defective design or construction
of the Improvements. Inspection not followed by notice of default shall not
constitute a waiver of any default then existing; nor shall it constitute an
acknowledgment or representation by Lender that there has been or will be
compliance with the Plans, the Development Documents, and Governmental
Requirements or that the construction is free from defective materials or
workmanship or a waiver of Lender's right thereafter to insist that the
Improvements be constructed in accordance with the Plans, the Development
Documents, and Governmental Requirements. Lender's failure to inspect shall not
constitute a waiver of any of Lender's rights.

Section 6.5. Insurance. Borrower shall maintain or cause to be
maintained in force insurance coverage at the times and to the extent required
by the Loan Documents including, without limitation, the Insurance Policies and
shall furnish to Lender upon request at reasonable intervals a certificate or
certificates from the respective insurer(s) setting forth the nature and extent
of all insurance maintained by Borrower in accordance with the Loan Documents
including, without limitation, the Insurance Policies. Borrower shall comply or
cause compliance at all times with the provisions of any insurance policy
covering or applicable to Borrower or the Property or any portion thereof, with
all requirements of the issuer of any such policy, and with all orders, rules,
regulations and other requirements of the National Board of Fire Underwriters
(or any body exercising similar functions) applicable to or affecting any part
of the Property or any use or condition thereof.

Section 6.6. Existence, Franchises and Permits. Borrower shall do or
cause to be done at all times all things necessary to maintain and preserve its
existence under the laws of its jurisdiction of organization, and to preserve,
protect, renew and extend any and all franchises, permits, licenses, privileges,
concessions and other material rights (including those relating to land use and
development, construction, access, water rights and use, noise, waste disposal
and pollution control) that are or may be applicable from time to time to
Borrower or that have been or may be granted for the Property.

Section 6.7. Notice to Lender. Borrower shall promptly notify Lender in
writing of any of the following occurrences or events as the same become known
to Borrower, specifying in each case the action Borrower has taken or caused to
be taken, or proposes to take or cause to be taken, with respect thereto: (a)
the occurrence of any default or any event which with the giving of notice or
the lapse of time, or both, could become a default; (b) any material default by
Borrower under any Governmental Requirement or in the payment of any
indebtedness (or in the performance of any obligation related thereto); (c) the
occurrence of any litigation, arbitration or governmental investigation or
proceeding not previously disclosed by Borrower to Lender which has been
instituted or (to the knowledge of Borrower) is threatened against Borrower, any
Guarantor or the Property or the occurrence of any material development in any
of the foregoing that has been previously disclosed; (d) any actual or
threatened condemnation or other taking of any material portion of the Property,
whether for a temporary or permanent

TERM LOAN AGREEMENT (Candlewood Wichita Northeast) Page 16

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use, or any negotiations with respect to any such taking, or any loss of or
substantial damage to any portion of the Property; (e) the occurrence of any
labor controversy not previously disclosed to Lender in writing which is pending
or (to the knowledge of Borrower) threatened against Borrower or any Guarantor,
or the occurrence of any material development in any such labor controversy
previously disclosed to Lender, which in either case would reasonably be
expected to have a Material Adverse Effect if adversely determined; and (f) any
notice received by Borrower with respect to the cancellation, material adverse
alteration or non-renewal of any insurance coverage maintained or required to be
maintained with respect to the Property.

Section 6.8. Costs and Expenses. Borrower shall pay when due all costs
and expenses required by this Agreement, including, without limitation, (a) all
intangible taxes, documentary stamp taxes and all other taxes and assessments
applicable to the Property; (b) all appraisal fees; (c) all fees for filing or
recording the Loan Documents; (d) all fees and commissions lawfully due to
brokers, salesmen, and agents in connection with the Loan or the Property; (e)
all reasonable fees and expenses of counsel to Lender in connection with the
negotiation, preparation, amendment, enforcement or defense of the Loan
Documents or the making of the Advance; (f) all title insurance and title
examination charges, including premiums for the Title Insurance and any
endorsements, and escrow fees and UCC search fees; (g) all survey costs and
expenses, including the cost of each Survey; (h) all premiums for the Insurance
Policies; (i) all environmental site assessments and related costs and expenses;
(j) all costs of any architects, engineers or consultants hired by Lender to
inspect the Property; and (k) all other costs and expenses payable to third
parties incurred by Lender in connection with the investigation, consummation,
enforcement or defense of the transactions contemplated by this Agreement.

Section 6.9. Further Assurances. Borrower will, on request of Lender,
(a) promptly correct any defect, error or omission which may be discovered in
the contents of this Agreement, or in any other Loan Document, or in the
execution or acknowledgment of any Loan Document; (b) execute, acknowledge,
deliver, procure and record and/or file such further instruments (including,
without limitation, further deeds of trust, security agreements, financing
statements, continuation statements, assignments of rents or leases), and do
such further acts as may be necessary, desirable or proper to carry out more
effectively the purposes of the Loan Documents and to more fully identify and
subject to the liens and security interests of the Mortgage any property
intended to be covered thereby, including specifically, but without limitation,
any renewals, additions, substitutions, replacements, or appurtenances to the
Property; (c) execute, acknowledge, deliver, procure and file and/or record any
document or instrument (including specifically any financing statement) deemed
advisable by Lender to protect the lien or the security interest under the
Mortgage against the rights or interests of third persons; and (d) provide such
certificates, documents, reports, information, affidavits and other instruments
and do such further acts as may be necessary, desirable or proper in the
reasonable determination of Lender to enable Lender to comply with the
requirements or requests of any agency having jurisdiction over Lender or any
examiners of such agencies with respect to the indebtedness secured hereby,
Borrower or the Property. Borrower shall pay all costs connected with any of the
foregoing.

Section 6.10. Inspection of Books and Records. Borrower will keep
accurate books and records in accordance with generally accepted accounting
principles in which full, true and correct entries shall be promptly made with
respect to the Property and the operation thereof. Borrower shall permit Lender,
at all reasonable times, to examine and copy the books and records of Borrower
pertaining to the Loan and the Property, and all contracts, statements,
invoices, bills, and claims for labor, materials and services supplied for the
construction of the Improvements.

Section 6.11. No Liability of Lender. Lender shall not be obligated to
inspect the Property or the Improvements, nor be liable or responsible for any
defect in the Property or the Improvements by reason of inspecting same, nor be
liable for the performance or default of Borrower, or any other party, or for
any failure to construct, complete, protect, or insure the Improvements, or for
the payment of costs of labor, materials, or services supplied for the
construction of the Improvements, or for the performance of any obligation of
Borrower whatsoever. Nothing, including without limitation the Advance or
acceptance of any document or instrument, shall be construed as a representation
or warranty, express or implied, to any party by Lender.

TERM LOAN AGREEMENT (Candlewood Wichita Northeast) Page 17

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Section 6.12. No Conditional Sale Contracts, Etc. Other than with
respect to the telephone and cable television systems, and for furnishings for
offices and common areas, no materials, equipment, or fixtures shall be
supplied, purchased, or installed for the construction or operation of the
Improvements pursuant to security agreements, conditional sale contracts, lease
agreements, or other arrangements or understandings whereby a security interest
or title is retained by any party or the right is reserved or accrues to any
party to remove or repossess any materials, equipment, or fixtures intended to
be utilized in the construction or operation of the Improvements.

Section 6.13. Defense of Actions. Lender may (but shall not be
obligated to) commence, appear in, or defend any action or proceeding purporting
to affect the Loan, the Property, or the respective rights and obligations of
Lender and Borrower pursuant to this Agreement. Lender may (but shall not be
obligated to) pay all necessary expenses, including attorneys' fees and expenses
incurred in connection with such proceedings or actions, which Borrower agrees
to repay to Lender on demand.

Section 6.14. Assignment of Permanent Commitment. Borrower shall
deliver to Lender a true and correct copy of any commitment (a "Permanent
Commitment") to purchase or refinance the Loan or to make any equity
contribution, the proceeds of which will be used to pay the Loan in full or in
part. As additional security for payment of the Loan, Borrower hereby transfers
and assigns to Lender, to the extent assignable, the full interest of Borrower
in (but not its liability for any breach under) any Permanent Commitment (even
though such Permanent Commitment does not create any benefits under the Note or
the Guaranty) if and when any Permanent Commitment is entered into by Borrower,
including all refundable deposits made thereunder.

Section 6.15. Prohibition on Assignment of Borrower's Interest. No
Person shall assign or encumber any interest in Borrower or any Guarantor
without Lender's prior written consent.

Section 6.16. Payment of Claims. Borrower shall promptly pay or cause
to be paid when due all costs and expenses incurred in connection with the
Property and Borrower shall keep the Property free and clear of any lien,
charge, or claim other than the encumbrances of the Mortgage and other liens, if
any, approved in writing by Lender. Notwithstanding anything to the contrary
contained in this Agreement, Borrower may contest, to the extent and in the
manner permitted by law, the validity or amount of any claim of any contractor,
consultant, architect or other person providing labor, materials, or services
with respect to the Property, or any tax or special assessment levied by any
Governmental Authority, and such contest on the part of Borrower shall not be a
default hereunder if and so long as Borrower shall have satisfied all of the
conditions of the Mortgage with respect to such contest.

Section 6.17. Restrictions and Annexation. Borrower shall not impose
any restrictive covenants, easements or other encumbrances upon the Property,
execute or file any subdivision plat affecting the Property, or consent to or
permit the annexation of the Property to any municipality without the prior
written consent of Lender, which consent will not be unreasonably withheld.

Section 6.18. Current Financial Statements. Without limitation of any
requirements of the Mortgage or of any other Loan Document, Borrower shall
deliver, or cause to be delivered, to Lender:

(a) current operating statements itemizing all income and expenses of
the Property, for each month (and for the fiscal year through the end of such
month) as soon as reasonably practicable but in any event within thirty (30)
days after the end of such month and for each fiscal year of Borrower within one
hundred twenty (120) days after the end thereof including also a projection of
such operations for the next fiscal year; such statements to include, if and as
required by Lender, rent schedules showing tenants' names, occupied tenant
space, lease terms, rents and vacant space;

(b) Financial Statements of Borrower and each Guarantor, for each
fiscal year of Borrower and each Guarantor, respectively, as soon as reasonably
practicable, but in any event within one hundred twenty (120) days after the end
thereof. The annual Financial Statements of Guarantors shall be consolidated
Financial Statements of Borrower, such Guarantors, all

TERM LOAN AGREEMENT (Candlewood Wichita Northeast) Page 18

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Future Borrowers and all Affiliates of any of them and shall be audited by an
independent certified public accountant. Each Guarantor shall also provide
annual Financial Statements which shall be certified in writing as true and
correct in all material respects by such Guarantor (or if such Guarantor is a
legal entity, by a shareholder or other representative of such Guarantor
acceptable to Lender). Candlewood, Inc. shall also provide to Lender, as soon as
reasonably practicable, but in any event within thirty (30) days after the
filing thereof with the Securities Exchange Commission, its 10-Q and 10-K
financial reports. With respect to the annual Financial Statements of Borrower,
such financial statements shall be certified in writing as true and correct in
all material respects by Borrower (or if Borrower is a legal entity, by a
shareholder or other representative of Borrower acceptable to Lender). With
respect to Borrower and each Guarantor, Financial Statements shall include, at a
minimum: a balance sheet, an income and expense statement, a statement showing
contingent liabilities, detailed cash flow statements for each project and/or
entity in which Borrower or any Guarantor has an interest, and any supporting
schedules or documentation which Lender may require. Detailed cash flow
statements shall include, as applicable: the project name, location, percentage
of Borrower's or any Guarantor's ownership interest, leasing status, net
operating income, current loan balance, debt service, source of any operating
deficit, amount of and beneficiary of any cash distributions, and the amount of
cash invested in or received from that enterprise. If requested by Lender,
Financial Statements shall include detailed cash flow projections for the next
fiscal year (twelve-month period) for each project and/or entity in which
Borrower or any Guarantor has an interest; and

Section 6.19. Tax Receipts. Subject to the provisions of Section 5.9,
Borrower shall furnish Lender with receipts or tax statements marked "Paid" to
evidence the payment of all taxes levied on the Property prior to delinquency
within thirty (30) days following the date on which such taxes are paid.

Section 6.20. Loan Participations. Borrower acknowledges and agrees
that Lender may, from time to time, sell or offer to sell interests in the Loan
to one or more assignees or participants. Borrower authorizes Lender to
disseminate any information it now has or hereafter obtains pertaining to the
Loan (including, without limitation, any security for the Loan and credit or
other information on Borrower, any of its principals, any Guarantor or any of
their principals or the Project) to any such participant, prospective
participant or assignee, any of Lender's Affiliates, including NationsBanc
Capital Markets, Inc., any regulatory body having jurisdiction over Lender and
to any other parties as necessary or appropriate in Lender's reasonable
judgment. Lender will endeavor to obtain a confidentiality agreement from each
such person to whom it gives any such information regarding the use of any such
information but Lender shall have no liability to Borrower or any Guarantor for
its failure to comply with the agreement contained in this sentence, and such
failure shall not give rise to any rights, remedies, defenses or offsets to
Borrowers or any Guarantor's obligations under the Loan Documents. Borrower
shall execute, acknowledge and deliver any and all instruments reasonably
requested by Lender in connection therewith and to the extent, if any, specified
in any such assignment or participation, such companies, assignees or
participants shall have the rights and benefits with respect to the Loan
Documents as such person would have if such person were Lender hereunder. Lender
agrees to notify Borrower in the event it assigns or participates the Note.

Section 6.21. Indemnification. Borrower shall indemnify and hold
harmless (a) Lender, (b) any Affiliate of Lender, (c) any participants in the
Loan, (d) the directors, officers, partners, employees and agents of Lender,
and/or such persons or entities, and (f) the heirs, personal representatives,
successors and assigns of each of the foregoing persons or entities in their
capacities as such (each an "Indemnified Party") from and against, and reimburse
them on demand for, any and all Indemnified Matters. WITHOUT LIMITATION, THE
FOREGOING INDEMNITIES SHALL APPLY TO EACH INDEMNIFIED PARTY WITH RESPECT TO
MATTERS WHICH IN WHOLE OR IN PART ARE CAUSED BY OR ARISE OUT OF THE NEGLIGENCE
OF SUCH (AND/OR ANY OTHER) INDEMNIFIED PARTY. However, such indemnities shall
not apply to a particular Indemnified Party to the extent that the subject of
the indemnification is caused by or arises out of the gross negligence or
willful misconduct of that Indemnified Party. Any amount to be paid under this
Section by Borrower to an Indemnified Party shall be a demand obligation owing
by Borrower (which

TERM LOAN AGREEMENT (Candlewood Wichita Northeast) Page 19

<PAGE> 24

Borrower hereby promises to pay) to Lender, as part of the Indebtedness, even if
in excess of the amount committed by Lender under Section 2.1, and secured by
the Loan Documents. Nothing in this Section, elsewhere in this Agreement or in
any other Loan Document shall limit or impair any rights or remedies of Lender,
or any other Indemnified Party (including without limitation any rights of
contribution or indemnification), against Borrower or any other person under any
other provision of this Agreement, any other Loan Document, any other agreement
or any applicable Governmental Requirement. The liability of Borrower or any
other person under this indemnity shall not be limited or impaired in any way by
(i) the release, foreclosure or other termination of the Mortgage and shall
survive the Release Date, the payment in full of the Indebtedness, any
bankruptcy or other debtor relief proceeding, or any other event whatsoever, and
(ii) any provision in the Loan Documents or applicable law limiting Borrower's
or such other person's liability or Lender's recourse or rights to a deficiency
judgment, or by any change, extension, release, inaccuracy, breach or failure to
perform by any party under the Loan Documents, Borrower's (and, if applicable,
such other person's) liability hereunder being direct and primary and not as a
guarantor or surety.

Section 6.22. Disclaimer of Permanent Financing. Borrower acknowledges
and agrees that Lender has not made any commitments, either express or implied,
to extend the term of the Loan past its stated maturity date except as expressly
provided herein.

Section 6.23. Appraisals. Prior to the Closing Date, Borrower shall
deliver to Lender the Initial Appraisal. Lender may at its option after the
occurrence of a default obtain at Borrower's expense as and when requested by
Lender (but in no event more often than once each year), appraisals of the
Property or any part thereof. Each such appraisal shall (a) be prepared in
accordance with written instructions from Lender by a third-party appraiser
selected by Lender, and (b) be otherwise satisfactory to Lender. The costs of
each such appraisal shall be payable by Borrower to Lender on demand (which
obligation Borrower hereby promises to pay) and shall be covered by the
provisions of Section 6.8.

Section 6.24. Estoppel Certificate. Borrower shall deliver to Lender,
promptly after a request therefor by Lender, an estoppel certificate, duly
executed and acknowledged by Borrower, stating the amount advanced to Borrower
under this Agreement, the amounts due on the Note and whether any offsets or
defenses exist under or against the Note. Lender agrees to deliver, promptly
after a request therefor by Borrower and the issuer of any Permanent Commitment,
an estoppel certificate, duly executed and acknowledged by Lender, stating the
amount advanced to Borrower under the Loan, the amounts due on the Note and
whether any default or potential default exists.

Section 6.25. Vouchers. Borrower shall deliver to Lender, on demand,
any contracts, bills of sale, statements, receipted vouchers or agreements under
which Borrower claims title to any materials, fixtures or articles incorporated
in the Improvements or otherwise subject to a lien or security interest in favor
of Lender.

Section 6.26. Security Deposits. Borrower shall deposit and maintain
all security deposits, if any, from the operation of the Project in a separate
account or accounts maintained with Lender exclusively for such security
deposits. Lender shall have the absolute right to monitor such account(s) and to
cause Borrower to contribute funds to such account(s) when in Lender's sole
discretion amounts in such account(s) are not adequate to cover all Approved
Leases.

Section 6.27. Environmental. Borrower will not cause, commit, permit or
allow to continue (a) any violation of any Environmental Requirement (i) by
Borrower or (ii) by or with respect to the Property or any use of or condition
or activity on the Property, or (b) the attachment of any environmental lien to
the Property. Borrower will not place, install, dispose of or release, or cause,
permit, or allow the placing, installation, disposal, spilling, leaking, dumping
or release of, any Hazardous Material (except for any such Hazardous Material of
a type and only in a quantity used in the normal course of the business of
Borrower or in the normal course of household use by any tenant under an
Approved Lease, which Hazardous Material is being held, stored, and used in
strict compliance with Environmental Requirements) or storage tank (or similar
vessel) on the Property and will keep the Property free of Hazardous Material
(except for any such Hazardous Material of a type and only in a quantity used in
the normal course of the business of Borrower or in the normal course of
household use by any

TERM LOAN AGREEMENT (Candlewood Wichita Northeast) Page 20

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tenant under an Approved Lease, which Hazardous Material is being held, stored,
and used in strict compliance with Environmental Requirements). Borrower shall
promptly deliver to Lender a copy of each report pertaining to the Property or
to Borrower prepared by or on behalf of Borrower pursuant to any Environmental
Requirement. Borrower shall immediately advise Lender in writing of any
Environmental Claim or of the discovery of any Hazardous Material on the
Property (except for any such Hazardous Material of a type and only in a
quantity used in the normal course of the business of Borrower or in the normal
course of household use by any tenant under an Approved Lease, which Hazardous
Material is being held, stored, and used in strict compliance with Environmental
Requirements), as soon as Borrower first obtains knowledge thereof, including a
full description of the nature and extent of the Environmental Claim and/or
Hazardous Material and all relevant circumstances.

