PRIME CAPITAL INVESTMENT CORP, S-11/A, 1998-05-19

PRIME CAPITAL INVESTMENT CORP
S-11/A, 1998-05-19
REAL ESTATE INVESTMENT TRUSTS

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 19, 1998

REGISTRATION NO. 333-37343
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- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

AMENDMENT NO. 1

TO
FORM S-11
REGISTRATION STATEMENT
UNDER

THE SECURITIES ACT OF 1933

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

PRIME CAPITAL INVESTMENT CORP.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN GOVERNING INSTRUMENTS)

230 PARK AVENUE

SUITE 1000

NEW YORK, NEW YORK 10169

TELEPHONE: (212) 808-6550

FACSIMILE: (212) 972-2561

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

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

JAMES W. ROITER
CHIEF EXECUTIVE OFFICER

PRIME CAPITAL INVESTMENT CORP.

230 PARK AVENUE

SUITE 1000

NEW YORK, NEW YORK 10169

TELEPHONE: (212) 808-6550

FACSIMILE: (212) 972-2561

(NAME AND ADDRESS OF AGENT FOR SERVICE)

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

COPIES TO:
WAYNE D. BOBERG, ESQ.
GEORGE C. HOWELL, III, ESQ.
F. ELLEN DUFF, ESQ.
WINSTON & STRAWN DAVID C. WRIGHT, ESQ.

35 WEST WACKER DRIVE HUNTON & WILLIAMS

CHICAGO, ILLINOIS 60601 RIVERFRONT PLAZA

TELEPHONE: (312) 558-5600 951 EAST BYRD STREET

FACSIMILE: (312) 558-5700 RICHMOND, VIRGINIA 23219

TELEPHONE: (804) 788-8200

FACSIMILE: (804) 788-8218

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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 number of the earliest 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, please 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. [_]

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

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, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH
SECTION 8(A), MAY DETERMINE.

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<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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, PRELIMINARY PROSPECTUS DATED MAY 19, 1998
PROSPECTUS

, 1998

8,750,000 SHARES
PRIME CAPITAL INVESTMENT CORP.

LOGO
COMMON STOCK

Prime Capital Investment Corp., a Maryland corporation ("Prime Capital" and,
together with its subsidiaries and affiliated companies, the "Company"), is a
fully-integrated, self-administered and self-managed real estate finance
company that invests primarily in commercial mortgage loans, preferred equity
in real estate and real estate operating companies, net leased real estate,
mortgage-backed securities and other real estate related assets. All of the
shares of common stock of the Company, par value $0.01 per share (the "Common
Stock"), offered hereby (the "Common Stock Offering") are being sold by the
Company. The Company will elect to be taxed as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). As
of March 31, 1998, the Company's assets consisted of $74,250,000 principal
amount of Mortgage Loans. See "The Company-Initial Assets." The Company has
closed but not funded one additional $35,000,000 facility and has identified
approximately $780,000,000 of potential investments which are in various stages
of negotiation or due diligence, and expects to close more than $245,000,000 of
commercial mortgage loans by June 30, 1998. The Company intends to pursue
advantageous real estate investments through the acquisition of a broad range
of real estate products, as more fully described in "The Company--Primary
Investments."

(Continued on the following page.)

The initial public offering price for the shares of Common Stock offered
hereby currently is expected to be between $19.00 and $21.00 per share (the
"Offering Price"). Prior to the Common Stock Offering, there has been no market
for the shares of Common Stock. The Offering Price will be determined by
negotiation between the Company and the Underwriter. See "Underwriting." The
Company intends to apply for listing on The New York Stock Exchange under the
symbol " ."

SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK INCLUDING, AMONG OTHERS:

. The possibility that the consideration paid by the Company for the general
partnership interests in the Operating Partnership (the "GP Common Units",
together with the LP Common Units, the "Common Units") may exceed the fair
market value of such interests, which could adversely affect the value of
the Common Stock;

. The possible dilutive effect resulting from the value of PCH's assets and
business being less than the value of the LP Common Units received for
such assets and business;

. The Company has no prior experience in operating and managing a REIT,
which could adversely affect the Company's results of operations;

. The Company, which has a limited operating history and limited assets,
will face significant competition in acquiring additional investments,
which may inhibit the Company's ability to achieve its investment
objectives;

. The Underwriter has material business relations with the Company and as a
result may have interests that conflict with the interests of the
purchasers of Common Stock in the Offering;

. Certain non-compete agreements restrict the Company's ability to invest
direct equity in certain types of real estate assets, which may prevent
the Company from investing direct equity in certain real estate assets
that might otherwise be in the Company's best interest;

. The Company currently owns and intends to invest primarily in mortgage
loans, which may be affected adversely by events of loss, such as credit
losses due to borrower default, hazard losses and state law enforceability
issues;

. The yield on and the value of the Company's investments (particularly
those in mortgage loans and mortgage-backed securities) may be affected
adversely by changes in prevailing interest rates, rates of prepayment and
credit losses;

. The Company intends to leverage its investments, in amounts to be
determined by Prime Capital's Board of Directors, which could lead to
increased volatility of the Company's income and net asset value and could
result in greater operating or capital losses;

. Ownership of Common Stock by each stockholder, other than FBR Asset
Investment Corporation which may own up to 10.9%, is limited to 9.9% of
the number of outstanding shares of Common Stock, which may deter third
parties from seeking to control or acquire the Company;

. The Company may be taxed as a regular corporation if it fails to qualify
as a REIT; and

. To avoid being taxed as a regular corporation, the Company must satisfy
certain requirements relating to its assets and income, which may restrict
the Company's investment opportunities, and the Company must distribute at
least 95.0% of its taxable income each year, which could require the
Company to sell assets or borrow money in order to satisfy this
requirement.

----------
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.
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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share of Common Stock.......... $ $ $
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Total (3).......................... $ $ $
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</TABLE>

(1) The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting." The Company has also agreed to grant to the
Underwriter a warrant to purchase up to 228,024 shares of Common Stock
(247,712 shares if the Underwriter exercises its over-allotment option in
full) at the Offering Price.

(2) Before deducting expenses in connection with the Common Stock Offering,
estimated at $ , which will be payable by the Company.

(3) The Company has granted the Underwriter a 30-day option to purchase up to
1,312,500 additional shares of Common Stock to cover over-allotments, if
any. If the Underwriter exercises such option in full, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Company,
before expenses of the Common Stock Offering, will be $ ,
$ and $ , respectively. The Underwriter has agreed to
reserve up to 200,000 shares of Common Stock for sale to certain employees
and directors of the Company and its Affiliates at the Price to the Public
net of any Underwriting Discounts and Commissions. To the extent such
reserved shares are sold to such individuals, total Underwriting Discounts
and Commissions will be reduced to the extent of such discounts. See
"Underwriting."

The shares of Common Stock are offered by the Underwriter, subject to prior
sale, when, as and if delivered to and accepted by it, and subject to the
approval of certain legal matters by counsel for the Underwriter and certain
other conditions. The Underwriter reserves the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about , 1998.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.

<PAGE>

(Continued from the previous page.)

Concurrently with the Offering, the Company is also offering 1,075,268
shares of its Common Stock in a private placement (the "Private Placement") to
FBR Asset Investment Corporation, an Affiliate of Friedman, Billings, Ramsey &
Co. ("FBR" or the "Underwriter"), which the Company expects to close
concurrently with the closing of the Common Stock Offering. The price of the
shares of Common Stock offered in the Private Placement is expected to be the
Offering Price (as defined below) per share (net of underwriting discounts).
The Common Stock Offering and the Private Placement are collectively referred
to herein as the "Offering" and the Common Stock is referred to herein as the
"Shares." In connection with providing interim financing to Prime Capital
Holding, LLC ("PCH") and Prime Capital Funding, Inc. (the "Taxable
Subsidiary"), FBR Asset Investment Corporation received a warrant to purchase
from the Company up to 152,016 shares of Common Stock (165,141 shares of
Common Stock if the Underwriter's over-allotment option is exercised in full)
(the "FBR Warrant") at a price per share equal to the Offering Price (as
defined below). See "Underwriting." In connection with the Offering, the
Underwriter will receive a warrant to purchase from the Company up to 228,024
shares of Common Stock (247,712 shares of Common Stock if the Underwriter's
over-allotment option is exercised in full) (the "Underwriter Warrant") at a
price per share equal to the Offering Price (as defined below). See
"Underwriting." See "Glossary" beginning on page G-1 for definitions of
certain terms used in this Prospectus.

The Prime Group, Inc. (together with its affiliates, "PGI") and James W.
Roiter collectively own substantially all of the equity interests in PCH. The
Operating Partnership owns all of the outstanding preferred stock of the
Taxable Subsidiary, which represents 95% of the economic value of the Taxable
Subsidiary but includes no voting power on most matters and all of the limited
partnership interests in the Operating Partnership. PCH owns all of the
outstanding common stock of the Taxable Subsidiary, which represents 5% of the
economic value of the Taxable Subsidiary and includes full voting power.

The Company has $45,000,000 of private capital available to it for the
purpose of funding Targeted Portfolio Investments. Mr. Reschke and Mr. Roiter
have collectively made $25,000,000 available to PCH and FBR Asset Investment
Corp. has made a $20,000,000 line available to PCH, which amounts together
represent the capital available to PCH. Of this amount, $25,000,000 represents
PCH's capital contribution and commitments made to the Operating Partnership
in exchange for the equity and businesses of the Taxable Subsidiary. As of
March 31, 1998, approximately $14,900,000 has been funded to the Company. In
addition, PCH has made a $20,000,000 loan available to the Operating
Partnership; no amounts are currently outstanding under this loan.

Concurrently with the Offering, PCH's limited partnership interests in the
Operating Partnership will be converted into 4,032,258 units of limited
partnership interests in the Operating Partnership (the "LP Common Units").
Concurrently with the Offering, PCH is expected to make an additional
contribution of capital to the Operating Partnership (the "Capital
Contribution") in the amount of $25,000,000, in exchange for which PCH is
expected to receive 1,334,086 LP Common Units. The per unit value of the LP
Common Units to be received by PCH is expected to be the Offering Price (as
defined herein) (net of underwriting discounts).

Upon completion of the Offering, the public and FBR Asset Investment
Corporation will own 89.1% and 10.9%, respectively, of the outstanding Common
Stock of the Company (90.3% and 9.7%, respectively, if the Underwriter's over-
allotment option is exercised in full). Upon completion of the Offering and
the Capital Contribution, the Company will own 9,825,269 GP Common Units (as
defined herein) and PCH will own 5,376,344 LP Common Units, (assuming the
Underwriter does not exercise its over-allotment option in full and that the
Company uses all of the net proceeds of the Offering to acquire GP Common
Units).

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

CERTAIN PERSONS PARTICIPATING IN THE COMMON STOCK OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE THE MARKET
PRICE THEREOF, PURCHASES OF THE COMMON STOCK TO COVER SYNDICATE SHORT
POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."

2
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TABLE OF CONTENTS
<TABLE>
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PAGE
<S> <C>
PROSPECTUS SUMMARY........................................................ 1
The Company............................................................. 1
Business Strategies and Investment Policies............................. 2
Leverage and Hedging.................................................... 2
Primary Investments..................................................... 3
Initial Assets.......................................................... 5
Risk Factors............................................................ 5
Formation and Structure of the Company.................................. 7
Certain Relationships and Related Transactions.......................... 10
The Offering............................................................ 10
Use of Proceeds......................................................... 11
Distribution Policy..................................................... 11
Tax Status of the Company............................................... 11
SUMMARY FINANCIAL DATA.................................................... 13
RISK FACTORS.............................................................. 14
Market Capitalization of the Company May Exceed Fair Market Value of the
Company's Assets....................................................... 14
Benefit to PCH May Have a Dilutive Effect............................... 14
Newly-Organized Entities; Absence of Identifiable Assets................ 14
Newly-Organized Entities............................................... 14
Appropriate Investments May Not Be Available and Full Investment of Net
Proceeds in Targeted Portfolio Investments Will Be Delayed............ 15
Limited Availability of Investments May Inhibit Company's Objectives... 15
Benefits to Insiders and Underwriters................................... 15
Benefits to Insiders................................................... 15
Conflicts with PGI and Certain of its Affiliates....................... 15
Certain of the Net Proceeds from the Common Stock Offering to be Used
to Pay Off Loans Which Will Benefit the Underwriter and PCH........... 15
Conflicts of Interests of Mr. Reschke and Conflicts with PGI............ 15
Mr. Reschke Will Continue to Engage in Activities Outside of the
Company, Including Real Estate Activities............................. 15
Conflicts With PGI and Certain of its Affiliates....................... 16
</TABLE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Risks Related to Investments in Mortgage Loans.......................... 16
Risk of Loss on Mortgage Loans......................................... 16
Multifamily and Commercial Loans Involve a Greater Risk of Loss than
Single Family Loans................................................... 17
Volatility of Values and the Net Operating Income of Mortgaged
Properties May Affect Adversely the Company's Mortgage Loans.......... 17
Construction, Bridge and Mezzanine Loans Involve Greater Risks of Loss
than Senior Loans..................................................... 17
Distressed Mortgage Loans May Have Greater Default Risks Than
Performing Loans...................................................... 18
Limited Recourse Loans May Limit the Company's Recovery to the Value of
the Mortgaged Property................................................ 18
One Action Rules May Limit the Company's Rights Following Defaults..... 18
Risks Related to Investments in Real Property........................... 18
Conditions Beyond Company's Control May Affect Adversely the Value of
Real Property......................................................... 18
Real Estate is Illiquid and its Value May Decrease..................... 18
The Company's Insurance Will Not Cover All Losses...................... 19
Property Taxes Decrease Returns on Real Estate......................... 19
Compliance with Americans with Disabilities Act and Other Changes in
Governmental Rules and Regulations May Be Costly...................... 19
Real Properties with Hidden Environmental Problems Will Increase Costs
and May Create Liability for the Company.............................. 19
Real Properties with Known Environmental Problems May Create Liability
for the Company....................................................... 19
Foreign Real Properties are Subject to Currency Conversion Risks and
the Uncertainty of Foreign Laws....................................... 20
</TABLE>

i
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<TABLE>
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PAGE
<S> <C>
Risks Related to Investments in MBS..................................... 20
Subordinated Interests are Subject to Greater Credit Risks Than More
Senior Classes........................................................ 20
Yields on Subordinated Interests, IOs and POs May Be Affected Adversely
By Interest Rate Changes.............................................. 21
Certain Investments May Generate Taxable Income Exceeding Cash Flow.... 21
Economic and Business Risks............................................. 22
Interest Rate Changes May Adversely Affect the Company's Investments... 22
The Company's Performance May Be Affected Adversely If Its Hedging
Strategy Is Not Successful............................................ 22
Leverage Can Reduce Income Available for Distribution.................. 23
Maturity Mismatch Between Asset Maturities and Borrowing Maturities May
Affect Adversely the Company's Net Income............................. 23
Interest Rate Mismatch Between Asset Yields and Borrowing Rates May
Affect Adversely the Company's Net Income............................. 23
The Company May Not Be Able to Borrow Money on Favorable Terms......... 24
Adverse Changes in General Economic Conditions Can Adversely Affect
Company's Business.................................................... 24
Competition in the Acquisition of Appropriate Investments May Inhibit
the Company's Ability to Achieve Objectives........................... 24
Investments May Be Illiquid and Their Value May Decrease............... 24
Delinquency and Loss Ratios May Be Affected by the Performance of
Third-Party Servicers................................................. 25
Legal and Tax Risks..................................................... 25
Tax Risks.............................................................. 25
Ownership Limit May Restrict Business Combination Opportunities........ 26
Equity Interests Could Cause the Company to Fail to Qualify as a REIT.. 26
</TABLE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Tax Status of the Taxable Subsidiary; Legislative Proposals............ 26
Plans Should Consider ERISA Risks of Investing in Common Stock......... 27
Certain Anti-Takeover Provisions May Inhibit a Change in Control of the
Company................................................................ 27
General................................................................ 27
Ownership Limit........................................................ 27
Potential Effects of the Issuance of Additional Preferred Stock........ 27
Staggered Board........................................................ 28
Exemption from Maryland Business Combination Statute................... 28
Maryland Control Shares Acquisition.................................... 28
Board of Directors May Change Certain Policies Without Stockholder
Consent............................................................... 29
Loss of Investment Company Act Exemption Would Adversely Affect the
Company............................................................... 29
Limitation on Liability of Officers and Directors of the Company....... 29
Other Risks............................................................. 29
Risk that Market for Common Stock Will Not Develop..................... 29
Increases in Interest Rates May Affect Adversely the Yield of the
Common Stock.......................................................... 29
Future Offerings of Capital Stock May Result in Dilution of the Book
Value or Earnings per Share of the Outstanding Common Stock........... 30
Shares Available for Future Sale....................................... 30
Risks Relating to Year 2000 Issue...................................... 30
THE COMPANY............................................................... 30
General................................................................. 30
The Taxable Subsidiary.................................................. 35
Business Strategy and Investment Policies............................... 36
Leverage and Hedging.................................................... 40
Reverse Repurchase Agreements.......................................... 40
Bank Credit Facilities................................................. 40
Mortgage Loans on Real Estate Owned by the Company..................... 40
CMOs................................................................... 41
Interest Rate Management Techniques.................................... 41
Hedging................................................................ 41
Primary Investments..................................................... 41
</TABLE>