If any Hazardous Material is discovered on the Property at any time and
regardless of the cause, Borrower shall promptly at Borrower's sole risk and
expense remove, treat, and dispose of the Hazardous Material in compliance with
all applicable Environmental Requirements and solely under Borrower's name (or
if removal is prohibited by any Environmental Requirement, take whatever action
is required by any Environmental Requirement), in addition to taking such other
action as is necessary to have the full use and benefit of the Property as
contemplated by the Loan Documents, and provide Lender with satisfactory
evidence of what action Borrower intends to take and that Borrower has
sufficient funds to take any such action. Borrower shall deliver to Lender as
soon as possible after such completion evidence satisfactory to Lender that all
required remedial action as stated above has been taken and successfully
completed. Lender may, but shall never be obligated to, remove or cause the
removal of any Hazardous Material from the Property (or if removal is prohibited
by any Environmental Requirement, take or cause the taking of such other action
as is required by any Environmental Requirement) if Borrower fails to promptly
commence such remedial actions following discovery and thereafter diligently
prosecute the same to the satisfaction of Lender (without limitation of Lender's
rights to declare a default under any of the Loan Documents and to exercise all
rights and remedies available by reason thereof); and Lender and its designees
are hereby granted access to the Property at any time or times, upon reasonable
notice (which may be written or oral), and a license which is coupled with an
interest and irrevocable, to remove or cause such removal or to take or cause
the taking of any such other action.

If Lender shall ever have reason to believe that any Hazardous Material
affects the Property, or if any Environmental Claim is made or threatened, if
requested by Lender, Borrower will at its expense provide to Lender from time to
time, in each case within thirty (30) days after Lender's request, a report
dated after the date of Lender's requirement of an environmental assessment of
the Property of such scope as Lender may request, by a consulting firm
acceptable to Lender and made in accordance with Lender's established
guidelines.

Section 6.28. Maintenance of the Property. Borrower shall maintain the
Property in first-class order and condition and make all necessary repairs
thereto, interior and exterior, structural and nonstructural, ordinary and
extraordinary, foreseen and unforeseen and will not commit or suffer to be
committed any waste of the Property. The necessity for and adequacy of repairs
to the Property shall be measured by the standard which is appropriate to
maintain the Property in substantially the same condition as of the date hereof,
such repairs to be made with new first-class materials and in a good and
workmanlike manner and shall be at least equal in quality and class to the
original work.

Section 6.29. Management Agreement. Borrower shall maintain the
Management Agreement in full force and effect for a term of not less than ten
(10) years and shall not modify, amend, terminate, or waive any terms of, or
rights of Borrower with respect to, the Management Agreement, without the prior
written consent of Lender.

Section 6.30. Operating Deficit Reserve Account. On or before the
Closing Date, Borrower shall deposit, or cause to be deposited into the
Operating Deficit Reserve Account an amount equal to $209,000.00. Upon
completion of the improvements to the Englewood Property in connection with the
Englewood Loan, Borrower shall deposit or cause to be deposited into the
Operating Deficit Reserve Account an amount equal to the greater of (i)
$64,000.00 or (ii) two percent (2%) of the actual construction costs of those
improvements to the Englewood Property in connection with the Englewood Loan
which are designated as Hard Costs in the Englewood Loan Agreement. Upon
completion of the improvements to the Omaha Property in

TERM LOAN AGREEMENT (Candlewood Wichita Northeast) Page 21

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connection with the Omaha Loan, Borrower shall deposit or cause to be deposited
into the Operating Deficit Reserve Account an amount equal to the greater of (i)
$65,500.00 or (ii) two percent (2%) of the actual construction costs of those
improvements to the Omaha Property in connection with the Omaha Loan which are
designated as Hard Costs in the Omaha Loan Agreement. Borrower understands and
acknowledges that, in the event Lender makes any of the Future Loans to any
Future Borrower, Lender will require such Person to become a joint owner of the
Operating Deficit Reserve Account and will require such Person to deposit funds
into the Operating Deficit Reserve Account based on the cost of construction of
the improvements in connection with such loan. The above referenced amounts are
collectively referred to herein as the "Minimum Deposit". In addition to the
Minimum Deposit, if Lender shall so require in its sole and absolute discretion,
at any time and from time to time, Borrower shall deposit or cause to be
deposited into the Operating Deficit Reserve Account an amount equal to the sum
of (i) the difference between the budgeted Englewood Hard Costs minus the actual
construction costs for constructing the improvements on the Englewood Property
in connection with the Englewood Loan and (ii) the difference between the
budgeted Omaha Hard Costs and the actual construction costs of the improvements
on the Omaha Property in connection with the Omaha Loan. If at any time any of
Borrower, Omaha, Englewood or any Future Borrower experiences an Operating
Deficit, such Person may apply to Lender to have a portion of the proceeds of
the Operating Deficit Reserve Account released for the payment of amounts owing
by such Person to Lender. Such application shall be in the form of a written
certificate, signed by such Person, which states the nature and amount of such
Operating Deficit together with such other documentation as may be required by
Lender. Lender may accept or reject such application in its sole and absolute
discretion. Borrower hereby acknowledges and agrees that Lender may at any time,
regardless of the existence of a Default or a potential default, use the
proceeds of the Operating Deficit Reserve Account to pay down any amounts owing
to Lender by Borrower, Omaha or Englewood, or any Affiliate of any of them
including without limitation, the principal amount and any other amounts
outstanding under the Loan, the Omaha Loan, the Englewood Loan or any Future
Loan. In the event Borrower, Englewood, Omaha or any Future Borrower seeks to
have the property securing its respective loan released pursuant to a sale
thereof or the refinance of such loan with a third-party lender, such Person
shall be entitled to withdraw from the Operating Deficit Reserve Account, upon
the payment in full of such Person's loan from Lender and provided that no
Default has occurred and is continuing, the difference between (a) the amount
deposited by such Person into the Operating Deficit Reserve Account and (b) any
amounts which have been withdrawn by or on behalf of such Person and paid to
Lender on account of an Operating Deficit; provided that the balance in the
Operating Deficit Reserve Account shall not, prior to the payment in full of all
obligations of Borrower, any Guarantor and any Future Borrower owing to Lender,
be less than $250,000.00.

Section 6.31. Reserve Account. Commencing on the Closing Date, and on
the 15th day of each successive calendar month thereafter until October 15,
1997, Borrower shall deposit into the Reserve Account the amount of $4,458.33.
Borrower shall, at all times thereafter maintain in the Reserve Account, an
amount equal to the greater of (i) $500.00 per room or (ii) four percent (4%) of
the gross rental income of the Property during any twelve (12) month period.
Borrower shall be entitled to withdraw proceeds from the Reserve Account for
capital improvements and replacement of furniture, fixtures and equipment upon
submission of a request therefor to Lender detailing such improvements and such
other information requested by Lender. Borrower shall only be entitled to
withdraw such amounts from the Reserve Account as are approved by Lender from
time to time in its sole and absolute discretion.

Section 6.32. Reservation System. Borrower shall, within ninety (90)
days of the Closing Date, deliver to Lender the Doubletree Agreement, executed
by all parties thereto in form and substance acceptable to Lender and shall not
modify, amend or terminate the Doubletree Agreement without the prior written
consent of Lender.

Section 6.33. Management of Property. Borrower shall not allow any
material change in the day-to-day leasing, management and operation of the
Property without the prior written consent of Lender.

TERM LOAN AGREEMENT (Candlewood Wichita Northeast) Page 22

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ARTICLE 7 - DEFAULT

Section 7.1. Events of Default. The occurrence of any one of the
following shall be a default under this Agreement ("default"):

(a) Failure to Pay Indebtedness. (i) Any of the Indebtedness arising
under the Note is not paid when due, whether by acceleration or
otherwise, including, without limitation, interest payments, the
principal payments required under Section 2.2 and any other principal
payments; or (ii) any of the other Indebtedness is not paid when due,
whether by acceleration or otherwise.

(b) Nonperformance of Covenants. Any covenant, agreement or condition
herein or in any other Loan Document is not fully and timely performed,
observed or kept.

(c) Representations. Any statement, representation or warranty to
Lender in any of the Loan Documents, or in any Financial Statement or
any other writing heretofore or hereafter delivered to Lender in
connection with the Indebtedness is false, fraudulent, misleading or
erroneous in any material respect on the Closing Date or on the date as
of which such statement, representation or warranty is made.

(d) Injunction. Any court of competent jurisdiction enjoins or
prohibits Borrower or Lender from performing this Agreement or any of
the other Loan Documents, and such injunction or order is not vacated
within forty-five (45) days after the granting thereof.

(e) Bankruptcy or Insolvency. The owner of the Property or any person
obligated to pay any part of the Indebtedness (or any general partner
or joint venturer of such owner or other person):

(1) (i) Executes an assignment for the benefit of creditors, or
takes any action in furtherance thereof; or (ii) admits in
writing its inability to pay, or fails to pay, its debts
generally as they become due; or (iii) as a debtor, files a
petition, case, proceeding or other action pursuant to, or
voluntarily seeks the benefit or benefits of any Debtor Relief
Law, or takes any action in furtherance thereof; or (iv) seeks
the appointment of a receiver, trustee, custodian or liquidator
of the Property or any part thereof or of any significant
portion of its other property; or

(2) Suffers the filing of a petition, case, proceeding or other
action against it as a debtor under any Debtor Relief Law or
seeking appointment of a receiver, trustee, custodian or
liquidator of the Property or any part thereof or of any
significant portion of its other property, and (i) admits,
acquiesces in or fails to contest diligently the material
allegations thereof, or (ii) the petition, case, proceeding or
other action results in entry of any order for relief or order
granting relief sought against it, or (iii) in a proceeding
under Title 11 of the United States Code, the case is converted
from one chapter to another, or (iv) fails to have the
petition, case, proceeding or other action permanently
dismissed or discharged on or before the earlier of trial
thereon or sixty (60) days next following the date of its
filing; or

(3) Conceals, removes, or permits to be concealed or removed,
any part of its property, with intent to hinder, delay or
defraud its creditors or any of them, or makes or suffers a
transfer of any of its property which may be fraudulent under
any bankruptcy, fraudulent conveyance or similar law; or makes
any transfer of its property to or for the benefit of a
creditor at a time when other creditors similarly situated have
not been paid; or suffers or permits, while insolvent, any
creditor to obtain a lien (other than as described in
subparagraph (4) below) upon any of its property through legal
proceedings which are not vacated and such lien discharged
prior to enforcement of such lien and in any event within sixty
(60) days from the date thereof; or

(4) Fails to have discharged within a period of ten (10) days
any attachment, sequestration, or similar writ levied upon any
of its property; or

TERM LOAN AGREEMENT (Candlewood Wichita Northeast) Page 23

<PAGE> 28

(5) Fails to pay immediately any final money judgment against
it.

(f) Transfer of the Property. Any sale, lease, conveyance, assignment
or transfer of all or any part of the Property or any interest therein
(except an interest under a purchase contract that conditions closing
on repayment of the Loan or issuance by Lender of consent to the sale),
whether by operation of law or otherwise, except: (i) sales or
transfers of items of the Accessories (as defined in the Mortgage)
which have become obsolete or worn beyond practical use and which have
been replaced by adequate substitutes, owned by Borrower, having a
value equal to or greater than the replaced items when new; and (ii)
the grant, in the ordinary course of business, of a leasehold interest
in a part of the Improvements to a tenant for occupancy, not containing
a right or option to purchase and not in contravention of any provision
of this Agreement, the Mortgage or of any other Loan Document. Lender
may, in its sole discretion, waive a default under this paragraph, but
it shall have no obligation to do so, and any waiver may be conditioned
upon such one or more of the following (if any) which Lender may
require: the grantee's integrity, reputation, character,
creditworthiness and management ability being satisfactory to Lender in
its sole judgment and grantee executing, prior to such sale or
transfer, a written assumption agreement containing such terms as
Lender may require, a principal paydown on the Note, an increase in the
rate of interest payable under the Note, a transfer fee, and any other
modification of the Loan Documents which Lender may require.

(g) Transfer or Encumbrance of Ownership of Borrower. The sale, pledge,
encumbrance, assignment or transfer, voluntarily or involuntarily, of
any interest in Borrower or any Guarantor or in any entity comprising
Borrower or any Guarantor (if Borrower or any such entity is not a
natural person but is a corporation, partnership, trust or other legal
entity), without the prior written consent of Lender (including,
without limitation, if Borrower or any entity comprising Borrower is a
partnership or joint venture, the withdrawal from or admission into it
of any general partner or joint venturer); provided that the transfers
of ownership interests in Borrower, Omaha, Englewood, and Candlewood to
Candlewood Hotel Company, Inc., a Delaware corporation, in connection
with the registered public offering of such company's shares of stock
shall not be a violation of this Section 7.1(g).

(h) Grant of Easement, Etc. Without the prior written consent of
Lender, Borrower grants any easement or dedication, files any plat,
condominium declaration, or restriction, or otherwise encumbers the
Property, or seeks or permits any zoning reclassification or variance,
unless such action is expressly permitted by the Loan Documents or does
not affect the Property.

(i) Default Under Other Lien. A default or event of default occurs
under any lien, security interest or assignment covering the Property
or any part thereof (whether or not Lender has consented to any such
lien, security interest or assignment and without hereby implying
Lender's consent to any such lien, security interest or assignment not
created under the Loan Documents), or the holder of any such lien,
security interest or assignment declares a default or institutes
foreclosure or other proceedings for the enforcement of its remedies
thereunder.

(j) Destruction. The Indebtedness has not been repaid in full following
an acceleration of the maturity of the Indebtedness pursuant to the
provisions of Section 3.2.

(k) Condemnation. (i) Any Governmental Authority shall require, or
commence any proceeding for, the demolition of any building or
structure comprising a part of the Property, or (ii) there is commenced
any proceeding to condemn or otherwise take pursuant to the power of
eminent domain, or a contract for sale or conveyance in lieu of such a
taking is executed which provides for the transfer of, a material
portion of the Property, including but not limited to the taking (or
transfer in lieu thereof) of any portion which would result in the
blockage or substantial impairment of access or utility service to the
Property or which would cause the Property to fail to comply with any
Governmental Requirement.

TERM LOAN AGREEMENT (Candlewood Wichita Northeast) Page 24

<PAGE> 29

(l) Liquidation, Etc. The death, liquidation, termination, dissolution,
merger, consolidation or failure to maintain good standing in the state
in which the Property is located, the state of such person's
organization or any state where such person is required to qualify to
do business of the owner of the Property or any person obligated to pay
any part of the Indebtedness.

(m) Material Adverse Change. In Lender's reasonable opinion, there has
occurred or exists a fact or set of circumstances which constitutes a
Material Adverse Effect.

(n) Enforceability; Priority. Any Loan Document shall for any reason
without Lender's specific written consent cease to be in full force and
effect, or shall be declared null and void or unenforceable in whole or
in part, or the validity or enforceability thereof, in whole or in
part, shall be challenged or denied by any party thereto other than
Lender; or the liens, mortgages or security interests of Lender in any
of the Property become unenforceable in whole or in part, or cease to
be of the priority herein required, or the validity or enforceability
thereof, in whole or in part, shall be challenged or denied by Borrower
or any person obligated to pay any part of the Indebtedness.

(o) Other Loan Documents. A default or event of default occurs under
the Omaha Loan, the Englewood Loan or any Loan Document other than this
Agreement, or any document evidencing or executed in connection with
any Future Loan, and the same is not remedied within the applicable
period of grace (if any) provided herein or in such document.

(p) Abandonment. Borrower (or any other owner of the Property) abandons
any or all of the Property.

(q) Encumbrance of the Property. Without the prior written consent of
Lender, except as otherwise specifically permitted in any Loan Document
(including, without limitation Section 5.9 of this Agreement), Borrower
(or any other owner of the Property) creates, places or permits to be
created or placed, or through any act or failure to act voluntarily
acquiesces in the placing of, or allows to remain, by operation of law
or otherwise, any deed of trust, mortgage, voluntary or involuntary
lien (whether statutory, constitutional or contractual), encumbrance or
charge, security interest, financing statement, equipment lease,
chattel mortgage, conditional bill of sale, title retention contract,
or other security device or instrument, against or covering the
Property or any part thereof, whether by operation of law or otherwise
regardless of whether the same is expressly or otherwise subordinate to
the lien or security interest of the Mortgage; provided that if a
notice of lis pendens is filed against the Property, such filing shall
not constitute a default hereunder so long as the claim for which such
lis pendens has been filed is being contested in good faith by
appropriate proceedings which have been disclosed to Lender in writing,
and adequate reserves for the payment of such related claim have been
set aside on the books of Borrower in accordance with generally
accepted accounting principles, consistently applied.

Section 7.2. Notice and Cure. If any provision of this Agreement or any
other Loan Document provides for Lender to give to Borrower any notice regarding
a default or incipient default, then if Lender shall fail to give such notice to
Borrower as provided, the sole and exclusive remedy of Borrower for such failure
shall be to seek appropriate equitable relief to enforce the agreement to give
such notice and to have any acceleration of the maturity of the Note or other
Indebtedness postponed or revoked and foreclosure and other proceedings in
connection therewith delayed or terminated pending or upon the curing of such
default in the manner and during the period of time permitted by such agreement,
if any, and Borrower shall have no right to damages or any other type of relief
not herein specifically set out against Lender, all of which damages or other
relief are hereby waived by Borrower. Nothing herein or in any other Loan
Document shall operate or be construed to add on or make cumulative any cure or
grace periods specified in any of the Loan Documents.

TERM LOAN AGREEMENT (Candlewood Wichita Northeast) Page 25

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ARTICLE 8 - RIGHTS AND REMEDIES OF LENDER

Section 8.1. Certain Remedies. Should a default occur, Lender may, at
its election, do any one or more of the following without notice (unless notice
is required by applicable statute):

(a) Declare the Indebtedness, or any part thereof, immediately
due and payable, whereupon it shall be due and payable without
notice of any kind, including but not limited to notice of
intention to accelerate, all of which are waived by Borrower.
Without limitation of the foregoing, upon the occurrence of a
default described in clauses (i), (iii) or (iv) of Section
7.1(e)(1), but only by virtue of such an occurrence with
respect to Borrower, all of the Indebtedness shall thereupon be
immediately due and payable, without presentment, demand,
protest, notice of protest, declaration or notice of
acceleration or intention to accelerate, or any other notice or
declaration or act of any kind, all of which are hereby
expressly waived by Borrower.

(b) Terminate its commitment to lend and any obligation to
disburse any Borrower's Deposit hereunder.

(d) Exercise any and all rights and remedies afforded by any of
the Loan Documents, or by law or equity or otherwise, as Lender
shall deem appropriate.

Section 8.2. Other Rights, etc. Upon the occurrence of a default,
Lender shall have the right, in addition to any other right or remedy of Lender,
but not the obligation, in its own name or in the name of Borrower, to enter
into possession of the Property, and to employ watchmen and other safeguards to
protect the Property. Borrower hereby appoints Lender as the attorney-in-fact of
Borrower with full power of substitution, and in the name of Borrower, if Lender
elects to do so, upon the occurrence of a default, to (a) endorse the name of
Borrower on any checks or drafts representing proceeds of the Insurance
Policies, or other checks or instruments payable to Borrower with respect to the
Property; (b) prosecute or defend any action or proceeding incident to the
Property. The power of attorney granted hereby is a power coupled with an
interest, is irrevocable and shall not terminate on disability of the principal.
Lender shall have no obligation to undertake any of the foregoing actions, and,
if Lender should do so, it shall have no liability to Borrower for the
sufficiency or adequacy of any such actions taken by Lender.

Section 8.3. Performance by Lender on Borrower's Behalf. Borrower
agrees that, if Borrower fails to perform any act or to take any action which
under any Loan Document Borrower is required to perform or take, or to pay any
money which under any Loan Document Borrower is required to pay, and whether or
not the failure then constitutes a default hereunder or thereunder, but provided
that there exists a default, or potential default, Lender, in Borrower's name or
its own name, may, but shall not be obligated to, perform or cause to be
performed such act or take such action or pay such money, and any expenses so
incurred by Lender and any money so paid by Lender, shall be a demand obligation
owing by Borrower to Lender (which obligation Borrower hereby promises to pay)
and Lender, upon making such payment, shall be subrogated to all of the rights
of the person, entity or body politic receiving such payment. Lender shall have
the right to enter upon the Property for any such purposes. No such payment or
performance by Lender shall waive or cure any default or waive any right, remedy
or recourse of Lender. Any such payment may be made by Lender in reliance on any
statement, invoice or claim without inquiry into the validity or accuracy
thereof. Each amount due and owing by Borrower to Lender pursuant to this
Section shall bear interest each day, from the date of such expenditure or
payment until paid, at the same rate as is provided in the Note for interest on
past due principal owed on the Note; and all such amounts, together with such
interest thereon, shall be a part of the Indebtedness and shall be secured by
the Mortgage. The amount and nature of any such expense and the time when paid
shall be fully established by the certificate of Lender or any of Lender's
officers or agents.

Section 8.4. Remedies Cumulative. All remedies provided for herein and
in any other Loan Document are cumulative of each other and of any and all other
remedies existing at law

TERM LOAN AGREEMENT (Candlewood Wichita Northeast) Page 26

<PAGE> 31

or in equity, and Lender shall, in addition to the remedies provided herein or
in any other Loan Document, be entitled to avail itself of all such other
remedies as may now or hereafter exist at law or in equity for the collection of
the Indebtedness and the enforcement of the covenants herein and the foreclosure
of the liens and security interests evidenced by the Mortgage or any other Loan
Document, and the resort to any remedy provided for hereunder or under any such
other Loan Document or provided for by law or in equity shall not prevent the
concurrent or subsequent employment of any other appropriate remedy or remedies.

ARTICLE 9 - GENERAL TERMS AND CONDITIONS

Section 9.1. Loan Documents. All documents, certificates, Insurance
Policies, and other items required under this Agreement to be executed and/or
delivered to Lender shall be in form and content satisfactory to Lender.

Section 9.2. Conditions for the Benefit of Lender. All conditions of
the obligations of Lender hereunder, including the obligation to make the
Advance, are imposed solely and exclusively for the benefit of Lender, and may
be freely waived in whole or in part by Lender at any time. No other person is a
beneficiary of such conditions, has standing to require satisfaction of such
conditions, or is entitled to assume that Lender will make the Advance or refuse
to make the Advance in the absence of strict compliance therewith.
Notwithstanding any approval, consent, inspection, verification, or receipt and
review of information or documents by Lender, Lender has no obligation or
responsibility whatsoever, and assumes no duty or obligation, for the adequacy,
form, or content of the Plans, any other contract, the Property or its
condition, the existence or non-existence of any facts related thereto, the
performance or quality of any work or workmanship regarding the Project or the
Property or the absence therefrom of defects, the financial condition, or the
reporting thereof, of Borrower, any Guarantor, or the Property, or the
compliance of any of the foregoing with any Governmental Requirement. Lender's
acceptance of an assignment of the Plans shall not constitute approval of the
Plans. Any inspection or audit of the Property or the books and records of
Borrower, or the procuring of documents and financial and other information, by
or on behalf of Lender shall be for Lender's protection only, and shall not
constitute any assumption of responsibility to Borrower or anyone else with
regard to the condition, construction, maintenance or operation of the Property,
or relieve Borrower of any of the Indebtedness or its obligations related
thereto. Lender has no duty to supervise or inspect any of the books and records
pertaining to the Property or the financial records of Borrower or any
Guarantor, or to inform Borrower or any other Person of the existence of any
defect, nor shall Lender have any liability for the performance or default of
Borrower, or any other person, or for any failure to construct, complete,
protect or insure the Improvements, or to pay any costs associated therewith, or
for the performance of any obligation of Borrower whatsoever. Failure by Lender
to inspect any work concerning the Project, or inspection not followed by notice
of default, shall not constitute a waiver of any of Lender's rights hereunder or
under any other Loan Document or otherwise or a representation that there has
been compliance with any Governmental Requirement or any other of Borrower's
obligations hereunder or that any such work is free from defects.

Section 9.3. Borrower in Control. In no event shall Lender's rights and
interests under the Loan Documents be construed to give Lender the right to
control, or be deemed to indicate that Lender is in control of, the business,
properties, management functions or operating decisions made by Borrower.

Section 9.4. Waiver by Lender. Lender may at any time and from time to
time in writing (a) waive compliance by Borrower with any covenant herein made
by Borrower to the extent and in the manner specified in such writing; (b)
consent to Borrower's doing any act which hereunder Borrower is prohibited from
doing, or to Borrower's failing to do any act which hereunder Borrower is
required to do, to the extent and in the manner specified in such writing; (c)
release any part of the Property or any interest therein from the lien and
security interest of the Mortgage; or (d) release any party liable, either
directly or indirectly, for the Indebtedness or for any covenant herein or in
any other Loan Document, without impairing or releasing the liability of any
other party. No such act shall in any way impair the rights or powers of Lender
except to the extent specifically agreed to by Lender in such writing.

TERM LOAN AGREEMENT (Candlewood Wichita Northeast) Page 27

<PAGE> 32

Section 9.5. Acts Not Constituting Waiver by Lender. Lender may waive
any default without waiving any other prior or subsequent default. Lender may
remedy any default without waiving the default remedied. Neither failure by
Lender to exercise, nor delay by Lender in exercising, any right, power or
remedy upon any default shall be construed as a waiver of such default or as a
waiver of the right to exercise any such right, power or remedy at a later date.
No single or partial exercise by Lender of any right, power or remedy hereunder
shall exhaust the same or shall preclude any other or further exercise thereof,
and every such right, power or remedy hereunder may be exercised at any time and
from time to time. No modification or waiver of any provision hereof nor consent
to any departure by Borrower therefrom shall in any event be effective unless
the same shall be in writing and signed by Lender and then such waiver or
consent shall be effective only in the specific instance, for the purpose for
which given and to the extent therein specified. No notice to nor demand on
Borrower in any case shall of itself entitle Borrower to any other or further
notice or demand in similar or other circumstances.

Section 9.6. Place of Payment; Forum. All Indebtedness which may be
owing at any time by Borrower shall be payable at the place designated in the
Note or if no such designation is made, at the address of Lender stated at the
end of this Agreement. Borrower hereby irrevocably submits generally and
unconditionally for itself and in respect of its property to the non-exclusive
jurisdiction of any Texas state court, or any United States federal court,
sitting in the City of Dallas, Texas, and to the non-exclusive jurisdiction of
any state or United States federal court sitting in the state in which any of
the Property is located, over any suit, action or proceeding arising out of or
relating to this Agreement or the Indebtedness. Borrower hereby agrees and
consents that, in addition to any methods of service of process provided for
under applicable law, all service of process in any such suit, action or
proceeding in any Texas state court, or any United States federal court, sitting
in the City of Dallas, Texas may be made by certified or registered mail, return
receipt requested, directed to Borrower at its address stated at the end of this
Agreement, or at a subsequent address of which Lender received actual notice
from Borrower in accordance with this Agreement, and service so made shall be
complete five (5) days after the same shall have been so mailed.

Section 9.7. Compliance with Usury Laws. It is the intent of Borrower
and Lender and all other parties to the Loan Documents to conform to and
contract in strict compliance with applicable usury law from time to time in
effect. All agreements between Borrower and Lender (or any other party liable
with respect to any Indebtedness under the Loan Documents) are hereby limited by
the provisions of this Section which shall override and control all such
agreements, whether now existing or hereafter arising and whether written or
oral (however, reference to the term "oral" shall not be construed to modify or
negate any provisions hereof or of any other Loan Document regarding the absence
or ineffectiveness of oral agreements). In no way, nor in any event or
contingency (including but not limited to prepayment, default, demand for
payment, or acceleration of the maturity of any obligation), shall the interest
taken, reserved, contracted for, charged or received under this Agreement, the
Note or otherwise, exceed the maximum amount permissible under applicable law.
If, from any possible construction of any document, interest would otherwise be
payable in excess of the maximum lawful amount, any such construction shall be
subject to the provisions of this Section, and such document shall be
automatically reformed and the interest payable shall be automatically reduced
to the maximum amount permitted under applicable law, without the necessity of
execution of any amendment or new document. If Lender shall ever receive
anything of value which is characterized as interest under applicable law and
which would apart from this provision be in excess of the maximum lawful amount,
an amount equal to the amount which would have been excessive interest shall,
without penalty, be applied to the reduction of the principal amount owing on
the Indebtedness in the inverse order of its maturity and not to the payment of
interest, or refunded to Borrower or the other payor thereof if and to the
extent such amount which would have been excessive exceeds such unpaid
principal. The right to accelerate maturity of the Note or any other
Indebtedness does not include the right to accelerate any interest which has not
otherwise accrued on the date of such acceleration, and Lender does not intend
to charge or receive any unearned interest in the event of acceleration. All
interest paid or agreed to be paid to Lender shall, to the extent permitted by
applicable law, be amortized, prorated, allocated and spread throughout the full
stated term (including any renewal or extension) of such Indebtedness so that
the amount of interest on account of such Indebtedness does not exceed the
maximum permitted by applicable law. As used in this Section, the term
"applicable law" shall mean the laws of the State of Texas or the federal laws
of the United States, whichever laws

TERM LOAN AGREEMENT (Candlewood Wichita Northeast) Page 28

<PAGE> 33

allow the greater interest, as such laws now exist or may be changed or amended
or come into effect in the future.

Section 9.8. Notices. All notices, requests, consents, demands and
other communications required or permitted to be given by or to any party
hereunder or under any other Loan Document shall be in writing and, unless
otherwise specifically provided in such other Loan Document, shall be deemed
sufficiently given or furnished if delivered by personal delivery, by reputable
courier or delivery service with proof of delivery, or by prepaid registered or
certified United States mail, addressed to the party to whom directed at the
address specified at the end of this Agreement (unless changed by similar notice
in writing given by the particular party whose address is to be changed) or by
telegram, telex, or facsimile. Any such notice or communication shall be deemed
to have been given either at the time of personal delivery or, in the case of
delivery service or mail, as of the date of first attempted delivery at the
address and in the manner provided herein, or, in the case of telegram, telex,
or facsimile, upon receipt. Notwithstanding the foregoing, no notice of change
of address shall be effective except upon receipt, and service of a notice
required by Texas Property Code Section 51.002, as amended, to the extent
applicable, shall be considered complete when the requirements of that statute
are met. This Section shall not be construed in any way to affect or impair any
waiver of notice or demand provided in any Loan Document or to require giving of
notice or demand to or upon any person in any situation or for any reason.

Section 9.9. Invalidity of Certain Provisions. A determination that any
provision of this Agreement is unenforceable or invalid shall not affect the
enforceability or validity of any other provision, and the determination that
the application of any provision of this Agreement to any person or circumstance
is illegal or unenforceable shall not affect the enforceability or validity of
such provision as it may apply to other persons or circumstances.

Section 9.10. Lender's Consent. Except where otherwise expressly
provided herein, in any instance hereunder where the approval, consent or the
exercise of judgment of Lender is required, the granting or denial of such
approval or consent and the exercise of such judgment shall be within the sole
discretion of Lender, and Lender shall not, for any reason or to any extent, be
required to grant such approval or consent or exercise such judgment in any
particular manner, regardless of the reasonableness of either the request or
Lender's judgment. In any instance when the approval or consent of Lender is
contemplated or required by the terms of this Agreement or any other Loan
Document, unless otherwise specifically provided no such approval or consent
shall be deemed to have been given except by a specific writing intended for
that purpose and executed by an authorized representative of Lender.

Section 9.11. Execution; Counterparts. This Agreement has been executed
in several counterparts, all of which are identical, and all of which
counterparts together shall constitute one and the same instrument. The date or
dates reflected in the acknowledgments of the Mortgage indicate the date or
dates of actual execution of this Agreement, but such execution is as of the
date shown on the first page hereof, and for purposes of identification and
reference the date of this Agreement shall be deemed to be the date reflected on
the first page hereof.

Section 9.12. Successors and Assigns. The terms, provisions, covenants
and conditions hereof shall be binding upon Borrower, and the heirs, devisees,
representatives, successors and assigns of Borrower, and shall inure to the
benefit of Lender and its successors and assigns. All references in this
Agreement to Borrower or Lender shall be deemed to include all such heirs,
devisees, representatives, successors and assigns.

Section 9.13. Modification or Termination. The Loan Documents may only
be modified or terminated by a written instrument or instruments intended for
that purpose and executed by the party against which enforcement of the
modification or termination is asserted. Any alleged modification or termination
which is not so documented shall not be effective as to any party. This
Agreement shall continue in full force and effect until the Indebtedness is paid
in full; and all provisions herein for indemnity of Lender (and any other
provisions herein specified to survive) shall survive payment in full of the
Indebtedness and any release or termination of this Agreement.

Section 9.14. No Partnership, etc. The relationship between Lender and
Borrower is solely that of lender and borrower. Lender has no fiduciary or other
special relationship with

TERM LOAN AGREEMENT (Candlewood Wichita Northeast) Page 29

<PAGE> 34

Borrower. Nothing contained in the Loan Documents is intended to create any
partnership, joint venture or association between Borrower and Lender or in any
way make Lender a co-principal with Borrower with reference to the Property. Any
inferences to the contrary of any of the foregoing are hereby expressly negated.

Section 9.15. Time of Essence. Time shall be of the essence in this
Agreement with respect to all obligations hereunder.

Section 9.16. Applicable Law. THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS ARE CONTRACTS MADE IN, AND UNDER THE LAWS OF, THE STATE OF TEXAS, AND
THEIR VALIDITY, ENFORCEMENT AND INTERPRETATION, SHALL FOR ALL PURPOSES BE
GOVERNED ENTIRELY BY TEXAS LAW AND APPLICABLE UNITED STATES FEDERAL LAW. CHAPTER
15 OF SUBTITLE 3, TITLE 79, OF THE REVISED CIVIL STATUTES OF THE STATE OF TEXAS,
AS IN EFFECT ON THE DATE HEREOF AND AS THE SAME MAY HEREAFTER BE AMENDED OR
SUPPLEMENTED FROM TIME TO TIME, SHALL NOT APPLY TO THE LOAN, THE ADVANCE OR ANY
LOAN DOCUMENT.

Section 9.17. Capital Requirements and Yield Maintenance. If at any
time after the date hereof, and from time to time, Lender determines that the
adoption or modification of any applicable law, rule or regulation regarding
taxation, Lender's required levels of reserves, deposits, insurance or capital
(including any allocation of capital requirements or conditions), or similar
requirements, or any interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with the
interpretation, administration or compliance of Lender with any of such
requirements, has or would have the effect of (i) increasing Lender's costs
relating to the obligations hereunder, or (ii) reducing the yield or rate of
return of Lender on the obligation hereunder, to a level below that which Lender
could have achieved but for the adoption or modification of any such
requirements, Lender shall give Borrower written notice of such fact and
Borrower shall, for the period commencing ninety (90) days from the date of any
written request by Lender (and the submission of reasonable evidence in support
thereof), pay to Lender on demand such additional amounts as (in Lender's sole
judgment, after good faith and reasonable computation, based upon any reasonable
averaging, attribution and allocation methods) will compensate Lender for such
increase in costs or reduction in yield or rate of return of Lender, except
taxes based on Lender's income and reductions in yield or rate of return based
on such taxes. No failure by Lender to demand payment of any additional amounts
payable hereunder shall constitute a waiver of Lender's right to demand payment
of such amounts at any subsequent time. Nothing herein contained shall be
construed or so operate as to require Borrower to pay any interest, fees, costs
or charges greater than is permitted by applicable law.

Section 9.18. Arbitration.

(a) Mandatory Arbitration. Any controversy or claim between or among
the parties hereto, including, without limitation, those arising out of or
relating to this Agreement or any other Loan Document, including, without
limitation, any claim based on or arising from an alleged tort, shall be
determined by binding arbitration in accordance with the Federal Arbitration Act
(or if not applicable, the applicable state law), the Rules of Practice and
Procedure for the Arbitration of Commercial Disputes of Endispute, Inc., doing
business as J.A.M.S./Endispute ("JAMS"), and the rules (the "Special Rules") set
forth in paragraph (b) of this Section. In the event of any inconsistency, the
Special Rules shall control. Judgment upon any arbitration award may be entered
in any court having jurisdiction. Any party to this Agreement may bring an
action, including, without limitation, a summary or expedited proceeding, to
compel arbitration of any controversy or claim to which this agreement applies
in any court having jurisdiction over such action. Each party to this Agreement
agrees to keep all of the foregoing matters and the related arbitration
proceedings strictly confidential, except for disclosures of information
required in the ordinary course of business of the parties or by any
Governmental Requirement.

TERM LOAN AGREEMENT (Candlewood Wichita Northeast) Page 30

<PAGE> 35

ninety (90) days of the demand for arbitration; further, the arbitrator shall
only, upon a showing of cause, be permitted to extend the commencement of such
hearing for up to an additional sixty (60) days. With respect to a controversy
or claim in which the claim or the amount of the controversy does not exceed
$2,000,000 in the aggregate, a single arbitrator (who shall have authority to
render a maximum award of $2,000,000, including all damages of any kind and
costs, fees and the like) shall be chosen and shall decide such controversy or
claim. With respect to a controversy or claim in which the claim or amount in
controversy exceeds $2,000,000 in the aggregate, such controversy or claim shall
be decided by a majority vote of three arbitrators. In all arbitration
proceedings in which the claim or amount in controversy exceeds $2,000,000 in
the aggregate, the arbitrators shall make specific, written findings of fact and
conclusions of law in the award.

(c) Reservations of Rights. Nothing in this Agreement shall be deemed
to (i) limit the applicability of any otherwise applicable statutes of
limitation or repose and any waivers contained in this Agreement; or (ii) be a
waiver by Lender of the protection afforded to it by 12 U.S.C. Sec. 91 or any
substantially equivalent state law; or (iii) limit the right of Lender (A) to
exercise self help remedies such as (but not limited to) setoff, or (B) to
foreclose against any real or personal property securing the Loan, or (C) to
obtain from a court provisional or ancillary remedies such as (but not limited
to) injunctive relief or the appointment of a receiver. Lender may exercise such
self help rights, foreclose upon such property, or obtain such provisional or
ancillary remedies before, during or after the pendency of any arbitration
proceeding brought pursuant to this Agreement. If Lender shall attempt to obtain
from a court such provisional or ancillary remedies, Borrower shall be entitled
to appear in such court and defend against same. At Lender's option, foreclosure
under a deed of trust, deed to secure debt or mortgage may be accomplished by
any of the following: the exercise of a power of sale under such deed of trust,
deed to secure debt or mortgage, or by judicial sale under such deed of trust,
deed to secure debt or mortgage, or by judicial foreclosure. Neither this
exercise of self help remedies nor the institution or maintenance of an action
for foreclosure or provisional or ancillary remedies shall constitute a waiver
of the right of any party, including the claimant in any such action, to
arbitrate the merits of the controversy or claim occasioning resort to such
remedies.