ii
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<TABLE>
<CAPTION>
PAGE
<S> <C>
Mortgage Loans.......................................................... 42
Preferred Equity........................................................ 44
Net Leased Real Estate.................................................. 44
MBS..................................................................... 45
Other Assets............................................................ 47
Initial Assets........................................................... 48
Formation and Structure of the Company................................... 49
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................. 50
MANAGEMENT OF OPERATIONS................................................... 52
Directors and Executive Officers......................................... 52
Committees of the Board of Directors..................................... 55
Election of Board of Directors; Compensation............................. 56
Executive Compensation................................................... 57
Employment Agreements.................................................... 57
Bonus Plan............................................................... 58
Indemnification of Directors and Officers................................ 58
Stock Option Plan........................................................ 59
USE OF PROCEEDS............................................................ 60
DISTRIBUTION POLICY........................................................ 60
DILUTION................................................................... 61
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS.............. 63
CAPITALIZATION............................................................. 64
PRINCIPAL STOCKHOLDERS OF THE COMPANY...................................... 65
DESCRIPTION OF CAPITAL STOCK............................................... 66
Authorized Shares........................................................ 66
Common Stock............................................................. 66
Registration Rights...................................................... 66
Shares of Preferred Stock................................................ 67
Restrictions on Transfer................................................. 67
Dividend Reinvestment Plan............................................... 70
Reports to Stockholders.................................................. 70
Transfer Agent and Registrar............................................. 70
Listing of the Common Stock.............................................. 70
</TABLE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
CERTAIN PROVISIONS OF MARYLAND LAW AND OF PRIME CAPITAL'S CHARTER AND
BYLAWS................................................................... 70
Classification of the Board of Directors................................ 70
Removal of Directors.................................................... 71
Business Combinations................................................... 71
Control Shares Acquisitions............................................. 71
Amendment to the Charter and Bylaws..................................... 72
Advance Notice of Director Nominations and New Business................. 72
Meetings of Stockholders................................................ 72
Possible Anti-Takeover Effect of Certain Provisions of Maryland Law and
of the Charter and Bylaws.............................................. 73
COMMON STOCK AVAILABLE FOR FUTURE SALE.................................... 73
General................................................................. 73
Registration Rights..................................................... 74
PARTNERSHIP AGREEMENT..................................................... 74
Management.............................................................. 74
Indemnification......................................................... 75
Transferability of Interests............................................ 75
Issuance of Additional Common Units..................................... 76
Capital Contributions................................................... 76
Awards Under The Stock Option Plan...................................... 76
Operations.............................................................. 76
Limited Partner Exchange Rights......................................... 76
Tax Matters............................................................. 77
Duties and Conflicts.................................................... 77
Redemption Rights....................................................... 77
Distributions........................................................... 77
Term.................................................................... 78
FEDERAL INCOME TAX CONSIDERATIONS......................................... 78
General................................................................. 78
Taxation of Prime Capital............................................... 79
Requirements for Qualification.......................................... 80
Organizational Requirements............................................ 80
Qualified REIT Subsidiary.............................................. 81
Ownership of a Partnership Interest.................................... 81
Income Tests........................................................... 82
Asset Tests............................................................ 86
Annual Distribution Requirements....................................... 87
Penalty Tax on Prohibited Transactions................................. 88
Failure to Qualify..................................................... 88
Taxation of Taxable Subsidiary.......................................... 89
</TABLE>

iii
<PAGE>

<TABLE>
<CAPTION>
PAGE
<S> <C>
Tax Aspects of Prime
Capital's Investment in
the Operating
Partnership............. 89
Partnership
Classification......... 89
Income Taxation of the
Operating Partnership
and Its Partners........ 89
Taxation of Taxable U.S.
Stockholders............ 91
Taxation of Tax-Exempt
Stockholders............ 93
Taxation of Non-U.S.
Stockholders............ 94
Information Reporting
Requirements and Backup
Withholding Tax......... 96
Other Tax Considerations. 96
Clinton REIT Proposals.. 96
Other Possible
Legislative or Other
Actions Affecting Tax
Consequences........... 97
ERISA CONSIDERATIONS....... 97
Employee Benefit Plans,
Tax-Qualified Retirement
Plans, and IRAs......... 98
Status of Prime Capital
under ERISA............. 98
CERTAIN LEGAL ASPECTS OF
MORTGAGE LOANS AND REAL
PROPERTY INVESTMENTS...... 100
General.................. 100
Types of Mortgage
Instruments............. 100
Interests in Real
Property................ 100
Leases and Rents......... 101
Condemnation and
Insurance............... 101
Foreclosure.............. 101
Ground Lease Risks....... 104
Bankruptcy Laws.......... 104
Default Interest and
Limitations on
Prepayments............. 105
Due on Sale and Due on
Encumbrance............. 105
Subordinate Financing.... 106
Acceleration on Default.. 106
Certain Laws and
Regulations; Types of
Mortgaged Property...... 106
Forfeitures in Drug and
RICO Proceedings........ 106
Environmental Risks...... 107
Applicability of Usury
Laws.................... 108
Americans With
Disabilities Act........ 108
Soldiers' and Sailors'
Civil Relief Act of
1940.................... 108
UNDERWRITING............... 109
LEGAL MATTERS.............. 110
EXPERTS.................... 110
</TABLE>

<TABLE>
<CAPTION>
PAGE
<S> <C>
ADDITIONAL INFORMATION..................................................... 111
GLOSSARY OF TERMS.......................................................... G-1
INDEX OF FINANCIAL STATEMENTS.............................................. F-1
</TABLE>

iv
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial data, including the financial statements and notes
thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated,
the information contained in this Prospectus assumes (i) the Underwriter's
over-allotment option is not exercised, (ii) the offering price (the "Offering
Price") of the Common Stock offered hereby is $20.00 per share, (iii) the
purchase by FBR Asset Investment Corporation of 1,075,268 shares of Common
Stock at a price equal to the Offering Price (net of underwriting discounts)
pursuant to the Private Placement, and (iv) PCH will make an additional
contribution of capital in the amount of $25,000,000 to Prime Capital
Investment, L.P. (the "Operating Partnership"), in exchange for which it will
receive 1,344,086 units of limited partnership interest (the "LP Common Units")
in the Operating Partnership at a per unit price equal to the Offering Price
(net of underwriting discounts). Unless the context otherwise requires, all
references in this Prospectus to the "Company" or "Prime Capital" shall mean
Prime Capital Investment Corp. and its subsidiaries, including the Operating
Partnership and its interest in Prime Capital Funding, Inc. (the "Taxable
Subsidiary"), or any one of them. Capitalized terms used but not defined herein
shall have the meanings set forth in the Glossary beginning on page G-1.

THE COMPANY

The Company operates as a fully-integrated, self-administered and self-
managed real estate finance company that invests primarily in commercial
mortgage loans, preferred equity in real estate and real estate operating
companies, net leased real estate, mortgage-backed securities and other real
estate related assets. The Company will elect to be taxed as a real estate
investment trust ("REIT") under the Code.

As of March 31, 1998, the Company's assets consisted of $74,250,000 principal
amount of Mortgage Loans. See "The Company--Initial Assets." The Company has
closed but not funded one additional $35,000,000 facility, and currently has
identified approximately $780,000,000 of potential mortgage loan and preferred
equity investments which are in various stages of negotiation or due diligence,
and expects to close more than $245,000,000 of commercial mortgage loans by
June 30, 1998. The Company intends to continue to pursue advantageous real
estate investments that capitalize on its expertise, experience, and
relationships and on market inefficiencies through the acquisition of a broad
range of real estate products, as more fully described in "The Company--Primary
Investments."

The Company will originate investments through a network of regional offices
that currently include offices in New York, Chicago and San Francisco. The
Company intends to expand into other markets, including Atlanta and Dallas. The
Company will use on and off-balance sheet debt structures to leverage
substantially all of its investment activities. The Company is structured as an
upREIT, which will facilitate future acquisition activities, and the Company
holds the preferred stock of the Taxable Subsidiary, which will give the
Company the ability to receive after-tax income generated by a broad range of
activities that may not be conducted by the Company directly due to its status
as a REIT.

The Company intends to invest primarily in fixed rate and floating rate first
Mortgage Loans. These mortgages will include permanent and Bridge Loans. The
Company will also make Construction Loans that will usually be secured by a
first mortgage lien against the property and will have other provisions
including completion guarantees. Most of the Bridge Loans and Construction
Loans will have participating features or exit fees that will incentivize the
borrower to allow the Company to issue the permanent loan.

The Company will provide Mezzanine Loans and invest in preferred equity
positions in real estate and real estate operating companies on a strategic
basis where the participating features of these facilities will provide the
Company with significant returns and earnings growth. The Company will invest
directly in net leased real

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estate leased to rated and non-rated companies. Most of these investments will
be in properties under long term leases. The Company will invest in real estate
properties on a leveraged basis. The Company's ability to invest in net leased
properties and other real estate properties may be limited under the Non-
Compete Agreements. Nothing restricts the Company's ability, however, to invest
in senior, junior, mezzanine or other forms of debt, or any form of preferred
equity in assets or entities that are considered within the primary businesses
of such publicly-traded companies. See "Certain Relationships and Related
Transactions". The Company also intends to purchase mortgage-backed securities
("MBS"), primarily commercial and multifamily mortgage-backed securities
("CMBS") originated, structured, and serviced by the Taxable Subsidiary.

Prime Capital is a Maryland corporation incorporated on September 19, 1997,
which will elect to be taxed as a REIT under the Code beginning with its 1998
taxable year. The Company's principal executive offices are located at 230 Park
Avenue, Suite 1000, New York, New York 10169, and its telephone number is 212-
808-6550.

BUSINESS STRATEGIES AND INVESTMENT POLICIES

The Company will provide the financial structure to support the investment
continuum in real estate assets demanded by a broad national customer base. The
Company's goal is to operate as a full service real estate finance company
capable of providing a broad array of financial products to the real estate
industry, including both traditional permanent mortgage loans and less
conventional, value-added financing structures in order to enhance returns to
the Company's shareholders. The Company intends to continue to develop
strategic relationships with major real estate operators and investors and make
investments that meet the investment criteria and objectives of the Company.

The Company will directly originate targeted investments through its
origination network and focus on portfolio management and servicing, including
special servicing, in order to maintain relationships and manage risk in the
portfolio.

There are no geographic limitations or requirement of geographic
diversification with respect to the Company's investments. The Company will,
however, use research driven approaches to portfolio management and will apply
the discipline of the capital markets for measuring liquidity and market value
of any given investment.

LEVERAGE AND HEDGING

The Company will use leverage in order to increase its investments and to
create returns on equity commensurate with its yield and risk objectives. The
Company, through its investment in the Taxable Subsidiary, has a $200,000,000
warehouse credit facility from Prudential Securities Credit Corporation (the
"PSCC Warehouse Facility") and is negotiating with Nomura Asset Capital
Corporation and Salomon Smith Barney regarding the establishment of additional
warehouse facilities. The Company expects to have approximately $1,000,000,000
of warehouse facilities available to it at the time of completion of the Common
Stock Offering.

The Company also intends to leverage its assets primarily through the
issuance of CMOs, reverse repurchase agreements, and other secured borrowing
arrangements and unsecured borrowings. In addition, the Company may use the
Taxable Subsidiary to take advantage of off-balance sheet financing structures
such as REMICs and FASITs. These structures will be used to match fund the
Company's assets and liabilities. The Company intends to use the proceeds from
securitizations and other borrowings to invest in Targeted Portfolio
Investments (as defined below) and, in turn, to borrow against such assets and
to repeat this process of borrowing and investing until it has significantly
leveraged its portfolio of assets.

The Company may hedge all or a portion of the interest rate risk associated
with such borrowings through the use of interest rate caps and swaps, forward
contracts and other similar hedging techniques. The Company

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also may engage in a variety of risk management techniques for the purpose of
managing the effective maturity or interest rates of its assets. These
techniques also may be used to attempt to protect against declines in the
market value of the Company's assets resulting from general economic and market
trends, although there is no perfect hedge for any investment and a hedge may
not perform its intended purpose of offsetting losses on an investment. Any
such hedging and other interest rate risk management techniques are subject to
risks and may affect adversely the Company's earnings. See "Risk Factors--
Economic and Business Risks--Leverage Can Reduce Income Available for
Distribution." No assurances can be made that the Company's investment and
leverage strategy can be implemented or will be successful.

PRIMARY INVESTMENTS

The Company intends to invest primarily in the following real estate related
assets (the "Targeted Portfolio Investments"). Although the Company cannot
anticipate with any certainty the percentage of the proceeds of the Offering
that will be invested in each category of Targeted Portfolio Investments, it
plans to invest the majority of its assets in Mortgage Loans.

Mortgage Loans. The Company intends to invest, by way of origination or
purchase, in commercial and multifamily senior, mezzanine and subordinate
mortgage loans and interests therein (hereinafter collectively referred to
as "Mortgage Loans"), including (i) commercial and multifamily term loans
with principal loan amounts generally in excess of $2,000,000; (ii) loans
used as temporary financing for commercial and multifamily projects
("Bridge Loans"); (iii) loans secured by junior liens on real property or
interests in real property ("Mezzanine Loans"); (iv) loans used to finance
construction of commercial and multifamily properties ("Construction
Loans"); (v) Mortgage Loans that entitle the holder to the receipt of
contingent interest, in addition to the stated rate of interest, based on a
percentage of the property's net operating income or gross revenue, gain on
sale of the property or net proceeds upon refinancing ("Participating
Mortgage Loans"); and (vi) senior, pari passu, and subordinate interests in
the Mortgage Loans described in clauses (i) through (v) above. The Company
also may invest in (i) Mortgage Loans that are in default as to payment of
principal and/or interest ("Nonperforming Mortgage Loans") and (ii)
Mortgage Loans for which default is likely or imminent or for which the
borrower is making monthly payments in accordance with a forbearance plan
("Subperforming Mortgage Loans" and, together with Nonperforming Mortgage
Loans, "Distressed Mortgage Loans"). The Company may hold its Mortgage
Loans or utilize them as collateral in connection with its issuance of
collateralized mortgage obligations.

Preferred Equity. The Company intends to make preferred equity
investments in specific real estate assets (or pools of assets) or in real
estate operating companies (the "Preferred Equity"). Generally, the
Preferred Equity will be expected to have a preferred claim to both the
operating cash flow and liquidation proceeds from the specific real estate
assets (or pool of assets) or from the operating company. The Company
expects that the Preferred Equity will earn a stated cumulative return and,
in some instances, may participate in future growth in both the net
operating income and the value of the assets of the issuer (or equity of
the issuer). Generally, a Preferred Equity investment may be made when the
existing owner, borrower, or real estate operating company requires
additional equity financing to fund an acquisition, development,
refinancing or expansion of the assets (or the company) and either (i) such
equity financing generally is not available to the issuer on a common
equity basis, or (ii) the owner/borrower desires to further leverage its
assets and is willing to grant the Company a preferred interest in such
assets in exchange for retaining a greater percentage of common ownership.
Regardless of the underlying rationale of the investment, the Company's
Preferred Equity investments are expected to offer the potential for a
higher yield than is generally available from the direct purchase of assets
or the funding of senior Mortgage Loans, although such investments also
carry greater risk of loss of principal and nonpayment of the preferred
return. The Company will attempt to mitigate these risks through
underwriting analysis of both the real estate collateral and the issuer.
With respect to a Preferred Equity investment in a real estate operating
company

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that is a taxable "C corporation", the Company's investment may not
represent (i) more than 10.0% of the voting securities of such real estate
operating company or (ii) more than 5.0% of the value of the Company's
total assets. The Company will structure any such Preferred Equity
investment so as to satisfy such asset tests. See "Risk Factors--Risks
Related to Investments in Real Property" and "Federal Income Tax
Considerations--Other Tax Considerations--Clinton Proposals."

Net Leased Real Estate. The Company intends to invest in net leased real
estate on a leveraged basis. Net leased real estate generally is defined as
real estate that is triple-net leased on a long-term basis (generally ten
years or more) to tenants who are customarily responsible for paying all
costs of owning, operating, and maintaining the leased property during the
term of the lease, in addition to the payment of a monthly net rent to the
landlord for the use and occupancy of the premises ("Net Leased Real
Estate"). The Company's ability to invest in Net Leased Real Estate may be
limited by the terms of certain non-compete agreements with entities which
are Affiliates of PGI. Nothing restricts the Company's ability, however, to
invest in senior, junior, mezzanine or other forms of debt, or any form of
preferred equity in assets or entities that are considered within the
primary businesses of such publicly-traded companies. See "Certain
Relationships and Related Transactions." The Company expects to acquire Net
Leased Real Estate on a leveraged basis with triple-net rents that will
provide sufficient cash flow to provide an attractive cash return on its
investment therein after debt service. The Company will focus on Net Leased
Real Estate that is leased on a long-term basis to credit tenants or that
is leased for shorter terms (or leased to non-credit tenants) when the
property can be leased to other tenants upon the expiration of the lease or
in the event of a default by the initial tenant.

Mortgage-Backed Securities. The Company intends to invest in CMBS and may
invest in RMBS, and intends to primarily invest in MBS created and serviced
by the Taxable Subsidiary. The Company intends to invest in various classes
of MBS, primarily non-investment grade and unrated classes. Non-investment
grade and unrated classes offer the potential of a higher yield than more
senior classes which customarily are rated investment grade, but non-
investment grade and unrated classes of MBS carry greater credit risk,
including a substantially greater risk of loss of principal and non-payment
of interest than investment grade rated classes. In connection with its
acquisition of non-investment grade and unrated MBS, the Company will
attempt to mitigate these risks through underwriting analysis of the real
estate collateral, the borrowers, and the related MBS structure and, where
appropriate, by obtaining rights to service defaulted mortgage loans
(including oversight and management of the resolution of such mortgage
loans by modification, foreclosure, deed in lieu of foreclosure or
otherwise) ("Special Servicing"), although the Company likely will not
obtain Special Servicing rights unless the underlying mortgage loan is in
default. See "The Company--Business Strategy and Investment Policies" and
"Risk Factors--Risks Related to Investments in MBS--Subordinated Interests
are Subject to Greater Credit Risks Than More Senior Classes." The Company
intends to invest in various classes of real estate mortgage investment
conduit ("REMIC") collateralized mortgage obligations ("CMOs" or "CMO
Bonds") and pass-through certificates ("Pass-Through Certificates"),
consisting primarily of non-investment grade classes. The Company also may
invest in various other classes of MBS, including interest only ("IO"),
principal only ("PO"), subordinated interest only ("Sub IO") and inverse
floating rate interest only ("Inverse IO") classes, as a short-term
liquidity tool or as a longer term investment strategy. Although these
investments can present increased risks, the Company believes that a
managed portfolio of IOs, POs, Sub IOs and Inverse IOs can produce
attractive returns in a variety of interest rate environments. See "Risk
Factors--Risks Related to Investments in MBS--Yields on Subordinated
Interests, IOs and POs May Be Affected Adversely By Interest Rate Changes."

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<PAGE>

commercial, multifamily and other real property on a leveraged basis. The
Company may acquire properties acquired at foreclosure or by deed-in-lieu
of foreclosure ("REO Property"), other underperforming or otherwise
distressed real property (all of such underperforming and distressed real
property, together with REO Property, is herein referred to collectively as
"Distressed Real Property") and in small commercial loans and business
loans secured by real estate with principal loan amounts generally of less
than $2,000,000 ("Small Commercial Loans"). In addition, the Company may
invest in real property (or interests therein) located outside the United
States.

The Company believes that the above-described investment activities will
complement each other from both a cash flow and a tax planning perspective. The
Company expects that the tax depreciation associated with its investments in
Net Leased Real Estate and certain Preferred Equity may offset, in part or in
whole, the non-cash accrual of interest income on certain Mortgage Loans and
MBS. Such non-cash interest income may include (i) the original issue discount
("OID") generally associated with MBS that are issued at a discount from par
and Participating Mortgage Loans, (ii) the "phantom" taxable income associated
with Distressed Mortgage Loans and with the foreclosure on or a "significant
modification" to a Mortgage Loan, and (iii) the phantom taxable income
attributable to a class of MBS that is designated as the residual interest in
one or more REMICs ("REMIC Residual Interests") and to ownership interests in
Mortgage Loans that are subject to non-REMIC CMO debt ("Non-REMIC Residual
Interests"). No assurances can be made, however, that the Company's investment
strategy will be successful or that such tax depreciation benefits will be
realized. See "Risk Factors--Risks Related to Investments in Mortgage Loans"
and "--Risks Related to Investments in MBS."

INITIAL ASSETS

As of March 31, 1998, the Company's investments consisted of eight Mortgage
Loans totaling $74,250,000 in principal amount. See "The Company--Primary
Investments."

RISK FACTORS

An investment in the Common Stock involves various risks, and prospective
investors should consider carefully the matters discussed under "Risk Factors"
beginning on page 14 prior to making an investment in the Common Stock. Such
risks include, among others, the following:

. The possibility that the consideration paid by the Company for the GP
Common Units may exceed the fair market value of such units which could
adversely affect the value of the Common Stock.

. The possible dilutive effect resulting from the value of PCH's assets and
business being less than the value of the LP Common Units received for
such assets and business.

. The Company, which has a limited operating history and limited assets,
will engage in highly competitive businesses which may inhibit the
Company's ability to achieve its investment objectives.

. The Underwriter has material business relations with the Company and as a
result the Underwriter and its Affiliates may have interests that
conflict with the interests of the purchasers of Common Stock in the
Offering.

. The Chairman of the Board of the Company will not devote his full time to
the business of the Company.

. Certain non-compete agreements restrict the Company's ability to invest
direct equity in certain types of real estate assets which may prevent
the Company from investing direct equity in certain real estate assets
that might otherwise be in the Company's best interests.

. The Company currently owns and intends to invest in Mortgage Loans, which
may be affected adversely by events of loss, such as credit losses due to
borrower default, hazard losses and state law enforceability issues.

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<PAGE>

. Investing in commercial and multifamily Mortgage Loans, especially loans
that are junior or subordinate to a senior Mortgage Loan, is generally
riskier than investing in single family residential loans, due to
generally larger loan balances, dependency on the successful completion
or operation of the project for repayment, third-party management of the
property and loan terms that require little or no amortization of the
loan over its term, but instead provide for a balloon payment at a stated
maturity and, in the case of junior or subordinate loans, are subject to
subordination to a senior Mortgage Loan.

. Investing in Mezzanine Loans generally is riskier than investing in more
senior Mortgage Loans because a foreclosure by a senior lienholder may
result in the Mezzanine Loan becoming unsecured, and the Company may not
recover the full amount, or indeed any, of its investment in such
Mezzanine Loan following such foreclosure.

. Investing in Construction Loans generally is riskier than investing in
conventional Mortgage Loans because Construction Loans generally are not
secured by income producing properties and completion of construction is
subject to delays, cost overruns and other factors outside the control of
the Company.

. The yield on and the value of the Company's investments in Mortgage Loans
and MBS may be affected adversely by changes in prevailing interest
rates, rates of prepayment and credit losses due to deteriorating cash
flow from the underlying real estate.

. The Company intends to significantly leverage its investments in an
amount to be determined by the Company's Board of Directors, which could
lead to reduced or negative cash flow, reduced liquidity and risk of loss
to foreclosure.

. The Company's borrowings are likely to include reverse repurchase
agreements with respect to its MBS and other short-term borrowings. A
decline in the market value of the assets securing such borrowings could
limit the Company's ability to borrow or result in lenders initiating
margin calls, requiring the Company to sell assets under adverse market
conditions in order to create liquidity. If such sales are made at prices
lower than the carrying value of the assets, the Company will experience
losses on such investments.

. The Company may invest in real property, or Mortgage Loans secured by
real property, with known environmental problems that may materially
impair the value of the real property, which may expose the Company to
liability in excess of the Company's investment therein.

. In periods of declining interest rates, prepayments on Mortgage Loans and
MBS generally increase and the Company likely will have to reinvest such
funds in lower-yielding investments. Conversely, in periods of rising
interest rates, prepayments on Mortgage Loans and MBS generally decrease
and the value of the Company's fixed-rate investments generally will
decline.

. The Company's performance may be affected adversely if the Company fails
to hedge effectively against interest rate and other risks.

. The Company intends to acquire Mortgage Loans and MBS secured by real
property located outside the United States, which will be subject to
foreign legal, political and currency conversion risks in addition to the
risks typically associated with real estate investments.

. The Company's proposed investment in MBS, Participating Mortgage Loans
and Distressed Mortgage Loans could result in the Company recognizing
interest income (including, but not limited to, OID) for tax purposes in
advance of the receipt of the related cash flow, which could require the
Company to sell assets, borrow money or raise capital in order to have
the cash needed to distribute all of its taxable income and thereby avoid
corporate income tax on its undistributed taxable income. In addition,
the Company may invest in REMIC Residual Interests and Non-REMIC Residual
Interests (each as defined herein), which may also generate taxable
income in excess of cash receipts.

. The yield on the Company's IOs, Sub IOs and Inverse IOs will be affected
adversely by faster than anticipated prepayment rates, which generally
are associated with a declining interest rate environment,

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<PAGE>

and the Company's Inverse IOs, which bear interest at rates that vary
inversely with changes to a specified index, will be affected adversely by
higher than anticipated levels of such index. Particularly high rates of
prepayment could result in a failure of the Company to recover fully its
initial investment in its IOs, Sub IOs and Inverse IOs. The Company's POs
will be affected adversely by slower than anticipated prepayment rates,
which generally are associated with a rising interest rate environment.

. Delinquency and loss ratios on the Company's Mortgage Loans could be
affected adversely by the performance of third-party servicers and
special servicers.

. Active formation and operation of competing REITs formed with objectives
similar to the Company's objectives may affect adversely the ability of
the Company to acquire assets in the future.

. Future offerings of debt and equity securities by the Company may have an
adverse effect on the market price of the Common Stock.

. Ownership of Common Stock by each stockholder, other than FBR Asset
Investment Corporation (which may own up to 10.9% of the outstanding
Common Stock), is limited to 9.9% of the outstanding Common Stock, which
may deter third parties from seeking to control or acquire the Company.

. The Company may be taxed as a regular corporation if it fails to qualify
as a REIT.

. In order to qualify for REIT status, the Company must distribute at least
95.0% of its taxable REIT income each year, which could require the
Company to sell assets or borrow money to satisfy this requirement.

. In order to qualify as a REIT, the Company must satisfy certain
requirements concerning the nature of its assets and income, which may
restrict the Company's ability to invest in various types of assets.

. To maintain its exemption from regulation under the Investment Company
Act of 1940, as amended (the "Investment Company Act"), the Company,
among other things, must maintain certain percentages of its investments
in certain asset classes that qualify for exemption from such regulation,
which requirement may restrict the Company's ability to invest in various
types of assets.

FORMATION AND STRUCTURE OF THE COMPANY

Since 1981, and until recent public offering transactions, The Prime Group,
Inc. ("PGI") was a diversified real estate company engaged in the ownership,
development, acquisition, operation, leasing, marketing and financing of
institutional-quality commercial and multifamily real estate. Starting in 1994,
PGI began contributing its various operating divisions to separate self-managed
and self-administered publicly-traded REITs and operating companies. Prime
Retail, Inc. (NYSE: PRT) became the successor-in-interest to PGI's retail
division in March 1994 and Prime Residential, Inc. became the successor-in-
interest to PGI's multi-family apartment division in August, 1994. Prime
Residential, Inc. was subsequently merged with and into Apartment Investment
and Management Company ("AIMCO") (NYSE: AIV). Brookdale Living Communities,
Inc. (NASD: BLCI) became the successor-in-interest to PGI's senior independent
and assisted living division in May 1997, and Prime Group Realty Trust (NYSE:
PGE) became the successor-in-interest to PGI's office and industrial division
in November 1997. As a result of the foregoing public offering transactions,
PGI has retained substantial ownership interests in Prime Retail, Inc.,
Brookdale Living Communities, Inc. and Prime Group Realty Trust. Michael W.
Reschke owns approximately 50.8% of the equity interest in PGI.

In September 1997, PGI organized PCH as a vehicle to take advantage of
mortgage loan and preferred equity investment opportunities that may not
otherwise be suitable for investment by PGI or the various publicly-traded
REITs and operating companies affiliated with PGI. PCH's business plan is to
engage in the origination and securitization of mortgage loans relating to all
forms of income-producing real estate. PGI and James W. Roiter collectively own
substantially all of the equity interests in PCH. PCH formed a wholly-owned
subsidiary, Prime Capital Funding, LLC ("PCF"), to originate and securitize
mortgage loans generally in excess of

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<PAGE>

$2,000,000. PCF originated these loans through regional offices located
throughout the country and financed such loans through its own equity and from
the proceeds of long-term warehouse lines of credit. In addition, PCH formed
certain wholly owned subsidiaries, such as Prime Capital Funding I, LLC ("PCF
I"), to serve as special purpose vehicles whose sole purpose was to hold
specific assets acquired by or on PCH's behalf.

On March 13, 1998, PCH contributed substantially all of its assets and
businesses to the Company in exchange for which PCH received all of the
outstanding common and preferred stock of the Taxable Subsidiary. PCH
contributed to the Operating Partnership (i) $25,000,000 of which $14,900,000
has been funded to date; (ii) 100% of the outstanding preferred stock of the
Taxable Subsidiary, which represents 95% of the economic value of the Taxable
Subsidiary but no voting power on most matters; and (iii) a promissory note
issued by the Taxable Subsidiary in the principal amount of up to $20,000,000,
of which $9,900,000 was outstanding, in exchange for all of the limited
partnership interests in the Operating Partnership. PCH owns 100% of the
outstanding common stock of the Taxable Subsidiary, which represents 5% of the
economic value of the Taxable Subsidiary and includes full voting power. PCH
has also agreed to lend up to $20,000,000 to the Operating Partnership on an
unsecured basis. As of March 31, 1998, there were no amounts outstanding under
such agreement. The note bears interest at a per annum rate of 10% and matures
at the time of completion of the Offering.

The transfer by PCH of substantially all of its assets and businesses to the
Operating Partnership and the Taxable Subsidiary was designed to consolidate
such assets and businesses in the Company and to continue and expand the
operations of the real estate lending business. The Company believes that the
Offering will provide the Company with enhanced access to the public markets
for debt and equity capital, thereby enhancing its potential for future growth
to the benefit of all stockholders.

The Company operates as a fully-integrated, self-administered and self-
managed real estate finance company that invests in real estate financing
transactions, including commercial mortgage loans, equity and preferred equity
in real estate, net leased real estate, and mortgage-backed securities. The
business and operations of the Company are conducted through the Operating
Partnership and the Taxable Subsidiary. Prime Capital has been and will
continue to be the sole general partner of the Operating Partnership. The
Taxable Subsidiary is not a qualified REIT subsidiary and is subject to all
applicable federal and state income taxes.

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<PAGE>

The (i) structure of the Company, (ii) the ownership of the equity in the
Company after giving effect to the Offering (assuming the Underwriter's over-
allotment option will not be exercised) and prior to the conversion of the LP
Common Units and (iii) the ownership relationships among Prime Capital, the
Operating Partnership, the Taxable Subsidiary and certain of their Affiliates
are shown in the following chart:

LOGO

(1) Prime Capital, a Maryland corporation that will elect to be taxed as a
REIT, will issue 1,075,268 shares of its Common Stock to FBR Asset
Investment Corporation, a Virginia corporation, in the Private Placement
and 8,750,000 shares of its Common Stock to public investors in the Common
Stock Offering.

(2) Certain executives of the Company are expected to be granted an aggregate
of 6.5% of the equity interests in PCH, subject to vesting requirements.

(3) Concurrently with the Offering, all of PCH's limited partnership interests
in the Operating Partnership will be converted into 4,032,258 LP Common
Units. In exchange for the Capital Contribution by PCH, the Operating
Partnership also will issue 1,344,086 LP Common Units to PCH.

(4) The Taxable Subsidiary owns 100% of the equity interests of certain special
purpose entities, including Prime Capital Funding I, LLC.

On a fully diluted basis, with the exception of the exercise by the
Underwriter of its over-allotment option, the exercise of any outstanding
warrants or the exercise of any outstanding stock options; the percentage of
common equity held by the public stockholders, PCH and FBR Asset Investment
Corporation will be 57.6%, 35.4% and 7.0%, respectively.