Section 9.19. Loan Agreement Governs. In the event of any conflict
between the terms of this Agreement and any terms of any other Loan Document,
the terms of this Agreement shall govern. All of the Loan Documents are by this
reference incorporated into this Agreement.

Section 9.20. Payments Set Aside. To the extent that Borrower or any
other person pays the Indebtedness or any part thereof to Lender, or Lender
enforces any of its rights under any Loan Document, and such payment or
enforcement or any part thereof is subsequently invalidated, declared to be
fraudulent or preferential, set aside, and/or required to be repaid to Borrower
or such other person, its estate, a trustee, receiver, or any other person under
any Governmental Requirement, then to the extent of such repayment, the
Indebtedness or part thereof originally intended to be satisfied, together with
all Loan Documents (including all the terms thereof and all Lender's rights
thereunder), notwithstanding any prior termination and/or delivery of the Loan
Documents to Borrower (it being agreed that the provisions of this Section shall
survive any such termination and/or delivery), shall be revived and continued in
effect as if such payment had not been made or such enforcement had not
occurred.

Section 9.21. Disclaimer of Financing. Lender has not made any
commitment or agreement, express or implied, to extend the term of the Loan past
the Maturity Date or to provide Borrower with any financing except as expressly
described in this Agreement.

Section 9.22. Evidence of Satisfaction. As part of satisfying or
performing any condition or obligation under the Loan Documents, Borrower shall
deliver to Lender evidence of such satisfaction or performance satisfactory to
Lender.

Section 9.23. Jointly Drafted. The parties have participated jointly in
the negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, there shall be no presumption or
burden of proof which arises favoring or disfavoring any party by virtue of the
authorship of any of the provisions of this Agreement.

TERM LOAN AGREEMENT (Candlewood Wichita Northeast) Page 31

<PAGE> 36

Section 9.24. Entire Agreement. The Loan Documents constitute the
entire understanding and agreement between Borrower and Lender with respect to
the transactions arising in connection with the Loan and supersede all prior
written or oral understandings and agreements between Borrower and Lender with
respect to the matters addressed in the Loan Documents. Borrower hereby
acknowledges that, except as incorporated in writing in the Loan Documents,
there are not, and were not, and no persons are or were authorized by Lender to
make, any representations, understandings, stipulations, agreements or promises,
oral or written, with respect to the matters addressed in the Loan Documents.

THE WRITTEN LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES. EACH PARTY HERETO FURTHER ACKNOWLEDGES THAT
SUFFICIENT SPACE HAS BEEN PROVIDED HEREIN, AND IN THE OTHER LOAN DOCUMENTS, FOR
THE PLACEMENT OF NONSTANDARD TERMS.

[INTENTIONALLY BLANK--SIGNATURES ON THE NEXT PAGE]

TERM LOAN AGREEMENT (Candlewood Wichita Northeast) Page 32

<PAGE> 37

EXECUTED and DELIVERED as of the date first recited.

The Address of Borrower is: BORROWER:

9432 East Central CANDLEWOOD WICHITA NORTHEAST, L.L.C.
Wichita, Kansas 67206 a Kansas limited liability company

By: /s/Warren D. Fix
-------------------------------
Name: Warren D. Fix
Title: Executive Vice President

The Address of Lender is: LENDER:

NationsBank of Texas, N.A. NATIONSBANK OF TEXAS, N.A.
901 Main Street, 51st Floor a national banking association
Dallas, Texas 75202
Attn: Real Estate Loan Administration

By: /s/Julie Wallis
--------------------------------
Julie Wallis,
Vice President

TERM LOAN AGREEMENT (Candlewood Wichita Northeast) Page 33

<PAGE> 1
EXHIBIT 10.8

PROMISSORY NOTE

$3,000,000.00 Dallas, Texas October 15, 1996

FOR VALUE RECEIVED, Candlewood Wichita Northeast, L.L.C., a Kansas limited
liability company (herein called "Maker"), hereby promises to pay to the order
of NationsBank of Texas, N.A., a national banking association ("Lender"), at its
banking house in the City of Dallas, Dallas County, Texas, the principal sum of
Three Million and No/100 Dollars ($3,000,000.00) (or the unpaid balance of all
principal advanced against this Note, if that amount is less), on or before
March 15 1999, subject to the right of Maker to extend such maturity date until
March 15, 2000, pursuant to Section 2.4 of the Loan Agreement (as hereinafter
defined), together with interest on the unpaid principal balance of this Note
from day to day outstanding, as hereinafter provided.

This Note has been issued pursuant to the terms of the Loan Agreement, to
which reference is made for all purposes. Advances against this Note by Lender
or any other holder hereof shall be governed by the Loan Agreement. Lender is
entitled to the benefits of and security provided for in the Loan Agreement.
Such security includes, but is not limited to, a Mortgage, Assignment, Security
Agreement and Financing Statement (which, as it may have been or may be amended,
restated, modified or supplemented from time to time, is herein called the
"Mortgage") of even date herewith from Maker to Lender, covering and affecting
certain property in Wichita, Sedgwick County, Kansas, more fully described
therein, and the Guaranties of Candlewood Hotel Company, Inc., a Delaware
corporation, Candlewood Hotel Company, L.L.C., a Delaware limited liability
company, Candlewood Omaha, L.L.C., a Delaware limited liability company, and
Candlewood Englewood, L.L.C., a Delaware limited liability company. Any notice
required or which any party desires to give under this Note shall be given and
effective as provided in the Mortgage.

Terms used herein with initial capital letters and not defined herein, if
any, have the meanings given them in the Loan Agreement.

Section 1. Definitions. As used herein the following terms shall have the
respective meanings set forth below:

(a) "Adjusted LIBOR Rate" means on the applicable Effective Date (defined
below), with respect to a LIBOR Rate Portion, a rate per annum equal to the sum
of (A) the quotient of (i) the LIBOR Rate on the applicable Effective Date,
divided by (ii) the remainder of 1.00 minus the LIBOR Reserve Requirement, if
any, on the applicable Effective Date, plus (B) the FDIC Percentage in effect on
the applicable Effective Date, plus (c) two and three-quarter percent (2.75%).

(b) "Applicable Rate" means the rate of interest applicable to the Loan or
portions thereof pursuant to the provisions of Section 2.

(c) "Business Day" means (a) for all purposes other than as covered by
clause (b) of this definition, any day of the week, other than Saturday, Sunday
or other day Lender is required or authorized by law or executive order to
close, and (b) with respect to all requests, notices and determinations in
connection with LIBOR Rate Portions, a day which is a Business Day described in
clause (a) of this definition and which is a day for trading by and between
banks for Dollar deposits in the London interbank market.

(d) "FDIC Percentage" means, on any day, the net assessment rate
(expressed as a percentage rounded to the next highest 1/100 of 1%) which is in
effect on such day (under the regulations of the Federal Deposit Insurance
Corporation or any successor) for determining the assessments paid by Lender to
the Federal Deposit Insurance Corporation (or any successor) for insuring
Eurocurrency deposits made in dollars at Lender's principal offices in Dallas,
Texas. Each good faith determination of said percentage made by Lender shall, in
the absence of manifest error, be binding and conclusive.

PROMISSORY NOTE (Candlewood Wichita Northeast) Page 1
<PAGE> 2
(e) "Interest Adjustment Date" means the earlier of either the last day of
an Interest Period or the Termination Date.

(f) "Interest Period" means, with respect to a LIBOR Rate Portion, a
period selected by Maker of 30, 60, 90, or 180 days, commencing on the Effective
Date of any LIBOR Rate Portion; provided that, unless the Loan is renewed and
extended prior to the maturity date of this Note, each Interest Period ending on
a date later than the Termination Date shall be deemed to end on the Termination
Date.

(g) "LIBOR Rate" shall mean, with respect to a LIBOR Rate Portion for the
Interest Period applicable thereto, the rate per annum (rounded upward to the
next higher of 1/100 of 1.0%) appearing on Telerate page 3750 (or any successor
page ) as the London interbank offered rate for deposits in U.S. Dollars at
approximately 11:00 a.m. (London time) two Business Days prior to the first day
of such Interest Period for a term comparable to such Interest Period. If for
any reason such rate is not available, the Term "LIBOR Rate" shall mean, for any
LIBOR Rate Portion for any Interest Period therefor, the rate per annum (rounded
upwards, if necessary, to the nearest 1/100 of 1.0%) appearing on Reuters Screen
LIBO Page as the London interbank offered rate for deposits in U.S. Dollars at
approximately 11:00 a.m. (London time) two Business Days prior to the first day
of such Interest Period for a term comparable to such Interest Period; provided,
however, if more than one rate is specified on Reuters Screen LIBO Page, the
applicable rate shall be the arithmetic mean of all such rates.

(h) "LIBOR Rate Portion" means that portion or those portions of the Loan
which bear interest computed with reference to the LIBOR Rate.

(i) "LIBOR Reserve Requirement" means, on any day, that percentage
(expressed as a decimal fraction) which is in effect on such date, as provided
by the Federal Reserve System for determining the maximum reserve requirements
generally applicable to financial institutions regulated by the Federal Reserve
Board comparable in size and type to Lender (including, without limitation,
basic supplemental, marginal and emergency reserves) under Regulation D with
respect to "Eurocurrency liabilities" as currently defined in Regulation D, or
under any similar or successor regulation with respect to Eurocurrency
liabilities or Eurocurrency funding (or, other category of liabilities which
include deposits by reference to which the interest rate on a LIBOR Rate Portion
is determined or any category or extensions of credit which include loans to a
non-United States office of Lender to United States residences) is determined.
Each determination by Lender of the LIBOR Reserve Requirement, shall, in the
absence of manifest error, be binding and conclusive.

(j) "Loan" means the principal indebtedness evidenced by this Note
outstanding from time to time.

(k) "Loan Agreement" means the Term Loan Agreement dated of even date
herewith executed by and between Maker and Lender.

(l) "Loan Documents" has the meaning set forth in the Loan Agreement.

(m) "Maximum Rate" as used in this Note means the maximum nonusurious rate
of interest per annum permitted by whichever of applicable United States federal
law or Texas law permits the higher interest rate, including to the extent
permitted by applicable law, any amendments thereof hereafter or any new law
hereafter coming into effect to the extent a higher Maximum Rate is permitted
thereby. To the extent, if any, that Chapter One ("Chapter One") of Title 79,
Texas Revised Civil Statutes, 1925, as amended establishes the Maximum Rate, the
Maximum Rate shall be the "indicated rate ceiling" (as defined in Chapter One)
in effect from time to time. The Maximum Rate shall be applied by taking into
account all amounts characterized by applicable law as interest on the debt
evidenced by this Note, so that the aggregate of all interest does not exceed
the maximum nonusurious amount permitted by applicable law.

(n) "Past Due Rate" as used in this Note means, on any day, a rate per
annum equal to the Prime Rate plus four percent (4%) per annum computed using
the 1/360 method described below.

PROMISSORY NOTE (Candlewood Wichita Northeast) Page 2
<PAGE> 3
(o) "Prime Rate" shall mean for each Prime Rate Portion the rate per annum
most recently established by Lender as its "prime rate". The Prime Rate is set
by Lender as a general reference rate of interest, taking into account such
factors as Lender may deem appropriate, it being understood that it is not
necessarily the lowest or best rate actually charged to any customer or a
favored rate, that it may not correspond to any future increases or decreases of
interest rates charged by other lenders, or market rates in general, and Lender
may make various commercial or other loans at rates of interest having no
relationship to such rate.

(p) "Prime Rate Portion" shall mean that portion of the Loan which will
bear interest computed with reference to the Prime Rate.

(q) "Property" means the Land, the Improvements and all other property
constituting the "Mortgaged Property," as defined in the Mortgage, or subject to
a right, lien or security interest to secure the Loan pursuant to any other Loan
Document.

(r) "Regulatory Change" means any change in applicable law or regulation,
or in the interpretation thereof by any governmental authority charged with the
administration thereof.

(s) "Seven Year U.S. Treasury Rate" means a rate of interest per annum (as
of the date of determination) on U.S. Treasury Notes having a maturity of seven
(7) years as shown in the seven-year listing in the "this week" column under the
heading "Treasury Constant Maturities" of the Federal Reserve statistical
release Form H.15 or, if such published rate of interest is not available for
any reason at least ten (10) Business Days prior to the date of determination,
such other comparable rate of interest determined by Lender, in its reasonable
discretion.

(t) "Termination Date" shall mean the final maturity date of this Note on
which all outstanding principal and accrued interest hereunder is due and
payable (as such maturity date may be renewed or extended, or accelerated under
the terms of this Note or otherwise).

(u) "Variable Rate" means the Prime Rate plus one-half of one percent
(.5%) per annum.

Without notice to Maker or anyone else, the Variable Rate and the Maximum
Rate shall each automatically fluctuate upward and downward as and in the amount
by which the Prime Rate and such maximum nonusurious rate of interest permitted
by applicable law, respectively, fluctuate, subject always to limitations
contained in this Note.

Section 2. Payments.

(a) Principal. Commencing on June 1, 1997 and continuing on the first
(1st) day of each successive calendar month thereafter until the Termination
Date when any remaining outstanding principal of this Note, together with all
accrued and unpaid interest hereon, shall be due and payable in full, Borrower
shall pay to Lender a principal payment in an amount which would be sufficient
to fully amortize the amount of the Loan, in level monthly payments over
twenty-five (25) years, at an interest rate equal to the greatest of (i) nine
percent (9%), (ii) the Variable Rate on the day which is ten (10) Business Days
prior to June 1, 1997, or (iii) the Seven Year U.S. Treasury Rate on the day
which is ten (10) Business Days prior to June 1, 1997, plus three and
one-quarter percent (3.25%). The principal payments required by this Subsection
(a) shall be in addition to, but not in lieu of, the interest payments required
in Subsection (c) below.

(b) Interest on the Loan shall accrue at a rate per annum equal to the
lesser of (i) at Maker's option, the Variable Rate, or the Adjusted LIBOR Rate
(the "Applicable Rate"), subject, however, to the provisions of this Section 2,
or (ii) the Maximum Rate; provided, however, if at any time the Applicable Rate
exceeds the Maximum Rate, resulting in the charging of interest hereunder to be
limited to the Maximum Rate, then any subsequent reduction in the Applicable
Rate shall not reduce the rate of interest below the Maximum Rate until the
total amount of interest accrued on the indebtedness evidenced hereby equals the
amount of interest which would have accrued on such indebtedness if the
Applicable Rate had at all times been in effect. Interest on this Note shall be
calculated at a daily rate equal to 1/360 of the

PROMISSORY NOTE (Candlewood Wichita Northeast) Page 3
<PAGE> 4
annual percentage rate which this Note bears, subject to the provisions hereof
limiting interest to the maximum permitted by applicable law.

(c) Interest hereon shall be due and payable monthly as it accrues, on or
before the first day of each calendar month commencing November 1, 1996, and
continuing on the first day of each successive month thereafter until the
Maturity Date and on demand thereafter until the entire principal balance is
paid in full.

(d) Upon at least three (3) Business Days' prior written notice to Lender
("Minimum Notice Requirement"), Maker may, on any Interest Adjustment Date
(other than the Termination Date), convert amounts of any LIBOR Rate Portion
into a Prime Rate Portion with interest accruing thereon, with reference to the
Variable Rate, as provided in paragraph (b) above in this Section 2.

(e) Upon satisfaction by Maker of the Minimum Notice Requirement, and
subject to the conditions provided in this Note, Maker may, on any date prior to
the Termination Date, convert amounts of not less than One Hundred Thousand and
No/100 Dollars ($100,000.00) in the aggregate on the same date (or any whole
multiple of One Hundred Thousand and No/100 Dollars ($100,000.00) in excess
thereof) of any Prime Rate Portion into a LIBOR Rate Portion with interest
accruing thereon with reference to the Adjusted LIBOR Rate as provided in
paragraph (b) above in this Section 2, for the Interest Period selected in such
notice.

(f) To the extent Maker has not made an effective election under and in
accordance with subparagraphs (d) or (e) above (including, without limitation,
at the expiration of an Interest Period), the Applicable Rate shall be the rate
specified pursuant to the provisions contained herein for a Prime Rate Portion.
If Maker has failed to make such election at the end of an Interest Period,
Maker shall be deemed to have made an advance for a Prime Rate Portion in the
amount, and in replacement, of the LIBOR Rate Portion then maturing.

(g) Each notice of LIBOR Rate election by Maker to Lender must satisfy the
Minimum Notice Requirement and shall include the following: (i) Maker's election
of the Adjusted LIBOR Rate; (ii) Maker's choice of an Interest Period during
which the Adjusted LIBOR Rate will apply; (iii) Maker's election of the
effective date (the "Effective Date") on which the LIBOR Rate Portion shall
begin; and (iv) the amount of outstanding loan principal which for any LIBOR
Rate Portion shall not be less than One Hundred Thousand and No/100 Dollars
($100,000.00) (or any whole multiple of One Hundred Thousand and No/100 Dollars
($100,000.00) in excess thereof), to which the Adjusted LIBOR Rate shall apply.

(h) Maker's election to convert to the Adjusted LIBOR Rate is subject to
the following conditions: (i) the Interest Period shall be limited to a period
commencing on the Effective Date and ending on a date 30, 60, 90 or 180 days
later elected by Maker in its notice to Lender; (ii) Maker's written notice of
an election shall be received by Lender in time to satisfy the Minimum Notice
Requirement; (iii) the last day of the Interest Period will not be subsequent in
time to the Termination Date; (iv) in the case of a continuation of a LIBOR Rate
Portion, the Interest Period applicable to such continuation shall commence on
the last day of the preceding Interest Period; (v) no LIBOR Rate election shall
be made if Lender determines by reason of circumstances affecting the interbank
Eurodollar market that either adequate or reasonable means do not exist for
ascertaining the Adjusted LIBOR Rate for any Interest Period, or it becomes
impracticable for Lender to obtain funds by purchasing U.S. dollars in the
interbank Eurodollar market, or if Lender determines that the Adjusted LIBOR
Rate will not adequately or fairly reflect the costs to Lender of maintaining
the applicable LIBOR Rate Portions at such rate, or if as a result of any
Regulatory Change, it shall become unlawful or impossible for Lenders to
maintain any such LIBOR Rate election; (vi) there shall never be more than three
(3) LIBOR Rate Portions, in the aggregate, in effect at any one time hereunder;
and (vii) no LIBOR Rate election shall be made after the occurrence and during
the continuance of a default (defined below).

(i) If, on or after the Effective Date, any Regulatory Change shall make
it unlawful or impossible for Lender (or its Eurodollar lending office) to make,
maintain or fund a LIBOR Rate Portion, Lender shall forthwith give notice
thereof to Maker, whereupon until Lender notifies Maker that the circumstances
giving rise to such suspension no longer exist, the obligation of Lender to make
any LIBOR Rate Portions shall be suspended. If Lender shall

PROMISSORY NOTE (Candlewood Wichita Northeast) Page 4
<PAGE> 5
determine that it may not lawfully continue to maintain and fund any of the
outstanding LIBOR Rate Portions to maturity and shall so specify in such notice,
Maker shall immediately prepay in full the then outstanding principal amount of
the LIBOR Rate Portions, together with accrued interest thereon. Concurrently
with prepaying the LIBOR Rate Portions, Lender shall be deemed to have made
advances for a Prime Rate Portion to Maker in an equal principal amount.