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<PAGE>

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Certain conflicts of interest exist between the Company and certain of its
officers and directors (including Michael W. Reschke and James W. Roiter). Mr.
Reschke has substantial commitments to entities other than the Company which
could potentially compete with the Company. The Company intends to enter into a
non-compete agreement with Mr. Reschke and PGI to minimize potential conflicts.
The Company also intends to adopt certain policies that are designed to
eliminate or minimize certain potential conflicts of interest. See "Certain
Relationships and Related Transactions."

PGI and Michael W. Reschke have entered into a separate non-compete agreement
with each of Prime Retail, Inc., Brookdale Living Communities, Inc., and Prime
Group Realty Trust (each a "Non-Compete Agreement" and, collectively, the "Non-
Compete Agreements"). Subject to certain conditions and exceptions, the Non-
Compete Agreements will prohibit the Company, as a result of PCH's ownership
interest in the Company, from making direct common equity investments in assets
or entities that are considered within the primary businesses of such publicly-
traded companies. Nothing restricts the Company's ability, however, to invest
in senior, junior, mezzanine or other forms of debt, or any form of preferred
equity in assets or entities that are considered within the primary businesses
of such publicly-traded companies. A Non-Compete Agreement will apply to the
Company so long as the Company is an affiliate of PGI under such agreement.
Under the Non-Compete Agreements, an affiliate is generally defined as any
entity in which PGI, Prime Group Limited Partnership and Michael W. Reschke,
individually or collectively, own or control, directly or indirectly, fifty
percent or more of the outstanding equity interests or have the right or power
to affect the investment or operational decision-making process. The Non-
Compete Agreements generally provide exceptions for mortgage loans,
subordinated debt financing, sale-leaseback transactions and preferred equity
investments. The primary businesses include the following types of real estate
and interests therein: retail properties, senior and assisted living and semi-
acute care properties and office and industrial properties. In the event one of
the Non-Compete Agreements prohibits the Company from making a potential
investment, the Company will seek to obtain a waiver under such agreement.
There can be no assurances that the Company will be successful in obtaining
such a waiver, in which event, the Company's investment will be prohibited. See
"Certain Relationships and Related Transactions."

The Underwriter, through an Affiliate, has established a short-term credit
facility in favor of the Taxable Subsidiary and PCH to finance the equity
required to purchase and/or origination of Mortgage Loans. It is anticipated
that a portion of the net proceeds of the Offering will be used to pay off such
credit facility, which will benefit the Underwriter and PCH. See "Use of
Proceeds" and "Underwriting."

THE OFFERING

<TABLE>
<S> <C>
Shares offered to the public in the Offering (1)............... 8,750,000
Shares to be outstanding after the Offering (1)(2)(3).......... 15,201,613
Proposed New York Stock Exchange Symbol........................
</TABLE>
- --------------------

(1) Assumes that the Underwriter's option to purchase up to an additional
1,312,500 shares to cover over-allotments is not exercised.

(2) Includes 1,075,268 shares of Common Stock issued to FBR Asset Investment
Corporation pursuant to the Private Placement, includes and assumes 100%
conversion of 5,376,344 LP Common Units held by PCH on a one for one basis
for Common Stock; does not include exercise of outstanding warrants or
stock options.

(3) Does not include (a) 1,520,161 shares reserved for issuance under the Stock
Option Plan (as defined herein) (1,651,411 shares reserved for issuance if
the Underwriter's over-allotment option is exercised in full), (b) 228,024
shares issuable pursuant to a warrant granted to the Underwriter (247,712
shares issuable if the Underwriter's over-allotment option is exercised in
full), and (c) up to 152,016 shares issuable pursuant to a warrant granted
to FBR Asset Investment Corporation (165,141 shares issuable if the
Underwriter's over-allotment option is exercised in full). See "Description
of Capital Stock" and "Capitalization."

10
<PAGE>

USE OF PROCEEDS

The proceeds to the Company from the Offering (which are estimated to be
approximately $175,000,000 for the Common Stock Offering, approximately
$20,000,000 for the Private Placement and $25,000,000 from the Capital
Contribution), after the deduction of underwriting discounts and commissions
applicable to the Offering, are approximately $207,750,000 ($232,163,000 if the
Underwriter's over-allotment option is exercised in full). The Company will use
the net proceeds of the Offering to acquire 9,825,269 GP Common Units
(representing a 64.6% general partnership interest in the Operating
Partnership).

The Operating Partnership will use a portion of the funds contributed by
Prime Capital to the Operating Partnership in return for Common Units to repay
approximately $59,844,000 in outstanding balances under its existing warehouse
facilities, which have current interest rates of approximately 6.687% and a
maturity date of May 31, 1998, and other existing indebtedness. See "Use of
Proceeds." The balance of the proceeds will be used for future acquisitions of
Targeted Portfolio Investments and working capital.

If the Underwriter's over-allotment option with respect to the Common Stock
is exercised, the Company will contribute the net proceeds from the exercise of
the option to the Operating Partnership in return for additional Common Units,
and the Operating Partnership will use the funds it receives from the Company
for future acquisitions of Targeted Portfolio Investments, working capital and
general corporate purposes.

Investors should be aware that it may take considerable time for the Company
to find additional Targeted Portfolio Investments, during which time the
Company's assets may be invested in relatively low yielding instruments. As a
result, the Company's earnings and dividends could be lower than is expected if
the Company is successful in investing in Targeted Portfolio Investments. See
"Capitalization" and "Use of Proceeds."

DISTRIBUTION POLICY

Prime Capital intends to make regular quarterly distributions to its
stockholders. Generally, Prime Capital intends to distribute at least 95.0% of
the Company's taxable income each year (subject to certain adjustments) so as
to qualify for REIT status under the Code. It is anticipated that the first
distribution to stockholders will be made following the end of the first full
calendar quarter following the Closing Date.

TAX STATUS OF THE COMPANY

Prime Capital intends to qualify and will elect to be taxed as a REIT under
sections 856 through 860 of the Code, commencing with its taxable year ending
December 31, 1998. If Prime Capital qualifies for taxation as a REIT, Prime
Capital generally will not be subject to federal corporate income tax on its
taxable income that is distributed to its stockholders. A REIT is subject to a
number of organizational and operational requirements. Although Prime Capital
does not intend to request a ruling from the Internal Revenue Service ("IRS")
as to its REIT status, Prime Capital has received an opinion of its legal
counsel that Prime Capital qualifies as a REIT, which opinion is based on
certain assumptions and representations about Prime Capital's ongoing
businesses and investment activities and other matters. No complete assurance
can be given that Prime Capital will be able to comply with such requirements
in the future. Furthermore, such opinion is not binding on the IRS or on any
court. Failure to qualify as a REIT would render Prime Capital subject to
federal income tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates and distributions to Prime Capital's
stockholders would not be deductible. Even if Prime Capital qualifies for
taxation as a REIT, the Company may be subject to certain federal, state and
local taxes on its income and property. Moreover, the Taxable Subsidiary,
through which the Company is expected to transact certain asset securitizations
and other

11
<PAGE>

income-producing activities, is not a qualified REIT subsidiary and, therefore,
taxable income of the Taxable Subsidiary is subject to all applicable federal
and state income taxes. Prime Capital will adopt the calendar year as its
taxable year. In connection with Prime Capital's election to be taxed as a
REIT, Prime Capital's articles of incorporation, as amended (the "Charter") and
Bylaws impose restrictions on the ownership and transfer of the Common Stock.
See "Risk Factors--Legal Risks and Tax Risks," "Description of Capital Stock--
Restrictions on Transfer" and "Federal Income Tax Considerations--Taxation of
Prime Capital."

12
<PAGE>

SUMMARY FINANCIAL DATA

The following table presents certain financial and operating data on a
historical and pro forma basis for the Company and its interest in the Taxable
Subsidiary. The financial and operating data should be read in conjunction with
the historical and pro forma financial statements and notes thereto included in
this Prospectus. The historical financial data as of March 31, 1998 and for the
three months ended March 31, 1998 have been derived from the audited financial
statements of the Company, the Operating Partnership and the Taxable Subsidiary
included elsewhere in this Prospectus. In accordance with generally accepted
accounting principles, the Taxable Subsidiary has been reflected in the table
under the equity method of accounting.

The pro forma data assume that (i) the Company had sold 8,750,000 shares of
Common Stock in the Common Stock Offering, with the contribution of the net
proceeds to the Operating Partnership (ii) the Company had sold 1,075,269
shares of Common Stock (net of underwriting discounts) in the Private Placement
to FBR Asset Investment Corporation with the contribution of the net proceeds
to the Operating Partnership and (iii) the Operating Partnership had received
$25,000,000 from PCH in exchange for the issuance of 1,344,086 LP Common Units
(at public offering price, net of underwriting discounts) as of the beginning
of the periods presented for the operating data and as of the balance sheet
date for the balance sheet data. The pro forma financial data are not
necessarily indicative of what the actual financial position or results of
operations of the Company would have been as of and for the periods indicated,
nor does it purport to represent future financial position and results of
operations.

SUMMARY FINANCIAL DATA

PRIME CAPITAL INVESTMENT CORP.

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEAR ENDED
ENDED MARCH 31, 1998 DECEMBER 31, 1997
--------------------- ---------------------
PRO FORMA HISTORICAL PRO FORMA HISTORICAL
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
EXPENSES:
Salaries & benefits............. $ 611 $ 46 $ 2,098 $ --
Professional fees............... 188 78 899 --
General & administrative........ 221 27 868 --
--------- ----- --------- ------
Total expenses.................. 1,020 151 3,865 --
--------- ----- --------- ------
Loss before share of loss of
Taxable Subsidiary and minority
interest....................... (1,020) (151) (3,865) --
Share of loss of Taxable
Subsidiary..................... (616) (60) (2,487) --
--------- ----- --------- ------
Loss before minority interest... (1,636) (211) (6,352) --
Minority Interest............... 579 -- 2,247 --
--------- ----- --------- ------
Net Loss........................ $ (1,057) $(211) $ (4,105) $ --
========= ===== ========= ======
Net loss per share of common
stock.......................... $ (0.11) $ (0.42)
========= =========
Weighted average shares of
common stock outstanding....... 9,825,269 9,825,269
========= =========
<CAPTION>
MARCH 31, 1998
---------------------
PRO FORMA HISTORICAL
--------- ----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash................................................... $ 206,751 $ 1
Note receivable from Taxable Subsidiary................ 20,000 9,906
Total assets........................................... 230,808 14,805
Total liabilities...................................... 151 992
Partners' equity....................................... -- 13,812
Minority interest...................................... 81,583 --
Stockholders' equity................................... 149,074 1
</TABLE>

13
<PAGE>

RISK FACTORS

An investment in the Common Stock involves various risks. Before purchasing
shares of Common Stock offered hereby, prospective investors should give
special consideration to the information set forth below, in addition to the
information set forth elsewhere in this Prospectus.

When used in this Prospectus, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend" and similar
expressions are intended to identify forward-looking statements regarding
events, conditions and financial trends that may affect the Company's future
plans of operations, business strategy, results of operations and financial
position. Prospective investors are cautioned that any forward-looking
statements are not guarantees of future performance and are subject to risks
and uncertainties and that actual results may differ materially from those
included within the forward-looking statements as a result of various factors.
Factors that could cause or contribute to such differences include, but are
not limited to, those described below, under the headings "Management's
Discussion and Analysis of Results of Operations" and "The Company" and
elsewhere in this Prospectus.

MARKET CAPITALIZATION OF THE COMPANY MAY EXCEED FAIR MARKET VALUE OF THE
COMPANY'S ASSETS.

The consideration paid by the Company for the Common Units may exceed the
current fair market value of such assets. Management of the Company believes
it is appropriate to value the Operating Partnership and the Taxable
Subsidiary as an ongoing business enterprise rather than with a view to values
that could be obtained from a liquidation of such entities and the sale of the
individual assets of such entities. Accordingly, the valuation of the Company
has been determined based on a capitalization of the Company's estimated cash
available for distribution. Because the liquidation value of the Company may
be less than the value of the Company as a going concern, holders of Common
Stock may suffer a loss in the value of their Common Stock if the Company is
required to sell its assets in a liquidation. The Company's estimate of cash
available for distribution is based on certain assumptions, including
assumptions with respect to future acquisitions, and anticipated operating
expense levels, which may not prove accurate and actual results may vary
substantially from the estimate. Accordingly, there can be no assurance that
the value of the Common Units (assuming that the value of the Common Units is
equal to the initial public offering price of the Common Stock) is equivalent
to the initial public offering price of the Common Stock.

BENEFIT TO PCH MAY HAVE A DILUTIVE EFFECT.

Concurrently with the Offering, PCH's limited partnership interest in the
Operating Partnership will be converted into 4,032,258 LP Common Units. Such
LP Common Units will be valued at approximately $75,000,000 upon the
consummation of the Offering. There can be no assurance that the value of the
LP Common Units received by PCH is equivalent to the value of PCH's ownership
interest in the Operating Partnership prior to the consummation of the
Offering. If the valuation of PCH's ownership interest exceeds fair market
value, such valuation could have a dilutive effect on the GP Common Units held
by the Company and, indirectly, have a material adverse effect on the value of
the Common Stock.

NEWLY-ORGANIZED ENTITIES; ABSENCE OF IDENTIFIABLE ASSETS

Newly-Organized Entities. The Company is a recently formed entity with a
limited operating history and untried operating policies and strategies. There
can be no assurance that the Company will be able to generate sufficient
revenue from operations to pay operating expenses of the Company and make or
sustain distributions to shareholders. See "Distribution Policy." The Company
will depend upon the experience and expertise of the employees recently hired
by the Company who will be responsible for administering day-to-day
operations. There can be no assurance, however, that the Company will be able
to implement successfully the strategies that the Company intends to pursue.

14
<PAGE>

Appropriate Investments May Not Be Available and Full Investment of Net
Proceeds in Targeted Portfolio Investments Will Be Delayed. Although the
Company has acquired some Targeted Portfolio Investments, there can be no
assurance that the Company will be able to identify additional Targeted
Portfolio Investments or other appropriate assets that meet its investment
criteria or that any such assets will produce a satisfactory return on the
Company's investment. The Company's management will have broad authority to
invest the net proceeds of the Offering in whatever investments the Company
deems appropriate at the time of their acquisition. In making these investment
decisions, the Company will follow its internal investment policies. See "The
Company--Business Strategies and Investment Policies." No assurance can be
made that management's decisions in this regard will result in a profit for
the Company.

Limited Availability of Investments May Inhibit Company's Objectives. The
results of the Company's operations are dependent upon the availability of
opportunities for the acquisition of Targeted Portfolio Investments. It may
take considerable time for the Company to find appropriate investments. In
general, the results of the Company's operations will be affected by the level
and volatility of interest rates, by conditions in the real estate and
financial markets, and general economic conditions. No assurances can be given
that the Company will be successful in acquiring economically desirable assets
or that the assets, once acquired, will maintain their economic desirability.
To the extent that the Company acquires assets, such acquisitions may pose
risks to the Company and to the Company's stockholders that are different from
or in addition to the risks enumerated herein.

The results of the Company's operations will also be affected by the
presence and the anticipated presence of numerous entities with investment
objectives similar to the Company and which may be significantly larger than
the Company and have access to greater capital. See "--Economic and Business
Risks--Competition in the Acquisition of Appropriate Investments May Inhibit
Company's Ability To Achieve Objectives."

BENEFITS TO INSIDERS AND UNDERWRITERS

Benefits to Insiders. In return for contributing all of the equity interests
in PCF and PCF I, PCH received limited partnership interests in the Operating
Partnership. The agreements pursuant to which the equity interests were
contributed and the limited partnership interests received were not negotiated
on an arm's length basis, and the representations, warranties and covenants in
such agreements may not provide the same level of protection as those
contained in a contribution agreement negotiated on an arm's length basis.
There can be no assurance that the value of the limited partnership interests
received by PCH in exchange for all of the equity interests in PCF and PCF I
is equivalent to the actual value of such assets to the Company.

Certain of the Net Proceeds from the Common Stock Offering to be Used to Pay
Off Loans Which Will Benefit the Underwriter and PCH. The Underwriter, through
an Affiliate, has established a short-term credit facility in favor of the
Taxable Subsidiary and PCH to finance the origination and/or purchase of
Mortgage Loans. Any outstanding balances on this credit facility will become
due and payable upon the closing of the Common Stock Offering. Consequently, a
portion of the net proceeds of the Common Stock Offering will be used to pay
off such credit facility, which will benefit the Underwriter and PCH. See "Use
of Proceeds" and "Underwriting."