(j) Maker shall indemnify Lender against any loss or expense which Lender
may, as a consequence of Maker's failure to make a payment on the date such
payment is due hereunder or the payment, prepayment or conversion of any LIBOR
Rate Portion hereunder on a day other than an Interest Adjustment Date, sustain
or incur in liquidating or employing deposits from third parties acquired to
effect, fund or maintain any such LIBOR Rate Portion or any part thereof. Such
loss or expense shall include, without limitation, (i) the interest which, but
for such failure, payment, prepayment or conversion, Lender would have earned in
respect of such LIBOR Rate Portion so paid, for the remainder of the Interest
Period applicable to such LIBOR Rate Portion, reduced, if Lender is able to
redeposit such principal amount so paid for the balance of such Interest Period,
by the interest earned by Lender as a result of so redepositing such principal
amount, plus (ii) any expenses or penalty incurred by Lender on redepositing
such principal amount. In the event any such loss or expense is incurred by
Lender, Lender shall furnish Maker with a certificate detailing the basis upon
which such loss or expense is computed. Any such certificate shall establish the
amount of such expense or loss for purposes of this paragraph, in the absence of
manifest error in calculation; provided, however, that upon the discovery of any
error, appropriate adjustments shall be made between Lender and Maker.

(k) Maker shall also indemnify Lender against and reimburse Lender for
increased costs to Lender, as a result of any Regulatory Change, in the
maintaining of any LIBOR Rate Portion. Lender shall give Maker written notice of
such costs within ninety (90) days of its implementation and/or compliance with
any such Regulatory Change and such costs shall be reimbursed to Lender prior to
the earlier of (i) the Termination Date or (ii) thirty (30) days following
written notice thereof from Lender to Maker. All payments made pursuant to this
paragraph shall be made free and clear, without reduction for, or account of,
any present or future taxes or other levies of any nature, excluding net income
and franchise taxes.

(l) After default, or maturity, past due principal, and past-due interest
to the extent permitted by law, shall bear interest at the Past Due Rate.

Section 3. General Provisions.

Whenever any payment shall be due under this Note on a day which is not a
Business Day, the date on which such payment is due shall be extended to the
next succeeding Business Day, and such extension of time shall be included in
the computation of the amount of interest then payable.

All principal, interest and other sums payable under this Note shall be
paid, not later than 2:00 o'clock p.m. (Dallas, Texas time) on the day when due,
in immediately available funds in lawful money of the United States of America.
Any payment under this Note or under any other Loan Document other than in the
required amount in good, unrestricted U.S. funds immediately available to the
holder hereof shall not, regardless of any receipt or credit issued therefor,
constitute payment until the required amount is actually received by the holder
hereof in such funds and shall be made and accepted subject to the condition
that any check or draft may be handled for collection in accordance with the
practice of the collecting bank or banks.

All payments made as scheduled on this Note shall be applied, to the
extent thereof, first to accrued but unpaid interest and the balance to unpaid
principal. Nothing herein shall limit or impair any rights of the holder hereof
to apply as provided in the Loan Documents any past due payments, any proceeds
from the disposition of any collateral by foreclosure or other collections after
default. Except to the extent specific provisions are set forth in this Note or
another Loan Document with respect to application of payments, all payments
received by the holder hereof shall be applied, to the extent thereof, to the
indebtedness secured by the Mortgage in such order and manner as the holder
hereof shall deem appropriate, any instructions from Maker or anyone else to the
contrary notwithstanding; provided, however, that, unless otherwise designated
by Maker or required by law, prepayments and involuntary payments (such as
casualty or condemnation proceeds) received by the holder hereof and applied to
principal

PROMISSORY NOTE (Candlewood Wichita Northeast) Page 5
<PAGE> 6
hereunder shall be applied first to the Variable Rate Portion (or that portion
of the LIBOR Rate Portion not subject to a prepayment penalty) and then to
reduce the LIBOR Rate Portion.

The occurrence of any one of the following shall be a default under this
Note ("default"):

(a) Any principal, interest or other amount of money due under this Note
is not paid in full when due, regardless of how such amount may have become due;
or
(b) the occurrence of any event of default under any Loan Document (and
the continuance thereof beyond any applicable period of grace or cure provided
therein).

Any default under this Note shall constitute a default under each of the Loan
Documents, and any default under any of the Loan Documents shall constitute a
default under this Note and under each of the other Loan Documents. Upon the
occurrence of a default, the holder hereof shall have the right to declare the
unpaid principal balance and accrued but unpaid interest on this Note at once
due and payable (and upon such declaration, the same shall be at once due and
payable), to foreclose any liens and security interests securing payment hereof
and to exercise any of its other rights, powers and remedies under this Note,
under any other Loan Document, or at law or in equity.

Neither the failure by the holder hereof to exercise, nor delay by the
holder hereof in exercising, the right to accelerate the maturity of this Note
or any other right, power or remedy upon any default shall be construed as a
waiver of such default or as a waiver of the right to exercise any such right,
power or remedy at any time. No single or partial exercise by the holder hereof
of any right, power or remedy shall exhaust the same or shall preclude any other
or further exercise thereof, and every such right, power or remedy may be
exercised at any time and from time to time. All rights and remedies provided
for in this Note and in any other Loan Document are cumulative of each other and
of any and all other rights and remedies existing at law or in equity, and the
holder hereof shall, in addition to the rights and remedies provided herein or
in any other Loan Document, be entitled to avail itself of all such other rights
and remedies as may now or hereafter exist at law or in equity for the
collection of the indebtedness owing hereunder, and the resort to any right or
remedy provided for hereunder or under any such other Loan Document or provided
for by law or in equity shall not prevent the concurrent or subsequent
employment of any other appropriate rights or remedies. Without limiting the
generality of the foregoing provisions, the acceptance by the holder hereof from
time to time of any payment under this Note which is past due or which is less
than the payment in full of all amounts due and payable at the time of such
payment, shall not (i) constitute a waiver of or impair or extinguish the rights
of the holder hereof to accelerate the maturity of this Note or to exercise any
other right, power or remedy at the time or at any subsequent time, or nullify
any prior exercise of any such right, power or remedy, or (ii) constitute a
waiver of the requirement of punctual payment and performance, or a novation in
any respect.

If any holder of this Note retains an attorney in connection with any
default or at maturity or to collect, enforce or defend this Note or any other
Loan Document in any lawsuit or in any probate, reorganization, bankruptcy or
other proceeding, or if Maker sues any holder in connection with this Note or
any other Loan Document and does not prevail, then Maker agrees to pay to each
such holder, in addition to principal and interest, all reasonable costs and
expenses incurred by such holder in trying to collect this Note or in any such
suit or proceeding, including reasonable attorneys' fees.

It is the intent of Lender and Maker and all other parties to the Loan
Documents to conform to and contract in strict compliance with applicable usury
law from time to time in effect. All agreements between Lender or any other
holder hereof and Maker (or any other party liable with respect to any
indebtedness under the Loan Documents) are hereby limited by the provisions of
this paragraph which shall override and control all such agreements, whether now
existing or hereafter arising and whether written or oral. In no way, nor in any
event or contingency (including but not limited to prepayment, default, demand
for payment, or acceleration of the maturity of any obligation), shall the
interest taken, reserved, contracted for, charged or received under this Note or
otherwise, exceed the maximum nonusurious amount permissible under applicable
law. If, from any possible construction of any document, interest would
otherwise be payable in excess of the maximum nonusurious amount, any such
construction shall be subject to the provisions of this paragraph and such
document shall be

PROMISSORY NOTE (Candlewood Wichita Northeast) Page 6
<PAGE> 7

automatically reformed and the interest payable shall be automatically reduced
to the maximum nonusurious amount permitted under applicable law, without the
necessity of execution of any amendment or new document. If the holder hereof
shall ever receive anything of value which is characterized as interest under
applicable law and which would apart from this provision be in excess of the
maximum lawful amount, an amount equal to the amount which would have been
excessive interest shall, without penalty, be applied to the reduction of the
principal amount owing on the indebtedness evidenced hereby in the inverse order
of its maturity and not to the payment of interest, or refunded to Maker or the
other payor thereof if and to the extent such amount which would have been
excessive exceeds such unpaid principal. The right to accelerate maturity of
this Note or any other indebtedness does not include the right to accelerate any
interest which has not otherwise accrued on the date of such acceleration, and
the holder hereof does not intend to charge or receive any unearned interest in
the event of acceleration. All interest paid or agreed to be paid to the holder
hereof shall, to the extent permitted by applicable law, be amortized, prorated,
allocated and spread throughout the full stated term (including any renewal or
extension) of such indebtedness so that the amount of interest on account of
such indebtedness does not exceed the maximum nonusurious amount permitted by
applicable law. As used in this paragraph, the term "applicable law" shall mean
the laws of the State of Texas or the federal laws of the United States,
whichever laws allow the greater interest, as such laws now exist or may be
changed or amended or come into effect in the future.

If more than one person or entity executes this Note as Maker, all of said
parties shall be jointly and severally liable for payment of the indebtedness
evidenced hereby. Maker and all sureties, endorsers, guarantors and any other
party now or hereafter liable for the payment of this Note in whole or in part,
hereby severally (i) waive demand, presentment for payment, notice of dishonor
and of nonpayment, protest, notice of protest, notice of intent to accelerate,
notice of acceleration and all other notice (except only for any notices which
are specifically required by this Note or any other Loan Document), filing of
suit and diligence in collecting this Note or enforcing any of the security
herefor; (ii) agree to any substitution, subordination, exchange or release of
any such security or the release of any party primarily or secondarily liable
hereon; (iii) agree that the holder hereof shall not be required first to
institute suit or exhaust its remedies hereon against Maker or others liable or
to become liable hereon or to enforce its rights against them or any security
herefor; (iv) consent to any extension or postponement of time of payment of
this Note for any period or periods of time and to any partial payments, before
or after maturity, and to any other indulgences with respect hereto, without
notice thereof to any of them; and (v) submit (and waive all rights to object)
to personal jurisdiction in the State of Texas, and venue in Dallas County,
Texas, for the enforcement of any and all obligations under the Loan Documents.

This Note may not be changed, amended or modified except in a writing
expressly intended for such purpose and executed by the party against whom
enforcement of the change, amendment or modification is sought.

The Loan is made solely for business purposes and is not for personal,
family, household or agricultural purposes.

Maker acknowledges and agrees that the holder of this Note may assign this
Note and its interest in the Loan or, from time to time, sell or offer to sell
interests in the Loan to one or more participants. The undersigned authorizes
the holder of this Note to disseminate any information it has pertaining to the
Loan, including, without limitation, credit information on the undersigned, any
of its principals and any guarantor of this Note, to any such participant or
prospective participant.

THIS NOTE, AND ITS VALIDITY, ENFORCEMENT AND INTERPRETATION, SHALL BE
GOVERNED BY TEXAS LAW (WITHOUT REGARD TO ANY CONFLICT OF LAWS PRINCIPLES) AND
APPLICABLE UNITED STATES FEDERAL LAW.

Time shall be of the essence in this Note with respect to all of Maker's
obligations hereunder.

PROMISSORY NOTE (Candlewood Wichita Northeast) Page 7
<PAGE> 8
THE LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.

THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

IN WITNESS WHEREOF, Maker has duly executed this Note as of the date first
above written.

MAKER:

CANDLEWOOD WICHITA NORTHEAST, L.L.C.,
a Kansas limited liability company

By: /s/ WARREN D. FIX
--------------------------------------

Name: Warren D. Fix
-------------------------------------

Title: Executive Vice President
-------------------------------------

PROMISSORY NOTE (Candlewood Wichita Northeast) Page 8

<PAGE> 1
EXHIBIT 10.9
SECURITY AGREEMENT

THIS SECURITY AGREEMENT (this "Agreement"), dated as of October 15, 1996,
is made and entered into by and between CANDLEWOOD WICHITA NORTHEAST, L.L.C., a
Kansas limited liability company ("Debtor"), in favor of NATIONSBANK OF TEXAS,
N.A., a national banking association ("Secured Party").

RECITALS:

A. Debtor and Secured Party have entered into a Term Loan Agreement of
even date herewith pursuant to which Secured Party has agreed to make a loan to
Debtor in an aggregate amount not to exceed Three Million and No/100 Dollars
($3,000,000.00) (the "Loan") in order to refinance the cost of construction of a
hotel, pursuant to the terms thereof (such Term Loan Agreement, as the same may
be amended, modified, supplemented, extended or restated and in effect from time
to time, being hereinafter referred to as the "Loan Agreement"). Each
capitalized term used but not expressly defined herein shall have the meaning
given such term in the Loan Agreement.

B. It is a condition precedent to the effectiveness of the Loan Agreement
that Debtor shall have executed and delivered this Agreement.

C. It is the intention of the parties hereto that this Agreement create a
first priority security interest in the Collateral (herein defined) securing the
payment of the obligations set forth in Section 1.02 hereof.

AGREEMENT

NOW, THEREFORE, in consideration of the premises set forth herein and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and in order to induce Secured Party to enter into the Loan
Agreement, Debtor hereby agrees with Secured Party as follows:

ARTICLE I

GRANT

1.01. Assignment and Grant of Security. Debtor hereby grants, pledges and
assigns to Secured Party, and hereby grants to Secured Party a security interest
in, the following assets of Debtor, and all rights, titles and interests of
Debtor therein, wherever located and whether now owned or hereafter acquired by
Debtor or in which Debtor now has or at any time in the future may acquire any
right, title or interest (collectively, the "Collateral"):

(a) all inventory in all of its forms, wherever located, now or hereafter
existing ("Inventory");

(b) all accounts, contract rights and documents (each as defined in the
Uniform Commercial Code as from time to time in effect in the State of Kansas or
other applicable jurisdiction pursuant to Section 5.05 hereof [the "UCC"]), and
(whether or not included in such definitions), all reservation systems and
agreements (collectively, the "Instruments"), now or hereafter existing, and all
rights now or hereafter existing in and to all room rental and the payments due
to Debtor with respect to Debtor's operation of the Project (the "Receivables");

(c) all bedding, linens, pillows, machinery, equipment (including, without
limitation, all computer systems which are used to control the facilities of the
rooms in the Property), tools, apparatus and furniture (including without
limitation all furniture and related amenities used in the hotel guest rooms in
the Project), now owned or hereafter acquired by Debtor or in which

SECURITY AGREEMENT Page 1
<PAGE> 2
Debtor now has or hereafter may acquire any right, title or interest, and any
and all additions, substitutions and replacements thereof, wherever located,
including without limitation, located on the Property, together with all
attachments, components, parts, equipment and accessories installed therein or
affixed thereto, including but not limited to all "equipment" as defined in
Section 9.109(2) of the UCC (collectively, the "Equipment and Furniture").

(d) all general intangibles (as defined in the UCC), and (whether or not
included in such definition) all contract rights other than Receivables; all
copyrights and trademarks of Debtor, and all licenses or other agreements
granted to Debtor with respect to any of the foregoing; all information,
advertising lists, advertising contracts, identification of suppliers,
specifications, designs, drawings, surveys, engineering reports, test reports,
manuals, telephone numbers and telephone listings, catalogs, books, records,
computer and automatic machinery software and programs, and the like pertaining
to operations by or the business of Debtor and all licenses with respect
thereto; all field accounting information and all media in which or on which any
of the information or knowledge or data or records, may be recorded or stored
and all computer programs used for the compilation or printout of such
information, knowledge, records or data; all licenses, consents, permits,
variances, certifications and approvals of all Governmental Authorities now or
hereafter held by Debtor pertaining to operations or business now or hereafter
conducted; and all causes of action, rights, claims and warranties now or
hereafter owned or acquired by Debtor;

(e) all rights, claims and benefits of Debtor against any Person arising
out of, relating to or in connection with Collateral purchased by Debtor,
including, without limitation, any such rights, claims or benefits against any
Person storing or transporting such Collateral;

(f) all insurance policies and bonds and claims relating to any property
described in this Section 1.01 and payments thereunder;

(g) all cars, trucks, trailers, construction and earth moving equipment
and other vehicles, whether or not covered by a certificate of title under the
law of any state, and all tires and other appurtenances to any of the foregoing
(collectively "Vehicles");

(h) all other personal property now owned of hereafter acquired by Debtor;
and

(i) all accessions to, all substitutions for and replacements of, and all
proceeds and products of any and all of the foregoing Collateral (including,
without limitation, proceeds which constitute property of the types described in
this Section 1.01) and, to the extent not otherwise included, all (i) payments
under insurance (whether or not Secured Party is the loss payee thereof), or any
indemnity, warranty or guaranty, payable by reason of loss or damage to or
otherwise with respect to any of the foregoing Collateral and (ii) all cash.

1.02. Description of Obligations. This Agreement creates a first priority
security interest securing the payment and performance of any and all
obligations, indebtedness and/or liabilities whether now existing or hereafter
arising, of Debtor to Secured Party, including, without limitation, any and all
obligations, indebtedness and/or liabilities of Debtor under the Loan Agreement,
the Note, the Omaha Guaranty (as defined in the Mortgage), the Englewood
Guaranty (as defined in the Mortgage) and the other Loan Documents, and any
obligations at any time owing, whether now existing or hereafter arising, by any
Future Borrower to Secured Party in connection with any Future Loan, including
any extensions, modifications, substitutions, amendments, renewals and
restatements thereof, whether for principal, interest, fees, premium, expenses,
indemnification or otherwise (all such obligations, indebtedness and
indebtedness being referred to herein as the "Obligations"). Without limiting
the generality of the foregoing, this Agreement secures the payment of all
amounts which constitute part of the Obligations and would be owed to Secured
Party, but for the fact that they are unenforceable or not allowable due to the
existence of a bankruptcy, reorganization or similar proceeding involving Debtor
or any other Person.

1.03. Debtor Remains Liable. Anything herein to the contrary
notwithstanding, (a) Debtor shall remain liable under the contracts and
agreements included in the Collateral to the extent set forth therein to perform
all of its duties and obligations thereunder to the same

SECURITY AGREEMENT Page 2
<PAGE> 3
extent as if this Agreement had not been executed, (b) the exercise by Secured
Party of any of its rights hereunder shall not release Debtor from any of its
duties or obligations under the contracts and agreements included in the
Collateral, and (c) Secured Party shall not have any obligation or liability
under the contracts and agreements included in the Collateral by reason of this
Agreement, nor shall Secured Party be obligated to perform any of the
obligations or duties of Debtor thereunder or to take any action to correct or
enforce any claim for payment assigned hereunder, make any payment, to make any
inquiry as to the nature or the sufficiency of any payment received by it or as
to the sufficiency of any performance by any party under any account or
Receivable (or any agreement giving rise thereto) or under any contract, to
present or file any claim, to take any action to enforce any performance or to
collect the payment of any amounts which may have been assigned to it or to
which it may be entitled at any time or times.

1.04. Delivery of Security Collateral. All certificates or instruments
representing or evidencing the Collateral shall be delivered to and held by or
on behalf of Secured Party pursuant hereto and shall be in suitable form for
transfer by delivery, or shall be accompanied by duly executed instruments of
transfer or assignment in blank, all in form and substance satisfactory to
Secured Party. After the occurrence of a Default or potential default, Secured
Party shall have the right, at any time in its discretion and without notice to
Debtor, to transfer to or to register in the name of Secured Party or any of its
nominees any or all of the Collateral. In addition, after the occurrence of any
Default, Secured Party shall have the right at any time to exchange certificates
or instruments representing or evidencing Collateral for certificates or
instruments of smaller or larger denominations.

ARTICLE II

REPRESENTATIONS AND WARRANTIES

2.01. Representations and Warranties. Debtor represents and warrants, with
respect to itself and the Collateral, as follows:

(a) All of the Inventory and the Equipment and Furniture pledged by Debtor
hereunder is or will be located on the Property, at 3141 North Webb Road in the
city of Wichita, Sedgwick County, Kansas. The chief place of business and chief
executive office of Debtor and the office where Debtor keeps all of its records
concerning the Receivables is located at 9342 East Central, Wichita, Kansas
67206. Any and all promissory notes or other instruments evidencing the
Receivables have been delivered and pledged to Secured Party duly endorsed and
accompanied by such duly executed instruments of transfer or assignment as are
necessary for such pledge, to be held as pledged collateral. Debtor has
possession and control of the Inventory and the Equipment and Furniture pledged
by it hereunder.

(b) Debtor is the legal and beneficial owner of all the Collateral free
and clear of any lien or security interest, option or other charge or
encumbrance except for the security interest created by this Agreement. No
effective financing statement or other similar document used to perfect and
preserve a security interest under the laws of any jurisdiction covering all or
any part of the Collateral is on file in any recording office, except such as
may have been filed in favor of Secured Party relating to this Agreement.

(d) This Agreement and the pledge of the Collateral pursuant hereto
creates a valid first priority security interest in the Collateral securing the
payment of the Obligations, and upon filing of financing statements with the
Texas Secretary of State and the Kansas Secretary of State, and any other
necessary actions to perfect such security interest, such first priority
security interest in such Collateral will be duly perfected; and all filings and
other actions necessary or desirable to perfect and protect such security
interest and such priority have been duly taken (or will be taken).

SECURITY AGREEMENT Page 3
<PAGE> 4
(e) No consent of any other Person and no authorization, approval or other
action by, and no notice to or filing with, any Governmental Authority is
required (i) for the pledge by Debtor of the Collateral pledged by it hereunder,
for the grant by Debtor of the security interest granted hereby or for the
execution, delivery or performance of this Agreement by Debtor, (ii) for the
perfection or maintenance of the pledge, assignment and security interest
created hereby (including the first priority nature of such pledge, assignment
and security interest) or (iii) for the exercise by Secured Party of the rights
provided for in this Agreement or the remedies in respect of the Collateral
pursuant to this Agreement.

(f) Debtor has the power and authority and the legal right to execute and
deliver, to perform its obligations under, and to grant the security interest in
the Collateral pursuant to, this Security Agreement, and Debtor has taken all
necessary partnership action to authorize its execution, delivery and
performance of, and grant of the security interest in the Collateral pursuant to
this Security Agreement.

(g) This Security Agreement constitutes the legal, valid and binding
obligation of Debtor enforceable in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency or similar laws
affecting the enforcement of creditors' rights generally.

(h) The execution, delivery and performance of this Security Agreement
will not violate any provision of any applicable law, rule, regulation or
contractual obligations of Debtor and will not result in the creation or
imposition of any lien on any of the properties or revenues of Debtor pursuant
to any applicable law, rule, regulation or contractual obligations of Debtor,
except as contemplated hereby.

(i) No consent or authorization of, filing with, or other act by or in
respect of, any Governmental Authority, and no consent of any other person
(including, without limitation, any stockholder or creditor of Debtor), is
required in connection with the execution, delivery, performance, validity or
enforceability of this Security Agreement.

(j) No action, suit or proceeding of or before any court, arbitrator or
any governmental body, agency or official is pending or, to the knowledge of
Debtor, threatened by or against Debtor or against any of its properties or
revenues with respect to this Security Agreement or any of the transactions
contemplated hereby.

ARTICLE III

COVENANTS

3.01. Further Assurances. (a) Debtor agrees that, where any agreement
existing as of the date hereof or hereafter to which Debtor is a party contains
any restriction prohibiting Debtor from granting any security interest under
this Agreement, Debtor will use its best efforts to obtain the necessary consent
to or waiver of such restriction from any Person so as to enable Debtor to
effectively grant to Secured Party such security interest under this Agreement.

(b) Debtor will from time to time at its expense promptly execute and
deliver all further instruments and documents, and take all further action, that
may be necessary or desirable, or that Secured Party may reasonably request, in
order to perfect and protect any pledge, assignment or security interest granted
or purported to be granted hereby, and the priority thereof, or to create or
preserve the full benefits of this Security Agreement and the rights and powers
of Secured Party herein granted, or to enable Secured Party to exercise and
enforce its rights and remedies hereunder with respect to any of the Collateral.
Without limiting the generality of the foregoing, upon written request by
Secured Party, Debtor will execute and file such financing or continuation
statements, or amendments thereto, and such other instruments or notices, as may
be necessary or desirable, or as Secured Party may request, in order to perfect
and preserve the pledge, assignment and security interest granted or purported
to be granted hereby with respect to any and all the Collateral.

SECURITY AGREEMENT Page 4
<PAGE> 5
(c) Debtor hereby authorizes Secured Party to file one or more financing
or continuation statements, and amendments thereto, relating to all or any part
of the Collateral without the signature of Debtor where and to the extent
permitted by applicable law. A photocopy or other reproduction of this Agreement
or any financing statement covering the Collateral or any part thereof shall be
sufficient as a financing statement where and to the extent permitted by
applicable law.

(d) Debtor will furnish to Secured Party from time to time statements and
schedules further identifying and describing the Collateral, and such other
reports in connection with the Collateral, as Secured Party may reasonably
request.

(e) In addition to such other information as shall be specifically
provided for herein, Debtor shall furnish to Secured Party such other
information with respect to the Collateral as Secured Party may reasonably
request from time to time in connection with the Collateral, or the protection,
preservation, maintenance or enforcement of the security interest or the
Collateral.

3.02. Inventory and Equipment and Furniture.

(a) Debtor shall keep all of the Inventory and the Equipment and Furniture
(other than Inventory, Equipment and Furniture sold in the ordinary course of
business) at the place or places specified therefor in Section 2.01(a) or, upon
thirty (30) days' prior written notice to Secured Party, at such other places in
such jurisdiction where all action required by Section 3.01 shall have been
taken with respect to such transferred Inventory and Equipment and Furniture.

(b) Debtor shall pay promptly when due or before penalty all property and
other taxes, assessments and governmental charges or levies imposed upon, and
all claims (including claims for labor, materials and supplies) against, the
Collateral pledged by it hereunder, except such taxes as are being contested in
good faith by appropriate proceedings for which adequate reserves have been
established in accordance with generally accepted accounting principles,
consistently applied.

3.03. Insurance. Debtor will, at its own expense, maintain, or cause to be
maintained, insurance on the Collateral as is reasonable and customary, with
Secured Party being named as loss payee and additional insured on all insurance
policies which pertain to the Collateral. If Debtor fails to perform or observe
any applicable covenants as to insurance on any of such Collateral, Secured
Party may at its own option obtain insurance on such Collateral, and any premium
therefor paid by Secured Party shall become part of the Obligations and shall
bear interest prior to the occurrence of a Default or potential default at the
interest rate then applicable to the Loan, and after the occurrence of a Default
or potential default, at the Past Due Rate (as defined in the Note). In the
event Secured Party maintains such substitute insurance, the additional premium
for such insurance shall be due on demand and payable by Debtor to Secured Party
in accordance with any notice delivered to Debtor by Secured Party. Debtor
hereby grants Secured Party a security interest in any refunds of unearned
premiums in connection with any cancellation, adjustment or termination of any
policy of insurance required by Secured Party and in all proceeds of such
insurance and hereby appoints Secured Party its attorney-in-fact to endorse any
check or draft that may be payable to Debtor in order to collect such refunds or
proceeds. Any such sums collected by Secured Party shall be credited, except to
the extent applied to the purchase by Secured Party of similar insurance, to any
amounts then owing on the Obligations.

3.04. Place of Perfection; Records; Collection of Receivables, Chattel
Paper and Instruments. Debtor will not (i) change the location of its chief
executive office from that specified in Section 2.01(a), or (ii) change its
name, identity or corporate structure to such an extent that any financing
statement filed by Secured Party in connection with this Security Agreement
would become seriously misleading, or (iii) use any trade name, unless Debtor
shall have given prior written notice as soon as practicable thereof, and prior
to effecting any such change Debtor shall have taken such steps as Secured Party
may deem necessary or advisable to continue the perfection and priority of the
security interest granted pursuant hereto.

SECURITY AGREEMENT Page 5
<PAGE> 6
3.05. Transfers and Other Liens. Debtor shall not (a) sell, assign (by
operation of law or otherwise) or otherwise dispose of, or grant any option with
respect to, any of the Collateral, or (b) create or permit to exist any lien,
security interest, option or other charge or encumbrance upon or with respect to
any of the Collateral, except for (i) the security interests in favor of Secured
Party under this Agreement, (ii) sales or transfers of Inventory or similar
items of personal property in the ordinary course of business, or (iii) sales or
transfers of items of personal property which have become obsolete or worn
beyond practical use and which have been replaced by adequate substitutes, owned
by Debtor, having a value equal to or greater than the replaced items when new.

3.06. Maintenance of Records. Debtor will keep and maintain at its own
cost and expense satisfactory and complete records of the Collateral, including,
without limitation, a record of all payments received and all credits granted
with respect to the Receivables. Debtor will mark its books and records
pertaining to the Collateral to evidence this Security Agreement and the
security interests granted hereby.

3.07. Right of Inspection. Secured Party and its officers, agents and
representatives shall have the right to inspect Debtor's books and records upon
request of Secured Party. Upon notice to Debtor, Secured Party and its officers,
agents and representatives shall at all reasonable times also have the right to
enter into and upon any premises where any of the Inventory or Equipment and
Furniture is located for the purpose of inspecting the same, observing its use
or otherwise protecting its interests therein.

3.08. Compliance with Terms of Contracts, etc. Debtor will perform and
comply in all material respects with all its obligations under all its other
contractual obligations relating to the Collateral.

3.09. Payment of Obligations. Debtor will pay promptly when due all taxes
and claims with respect to the Collateral, or in respect of its income or
profits therefrom.

3.10. Limitation on Liens on Collateral. Debtor will not create, assume or
permit to exist, will defend the Collateral against, and will take such other
action as is necessary to remove, any lien, security interest or claim in or to
the Collateral, other than the security interest and liens created hereby and
will defend the right, title and interest of Secured Party in and to any of the
Collateral against the claims and demands of all Persons whomsoever.

3.11. Limitations on Dispositions of Collateral. Debtor will not sell,
transfer, lease, abandon or otherwise dispose of any of the Collateral, or
attempt, offer or contract to do so, except as permitted under Section 3.05.

3.12. Maintenance of Equipment and Furniture. Debtor will maintain each
item of Equipment and Furniture (including without limitation all furniture and
related amenities in the hotel guest rooms located in the Project) in good
working order.

3.13. Further Identification of Collateral. Debtor will furnish to Secured
Party from time to time upon request statements and schedules further
identifying and describing the Collateral and such other reports in connection
with the Collateral as Secured Party may reasonably request, all in reasonable
detail and in form satisfactory to Secured Party.

3.14. Notices. Debtor will advise Secured Party promptly, in reasonable
detail, (i) of any lien or security interest on, or claim asserted against, any
of the Collateral, and (ii) of the occurrence of any other event which could
reasonably be expected to have a material adverse effect on the aggregate value
of the Collateral hereunder.

SECURITY AGREEMENT Page 6
<PAGE> 7
ARTICLE IV

RIGHTS AND POWERS OF SECURED PARTY

4.01. Secured Party May Perform. If Debtor fails to perform any agreement
contained herein, Secured Party may itself perform, or cause performance of,
such agreement, and the expenses of Secured Party incurred in connection
therewith shall be payable by Debtor as provided in Section 4.05.

4.02. Limitation on Secured Party's Duties. The powers conferred on
Secured Party hereunder are solely to protect its interest in the Collateral and
shall not impose any duty upon it or any Secured Party to exercise any such
powers. Except for the safe custody of any Collateral in its possession and the
accounting for moneys actually received by it hereunder, Secured Party shall
have no duty as to any of the Collateral, whether or not Secured Party has or is
deemed to have knowledge of such matters, or as to the taking of any necessary
steps to preserve rights against prior parties or any other rights pertaining to
any reasonable care in the custody and preservation of any Collateral in its
possession if such Collateral is accorded treatment substantially equal to that
which Secured Party accords its own property. Except as provided in this Section
4.02, Secured Party shall not have any duty or liability to protect or preserve
any Collateral or to preserve rights pertaining thereto. Nothing contained in
this Agreement shall be construed as requiring or obligating Secured Party, and
Secured Party shall not be required or obligated, to (a) present or file any
claim or notice or take any action, with respect to any Collateral or in
connection therewith or (b) notify Debtor of any decline in the value of any
Collateral. Secured Party's sole duty with respect to the custody, safekeeping
and physical preservation of the Collateral in its possession, under Section
9.207 of the UCC or otherwise, shall be to deal with it in the same manner as
Secured Party deals with similar property for its own account. Neither Secured
Party, nor any of its directors, officers, employees or agents shall be liable
for failure to demand, collect or realize upon all or any part of the Collateral
or for any delay in doing so or shall be under any obligation to sell or
otherwise dispose of any Collateral upon the request of Debtor or otherwise.

4.03. Secured Party's Appointment as Attorney-in-Fact.

(a) Powers. Debtor hereby irrevocably constitutes and appoints Secured
Party and any officer or agent thereof, with full power of substitution, as its
true and lawful attorney-in-fact with full irrevocable power and authority in
the place and stead of Debtor and in the name of Debtor or in its own name,
after the occurrence of a Default or potential default, for the purpose of
carrying out the terms of this Security Agreement, to take any and all
appropriate action and to execute any and all documents and instruments which
may be necessary or desirable to accomplish the purposes of this Security
Agreement, and, without limiting the generality of the foregoing, Debtor hereby
gives Secured Party the power and right, on behalf of Debtor, without notice to
or assent by Debtor, to do the following:

(1) in the case of any Collateral, in the name of Debtor or its own
name, or otherwise, to take possession of and endorse and collect any
checks, drafts, notes, acceptances or other instruments for the payment of
moneys due under, or with respect to, any Collateral and to file any claim
or to take any other action or proceeding in any court of law or equity or
otherwise deemed appropriate by Secured Party for the purpose of
collecting any and all such moneys due or with respect to such Collateral
whenever payable;

(2) to pay or discharge taxes and liens levied or placed on or
threatened against the Collateral, to effect any repairs or any insurance
called for by the terms of this Security Agreement and to pay all or any
part of the premiums therefor and the costs thereof; and

(3) (i) to direct any party liable for any payment under any of the
Collateral to make payment of any and all moneys due or to become due
thereunder directly to Secured Party or as Secured Party shall direct;
(ii) to ask or demand for, collect, receive payment of and receipt for,
any and all moneys, claims and other amounts due or to

SECURITY AGREEMENT Page 7
<PAGE> 8
become due at any time in respect of or arising out of any Collateral;
(iii) to commence and prosecute any suits, actions or proceedings at law
or in equity in any court of competent jurisdiction to collect the
Collateral or any portion thereof and to enforce any other right in
respect of any Collateral; (iv) to defend any suit, action or proceeding
brought against Debtor with respect to any Collateral; (v) to settle,
compromise or adjust any suit, action or proceeding described in the
preceding clause and, in connection therewith, to give such discharges or
releases as Secured Party may deem appropriate; (vi) to assign any
trademark (along with the goodwill of the business to which any such
trademark pertains), throughout the world for such term or terms, on such
conditions, and in such manner, as Secured Party shall in its sole
discretion determine; and (vii) generally, to sell, transfer, pledge and
make any agreement with respect to or otherwise deal with any of the
Collateral as fully and completely as though Secured Party were the
absolute owner thereof for all purposes, and to do, at Secured Party's
option and Debtor's expense, at any time, or from time to time, all acts
and things which Secured Party deems necessary to protect, preserve or
realize upon the Collateral and the liens of Secured Party thereon and to
effect the intent of this Security Agreement, all as fully and effectively
as Debtor might do.

This power of attorney is power coupled with an interest and shall be
irrevocable until the Obligations shall have been paid in full or this Security
Agreement shall have been terminated.

(b) Other Powers. Debtor also authorizes Secured Party, at any time and
from time to time, to execute, in connection with any sale provided for in
Section 4.04, any endorsements, assignments or other instruments of conveyance
or transfer with respect to the Collateral.

(c) No Duty on the Part of Secured Party. The powers conferred on Secured
Party hereunder are solely to protect the interests of Secured Party in the
Collateral and shall not impose any duty upon Secured Party to exercise any such
powers. Secured Party shall be accountable only for amounts that it actually
receives as a result of the exercise of such powers, and neither it nor any of
its officers, directors, employees or agents shall be responsible to Debtor for
any act or failure to act hereunder, except for its own gross negligence or
willful misconduct, IT BEING THE INTENT OF THE PARTIES HERETO THAT SECURED PARTY
SHALL NOT BE ACCOUNTABLE FOR ITS OWN NEGLIGENCE.

4.04. Remedies. If a Default or potential default shall occur and be
continuing, Secured Party may exercise, in addition to all other rights and
remedies granted to them in this Security Agreement and in any other instrument
or agreement securing, evidencing or relating to the Obligations, all rights and
remedies of a secured party under the UCC. Without limiting the generality of
the foregoing, Secured Party, without demand of performance or other demand,
presentment, protest, advertisement or notice of any kind (except any notice
required by law referred to below) to or upon Debtor or any other Person (all
and each of which demands, offenses, advertisements and notices are hereby
waived), may in such circumstances forthwith collect, receive, appropriate and
realize upon the Collateral, or any part thereof, and/or may forthwith sell,
lease, assign, give option or options to purchase, or otherwise dispose of and
deliver the Collateral or any part thereof (or contract to do any of the
foregoing), in one or more parcels at public or private sale or sales, at any
exchange, broker's board or office of Secured Party or elsewhere upon such terms
and conditions as it may deem advisable and at such prices as it may deem best,
for cash or on credit or for future delivery without assumption of any credit
risk. Secured Party shall have the right upon any such public sale or sales,
and, to the extent permitted by law, upon any such private sale or sales, to
purchase the whole or any part of the Collateral so sold, free of any right or
equity of redemption in Debtor, which right or equity is hereby waived and
released. Debtor further agrees, at Secured Party's request, to assemble the
Collateral and make it available to Secured Party at places which Secured Party
shall reasonably select, whether at Debtor's premises or elsewhere. Secured
Party shall apply the net Proceeds of any such collection, recovery, receipt,
appropriation, realization or sale, after deducting all reasonable costs and
expenses of every kind incurred therein or incidental to the care or safekeeping
of any of the Collateral or in any way relating to the Collateral or the rights
of Secured Party hereunder, including, without limitation, reasonable attorneys'
fees and disbursements, to the payment in whole or in part of the Obligations,
in such order as Secured Party may elect, and only after such application and
after the payment by Secured Party of any

SECURITY AGREEMENT Page 8
<PAGE> 9
other amount required by any provision of law, need Secured Party account for
the surplus, if any, to Debtor. To the extent permitted by applicable law,
Debtor waives all claims, damages and demands it may acquire against Secured
Party arising out of the exercise by them of any rights hereunder. If any notice
of a proposed sale or other disposition of Collateral shall be required by law,
such notice shall be deemed reasonable and proper if given at least five (5)
days before such sale or other disposition. Debtor shall remain liable for any
deficiency if the Proceeds of any sale or other disposition of the Collateral
are insufficient to pay the Obligations and the fees and disbursements of any
attorneys employed by Secured Party to collect such deficiency.

4.05. Indemnity and Expenses. (a) Debtor agrees to indemnify Secured Party
from and against any and all claims, damages, losses, liabilities, costs and
expenses of any kind (including reasonable attorneys' fees) arising out of or
resulting from this Agreement or the security interest granted herein, or any of
the Collateral (including, without limitation, enforcement of this Agreement),
EXPRESSLY INCLUDING SUCH CLAIMS, LOSSES OR LIABILITIES ARISING OUT OF MERE
NEGLIGENCE OF SECURED PARTY, except claims, losses or liabilities resulting from
Secured Party's gross negligence or willful misconduct.