CONFLICTS OF INTERESTS OF MR. RESCHKE AND CONFLICTS WITH PGI

Mr. Reschke Will Continue to Engage in Activities Outside of the Company,
Including Real Estate Activities. Under the terms of his employment agreement
as Chairman of the Board of the Company, Mr. Reschke will be permitted to
devote a considerable portion of his time to the management of interests
outside of the Company. In addition to serving as Chairman of the Board of the
Company, Mr. Reschke expects to continue to serve as Chairman of the Board of
Prime Retail, Inc. (NYSE: PRT), Chairman of the Board of Brookdale Living
Communities, Inc. (Nasdaq: BLCI), Chairman of the Board and CEO of PGI,
Chairman of the Board of Prime

15
<PAGE>

Group Realty Trust (NYSE: PGE) and to serve on various other boards and civic
organizations. See "Management of Operations" and "Principal Shareholders of
the Company." As a result of these interests and the business time to be
devoted to activities related to them, certain conflicts of interest may arise
between Mr. Reschke's duties and responsibilities to the Company and his other
interests. The Company could be adversely affected if these conflicts of
interest adversely affect his performance of managerial duties and
responsibilities to the Company. PGI, its Affiliates and Mr. Reschke have
entered into a non-compete agreement with the Company that contains
restrictions on their ability to compete with the Company. However, there can
be no assurance that these contracts or the Company's policies with respect to
conflicts of interest always will be successful in eliminating the influence
of such conflicts and, if they are not successful, decisions could be made
that might fail to represent fully the interests of all shareholders.

Conflicts with PGI and Certain of its Affiliates. PGI holds ownership
interests in Prime Retail, Inc., Brookdale Living Communities, Inc. and Prime
Group Realty Trust. The primary businesses of these entities are retail
properties, senior independent and assisted living and semi-acute care
properties, and office and industrial properties. To address potential
conflicts of interest that PGI may have with these publicly-traded entities,
PGI has entered into the Non-Compete Agreements with these companies. The Non-
Compete Agreements prohibit PGI from making direct equity investments in
assets or entities considered within the primary businesses of such entities,
subject to certain exceptions. As a result of PCH's ownership interest in the
Company after the Offering, the Company will be prohibited from making direct
equity investments in such types of real estate or interests therein, so long
as the Company is an affiliate of PGI under such agreements. Under the Non-
Compete Agreements, an affiliate is generally defined as any entity in which
PGI, Prime Group Limited Partnership and Mr. Reschke, individually or
collectively, own or control, directly or indirectly, fifty percent or more of
the outstanding equity interests or have the right or power to affect the
investment or operational decision-making process of such entity. In the event
one of the Non-Compete Agreements prohibits a potential investment, the
Company will seek to obtain a waiver under such agreement. There can be no
assurances that the Company will obtain such a waiver, in which case the
investment by the Company will be prohibited.

In addition, PCH owns 100% of the common stock of the Taxable Subsidiary
which enables it to control the affairs of the Taxable Subsidiary. The
Operating Partnership holds the preferred stock of the Taxable Subsidiary
which is entitled to 95% of the economic benefit of the income of the Taxable
Subsidiary. Although the common stock is entitled to only 5% of the economic
benefit of the income of the Taxable Subsidiary, it is entitled to 100% of the
voting control. PCH therefore, has the ability to cause the Taxable Subsidiary
to act in a manner which may not be in the best interest of the Company's
shareholders.

RISKS RELATED TO INVESTMENTS IN MORTGAGE LOANS

Risk of Loss on Mortgage Loans. The Company has acquired and intends to
acquire, accumulate and securitize Mortgage Loans as part of its investment
strategy. While holding Mortgage Loans, the Company will be subject to risks
of borrower defaults, bankruptcies, fraud losses and special hazard losses
that are not covered by standard hazard insurance. In addition, investments in
Mortgage Loans are subject to risks involving the rate and timing of payments
of principal (including prepayments, repurchases, defaults and liquidations).
The rate of principal payments may vary significantly over time, depending on
a variety of factors such as mortgage loan interest rates and economic,
demographic, tax and legal factors. The costs of financing and hedging
Mortgage Loans could exceed the interest income on the Mortgage Loans. In the
event of a default on a Mortgage Loan held by the Company, the Company will
bear the risk of loss of principal to the extent of any deficiency between the
value of the mortgage collateral and the principal amount of the Mortgage
Loan. It may not be possible or economical for the Company to securitize all
of the Mortgage Loans it acquires, in which case the Company will continue to
hold the Mortgage Loans and bear the risks of borrower defaults, bankruptcies,
fraud losses and special hazard losses. Furthermore, the Company would expect
to retain a subordinate interest in any securitizations of Mortgage Loans, in
which case it would retain substantially all of these risks in a more
concentrated form up to the amount of its subordinated interest.

16
<PAGE>

Multifamily and Commercial Loans Involve a Greater Risk of Loss than Single
Family Loans. The Mortgage Loans that the Company has acquired and expects to
acquire generally will be secured by existing multifamily or commercial real
estate, including apartments, shopping centers, office buildings, hotels,
industrial properties, theme parks, hospitals and nursing homes. Real property
pledged as security for Mortgage Loans is referred to as "Mortgaged Property."
Multifamily and commercial real estate lending is considered to involve a
higher degree of risk than single family residential lending because of a
variety of factors, including generally larger loan balances, dependency on
successful operation of the Mortgaged Property and the operating businesses of
tenants therein for repayment, and loan terms that often require little or no
amortization of the loan principal and, instead, provide for a balloon payment
at a stated maturity date. In addition, the value of multifamily and
commercial real estate can be affected significantly by the supply and demand
in the market for that type of property. Market values may vary as a result of
economic events, governmental regulations or other factors outside the control
of the borrower or the Company, such as rent control laws in the case of
multifamily Mortgage Loans, which may impact the future cash flow of the
underlying Mortgaged Property.

The successful operation of a multifamily or commercial real estate project
also generally is dependent on the performance of the property manager of that
project. The property manager would be responsible for responding to changes
in the local market, planning and implementing the rental structure, including
establishing appropriate rental rates, and advising the owner so that
maintenance and capital improvements can be carried out in a timely fashion
and at an appropriate cost. There can be no assurance regarding the
performance of any operators and/or managers or persons who may become
operators and/or managers upon the expiration or termination of leases or
management agreements or following any default or foreclosure under a Mortgage
Loan.

The Volatility of the Values and the Net Operating Income of Mortgaged
Properties May Affect Adversely the Company's Mortgage Loans. Commercial and
multifamily property values and net operating income derived therefrom are
subject to volatility and may be affected adversely by a number of factors,
including, but not limited to, national, regional and local economic
conditions (which may be impacted adversely by plant closings, industry
slowdowns and other factors); local real estate conditions (such as an
oversupply of housing, retail, industrial, office or other commercial space);
changes or continued weakness in specific industry segments; perceptions by
prospective tenants and, in the case of retail properties, retailers and
shoppers, of the safety, convenience, services and attractiveness of the
property; the willingness and ability of the property's owner to provide
capable management and adequate maintenance; construction quality, age and
design; demographic factors; retroactive changes to building or similar codes;
and increases in operating expenses (such as energy costs). The historical
operating results of the Mortgaged Properties may not be comparable to future
operating results. In addition, other factors may affect adversely the
Mortgaged Properties' value without affecting the net operating income,
including changes in governmental regulations, zoning or tax laws, potential
environmental or other legal liabilities, the availability of refinancing, and
changes in interest rate levels.

Construction, Bridge and Mezzanine Loans Involve Greater Risks of Loss than
Senior Loans. The Company may acquire Construction Loans, Bridge Loans and
Mezzanine Loans. These types of Mortgage Loans are considered to involve a
higher degree of risk than long-term senior mortgage lending secured by
income-producing real property. This is because of a variety of factors,
including, in the case of Construction Loans, dependency on successful
completion and operation of the project for repayment, difficulties in
estimating construction or rehabilitation costs and loan terms that often
require little or no amortization of loan principal, providing instead for
additional advances to be made and for a balloon payment at a stated maturity
date. In the case of Mezzanine Loans, the factors would include, among other
things, that a foreclosure by the holder of the senior loan could result in a
Mezzanine Loan becoming unsecured. Accordingly, the Company may not recover
the full amount, or any, of its investment in such Mezzanine Loan. In
addition, Construction Loans, Bridge Loans and Mezzanine Loans may have higher
loan-to-value ratios than conventional Mortgage Loans because of shared
appreciation provisions. Although the borrower may have an initial equity
investment of 10.0% to 15.0% of total project costs, such initial equity may
not be sufficient to protect the Company's investment in Construction Loans,
Bridge Loans or Mezzanine Loans.

17
<PAGE>

Distressed Mortgage Loans May Have Greater Default Risks Than Performing
Loans. The Company may acquire Nonperforming and Subperforming Mortgage Loans,
as well as Mortgage Loans that have had a history of delinquencies. These
Mortgage Loans presently may be in default or may have a greater than normal
risk of future defaults and delinquencies, as compared to newly originated,
high quality loans. Returns on an investment of this type depend on the
borrower's ability to make required payments (or, with respect to
Subperforming Loans, the modified monthly payments required under the
applicable forbearance plan) or, in the event of default, the ability of the
loan's servicer to foreclose and liquidate the Mortgaged Property underlying
the Mortgage Loan. There can be no assurance that the servicer can liquidate a
defaulted Mortgage Loan successfully or in a timely fashion. See "Certain
Legal Aspects of Mortgage Loans and Real Property Investments."

Limited Recourse Loans May Limit the Company's Recovery to the Value of the
Mortgaged Property. The Company anticipates that a substantial portion of the
Mortgage Loans that it will acquire and of the mortgage loans underlying the
MBS that it will acquire may contain limitations on the mortgagee's recourse
against the borrower. In other cases, the mortgagee's recourse against the
borrower may be limited by applicable provisions of the laws of the
jurisdictions in which the Mortgaged Properties are located or by the
mortgagee's selection of remedies and the impact of those laws on that
selection. In those cases, in the event of a borrower default, recourse may be
limited to only the specific Mortgaged Property and other assets, if any,
pledged to secure the relevant Mortgage Loan. Even as to those Mortgage Loans
that provide for recourse against the borrower and its assets generally, there
can be no assurance that such recourse will provide a recovery in respect of a
defaulted Mortgage Loan greater than the liquidation value of the Mortgaged
Property securing that Mortgage Loan.

One Action Rules May Limit the Company's Rights Following Defaults. Several
states have laws that prohibit more than one "judicial action" to enforce a
mortgage obligation, and some courts have construed the term "judicial action"
broadly. The servicer of the mortgage obligation may be required to foreclose
first on properties located in states where such "one action" rules apply (and
when non-judicial foreclosure is permitted) before foreclosing on properties
located in states where judicial foreclosure is the only permitted method of
foreclosure. See "Certain Legal Aspects of Mortgage Loans and Real Property
Investments--Foreclosure."

RISKS RELATED TO INVESTMENTS IN REAL PROPERTY

Conditions Beyond the Company's Control May Affect Adversely the Value of
its Real Property Investments. The Company expects to invest directly and
indirectly in real estate through the funding of Preferred Equity investments
in real estate and real estate operating companies, as well as the direct
investment in Net Leased Real Estate. These investments are subject to varying
degrees of risk generally incident to the ownership of real estate. The
underlying value of these investments and the Company's income and ability to
make distributions to its stockholders are dependent upon the ability of the
owner to operate the underlying real estate properties in a manner sufficient
to maintain or increase revenues in excess of operating expenses and debt
service or, in the case of real estate leased to a single lessee, the ability
of the lessee to make rent payments. Revenues may be adversely affected by
adverse changes in national or local economic conditions, competition from
other properties offering the same or similar services, changes in interest
rates and in the availability, cost and terms of mortgage funds, the impact of
present or future environmental legislation and compliance with environmental
laws, the ongoing need for capital improvements (particularly in older
structures), changes in real estate tax rates and other operating expenses,
adverse changes in governmental rules and fiscal policies, civil unrest, acts
of God, including earthquakes, hurricanes and other natural disasters (which
may result in uninsured losses), acts of war, adverse changes in zoning laws,
and other factors which are beyond the control of the Company. Additionally,
the Company could acquire ownership of real property by foreclosing on certain
of the Mortgage Loans. Foreclosure can be costly and time consuming,
particularly in bankruptcy proceedings.

Real Estate is Illiquid and its Value May Decrease. 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. No
assurances can be given that the fair market value of any of the Company's
real estate assets will not decrease in the future.

18
<PAGE>

The Company's Insurance Will Not Cover All Losses. The Company intends to
maintain, or cause the owner to maintain, comprehensive insurance on each of
the underlying real estate properties in which the Company has an interest,
including liability and fire and extended coverage, in amounts sufficient to
permit the replacement of the properties in the event of a total loss, subject
to applicable deductibles. The Company will endeavor to obtain coverage of the
type and in the amount customarily obtained by owners of properties similar in
nature. There are certain types of losses, however, generally of a
catastrophic nature, such as earthquakes, floods and hurricanes, that may be
uninsurable or not economically insurable. Inflation, changes in building
codes and ordinances, environmental considerations, and other factors also
might make it infeasible to use insurance proceeds to replace a property if it
is damaged or destroyed. Under such circumstances, the insurance proceeds
received by the Company, if any, might not be adequate to restore the
Company's investment with respect to the affected property.

Property Taxes Decrease Returns on Real Estate. All real property owned by
the Company will be subject to real property taxes and, in some instances,
personal property taxes. Such real and personal property taxes may increase or
decrease as property tax rates change and as the properties are assessed or
reassessed by taxing authorities. An increase in property taxes on the
Company's real property could affect adversely the Company's income and
ability to make distributions to its stockholders and could decrease the value
of that real property.

Compliance with the Americans with Disabilities Act and Other Changes in
Governmental Rules and Regulations May Be Costly. Under the Americans with
Disabilities Act of 1990 (the "ADA"), all public properties are required to
meet certain federal requirements related to access and use by disabled
persons. Certain underlying real estate properties acquired directly or
indirectly by the Company may not be in compliance with the ADA. If a property
is not in compliance, the owner of the property will be required to make
modifications to such property to bring it in compliance, or face the
possibility of paying fines or private damage claims. In addition, changes in
governmental rules and regulations or enforcement policies affecting the use
and operation of the real estate, including changes to building codes and fire
and life-safety codes, may occur. If the owner or lessee of the property is
required to make substantial modifications to the property to comply with the
ADA or other changes in governmental rules and regulations, the owner's or
lessee's ability to make payments to the Company and, accordingly, the
Company's ability to make expected distributions to its stockholders could be
adversely affected.

Real Properties with Hidden Environmental Problems Will Increase the
Company's Costs and May Create Liability for the Company. Operating costs and
the value of the underlying real estate property acquired by the Company may
be affected by the obligation to pay for the cost of complying with existing
environmental laws, ordinances and regulations, as well as the cost of future
legislation. 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 or
toxic substances on, under or in such property. Such laws often impose
liability on the owner or operator of the property whether or not he or she
knew of, or was responsible for, the presence of such hazardous or toxic
substances. Therefore, an environmental liability could have a material
adverse effect on the value of the underlying real property acquired by the
Company, the Company's income and cash available for distribution to its
stockholders. The Company intends to obtain Phase I environmental site
assessments on all underlying real property acquired by the Company prior to
the acquisition by the Company of such properties. The purpose of Phase I
environmental site assessments is to identify potential environmental
contamination that is made apparent from historical reviews of the properties,
reviews of certain public records, preliminary investigations of the sites and
surrounding properties, and screening for the presence of hazardous
substances, toxic substances and underground storage tanks. However, even if a
Phase I environmental site assessment is obtained, there is no assurance that
it will reveal all existing and potential environmental risks and liabilities,
and there may be unknown material environmental obligations or liabilities
which are not discovered in a Phase I environmental site assessment.

Real Properties with Known Environmental Problems May Create Liability for
the Company. The Company may invest in real estate, or mortgage loans secured
by real property, with known environmental problems that

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materially impair the value of the real property. In such cases, the Company
will take certain steps to limit its environmental liability, including, the
creation of a special purpose entity which will own such real property.
Despite these precautionary measures, there are risks associated with such an
investment.

Foreign Real Properties are Subject to Currency Conversion Risks and the
Uncertainty of Foreign Laws. The Company may invest in real estate, or
Mortgage Loans secured by real property, located outside the United States.
Investing in real property located in foreign countries creates risks
associated with the uncertainty of foreign laws and markets. Moreover,
investments in foreign assets are subject to currency conversion risks. In
addition, income from investment in foreign real property and, in some
instances, foreign Mortgage Loans may be subject to tax by foreign
jurisdictions, which would reduce the economic benefit of such investments.
The Company has no experience in investing in foreign real estate. Any foreign
income tax credits available to the Company would not be passed through to its
shareholders.