(b) Debtor will upon demand pay to Secured Party the amount of any and all
reasonable expenses, including the reasonable fees and expenses of its counsel
and of any experts and agents, which Secured Party may incur in connection with
(i) the administration of this Agreement, (ii) the custody, preservation, use or
operation of, or the sale of, collection from, or other realization upon, any of
the Collateral, (iii) the exercise or enforcement of any of the rights of
Secured Party hereunder or (iv) the failure by Debtor to perform or observe any
of the provisions hereof. Any such amounts so made shall be a part of the
Obligation, shall be payable upon demand, and if not paid upon demand shall bear
interest at the Past Due Rate.

4.06. No Waiver. Any failure by Secured Party to insist, or any election
by Secured Party not to insist, upon strict performance by Debtor of any of the
terms, provisions or conditions of this Agreement shall not be deemed to be a
waiver of same or of any other terms, provisions or conditions thereof, and
Secured Party shall have the right at any time or times thereafter to insist
upon strict performance by Debtor of any and all of such terms, provisions and
conditions. This Agreement is intended to be performed in accordance with, and
only to the extent permitted by, all applicable legal requirements.

ARTICLE V

MISCELLANEOUS

5.01. Cumulative Rights. All rights and remedies of Secured Party under
the Loan Documents are cumulative of each other and of every other right and
remedy which Secured Party may otherwise have at law or in equity or under any
other contract or other writing for the enforcement of the security interest
herein or the collection of the Obligations. The exercise of one or more rights
or remedies shall not prejudice or impair the concurrent or subsequent exercise
of other rights or remedies.

5.02. Modifications; Amendments; Schedules; Etc. No amendment or waiver of
any provision of this Agreement, and no consent to any departure by Debtor
herefrom, shall in any event be effective unless the same shall be in writing
and signed by Secured Party, and then such waiver or consent shall be effective
only in the specific instance and for the specific purpose for which given. Upon
any change in any information disclosed herein or on any Schedule hereto, Debtor
shall promptly prepare and deliver to Secured Party a replacement schedule,
indicating its effective date, in form and substance satisfactory to Secured
Party, and amendments to and additional financing statements as Secured Party
may require to preserve and perfect a first priority security interest in the
Collateral.

5.03. Continuing Security Interest. This Agreement shall create a
continuing security interest in the Collateral and shall remain in full force
and effect until the later of (i) the final payment in full of the Obligations
and all amounts payable under this Agreement and (ii) the expiration or
termination of the obligations of Secured Party to extend credit to Debtor. Upon

SECURITY AGREEMENT Page 9
<PAGE> 10
any such termination, Secured Party will, at Debtor's expense, execute and
deliver to Debtor such documents as Debtor shall reasonably request to evidence
such termination.

5.04. Arbitration.

(a) Mandatory Arbitration. Any controversy or claim between or among the
parties hereto, including, without limitation, those arising out of or relating
to this Agreement or any other Loan Document, including, without limitation, any
claim based on or arising from an alleged tort, shall be determined by binding
arbitration in accordance with the Federal Arbitration Act (or if not
applicable, the applicable state law), the Rules of Practice and Procedure for
the Arbitration of Commercial Disputes of Endispute, Inc., doing business as
J.A.M.S./Endispute ("JAMS"), and the rules (the "Special Rules") set forth in
paragraph (b) of this Section . In the event of any inconsistency, the Special
Rules shall control. Judgment upon any arbitration award may be entered in any
court having jurisdiction. Any party to this Agreement may bring an action,
including, without limitation, a summary or expedited proceeding, to compel
arbitration of any controversy or claim to which this agreement applies in any
court having jurisdiction over such action. Each party to this Agreement agrees
to keep all of the foregoing matters and the related arbitration proceedings
strictly confidential, except for disclosures of information required in the
ordinary course of business of the parties or by any Governmental Requirement.

(b) Special Rules. The arbitration shall be conducted in the city of
Borrower's domicile as of the Closing Date and shall be administered by JAMS who
will appoint an arbitrator; if JAMS is unable or legally precluded from
administering the arbitration, then the American Arbitration Association will
serve. All arbitration hearings will be commenced within ninety (90) days of the
demand for arbitration; further, the arbitrator shall only, upon a showing of
cause, be permitted to extend the commencement of such hearing for up to an
additional sixty (60) days. With respect to a controversy or claim in which the
claim or the amount of the controversy does not exceed $2,000,000 in the
aggregate, a single arbitrator (who shall have authority to render a maximum
award of $2,000,000, including all damages of any kind and costs, fees and the
like) shall be chosen and shall decide such controversy or claim. With respect
to a controversy or claim in which the claim or amount in controversy exceeds
$2,000,000 in the aggregate, such controversy or claim shall be decided by a
majority vote of three arbitrators. In all arbitration proceedings in which the
claim or amount in controversy exceeds $2,000,000 in the aggregate, the
arbitrators shall make specific, written findings of fact and conclusions of law
in the award.

(c) Reservations of Rights. Nothing in this Agreement shall be deemed to
(i) limit the applicability of any otherwise applicable statutes of limitation
or repose and any waivers contained in this Agreement; or (ii) be a waiver by
Lender of the protection afforded to it by 12 U.S.C. Sec. 91 or any
substantially equivalent state law; or (iii) limit the right of Lender (A) to
exercise self help remedies such as (but not limited to) setoff, or (B) to
foreclose against any real or personal property securing the Loan, or (C) to
obtain from a court provisional or ancillary remedies such as (but not limited
to) injunctive relief or the appointment of a receiver. Lender may exercise such
self help rights, foreclose upon such property, or obtain such provisional or
ancillary remedies before, during or after the pendency of any arbitration
proceeding brought pursuant to this Agreement. If Lender shall attempt to obtain
from a court such provisional or ancillary remedies, Borrower shall be entitled
to appear in such court and defend against same. At Lender's option, foreclosure
under a deed of trust, deed to secure debt or mortgage may be accomplished by
any of the following: the exercise of a power of sale under such deed of trust,
deed to secure debt or mortgage, or by judicial sale under such deed of trust,
deed to secure debt or mortgage, or by judicial foreclosure. Neither this
exercise of self help remedies nor the institution or maintenance of an action
for foreclosure or provisional or ancillary remedies shall constitute a waiver
of the right of any party, including the claimant in any such action, to
arbitrate the merits of the controversy or claim occasioning resort to such
remedies.

5.05. GOVERNING LAW; TERMS. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, EXCEPT TO THE
EXTENT THAT THE VALIDITY OR PERFECTION OF THE

SECURITY AGREEMENT Page 10
<PAGE> 11
SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR
COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF
TEXAS. UNLESS OTHERWISE DEFINED HEREIN OR IN THE LOAN AGREEMENT, TERMS USED IN
ARTICLE 9 OF THE UCC ARE USED HEREIN AS THEREIN DEFINED.

5.06. WAIVER OF JURY TRIAL. DEBTOR AND SECURED PARTY EACH HEREBY WAIVE
TRIAL BY JURY IN ANY JUDICIAL PROCEEDINGS INVOLVING, DIRECTLY OR INDIRECTLY, ANY
MATTER (WHETHER IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF,
RELATED TO, OR CONNECTED WITH THIS AGREEMENT OR THE RELATIONSHIP ESTABLISHED
HEREUNDER OR UNDER THE OTHER LOAN DOCUMENTS.

5.07. Secured Party's Right to Use Agents. Secured Party may exercise its
rights and remedies under this Agreement through an agent, representative,
attorney or other designee.

5.08. No Interference, Compensation or Expense. Secured Party may exercise
its rights and remedies under this Agreement (a) without resistance or
interference by Debtor and (b) without payment of any rent, license fee or
compensation of any kind to Debtor.

5.09. Waivers of Rights Inhibiting Enforcement. Debtor waives (a) any
claim that, as to any part of the Collateral, a public sale, should the Secured
Party elect so to proceed, is, in and of itself, not a commercially reasonable
method of sale for such Collateral, (b) except as otherwise provided in this
Agreement, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY SUCH RIGHT THAT DEBTOR
WOULD OTHERWISE HAVE UNDER THE CONSTITUTION OR ANY STATUTE OF THE UNITED STATES
OR OF ANY STATE, AND ALL OTHER REQUIREMENTS AS TO THE TIME, PLACE AND TERMS OF
SALE WITH RESPECT TO THE ENFORCEMENT OF SECURED PARTY'S AND ALL OTHER RIGHTS
HEREUNDER and (c) all rights of redemption, appraisal or valuation.

5.10. Notices and Deliveries. All notices, communications and materials to
be given or delivered pursuant to this Agreement shall be delivered in
accordance with Section 9.8 of the Loan Agreement.

5.11. Successors and Assigns. All of the provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns.

5.11. Loan Document. This Agreement is a Loan Document executed pursuant
to the Loan Agreement and shall (unless otherwise expressly indicated herein) be
construed, administered and applied in accordance with the terms and provisions
thereof.

5.12. Paragraph Headings. The paragraph headings used in this Agreement
are for convenience of reference only and are not to affect the construction
hereof or be taken into consideration in the interpretation hereof.

5.13. Severability. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under present or future Laws during the term
hereof, such provision shall be fully severable, this Agreement shall be
construed and enforced as if such illegal, invalid, or unenforceable provision
had never comprised a part hereof, and the remaining provisions hereof shall
remain in full force and effect and shall not be affected by the illegal,
invalid, or unenforceable provision or by its severance herefrom. Furthermore,
in lieu of such illegal, invalid, or unenforceable provision there shall be
added automatically as a part of this Agreement a legal, valid, and enforceable
provision as similar in terms to the illegal, invalid, or unenforceable
provision as may be possible.

5.14. Obligations Not Affected. To the fullest extent permitted by
applicable law, the obligations of Debtor under this Agreement shall remain in
full force and effect without regard to, and shall not be impaired or affected
by:

SECURITY AGREEMENT Page 11
<PAGE> 12
(a) any amendment or modification or addition or supplement to any Loan
Document, any instrument delivered in connection therewith or any assignment or
transfer thereof;

(b) any exercise, non-exercise, or waiver by Secured Party of any Right,
remedy, power or privilege under or in respect of, or any release of any
guaranty, any collateral or the Collateral or any part thereof provided pursuant
to, this Agreement or any other Loan Document;

(c) any waiver, consent, extension, indulgence or other action or inaction
in respect of this Agreement or any other Loan Document or any assignment or
transfer of any thereof; or

(d) any bankruptcy, insolvency, reorganization, arrangement, readjustment,
composition, liquidation or the like of Debtor, or any other Person, whether or
not Debtor shall have notice or knowledge of any of the foregoing.

5.15. ENTIRE AGREEMENT. THIS AGREEMENT, TOGETHER WITH THE OTHER LOAN
DOCUMENTS, REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES.

5.16. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original, but all such counterparts together shall constitute but one and the
same instrument.

IN WITNESS WHEREOF, Debtor and Secured Party have duly executed and
delivered this Agreement effective as of the date first above written.

Address of Debtor: DEBTOR:

9432 East Central CANDLEWOOD WICHITA NORTHEAST, L.L.C.
Wichita, Kansas 67206 a Kansas limited liability company

By: /s/ Warren D. Fix
----------------------------------------

Name: Warren D. Fix
-------------------------------------

Title: Executive Vice President
--------------------------------------

The Address of Secured Party is: SECURED PARTY:

NationsBank of Texas, N.A. NATIONSBANK OF TEXAS, N.A.
901 Main Street, 51st Floor a national banking association
Dallas, Texas 75202
Attn: Real Estate Loan Administration

By: /s/ Julie Wallis
----------------------------------------

Julie Wallis,
Vice President

SECURITY AGREEMENT Page 12

<PAGE> 1
EXHIBIT 10.10

GUARANTY AGREEMENT

WHEREAS, Candlewood Wichita Northeast, L.L.C., a Kansas limited liability
company ("Borrower"), is or may become indebted to NationsBank of Texas, N.A., a
national banking association ("Lender"), and Lender is not willing to forbear or
to extend credit to Borrower without this Guaranty Agreement (this "Guaranty");
and

WHEREAS, unless defined herein or indicated otherwise, all capitalized
terms herein are defined in that certain Term Loan Agreement (as amended from
time to time, the "Loan Agreement") dated October 15, 1996, by and between
Lender and Borrower, and are used herein as so defined.

THEREFORE, for Ten Dollars ($10.00) and other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, and as
a material inducement to Lender to extend credit to Borrower, the undersigned,
Candlewood Hotel Company, Inc., a Delaware corporation ("Guarantor"), hereby
guarantees to Lender the prompt and full payment and performance of the
indebtedness and obligations described below in this Guaranty (collectively
called the "Guaranteed Obligation"), this Guaranty being upon the following
terms and conditions:

1. Guaranty of Payment; Limitation of Liability for Principal Payment. Guarantor
hereby unconditionally guarantees to Lender the payment, as and when the same
shall be due and payable, whether by lapse of time, by acceleration of maturity
or otherwise, and at all times thereafter, of all principal, interest, fees,
costs, expenses, indemnification indebtedness (including, without limitation,
indebtedness arising pursuant to the indemnities contained in Section 6.21 of
the Loan Agreement) and other sums of money now or hereafter due and owing
pursuant to the terms of that certain Promissory Note (the "Note") of even date
with the Loan Agreement, executed by Borrower payable to the order of Lender in
the principal face amount of Three Million and No/100 Dollars ($3,000,000.00),
or pursuant to the terms of the Loan Agreement, the Mortgage or any other of the
Loan Documents now or hereafter existing, and all renewals, extensions,
refinancings, modifications or amendments of such indebtedness or any part
thereof and any other obligations at any time owing, whether now existing or
hereafter arising, of any Future Borrower to Lender in connection with any
Future Loan (herein collectively called the "Indebtedness"). This Guaranty
covers the Indebtedness whether presently outstanding or arising subsequent to
the date hereof including all amounts advanced by Lender in stages or
installments. The guaranty of Guarantor as set forth in this Section is a
guaranty of payment and not of collection.

2. Guaranty of Performance. Guarantor additionally hereby unconditionally
guarantees to Lender the timely performance of all other obligations of Borrower
under all of the Loan Documents.

3. Primary Liability of Guarantor. This Guaranty is an absolute, irrevocable and
unconditional guaranty of payment and performance. In the event of default by
Borrower in payment or performance of the Guaranteed Obligation, or any part
thereof, when such indebtedness or performance becomes due, either by its terms
or as the result of the exercise of any power to accelerate, Guarantor shall, on
demand and without presentment, protest, notice of protest, further notice of
nonpayment or of dishonor or of default or nonperformance, or notice of
acceleration or of intent to accelerate, or any other notice whatsoever, without
any notice having been given to Guarantor previous to such demand of the
acceptance by Lender of this Guaranty, and without any notice having been given
to Guarantor previous to such demand of the creating or incurring of such
indebtedness or of such obligation to perform, pay the amount pursuant to
Section 1 hereof to Lender or perform or observe the agreement, covenant, term
or condition, as the case may be, and it shall not be necessary for Lender, in
order to enforce such payment or performance by Guarantor, first to institute
suit or exhaust its remedies against Borrower or others liable on such
indebtedness or for such performance, to enforce its rights against any security
which shall ever have been given to secure such indebtedness or performance, to
join Borrower or any others liable on the Guaranteed Obligation in any action to
enforce this Guaranty, or to resort to any other means of obtaining payment or
performance

GUARANTY AGREEMENT (CANDLEWOOD WICHITA NORTHEAST-CANDLEWOOD, INC.) PAGE 1
<PAGE> 2
of the Guaranteed Obligation. Suit may be brought or demand may be made against
all parties who have signed this Guaranty, or against any one or more of them,
separately or together, without impairing the rights of Lender against any other
party hereto. At any time Lender is entitled to exercise its remedies hereunder,
it may in its discretion elect to demand payment or performance. If Lender
elects to demand performance, it shall at all times thereafter have the right to
demand payment until all of the Indebtedness has been paid in full. If Lender
elects to demand payment, it shall at all times thereafter have the right to
demand performance until all of the Indebtedness has been paid in full.

4. Certain Agreements and Waivers by Guarantor. Guarantor hereby agrees that
neither Lender's rights and remedies nor Guarantor's obligations under the terms
of this Guaranty shall be released, diminished, impaired, reduced or affected by
any one or more of the following:

(a) any limitation of liability or recourse in any other Loan
Document;

(b) the taking or accepting of any other security or guaranty for,
or right of recourse with respect to, any or all of the Guaranteed Obligation;

(c) any release, surrender, exchange, subordination, deterioration,
waste, impairment or loss of, or any failure to create or perfect, any lien or
security interest with respect to any security at any time existing or
purported, believed or expected to exist in connection with any or all of the
Guaranteed Obligation;

(d) any partial release of the liability of Guarantor hereunder, or
if there is more than one person signing this Guaranty, the complete or partial
release of any one or more of them hereunder;

(e) the death, insolvency, bankruptcy, disability, dissolution,
liquidation, termination, receivership, reorganization, change of form and/or
name, structure or ownership, sale of all assets, or lack of corporate,
partnership or other power of Borrower, any of the undersigned, or any party at
any time liable for the payment or performance of any or all of the Guaranteed
Obligation, whether now existing or hereafter occurring;

(f) renewal, extension, modification or rearrangement of the payment
or performance of any or all of the Guaranteed Obligation, either with or
without notice to or consent of Guarantor, or any adjustment, indulgence,
forbearance, or compromise that may be granted or given by Lender to Borrower or
Guarantor from time to time;

(g) any neglect, delay, omission, failure, or refusal of Lender to
take or prosecute any action for the collection or enforcement of any of the
Guaranteed Obligation or to foreclose or take or prosecute any action to
foreclose upon any security therefor or to take or prosecute any action in
connection with any Loan Document;

(h) any failure of Lender to notify Guarantor of any creation,
renewal, extension, rearrangement, modification or assignment of the Guaranteed
Obligation or any part thereof, or of any Loan Document, or of any release of or
change in any security or of any other action taken or refrained from being
taken by Lender against Borrower or any security or other recourse or of any new
agreement between Lender and Borrower, it being understood that Lender shall not
be required to give Guarantor any notice of any kind under any circumstances
with respect to or in connection with the Guaranteed Obligation;

(i) the unenforceability of all or any part of the Guaranteed
Obligation against Borrower, whether because the Guaranteed Obligation exceeds
the amount permitted by law or violates any usury law, the act of creating the
Guaranteed Obligation, or any part thereof, is ultra vires, the officers or
persons creating same acted in excess of their authority, Borrower has any valid
defense, claim or offset with respect thereto, or otherwise, it being agreed
that Guarantor shall remain liable hereon regardless of whether Borrower or any
other person be found not liable on the Guaranteed Obligation, or any part
thereof, for any reason; or

GUARANTY AGREEMENT (CANDLEWOOD WICHITA NORTHEAST-CANDLEWOOD, INC.) PAGE 2
<PAGE> 3
(j) any payment by Borrower to Lender is held to constitute a
preference under the bankruptcy laws or if for any other reason Lender is
required to refund such payment or pay the amount thereof to someone else.

It is the intent of Guarantor and Lender that the obligations and liabilities of
Guarantor hereunder are absolute and unconditional under any and all
circumstances and that until the Guaranteed Obligation or all amounts required
to be paid by Guarantor under this Guaranty are fully and finally paid and
performed, such obligations and liabilities shall not be discharged or released,
in whole or in part, by any act or occurrence which might, but for the
provisions of this Guaranty, be deemed a legal or equitable discharge or release
of a guarantor.

5. Subordination; Subrogation. If, for any reason whatsoever, Borrower is now or
hereafter becomes indebted to Guarantor:

(a) such indebtedness and all interest thereon and all liens,
security interests and rights now or hereafter existing with respect to property
of Borrower securing same shall, at all times, be subordinate in all respects to
the Guaranteed Obligation and to all liens, security interests and rights now or
hereafter existing to secure the Guaranteed Obligation. Notwithstanding anything
to the contrary contained in this Guaranty or any payments made by any party
hereunder, Guarantor hereby permanently and irrevocably waives any right of
subrogation in or under any of the Loan Documents or to participate in any way
therein, or in any right, title or interest in and to any security or right of
recourse for the Guaranteed Obligation;

(b) after the occurrence of a default (whether or not declared)
under any of the Loan Documents, Guarantor shall not be entitled to enforce or
receive payment, directly or indirectly, of any such indebtedness of Borrower to
Guarantor until the Guaranteed Obligation has been fully and finally paid and
performed;

(c) Guarantor hereby assigns to Lender and grants to Lender a
security interest, as security for the Guaranteed Obligation, in all such
indebtedness and security therefor, if any, of Borrower to Guarantor now
existing or hereafter arising, including any dividends and payments pursuant to
debtor relief or insolvency proceedings referred to below. In the event of
receivership, bankruptcy, reorganization, arrangement or other debtor relief or
insolvency proceedings involving Borrower as debtor, Lender shall have the right
to prove its claim in any such proceeding so as to establish its rights
hereunder and shall have the right to receive directly from the receiver,
trustee or other custodian (whether or not a default shall have occurred or be
continuing under any of the Loan Documents), dividends and payments which are
payable upon any obligation of Borrower to Guarantor now existing or hereafter
arising, and to have all benefits of any security therefor, until the Guaranteed
Obligation has been fully and finally paid and performed. If, notwithstanding
the foregoing provisions, Guarantor should receive any payment, claim or
distribution which is prohibited as provided above in this Section 5, Guarantor
shall pay the same to Lender immediately, Guarantor hereby agreeing that it
shall receive the payment, claim or distribution in trust for Lender and shall
have absolutely no dominion over the same except to pay it immediately to
Lender; and

(d) Guarantor shall promptly upon request of Lender from time to
time execute such documents and perform such acts as Lender may require to
evidence and perfect its interest and to permit or facilitate exercise of it
rights under this Section , including but not limited to execution and delivery
of financing statements, proofs of claim, further assignments and security
agreements, and delivery to Lender of any promissory notes or other instruments
evidencing indebtedness of Borrower to Guarantor. All promissory notes, accounts
receivable ledgers or other evidences, now or hereafter held by Guarantor, of
obligations of Borrower to Guarantor shall contain a specific written notice
thereon that the indebtedness evidenced thereby is subordinated under and is
subject to the terms of this Guaranty.

Nothing herein contained shall operate as a release or discharge, in whole or in
part, of any claim of Guarantor against Borrower, by subrogation or otherwise,
by reason of any act done or payment made by Guarantor pursuant to the
provisions of this Guaranty; but all such claims, including claims for any
indebtedness of Borrower to Guarantor, whether now existing or

GUARANTY AGREEMENT (CANDLEWOOD WICHITA NORTHEAST-CANDLEWOOD, INC.) PAGE 3
<PAGE> 4
hereafter arising, shall be subordinate to the Guaranteed Obligation and the
liens, security interests and rights of Lender under the Loan Documents.

6. Other Liability of Guarantor or Borrower. If Guarantor becomes liable for any
indebtedness owing by Borrower to Lender, by endorsement or otherwise, other
than under this Guaranty, such liability shall not be in any manner impaired or
affected hereby, and the rights of Lender hereunder shall be cumulative of any
and all other rights that Lender may ever have against Guarantor. If Borrower is
or becomes indebted to Lender for other than the Indebtedness, any payment
received or recovery realized upon any indebtedness of Borrower to Lender may,
except to the extent paid by Guarantor on the Indebtedness or specifically
required by law or agreement of Lender to be applied to the Indebtedness, in
Lender's sole discretion be applied upon indebtedness of Borrower to Lender
other than the Indebtedness.

7. Lender Assigns. This Guaranty is for the benefit of Lender and Lender's
successors and assigns, and in the event of an assignment of the Indebtedness or
any part thereof, the rights and benefits hereunder, to the extent applicable to
the Indebtedness so assigned, may be transferred with such Indebtedness.
Guarantor waives notice of any transfer or assignment of the Indebtedness, or
any part thereof, and agrees that failure to give notice will not affect the
liabilities of Guarantor hereunder.

8. Binding Effect. This Guaranty is binding not only on Guarantor, but on
Guarantor's respective estates, heirs, personal representatives, successors and
assigns. Upon the death of any of the undersigned, this Guaranty shall continue
against his estate and against all survivors among the undersigned as to all of
the Guaranteed Obligations, including that portion incurred or arising after
such death. If this Guaranty is signed by more than one person, then all of the
obligations of Guarantor arising herein shall be jointly and severally binding
on each of the undersigned, and their respective heirs, personal
representatives, successors and assigns, and the term "Guarantor" shall mean all
such persons and each of them individually. Words importing persons herein shall
include firms, associations, partnerships (including limited partnerships),
joint ventures, trusts, corporations and other legal entities, including public
or governmental bodies, agencies or instrumentalities, as well as natural
persons.

9. Governing Law; Forum. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND APPLICABLE UNITED STATES
FEDERAL LAW, AND IS INTENDED TO BE PERFORMED IN ACCORDANCE WITH, AND ONLY TO THE
EXTENT PERMITTED BY, SUCH LAWS. ALL OBLIGATIONS OF GUARANTOR HEREUNDER ARE
PAYABLE AND PERFORMABLE AT THE PLACE WHERE THE GUARANTEED OBLIGATION IS PAYABLE
AND PERFORMABLE. GUARANTOR HEREBY IRREVOCABLY SUBMITS GENERALLY AND
UNCONDITIONALLY FOR GUARANTOR AND IN RESPECT OF GUARANTOR'S PROPERTY TO THE
NON-EXCLUSIVE JURISDICTION OF ANY TEXAS STATE COURT, OR ANY UNITED STATES
FEDERAL COURT, SITTING IN THE CITY OF DALLAS, TEXAS, OVER ANY SUIT, ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS GUARANTY OR THE INDEBTEDNESS.
GUARANTOR HEREBY AGREES AND CONSENTS THAT, IN ADDITION TO ANY METHODS OF SERVICE
OF PROCESS PROVIDED FOR UNDER APPLICABLE LAW, ALL SERVICE OF PROCESS IN ANY SUCH
SUIT, ACTION OR PROCEEDING IN ANY TEXAS STATE COURT, OR ANY UNITED STATES
FEDERAL COURT, SITTING IN THE CITY OF DALLAS, TEXAS MAY BE MADE BY CERTIFIED OR
REGISTERED MAIL, RETURN RECEIPT REQUESTED, DIRECTED TO GUARANTOR AT GUARANTOR'S
ADDRESS STATED IN THIS GUARANTY, OR AT A SUBSEQUENT ADDRESS OF WHICH LENDER
RECEIVED ACTUAL NOTICE FROM GUARANTOR IN ACCORDANCE WITH THIS GUARANTY, AND
SERVICE SO MADE SHALL BE COMPLETE FIVE (5) DAYS AFTER THE SAME SHALL HAVE BEEN
SO MAILED.

10. Invalid Provisions. If any provision of this Guaranty or the application
thereof to any person or circumstance shall, for any reason and to any extent,
be invalid or unenforceable, neither the remainder of this Guaranty nor the
application of such provision to any other person or circumstance shall be
affected thereby, but rather the same shall be enforced to the greatest extent
permitted by law.

GUARANTY AGREEMENT (CANDLEWOOD WICHITA NORTHEAST-CANDLEWOOD, INC.) PAGE 4
<PAGE> 5
11. Attorneys Fees and Costs of Collection. Guarantor shall pay on demand the
reasonable attorney's fees and all other costs and expenses which may be
incurred by Lender in the enforcement of or preservation of Lender's rights
under this Guaranty, which covenant shall survive any payment or discharge in
full of the Indebtedness.

12. Payments. All sums payable under this Guaranty shall be paid in lawful money
of the United States of America which at the time of payment is legal tender for
the payment of public and private debts.

13. Controlling Agreement. It is not the intention of Lender or Guarantor to
obligate Guarantor to pay interest in excess of that legally permitted to be
paid by Guarantor under applicable law. Should it be determined that any portion
of the Guaranteed Obligation constitutes interest in excess of the maximum
amount of interest which Guarantor (in such capacity) may lawfully be required
to pay under applicable law, the obligation of Guarantor to pay such interest
shall automatically be limited to the payment thereof in the maximum amount so
permitted under applicable law. The provisions of this Section shall override
and control all other provisions of this Guaranty and of any other agreement
between Guarantor and Lender.

14. Warranties and Representations of Guarantor. Guarantor hereby represents and
warrants that (a) Guarantor will be immediately prior to the registered offering
of the sale of its shares of stock under the Securities Act of 1933, as amended,
the owner of a direct or indirect interest in, and is now under common ownership
with, Borrower and that this Guaranty may reasonably be expected to benefit
Guarantor, in an amount not less than the amount guaranteed hereunder; (b)
Guarantor is a corporation, duly organized and validly existing and in good
standing under the laws of the state of its organization; (c) this Guaranty is
duly authorized, is valid and is binding upon Guarantor; (d) Guarantor is not,
and the execution, delivery and performance by Guarantor of this Guaranty will
not cause Guarantor to be, in violation of or in default with respect to any law
or in default (or provide cause for acceleration of indebtedness) under any
agreement or restriction by which Guarantor is bound or affected; (e) except as
expressly disclosed in writing to Lender, there is no action, suit or proceeding
pending or to the knowledge of Guarantor threatened before or by any court or
governmental authority against or affecting Guarantor which constitutes a
Material Adverse Effect; (f) all financial statements and information heretofore
furnished to Lender by Guarantor do, and all financial statements and
information hereafter furnished to Lender by Guarantor will, fully and
accurately in all material respects present the financial condition of Guarantor
as of the dates therein, and, since the date of the most recent financial
statements of Guarantor heretofore furnished to Lender, no Material Adverse
Effect has occurred with respect to the financial condition of Guarantor, nor,
except as heretofore disclosed in writing to Lender, has Guarantor incurred any
material liability, direct or indirect, fixed or contingent; (g) after giving
effect to this Guaranty, Guarantor is solvent; (h) Lender has no duty at any
time to investigate or inform Guarantor of the financial or business condition
or affairs of Borrower, or any change therein; and (i) Guarantor acknowledges
and agrees that Guarantor may be required to pay and perform the Guaranteed
Obligation in full, subject to Section 1 hereof, without assistance or support
from Borrower or any other party. Guarantor's representations and warranties are
a material inducement to Lender to enter into the other Loan Documents and shall
survive the execution hereof and any bankruptcy, foreclosure, transfer of
security or other event affecting Borrower, Guarantor, or any security for the
Indebtedness.

15. Notices. All notices, requests, consents, demands and other communications
required or which any party desires to give hereunder shall be in writing and
shall be deemed sufficiently given or furnished if delivered by personal
delivery, by telegram, telex, or facsimile, by expedited delivery service with
proof of delivery, or by registered or certified United States mail, postage
prepaid, at the addresses specified at the end of this Guaranty (unless changed
by similar notice in writing given by the particular party whose address is to
be changed). Any such notice or communication shall be deemed to have been given
either at the time of personal delivery or, in the case of delivery service or
mail, as of the date of first attempted delivery at the address and in the
manner provided herein, or, in the case of telegram, telex, or facsimile, upon
receipt. Notwithstanding the foregoing, no notice of change of address shall be
effective except upon receipt. This Section shall not be construed in any way to
affect or impair any waiver of notice or demand provided in this Guaranty or in
any other Loan Document or to require giving of notice or demand to or upon any
person in any situation or for any reason.

GUARANTY AGREEMENT (CANDLEWOOD WICHITA NORTHEAST-CANDLEWOOD, INC.) PAGE 5
<PAGE> 6
16. Cumulative Rights, etc. The exercise by Lender of any right or remedy
hereunder or under any other Loan Document, or at law or in equity, shall not
preclude the concurrent or subsequent exercise of any other right or remedy.
Lender shall have all rights, remedies and recourses afforded to Lender by
reason of this Guaranty or any other Loan Document or by law or equity or
otherwise, and the same (a) shall be cumulative and concurrent, (b) may be
pursued separately, successively or concurrently against Guarantor or others
obligated for the Guaranteed Obligation, or any part thereof, or against any one
or more of them, or against any security or otherwise, at the sole discretion of
Lender, (c) may be exercised as often as occasion therefor shall arise, it being
agreed by Guarantor that the exercise, discontinuance of the exercise of or
failure to exercise any of same shall in no event be construed as a waiver or
release thereof or of any other right, remedy, or recourse, and (d) are intended
to be, and shall be, nonexclusive. No waiver of any default on the part of
Guarantor, or of any breach of any of the provisions of this Guaranty or of any
other document shall be considered a waiver of any other or subsequent default
or breach, and no delay or omission in exercising or enforcing the rights and
powers granted herein or in any other document shall be construed as a waiver of
such rights and powers, and likewise no exercise or enforcement of any rights or
powers hereunder or under any other document shall be held to exhaust such
rights and powers, and every such right and power may be exercised from time to
time. The granting of any consent, approval or waiver by Lender shall be limited
to the specific instance and purpose and shall not constitute consent or
approval in any other instance or for any other purpose. No notice to nor demand
on Guarantor, in any case shall of itself entitle Guarantor, to any other or
further notice or demand in similar or other circumstances. No provision of this
Guaranty nor any right, remedy or recourse of Lender with respect hereto, nor
any default or breach, can be waived, nor can this Guaranty or Guarantor be
released or discharged in any way or to any extent, except specifically by a
writing intended for that purpose (referring specifically to this Guaranty)
executed by Lender.

17. Term of Guaranty. This Guaranty shall continue in full force and effect
until Guarantor has fully and finally paid all amounts (including, without
limitation, the Indebtedness described in Section 1 hereof) and performed all
obligations (including, without limitation, all obligations described in Section
2 hereof) required to be paid or performed by Guarantor under this Guaranty.
Notwithstanding anything to the contrary contained in this Section or elsewhere
in this Guaranty or in any other Loan Document, (a) if pursuant to any
bankruptcy, insolvency or other debtor relief law or any order or decision
thereunder Lender must rescind or restore any payment or part thereof received
by Lender in satisfaction of the Indebtedness or any part thereof, the term
"Indebtedness" as used herein includes such payment to the extent rescinded or
restored, and, to the extent of the payment rescinded or restored, any prior
return, cancellation, release or discharge by Lender of this Guaranty or of
Guarantor shall be without effect and this Guaranty shall remain in full force
and effect notwithstanding such return, cancellation, release or discharge, and
(b) if any indemnification indebtedness is incurred pursuant to any indemnity
contained in any Loan Document (including, without limitation, Section 6.21 of
the Loan Agreement), the term "Indebtedness" as used herein includes such
indemnification indebtedness, and, to the extent of such indemnification
indebtedness, any prior return, cancellation, release or discharge by Lender of
this Guaranty or of Guarantor shall be without effect and this Guaranty shall
remain in full force and effect notwithstanding such return, cancellation,
release or discharge.

18. Financial Statements. Guarantor shall furnish to Lender a balance sheet
(including disclosure of all contingent liabilities) and an income statement of
Guarantor, for each fiscal year of Guarantor as soon as reasonably practicable,
but in any event within one hundred twenty (120) days after the end of such
fiscal year. Each such financial statement shall be certified in writing as true
and correct in all material respects by Guarantor (or if Guarantor is a legal
entity, by a shareholder or other representative of Guarantor acceptable to
Lender) and audited by an independent third party certified public accountant
acceptable to Lender. Guarantor shall also furnish to Lender, as soon as
reasonably practicable, but in any event within thirty (30) days after the
filing of such with the Securities Exchange Commission, Guarantor's 10Q and 10K
financial reports.

19. Participations. Guarantor acknowledges and agrees that Lender may from time
to time sell or offer to sell participations in the loan evidenced by the Note
to one or more participants. Guarantor hereby authorizes Lender to provide to
any such participant or prospective participant such information as Lender has
from time to time pertaining to the Indebtedness or this

GUARANTY AGREEMENT (CANDLEWOOD WICHITA NORTHEAST-CANDLEWOOD, INC.) PAGE 6
<PAGE> 7
Guaranty, including but not limited to credit information on Borrower, Guarantor
and any of their principals, respectively.

20. Gender; Titles; Construction. Within this Guaranty, words of any gender
shall be held and construed to include any other gender, and words in the
singular number shall be held and construed to include the plural, unless the
context otherwise requires. Titles appearing at the beginning of any
subdivisions hereof are for convenience only, do not constitute any part of such
subdivisions, and shall be disregarded in construing the language contained in
such subdivisions. The use of the words "herein," "hereof," "hereunder" and
other similar compounds of the word "here" shall refer to this entire Guaranty
and not to any particular section, paragraph or provision.

21. Time of Essence. Time shall be of the essence in this Guaranty with respect
to all of Guarantor's obligations hereunder.

22. Execution. This Guaranty may be executed in multiple counterparts, each of
which, for all purposes, shall be deemed an original, and all of which together
shall constitute one and the same agreement; and if the term "Guarantor"
includes more than one person, the failure of any one or more such persons to
execute a counterpart thereof shall not impair or affect the enforceability of
this Guaranty against any person who does sign this Guaranty.

23. Entire Agreement. This Guaranty embodies the entire agreement between Lender
and Guarantor with respect to guaranty by Guarantor of the Guaranteed Obligation
and supersedes all prior agreements and understandings, if any, with respect to
guaranty by Guarantor of the Guaranteed Obligation.

24. Drafted Jointly. The parties have participated jointly in the negotiation
and drafting of this Guaranty. In the event an ambiguity or question of intent
or interpretation arises, there shall be no presumption or burden of proof which
arises favoring or disfavoring any party by virtue of the authorship of any of
the provisions of this Guaranty.

EXECUTED as of and dated October 15, 1996.

Address of Guarantor: GUARANTOR:

9342 East Central CANDLEWOOD HOTEL COMPANY, INC.,
Wichita, Kansas 67206 a Delaware corporation

By: /s/ Warren D. Fix
-------------------------------------------

Name: Warren D. Fix
-----------------------------------------

Title: Executive Vice President
------------------------------------------

GUARANTY AGREEMENT (CANDLEWOOD WICHITA NORTHEAST-CANDLEWOOD, INC.) PAGE 7

<PAGE> 1

EXHIBIT 23.2

ACCOUNTANTS' CONSENT

The Board of Directors
Candlewood Hotel Company, L.L.C.

We consent to the inclusion herein in the registration statement (No. 333-12021)
on Form S-1 of Candlewood Hotel Company, Inc. of our report dated August 23,
1996, relating to the consolidated balance sheets of Candlewood Hotel Company,
L.L.C. and subsidiaries as of December 31, 1995 and June 30, 1996 and the
related consolidated statements of operations, members' equity and cash flows
for the period from October 1, 1995 (date of inception) to December 31, 1995 and
for the six months ended June 30, 1996 and to the reference to our firm under
the heading "Experts" in the prospectus.

KPMG Peat Marwick LLP

Wichita, Kansas

October 25, 1996