RISKS RELATED TO INVESTMENTS IN MBS

Subordinated Interests are Subject to Greater Credit Risks Than More Senior
Classes. The Company intends to acquire non-investment grade MBS, including
"first loss" classes of MBS (hereinafter referred to as "Subordinated
Interests"). A first loss class is the most subordinated class of a multi-
class issuance of pass-through or debt securities and is the first to bear the
loss upon a default on the underlying mortgage pass-through securities or
pools of whole loans securing or backing a series of MBS ("Mortgage
Collateral"). Subordinated Interests are subject to special risks, including a
substantially greater risk of loss of principal and non-payment of interest
than more senior classes. While the market values of most Subordinated
Interest classes tend to react less to fluctuations in interest rate levels
than more senior classes, the market values of Subordinated Interest classes
tend to be more sensitive to changes in economic conditions than more senior
classes. As a result of these and other factors, Subordinated Interests
generally are not actively traded and may not provide holders thereof with
liquidity.

The yield to maturity on Subordinated Interests of the type the Company
intends to acquire will be extremely sensitive to the default and loss
experience of the underlying Mortgage Collateral and the timing of any such
defaults or losses. Because the Subordinated Interests of the type the Company
intends to acquire generally have no credit support, to the extent there are
realized losses on the Mortgage Collateral for such classes, the Company may
not recover the full amount, or any, of its initial investment in such
Subordinated Interests.

When the Company acquires a Subordinated Interest, it typically will be
unable to obtain the right to service the underlying Mortgage Collateral if
such collateral is performing. To minimize its losses, if the underlying
Mortgage Collateral is in default, the Company will seek to obtain the Special
Servicing rights to service such underlying Mortgage Collateral, although in
many cases it will not be able to obtain Special Servicing rights on
acceptable terms. If the Company does acquire Special Servicing rights, then
it may in some cases contract with a third-party special servicer to perform
the Special Servicing functions, and thus the performance of the Company's
investments would be dependent upon such third party's performance. To the
extent the Company does not obtain Special Servicing rights with respect to
the Mortgage Collateral underlying its MBS, the servicer of the Mortgage
Collateral generally would be responsible to holders of the senior classes of
MBS, whose interests may not be the same as those of the holders of the
subordinated classes. Accordingly, the Mortgage Collateral may not be serviced
in a manner that is most advantageous to the Company as the holder of a
subordinated class.

The subordination of Subordinated Interests to more senior classes may
affect adversely the yield on the Subordinated Interests even if realized
losses are not ultimately allocated to such classes. On any payment date,
interest and principal are paid on the more senior classes before interest and
principal are paid with respect to the unrated or non-investment grade credit
support classes. Typically, interest deferred on these credit support classes
is payable on subsequent payment dates to the extent funds are available, but
such deferral may not itself bear interest. Such deferral of interest will
affect adversely the yield on the Subordinated Interests.

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Yields on Subordinated Interests, IOs and POs May Be Affected Adversely By
Interest Rate Changes. The yield of the Subordinated Interests also will be
affected by the rate and timing of payments of principal (including
prepayments, repurchase, defaults and liquidations) on the mortgage loans
underlying a series of MBS. The rate of principal payments may vary
significantly over time depending on a variety of factors such as the level of
prevailing mortgage loan interest rates and economic, demographic, tax, legal
and other factors. Prepayments on the mortgage loans underlying a series of
MBS generally are allocated to the more senior classes of MBS until those
classes are paid in full or until the end of a lock-out period, typically of
five years or more. Generally, prepayments of principal from the mortgage
loans are not received by the Subordinated Interests holders for a period of
at least five years. As a result, the weighted average lives of the
Subordinated Interests may be longer than would be the case if, for example,
prepayments were allocated pro rata to all classes of MBS. To the extent that
the holder of Subordinated Interests is not paid compensating interest on
interest shortfalls due to prepayments, liquidations or otherwise, the yield
on the Subordinated Interests may be affected adversely. The Company may
acquire IO classes of MBS, which are entitled to no (or only nominal) payments
of principal, but only to payments of interest. The yield to maturity of IOs
is very sensitive to changes in the weighted average life of such securities,
which in turn is dictated by the rate of prepayments on the underlying
mortgage loans. In periods of declining interest rates, rates of prepayments
on mortgage loans generally increase, and if the rate of prepayments is faster
than anticipated, then the yield on IOs will be negatively affected. Inverse
IOs bear interest at a floating rate that varies inversely with (and often at
a multiple of) changes in a specified index. The Company may invest in Inverse
IOs for the purpose of, among other things, hedging its portfolio of IOs. The
yield to maturity of an Inverse IO is extremely sensitive to changes in the
related index. The Company also expects to invest in Sub IOs, a class for
which interest generally is withheld and used to make principal payments on
more senior classes or to fund a reserve account for the protection of senior
classes until overcollateralization or until the balance in the reserve
account reaches a specified level. Interest on a Sub IO generally will be paid
only after the overcollateralization or the balance in the reserve account
reaches the specified level. Sub IOs provide credit support to the senior
classes, and thus bear substantial credit risk. Moreover, because all IO
classes only receive interest payments, their yields are extremely sensitive
not only to default losses but also to changes in the weighted average life of
the relevant classes, which in turn will be dictated by the rate of
prepayments on the underlying Mortgage Collateral. In addition, Sub IOs often
generate taxable income in excess of cash received in the first years after
they are issued. See "The Company--Primary Investments--MBS."

The Company may acquire POs, which are classes of MBS that are entitled to
no payments of interest, but only to payments of principal. The yield to
maturity of POs is very sensitive to changes in the weighted average life of
such securities, which in turn is dictated by the rate of prepayments on the
underlying Mortgage Collateral. In periods of declining interest rates, rates
of prepayment on mortgage loans generally increase, and if the rate of
prepayments is faster than anticipated, the yield on POs will be positively
affected. Conversely, the yield on POs will be affected adversely by slower
than anticipated prepayment rates, which generally are associated with a
rising interest rate environment. In addition, POs typically generate OID.

Certain Investments May Generate Taxable Income Exceeding Cash Flow. The
Company also may invest in certain classes of MBS that are designated as the
residual interest in the related REMIC (a "REMIC Residual Interest") or that
represent the residual interest in a non-REMIC securitization ("Non-REMIC
Residual Interest"), which receive principal and interest payments in excess
of amounts needed to make payments on other classes of securities or to fund a
reserve account. Like interest otherwise allocable to Sub IOs, principal and
interest amounts otherwise allocable to such residual interests are used to
protect the senior classes of securities from credit losses on the underlying
mortgage loans. Moreover, in any given year, the taxable income produced by a
residual interest may exceed its cash flow. The Company may also invest in
Participating Mortgage Loans and Distressed Mortgage Loans and such loans may
produce taxable interest income for the Company prior to the Company's receipt
of the related cash flow. See "--Legal and Tax Risks."

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ECONOMIC AND BUSINESS RISKS

Interest Rate Changes May Adversely Affect the Company's Investments. The
value of MBS is affected substantially by prepayment rates on the mortgage
loans comprising the mortgage collateral for such securities. Prepayment rates
on MBS are influenced by changes in current interest rates and a variety of
economic, geographic and other factors and cannot be predicted with certainty.
In periods of declining mortgage interest rates, prepayments on MBS generally
increase. If general interest rates also decline, the amounts available for
reinvestment by the Company during such periods are likely to be reinvested at
lower interest rates than the Company was earning on the MBS that were
prepaid. MBS may decrease in value as a result of increases in interest rates
and may benefit less than other fixed-income securities from declining
interest rates because of the risk of prepayment. In general, changes in both
prepayment rates and interest rates will change the total return on MBS, which
in turn will affect the amount available for distribution to stockholders.
This volatility may be greater with certain MBS, such as IOs and Inverse IOs,
that the Company intends to acquire, and may be less with other MBS secured by
commercial mortgages, which generally have some yield or call protection, than
with residential backed MBS which do not usually have such protections. The
value of adjustable rate mortgage loans and MBS paying adjustable coupon
rates, which the Company may acquire in the future, generally will vary
inversely with changes in prevailing interest rates. Under certain interest
rate or prepayment rate scenarios, the Company may fail to recoup fully its
cost of acquisition of such investments.

The Company's operating results depend in part on the difference between the
interest income earned on interest-earning assets and the interest expense
incurred in connection with its interest-bearing liabilities. Changes in the
general level of interest rates can affect the Company's income by affecting
the spread between the Company's interest-earning assets and interest-bearing
liabilities, as well as, among other things, the value of the Company's
interest-earning assets and its ability to realize gains from the sale of
assets and the average life of the Company's interest-earning assets.

Interest rates are highly sensitive to many factors, including governmental
fiscal, monetary and tax policies, domestic and international economic and
political considerations, and other factors beyond the control of the Company.
The profitability of the Company may be adversely affected during any period
as a result of changing interest rates.

The Company's Performance May Be Affected Adversely If Its Hedging Strategy
Is Not Successful. The Company's performance may be affected adversely if the
Company fails to limit the effects of changes in interest rates on its
operations by employing an effective hedging strategy, including engaging in
interest rate swaps, caps, floors and other interest rate exchange contracts,
and buying and selling interest rate futures and options on such futures. The
use of these instruments to hedge a portfolio carries certain risks, including
the risk that losses on a hedge position will reduce the funds available for
distribution to stockholders and, indeed, that such losses may exceed the
amount invested in such instruments. There is no perfect hedge for any
investment and a hedge may not perform its intended purpose of offsetting
losses on an investment. For example, the Company will attempt to match the
interest rate indexes and repricing terms of its Mortgage Loans with those of
its borrowings, but it may not be able to achieve a perfect match. During
periods of volatile interest rates, such interest rate mismatches could affect
adversely the Company's ability to hedge effectively its interest rate risk.
The Company may enter into over-the-counter hedging transactions in which the
protections afforded to participants in an organized exchange and in a
regulated environment may not be available, which will expose the Company to
counterparty risk. Although the Company intends to enter into such contract
only with counterparties the Company believes to be financially sound and to
monitor the financial soundness of such parties on a periodic basis, the
Company may be exposed to the risk that the counterparties with which the
Company trades may become financially unsound or insolvent. If a counterparty
ceases making markets and quoting prices in such instruments, which may render
the Company unable to enter into an offsetting transaction with respect to an
open position, the Company may be forced to unwind its position, which may
result in a loss on the hedge position and could cause the Company to suffer
the adverse consequence against which the hedging transaction was designed to
protect. Certain of the hedging instruments acquired by the Company are traded
on exchanges,

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which may subject the Company to the risk of trading halts, suspensions,
exchange or clearing house equipment failure, insolvency of a brokerage firm
or other disruptions of normal trading activities. If the Company anticipates
that the income from any hedging transaction will not be qualifying income for
REIT income test purposes, the Company may conduct part or all of such hedging
activities through the Taxable Subsidiary. See "Federal Income Tax
Considerations--Requirements for Qualification--Income Tests" and "--Other Tax
Considerations --Clinton REIT Proposals."

Leverage Can Reduce Income Available for Distribution. After the initial
"start-up" period, the Company intends to leverage its portfolio through
borrowings, generally through the use of reverse repurchase agreements, bank
credit facilities, warehouse lines of credit on pools of real estate and
mortgage loans, mortgage loans on real estate and other borrowings. The
percentage of leverage used will vary depending on the Company's estimate of
the stability of the portfolio's cash flow. To the extent that changes in
market conditions cause the cost of such financing to increase relative to the
income that can be derived from the assets acquired, the Company may reduce
the amount of leverage it utilizes.

Although there is no specified limitation on the Company's indebtedness, in
general the Company expects the ratio of the Company's overall indebtedness to
not exceed 80% of the Company's total market capitalization defined as total
debt outstanding, on a consolidated basis, divided by the sum of (a) total
debt outstanding, plus (b) total equity market value of the Company's
outstanding equity securities, from time to time. However, the Company's
Charter and Bylaws do not limit the amount of indebtedness the Company can
incur, and the Board of Directors has the discretion to deviate from or change
this indebtedness policy at any time, without consent from or notice to the
Company's shareholders.

Leverage creates an opportunity for increased net income, but at the same
time creates risks. For example, required debt service payments, which
increase with increased leverage could reduce the net income available for
distributions to stockholders. The Company will leverage assets only when
there is an expectation that it will enhance returns, although there can be no
assurance that the Company's use of leverage will prove to be beneficial.
Moreover, there can be no assurance that the Company will be able to meet its
debt service obligations and, to the extent that it cannot, the Company risks
the loss of some or all of its assets to foreclosure.

Maturity Mismatch Between Asset Maturities and Borrowing Maturities May
Affect Adversely the Company's Net Income. The Company's use of short-term
floating rate borrowings to acquire long term assets, including Mortgage Loans
and MBS, some of which will bear a fixed rate of interest may expose the
Company to a maturity mismatch. As a consequence, the Company's borrowing
costs could exceed the income earned on the Company's assets acquired with the
borrowed funds, thereby reducing the Company's income and ability to make
distributions to its stockholders. Further, MBS subject to reverse repurchase
agreements periodically are marked to market by the repurchase lender, and a
decline in the value of MBS pledged to secure reverse repurchase agreements
may result in margin calls. In addition, if renewals of or substitutes for
maturing or called short term borrowings are unavailable to the Company for
any reason, the Company may be required to sell assets quickly to repay those
borrowings. Certain of the Company's MBS may be illiquid and a sale associated
with a short marketing period generally would result in the Company receiving
a lower price than otherwise would be available. There can be no assurance
that the Company will not incur losses associated with forced sales of
illiquid collateral to repay borrowings. Furthermore, the use of leverage will
magnify the Company's exposure to losses. For example, a loss equal to 20.0%
on an asset that is 80.0% leveraged would eliminate the Company's equity in
that asset completely, while the same loss would leave the Company with 80.0%
of its equity in an asset if no leverage had been applied to that asset.

Interest Rate Mismatch Between Asset Yields and Borrowing Rates May Affect
Adversely the Company's Net Income. The Company's borrowings may be at
interest rates based on indexes and repricing terms similar to, but of
somewhat shorter maturities than, the interest rate indexes and repricing
terms of various of the Company's variable rate assets. While the historical
spread between relevant short-term interest rate indexes has been relatively
stable, there have been periods, such as the high interest rate environment of
1979 through 1982,

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when the spread between those indexes was volatile. Further, certain of the
Company's assets will bear fixed rates of interest and have long-term
maturities. There can be no assurance that such fixed rates of interest will
exceed the variable rates of interest on related borrowings. Interest rate
mismatches could impact the Company's financial condition in a material way,
and affect adversely the Company's income and ability to make distributions to
its stockholders, dividend yield and the market price of the Common Stock. See
"--Economic and Business Risks--Leverage Can Reduce Income Available for
Distribution" and "--The Company May Not Be Able to Borrow Money on Favorable
Terms."

The Company May Not Be Able to Borrow Money on Favorable Terms. The ability
of the Company to achieve its investment objectives through leverage will
depend on the Company's ability to borrow money on favorable terms. The
Company currently has a borrowing facility with Prudential Securities Credit
Corporation ("PSCC") for $200,000,000. See "The Company." The Company is
negotiating with Nomura Asset Capital Corporation and Salomon Smith Barney
with respect to additional borrowing facilities to become effective on or
after the Offering. See "The Company." There is no assurance, however, that
the Company will be able to enter into borrowing arrangements which will
enable the Company to borrow money on favorable terms which will be sufficient
to fund purchases of assets in accordance with the Company's business plan. If
the Company is unable to obtain adequate financing arrangements, its ability
to purchase assets and conduct its business will be adversely affected.

Adverse Changes in General Economic Conditions Can Adversely Affect The
Company's Business. The Company's success is dependent upon the general
economic conditions in the geographic areas in which a substantial number of
its investments are located. Adverse changes in national economic conditions
or in the economic conditions of the regions in which the Company conducts
substantial business likely would have an adverse affect on real estate
values, interest rates and, accordingly, the Company's business.

Competition in the Acquisition of Appropriate Investments May Inhibit the
Company's Ability to Achieve its Objectives. The Company intends to engage in
highly competitive businesses. The acquisition of Mortgage Loans, MBS,
Preferred Equity and Net Leased Real Estate is often based on competitive
bidding. In addition, the Company's competitors may seek to establish
relationships with the financial institutions and other firms from whom the
Company intends to purchase such assets. Many of the Company's anticipated
competitors, including Goldman Sachs' Whitehall Street Real Estate Fund, Black
Rock Capital Finance, AMRESCO, General Electric Capital Corporation, First
Chicago Commercial Assets, LaSalle National Bank, Ocwen Financial Corporation,
Blackstone Real Estate Advisors, Bank of America Securities Corporation and
CRIIMI MAE Inc., are significantly larger than the Company at the present
time, have established operating histories and procedures, may have access to
greater capital and other resources, and may have other advantages over the
Company in conducting certain businesses and providing certain services. There
are several existing REITs formed for purposes similar to the Company's and
others may be organized in the future. The existence of additional REITs may
increase competition for available Targeted Portfolio Investments. The
Company's net income will depend, in large part, on the Company's ability to
acquire and originate Mortgage Loans and MBS having yields that produce
favorable spreads over the Company's borrowing costs. Increased competition
for the acquisition of, or a reduction in the available supply of, Mortgage
Loans and MBS could result in higher prices and thus lower yields on such
Mortgage Loans and MBS, which could narrow (or make negative) the yield spread
between the Company's investments and its borrowing costs. In addition, the
Company's competitors may seek to establish relationships with the financial
institutions and other firms from whom the Company intends to acquire Mortgage
Loan and MBS. There can be no assurance that the Company will be able to
acquire sufficient Targeted Portfolio Investments at yields sufficient to
cover the Company's capital costs and achieve the Company's objectives. In
addition, there can be no assurance that Targeted Portfolio Investments
suitable for acquisition by the Company will be available, or that changes in
market conditions or applicable laws will not affect the availability of
Targeted Portfolio Investments.

Investments May Be Illiquid and Their Value May Decrease. Many of the
Company's assets are and will be relatively illiquid. In addition, certain of
the MBS that the Company will acquire will include interests that have

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not been registered under the Securities Act, or other applicable securities
laws, resulting in a prohibition against transfer, sale, pledge or other
disposition of those MBS except in transactions that are exempt from the
registration requirements of, or are otherwise in accordance with, the
securities laws. The ability of the Company to vary its portfolio in response
to changes in economic and other conditions will be relatively limited. No
assurances can be given that the fair market value of any of the Company's
assets will not decrease in the future.

Delinquency and Loss Ratios May Be Affected by the Performance of Third-
Party Servicers. In the event that the Company contracts for the servicing of
its Mortgage Loans with third-party servicers, it will be subject to risks
associated with potentially inadequate servicing. Many borrowers require
notices and reminders to keep Mortgage Loans current and to prevent
delinquencies and foreclosures. A substantial increase in the delinquency or
foreclosure rate resulting from inadequate servicing could affect adversely
the Company's performance and ability to access profitably the capital markets
for its financing needs, including future securitizations.

LEGAL AND TAX RISKS

Tax Risks. Prime Capital intends to operate in a manner so as to qualify as
a REIT for federal income tax purposes. Although Prime Capital does not intend
to request a ruling from the Service as to its REIT status, Prime Capital has
received an opinion from Winston & Strawn that, based on certain assumptions
and representations, it so qualifies. Investors should be aware, however, that
opinions of counsel are not binding on the IRS or any court. The REIT
qualification opinion only represents the view of counsel to Prime Capital
based on that counsel's review and analysis of existing law, which includes no
controlling precedent on point. Furthermore, both the validity of the opinion
and the continued qualification of Prime Capital as a REIT will depend on
Prime Capital's satisfaction of certain asset, income, organizational,
distribution and stockholder ownership requirements on a continuing basis. If
Prime Capital were to fail to qualify as a REIT in any taxable year, Prime
Capital would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates, and
distributions to stockholders would not be deductible by Prime Capital in
computing its taxable income. Any such corporate tax liability could be
substantial and would reduce the amount of cash available for distribution to
stockholders, which in turn could have an adverse impact on the value of, and
trading prices for, the Common Stock. Unless entitled to relief under certain
Code provisions, Prime Capital also would be disqualified from taxation as a
REIT for the four taxable years following the year during which Prime Capital
ceased to qualify as a REIT.

Prime Capital must distribute annually at least 95.0% of its net taxable
income (excluding any net capital gain) in order to avoid corporate income
taxation of the earnings that it distributes. In addition, Prime Capital will
be subject to a 4.0% nondeductible excise tax on the amount, if any, by which
certain distributions paid by it with respect to any calendar year are less
than the sum of (i) 85.0% of its ordinary income for that year, (ii) 95.0% of
its capital gain net income for that year, and (iii) 100% of its undistributed
taxable income from prior years. However, to the extent Prime Capital elects
to retain and pay income tax on net long-term capital gains it received during
the year such amounts will be treated as having been distributed for purposes
of the 4.0% excise tax.

Prime Capital intends to make distributions to its stockholders to comply
with the 95.0% distribution requirement and to avoid the nondeductible excise
tax. However, differences in timing between the recognition of taxable income
and the actual receipt of cash could require the Company to borrow funds or
sell assets on a short-term basis to meet the 95.0% distribution requirement
and to avoid the nondeductible excise tax. The requirement to distribute a
substantial portion of Prime Capital's net taxable income could cause Prime
Capital (i) to sell assets in adverse market conditions, (ii) to distribute
amounts that represent a return of capital, or (iii) to distribute amounts
that would otherwise be spent on future acquisitions, unanticipated capital
expenditures, or repayment of debt. Gain from the disposition of any asset
held primarily for sale to customers in the ordinary course of business
generally will be subject to a 100% tax.

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The Company expects to acquire Subordinated Interests and Participating
Mortgage Loans that are deemed to have OID for federal income tax purposes,
which is generally equal to the difference between an obligation's issue price
and its redemption price. The income generated by such instruments for federal
income tax purposes will consist of amortization of the OID and the coupon
interest associated with the instruments. Prime Capital will be required to
recognize as income each year the portion of the OID that accrues during that
year, which will increase its taxable income for that year and subject Prime
Capital to a corporate-level tax for that year unless Prime Capital
distributes all of such taxable income, notwithstanding the fact that there
may be no corresponding contemporaneous receipt of cash by Prime Capital.
REMIC Residual Interests and Non-REMIC Residual Interests also may generate
taxable income in excess of cash flow or economic income in any year. In
addition, certain taxable income produced by a REMIC Residual Interest
("Excess Inclusion") (and, to the extent provided by future Treasury
Regulations, by Non-REMIC Residual Interests) may cause Prime Capital's
stockholders to suffer certain adverse tax consequences. Additionally, because
Prime Capital is an accrual basis taxpayer, it may be required to recognize
interest income that accrues with respect to Distressed Mortgage Loans even
though the borrowers fail to pay the full amounts due. See "Federal Income Tax
Considerations." Finally, the Company may recognize taxable income without
receiving a corresponding cash distribution if it forecloses on or makes a
"significant modification" (as defined in Treasury Regulations section 1.1001-
3(e)) to a Mortgage Loan, to the extent that the fair market value of the
underlying property or the principal amount of the modified loan, as
applicable, exceeds the Company's basis in the original loan. Consequently,
the acquisition by Prime Capital of Subordinated Interests, Mortgage Loans
that are deemed to have OID, REMIC Residual Interests, or Non-REMIC Residual
Interests could have the effect of requiring Prime Capital to incur borrowings
or to liquidate a portion of its portfolio at rates or times that Prime
Capital regards as unfavorable to distribute all of its taxable income and
thereby avoid corporate income and excise tax.

Ownership Limit May Restrict Business Combination Opportunities. In order
for the Company to maintain its qualification as a REIT, not more than 50.0%
in value of its outstanding shares of capital stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of any taxable year (other than its
first REIT taxable year). For the purpose of preserving the Company's REIT
qualification, the Charter generally prohibits direct or indirect ownership of
more than (i) 9.9% of the number of outstanding shares of Common Stock, or
(ii) 9.9% of the number of outstanding shares of any series of Preferred Stock
by any stockholder (the "Ownership Limit"), other than FBR Asset Investment
Corporation, which may own up to 10.9% of the number of outstanding shares of
Common Stock. The Ownership Limit could have the effect of discouraging a
takeover or other transaction in which holders of some, or a majority, of the
shares of Common Stock might receive a premium for their shares of Common
Stock over the then prevailing market price or which such holders might
believe to be otherwise in their best interests. See "Description of Capital
Stock--Restrictions on Transfer" and "Federal Income Tax Considerations--
Requirements for Qualification."

Equity Interests Could Cause the Company to Fail to Qualify as a REIT. The
acquisition of an equity interest in a real estate operating company could
cause the Company to fail certain of the requirements which are necessary for
it to be taxed as a REIT. See "Federal Income Tax Considerations--Requirements
for Qualification--Income Tests." For instance, to the extent the Company
acquires an equity interest in a real estate operating company that is a
partnership or other pass-through entity, the Company potentially could
receive income which would not qualify for purposes of the gross income tests
because of the furnishing of non-customary services to the tenants at the
property, the receipt of participating rent based on the tenants' profits, or
other reasons. In addition, to the extent the Company owns an equity interest
in a real estate operating company that is a C corporation, such investment
may not represent more than 5.0% of the value of the Company's total assets or
more than 10.0% of the issuer's voting securities. See "Federal Income Tax
Considerations--Requirements for Qualification--Income Tests" and "--Other Tax
Considerations--Clinton REIT Proposals."

Tax Status of the Taxable Subsidiary; Legislative Proposals. The Taxable
Subsidiary will be subject to all applicable federal and state income taxes.
Under existing federal income tax law, the Company is permitted to own all of
the preferred stock of the Taxable Subsidiary and receive (through the
Operating Partnership) 95% of

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the after-tax income of the Taxable Subsidiary (the remainder of such income
is payable to the owner of the common stock, initially PCH). Certain
requirements for REIT qualification under existing law may in the future limit
the Company's ability to receive increased distributions from the Taxable
Subsidiary without jeopardizing the Company's qualification as a REIT.
Moreover, REIT legislative proposals by the Clinton administration, currently
under consideration by Congress, if enacted, would limit the Company's
ownership of the Taxable Subsidiary or would restrict the future level of
operations of the Taxable Subsidiary. In either event, the economic benefit to
the Company attributable to the Taxable Subsidiary would be substantially
reduced. See "Federal Income Tax Considerations--Other Tax Considerations--
Clinton REIT Proposals."

Plans Should Consider ERISA Risks of Investing in Common Stock. The Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and section 4975
of the Code prohibit certain transactions that involve (i) certain pension,
profit-sharing, employee benefit, or retirement plans or individual retirement
accounts (each a "Plan") and (ii) the assets of a Plan. A "party in interest"
or "disqualified person" with respect to a Plan will be subject to (x) an
initial 15.0% excise tax on the amount involved in any prohibited transaction
involving the assets of the Plan and (y) an excise tax equal to 100.0% of the
amount involved if any prohibited transaction is not corrected. Consequently,
the fiduciary of a Plan contemplating an investment in the Common Stock should
consider whether the Company, any other person associated with the issuance of
the Common Stock, or any Affiliate of the foregoing is or might become a
"party in interest" or "disqualified person" with respect to the Plan. In such
a case, the acquisition or holding of Common Stock by or on behalf of the Plan
could be considered to give rise to a prohibited transaction under ERISA and
the Code. See "ERISA Considerations--Employee Benefit Plans, Tax Qualified
Retirement Plans, and IRAs."

CERTAIN ANTI-TAKEOVER PROVISIONS MAY INHIBIT A CHANGE IN CONTROL OF THE
COMPANY.

General. Certain provisions contained in the Charter and Bylaws and the
Maryland General Corporation Law (the "MGCL") may have the effect of
discouraging a third party from making an acquisition proposal for Prime
Capital and may thereby delay, deter or prevent a change in control of the
Company or the removal of existing management and, as a result, could prevent
the stockholders of the Company from being paid a premium for their shares of
Common Stock over then-prevailing market prices. See "Description of Capital
Stock--Common Stock" and "Certain Provisions of Maryland Law and of Prime
Capital's Charter and Bylaws."

Ownership Limit. The Ownership Limit set forth in the Charter provides that,
subject to certain specified exceptions (including exceptions in the case of
PCH and FBR Asset Investment Corporation, as noted above), no person or entity
may own, or be deemed to own by virtue of the applicable constructive
ownership provisions of the Code, more than (i) 9.9% of the number of
outstanding shares of Common Stock, or (ii) 9.9% of the number of outstanding
shares of any series of Preferred Stock. The Board of Directors may, but in no
event will be required to, waive the Ownership Limit or such other limitation
as provided in the Charter, as applicable, with respect to a particular
stockholder if it determines that such ownership will not jeopardize the
Company's status as a REIT and the Board of Directors otherwise decides such
action would be in the best interest of the Company. As a condition of such
waiver, the Board of Directors may require a ruling from the IRS or an opinion
of counsel satisfactory to it and undertakings or representations from the
applicant with respect to preserving the REIT status of the Company. The
foregoing ownership limitations may have the effect of precluding acquisition
of control of the Company without the consent of the Board of Directors and,
consequently, stockholders may be unable to realize a premium for their shares
over the then prevailing market price which is customarily associated with
such control acquisitions.

Potential Effects of the Issuance of Preferred Stock. The Charter permits
the Board of Directors to issue up to 30,000,000 shares of preferred stock,
par value $0.01 per share ("Preferred Stock"). The Board of Directors could
authorize the issuance of Preferred Stock with terms and conditions which
could have the effect of discouraging a takeover or other transaction in which
holders of some or a majority of shares of Common Stock might receive a
premium for their shares of Common Stock over the then-prevailing market price
of such Common Stock.

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Staggered Board. The Board of Directors has three classes of directors. The
initial terms of the first, second and third classes will expire in 1999, 2000
and 2001, respectively. Directors for each class will be elected for a three-
year term upon the expiration of that class' initial term. Subject to the
right of the holders of any Preferred Stock to elect and remove directors in
certain circumstances, the affirmative vote of the holders of a majority of
the outstanding Common Stock is required to remove a director.

Exemption from Maryland Business Combination Statute. Under the MGCL,
certain "business combinations" (including certain issuances of equity
securities) between a Maryland corporation such as Prime Capital and any
person who owns 10.0% or more of the voting power of the corporation's shares
or an affiliate or associate of the corporation which, at any time within the
two-year period prior to the date in question, was the beneficial owner of
10.0% of more of the voting power of then-outstanding voting stock of the
corporation (an "Interested Stockholder"), or between the corporation and an
affiliate of an Interested Stockholder, are prohibited for five years after
the most recent date on which the Interested Stockholder became an Interested
Stockholder. Thereafter, any such business combination must be recommended by
the board of directors of the corporation and approved by the affirmative vote
of at least (a) 80.0% of the votes entitled to be cast by holders of
outstanding voting shares of the corporation's voting stock and (b) two-thirds
of the votes entitled to be cast by holders of outstanding voting shares of
the corporation's voting stock other than shares held by the Interested
Stockholder with whom (or with whose affiliate) the business combination is to
be effected, unless, among other things, the holders of shares of voting stock
receive a minimum price (as defined in the MGCL) for their shares and the
consideration is received in cash or in the same form as previously paid by
the Interested Stockholder for its shares. As permitted by the MGCL, the Board
of Directors of the Company has opted out of the business combinations
provisions of the MGCL with respect to any business combination involving PGI
or any of its Affiliates (including Mr. Reschke and PCH). Accordingly, the
five-year prohibition and the super-majority stockholder vote requirement will
not apply to any "business combinations" between PGI or its Affiliates and the
Company. As a result, PGI and its affiliates may be able to enter into
"business combinations" with the Company, which may or may not be in the best
interests of the stockholders, without the super-majority stockholder approval
as described above. Further, the MGCL's business combinations statute could
have the effect of discouraging offers from third parties to acquire the
Company and increasing the difficulty of consummating any such offer. See
"Certain Provisions of Maryland Law and of the Charter and Bylaws--Business
Combinations."

Maryland Control Share Acquisition Statute. The MGCL provides that "control
shares" of a Maryland corporation acquired in a "control share acquisition"
have no voting rights except to the extent approved by a vote of two-thirds of
the votes entitled to be cast on the matter, excluding shares of stock
previously owned by the acquiror or by officers or directors who are employees
of the corporation. Control shares are voting shares of stock which, if
aggregated with all other such shares of stock previously acquired by the
acquiror, would entitle the acquiror to exercise voting power in electing
directors within one of the following ranges of voting power (i) one-fifth or
more but less than one-third, (ii) one-third or more but less than a majority
or (iii) a majority of all voting power ("Control Shares"). Control Shares do
not include shares that the acquiring person is then entitled to vote as a
result of having previously obtained stockholder approval. A "Control Share
Acquisition" means the acquisition of, or the power to direct the exercise of
voting power with respect to, Control Shares, subject to certain exceptions.

If voting rights are not approved at a meeting of stockholders then, subject
to certain conditions and limitations, the issuer may redeem any or all of the
Control Shares (except those for which voting rights have previously been
approved) for fair value. If voting rights for Control Shares are approved at
a stockholders' meeting and the acquiror becomes entitled to vote a majority
of the shares of stock entitled to vote, all other stockholders may exercise
appraisal rights.

The Bylaws currently contain a provision exempting from the control share
acquisition statute any and all acquisitions by any person of Prime Capital's
shares of capital stock. There can be no assurance that the Board of Directors
will not amend or eliminate such provision in the future. If the foregoing
provisions in the Bylaws are rescinded, the control shares provision of the
MGCL could have the effect of discouraging offers to acquire

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<PAGE>

control of the Company and of increasing the difficulty of consummating any
such offer. See "Certain Provisions of Maryland Law and of the Charter and
Bylaws--Control Share Acquisitions."

Board of Directors May Change Certain Policies Without Shareholder Consent.
The major policies of the Company, including its investment policy and other
policies with respect to acquisitions, financing, growth, operations, debt and
distributions, are determined by its Board of Directors. The Board of
Directors may amend or revise these and other policies, or approve
transactions that deviate from these policies, from time to time without
notification to or a vote of the holders of the Common Stock. The Company
cannot change its policy of seeking to maintain its qualification as a REIT
without the approval of the holders of two-thirds of the outstanding shares of
Common Stock. See "The Company--Business Strategy and Investment Policies" and
"Certain Provisions of Maryland Law and of the Company's Charter and Bylaws."

Loss of Investment Company Act Exemption Would Adversely Affect the Company.
The Company believes that it will not be, and intends to conduct its
operations so as not to become, regulated as an investment company under the
Investment Company Act. The Investment Company Act exempts entities that,
directly or through majority-owned subsidiaries, are "primarily engaged in the
business of purchasing or otherwise acquiring mortgages and other liens on and
interests in real estate" ("Qualifying Interests"). Under current
interpretations by the staff of the Commission, in order to qualify for this
exemption, the Company, among other things, must maintain at least 55.0% of
its assets in Qualifying Interests and also may be required to maintain an
additional 25.0% in Qualifying Interests or other real estate-related assets.
The assets that the Company may acquire therefore may be limited by the
provisions of the Investment Company Act. In connection with its acquisition
of Subordinated Interests, the Company intends, where appropriate, to obtain
foreclosure rights, by obtaining the Special Servicing Rights, with respect to
the underlying mortgage loans, although there can be no assurance that it will
be able to do so on acceptable terms. As a result of obtaining such rights,
the Company believes that the related Subordinated Interests will constitute
Qualifying Interests for the purpose of the Investment Company Act. The
Company does not intend, however, to seek an exemptive order, no-action letter
or other form of interpretive guidance from the Commission or its staff on
this position. If the Commission or its staff were to take a different
position with respect to whether such Subordinated Interests constitute
Qualified Interests, the Company could, among other things, be required either
(a) to change the manner in which it conducts its operations to avoid being
required to register as an investment company or (b) to register as an
investment company, either of which could have an adverse effect on the
Company and the market price for the Common Stock.

Limitation on Liability of Officers and Directors of the Company. The
Charter of Prime Capital contains a provision which, subject to certain
exceptions, eliminates the liability of a director or officer to the Company
or its stockholders for monetary damages. This provision does not eliminate
such liability to the extent that it is proved that the director or officer
actually received an improper benefit or profit or to the extent that a
judgment is entered based on a finding that the director's or officer's action
or failure to act resulted from active and deliberate dishonesty. See
"Management of Operations--Indemnification of Directors and Officers."

OTHER RISKS

Risk that Market for Common Stock Will Not Develop. Prior to the Common
Stock Offering, there has not been a public market for the shares of Common
Stock offered hereby. The Offering Price will be determined by the Company and
the Underwriter. See "Underwriting." There can be no assurance that the price
at which the shares of Common Stock will sell in the public market after the
Common Stock Offering will not be lower than the Offering Price. The Company
intends to apply for listing on the New York Stock Exchange. Quotation through
The New York Stock Exchange does not ensure, however, that an active market
will develop for the Company's Common Stock.

Increases in Interest Rates May Affect Adversely the Market Price of the
Common Stock. The Company's earnings will be derived primarily from the
expected positive spread between the yield on the Company's Targeted Portfolio
Investments and the costs to the Company of its borrowings. This expected
positive spread

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<PAGE>

will not necessarily be larger in high interest rate environments than in low
interest rate environments. In periods of high interest rates, however, the
net income of the Company, and therefore the dividend yield on the Common
Stock, may be less attractive compared to alternative investments of equal or
lower risk, which could impact adversely the market price of the Common Stock.

Future Offerings of Capital Stock May Result in Dilution of the Book Value
or Earnings per Share of the Outstanding Common Stock. The Company may
increase its capital resources in the future by making additional offerings of
its Common Stock, securities convertible into its Common Stock or Preferred
Stock. The actual or perceived effect of such offerings may be the dilution of
the book value or earnings per share of the Common Stock outstanding, which
may result in the reduction of the market price of the Common Stock.

Shares Available for Future Sale. Upon consummation of the Offering, the
Company will have a total of 9,825,269 shares of Common Stock outstanding, of
which 1,075,269 shares will constitute "restricted" securities as that term is
defined in Rule 144 as promulgated under the Securities Act. The 1,075,269
restricted shares are subject to 180 day lock-up agreements with the
Underwriter, which the Underwriter may waive in its sole discretion. Such
shares will become eligible for sale in the public market upon registration or
from time to time upon the expiration of the two-year holding period under
Rule 144 on the second anniversary of the Closing Date. After the Offering,
PCH will own 5,376,344 LP Common Units. Such LP Common Units may be redeemed
for cash or Common Stock, at the option of the Company, on a one-for-one basis
beginning one year after the Closing Date. Common Stock issued upon the
redemption of LP Common Units will become eligible for sale in the public
market upon registration or from time to time upon the expiration of the
applicable holding period under Rule 144.

Following the Offering, sales of substantial amounts of the Common Stock in
the public market pursuant to Rule 144 or otherwise, or the availability of
such shares for sale, could adversely affect the prevailing market price of
the Common Stock and impair the Company's ability to raise additional capital
through the sale of equity securities. No prediction can be made of the effect
that future sales of Common Stock will have on the market price of Common
Stock.

Risks Relating to the Year 2000 Issue. Many existing computer programs were
designed and developed without considering the impact of the upcoming change
in the century. A problem may arise if a computer program uses only two digits
to identify a year in the date field. Extensive problems can result to a
company's business requiring substantial resources to remedy. For example,
amortization schedules for Mortgage Loans could be calculated inaccurately.
Although the Company does not expect the Year 2000 problem to have a material
adverse effect on its business, the failure of the Company to adequately
address the Year 2000 problem could have a material adverse effect on the
Company's business.

THE COMPANY

GENERAL

The Company is a fully-integrated, self-administered and self-managed real
estate finance company that invests primarily in interests in real estate
financing transactions, including commercial mortgage loans, preferred equity
in real estate and real estate operating companies and net leased real estate,
mortgage-backed securities and other real estate related assets. The Company
will originate investments through a network of regional offices that
currently include offices in New York, Chicago and San Francisco. The Company
intends to expand into other markets, including Atlanta and Dallas. The
Company will use on and off-balance sheet debt structures to leverage
substantially all of its investment activities. The Company is structured as
an upREIT, which will facilitate future acquisition activities, and the
Company holds the preferred stock of the Taxable Subsidiary, which will give
the Company the ability to receive after-tax income generated by a broad range
of activities that for tax reasons may not be conducted by the Company
directly due to its REIT status.

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<PAGE>

The Company intends to invest primarily in fixed rate and floating rate
first Mortgage Loans. These mortgages will include permanent and Bridge Loans.
The Company will also make Construction Loans that will usually be secured by
a first mortgage liens against the property and will have other provisions
including completion guarantees. Most of the Bridge Loans and Construction
Loans will have participating features or exit fees that will incentivize the
borrower to allow the Company to issue the permanent loan.

The Company will invest directly in net leased real estate leased to rated
and non-rated companies. Most of these investments will be in properties under
long term leases. The Company will invest in real estate properties on a
leveraged basis. The Company's ability to invest in net leased properties and
other real estate properties may be limited under the Non-Compete Agreements.
Nothing restricts the Company's ability, however, to invest in senior, junior,
mezzanine or other forms of debt, or any form of preferred equity in assets or
entities that are considered within the primary businesses of such publicly-
traded companies. See "Certain Relationships and Related Transactions." The
Company also intends to purchase MBS, primarily CMBS originated, structured,
and serviced by the Taxable Subsidiary.

The Company intends to pursue advantageous real estate investments that
capitalize on its expertise, experience, and relationships and on market
inefficiencies through the acquisition of a broad range of real estate
products, as more fully described in "--Primary Investments." PGI and James W.
Roiter collectively own substantially all of the equity interests in PCH.
Prime Capital has been and will continue to be the sole general partner of the
Operating Partnership. On March 13, 1998 the Company acquired substantially
all of the assets and businesses of PCH in exchange for which PCH received all
of the limited partnership interests in the Operating Partnership and all of
the outstanding common stock of the Taxable Subsidiary. As of March 31, 1998
the Company through its Taxable Subsidiary has originated a portfolio which
consisted of $74,250,000 of mortgage loans. See "--Initial Assets."
Concurrently with the Offering, PCH's limited partnership interests in the
Operating Partnership will be converted into 4,032,258 LP Common Units.
Concurrently with the Offering, PCH is expected to make an additional
contribution of capital to the Operating Partnership in the amount of
$25,000,000 in exchange for which it is expected to receive 1,334,086 LP
Common Units. The value per unit of the LP Common Units received by PCH is
expected to be the Offering Price (net of underwriting discounts).

Concurrently with the Offering, the Company is also offering 1,075,268
shares of Common Stock in the Private Placement to FBR Asset Investment
Corporation, an Affiliate of the Underwriter, which the Company expects to
close concurrently with the Offering. The per share price of Common Stock
offered in the Private Placement will be the Offering Price (net of
underwriting discounts).

Upon completion of the Offering, the public and FBR Asset Investment
Corporation will own 89.1% and 10.9%, respectively, of the common equity of
the Company (90.3% and 9.7%, respectively, if the Underwriter's over-allotment
option is exercised in full). Upon completion of the Offering and the Capital
Contribution, the Company will own 9,825,269 GP Common Units and PCH will own
5,376,344 LP Common Units (assuming the Underwriter exercises its over-
allotment option in full and that the Company uses all of the net proceeds of
the Offering to acquire GP Common Units).

Prior to the Offering, Prudential Securities Credit Corp. ("PSCC")
established in favor of PCF I a short-term revolving credit warehouse facility
(the "PSCC Warehouse Facility") on a secured basis in the maximum principal
amount of $200,000,000. The PSCC Warehouse Facility provides interim funding
for the purchase of certain Mortgage Loans by PCF I with a commitment fee
payable by PCF I to PSCC of one-quarter of 1.0% of the maximum amount payable
in advance, which will be initially $500,000. PSCC will not advance the full
amount required by PCF I to fund the Mortgage Loans, but will only advance a
specified percentage of (i) the outstanding balance of such Mortgage Loans or,
(ii) in certain cases, the value of the property underlying such Mortgage
Loans. Consequently, PCF I will be required to fund a portion of the purchase
price of any of the Mortgage Loans it acquires (the "Haircut Amounts") by
using capital from other sources. Any outstanding

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<PAGE>

indebtedness under the PSCC Warehouse Facility is due and payable on the
earliest of (i) the Company's receipt of the proceeds of the Offering, (ii)
May 31, 1998, or (iii) in the event of a default under the PSCC Warehouse
Facility, the date of a declaration of acceleration by PSCC following such
default. The Company and PSCC have agreed to extend the PSCC Warehouse
Facility subject to the completion of documentation satisfactory to PSCC.

In addition, prior to the Offering, in order to secure capital to enable PCF
I to fund a portion of the Haircut Amounts it will incur in connection with
the funding of Mortgage Loans, PCH has entered into a short-term revolving
credit facility (the "FBR Credit Facility") with FBR Asset Investment
Corporation, an Affiliate of the Underwriter. The FBR Credit Facility was
amended on March 13, 1998 to, among other things, add the Taxable Subsidiary
as a co-borrower. The FBR Credit Facility is secured by certain of the assets
of PCH and the equity interest in PCF. Advances under the FBR Credit Facility
shall be for the sole purpose of enabling PCF I to finance a portion of the
Haircut Amounts incurred in connection with the PSCC Warehouse Facility. The
maximum principal amount of the FBR Credit Facility is $20,000,000, with an
initial commitment fee payable by PCH to FBR Asset Investment Corporation
equal to $200,000. Any outstanding indebtedness under the FBR Credit Facility
is due and payable on the earliest of (i) the closing date of the Offering,
(ii) May 31, 1998, or (iii) in the event of a default under the FBR Credit
Facility, the date of a declaration of acceleration by FBR Asset Investment
Corporation following such default. The Company and FBR Asset Investment
Corporation have agreed to extend the FBR Credit Facility subject to
completion of documentation satisfactory to FBR Asset Investment Corporation
in its sole discretion.

PCH has agreed to lend up to $20,000,000 to the Operating Partnership on an
unsecured basis. As of March 31, 1998, there were no amounts outstanding under
such agreement. The note bears interest at a per annum rate of 10% and matures
at the time of completion of the Common Stock Offering. The Operating
Partnership received a promissory note in the amount of $20,000,000 from PCH
which was initially issued by the Taxable Subsidiary to PCH in exchange for
PCH's contribution of assets to the Taxable Subsidiary on March 13, 1998. Such
note has an outstanding balance of $9,900,000. This loan matures on March 12,
1999 but is subject to automatic renewal for successive annual periods
assuming no events of default exist at the respective renewal date. The
Operating Partnership has agreed to lend the Taxable Subsidiary up to an
additional $20,000,000 on an unsecured subordinated basis. The note evidencing
the obligations under such loan bears interest at a rate of 10% and matures
upon the maturity of the FBR Credit Facility, and is subject to renewal.

The Company expects to continue to originate and fund loans through its
existing credit facilities, and will seek to obtain other warehouse lines of
credit in order to support its investment activities. The Company is currently
engaged in discussions with Nomura Asset Capital Corporation and Salomon Smith
Barney for the establishment of additional warehouse lines of credit. The
Company will seek to have approximately $1,000,000,000 of warehouse facilities
available to it at the time of the Offering. There is no assurance, however,
that the Company will be able to extend its existing credit facilities or
enter into additional borrowing arrangements that will enable the Company to
borrow money on terms sufficient to fund purchases of assets in accordance
with the Company's business plan. If the Company is unable to obtain adequate
financing arrangements, its ability to purchase assets and conduct its
business will be adversely affected.

The Company will operate as a fully integrated self-administered and self-
managed real estate finance company. Management of the Company believes that
this is the most economically beneficial structure because it significantly
reduces the potential conflicts of interest between management and its
shareholders and it minimizes external costs associated with managing the
investments of the Company.

The Company will operate as a "hybrid REIT" in that it will make investments
in real property in addition to mortgage loans and securities. This investment
activity will provide some depreciation, which will provide some internal
growth and liquidity. It is anticipated that the Company will invest a portion
of the proceeds of the Offering and leverage the assets utilizing warehouse
facilities and permanent financing structures, and that it will seek to raise
additional equity in secondary offerings in order to continue to support the
growth of its asset base and earnings.

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The Company's objective is to maximize stockholder value by creating an on-
going and increasing cash flow stream available for distribution through
originating and securitizing loans and by continuing to expand its investment
activities and by expanding into related real estate lines. Upon the
completion of the Offering, the Company intends to continue to invest in
Mortgage Loans, Bridge Loans, Mezzanine Loans, Equity and Preferred Equity
investments, Construction Loans, Net Leased Real Estate and CMBS.

The Company will use the proceeds of the Offering to repay the PSCC
Warehouse Facility and the FBR Credit Facility and other debt outstanding. See
"Use of Proceeds." The Company expects to continue to make investments
pursuant to its business plan. Once the Company has fully invested the
proceeds of the Offering, it will need to borrow funds available to it under a
warehouse agreement with PSCC or another lender. The Company will seek other
sources of short and long term financing to provide liquidity and fund future
investments. Management has had discussions with other potential lenders and
has experience in the capital markets and believes that it will be successful
in identifying sources of funds required to support its growth plans.
Management expects to raise equity funds in the future to support the growth
of the Company. There is no assurance, however, that the Company will be able
to identify and obtain sufficient sources of debt or equity funds to purchase
assets and conduct its business in accordance with its business plan.

The Company's business will be conducted primarily through the Operating
Partnership, which will also own substantially all of the assets of the
Company, other than assets which are better suited to be owned by the Taxable
Subsidiary or a special purpose subsidiary of the Taxable Subsidiary for
securitization purposes. See "--The Taxable Subsidiary."

The Company has approximately 30 employees located in three offices
(including employees of the Operating Partnership and the Taxable Subsidiary).
The Company believes that its national loan origination network located in its
field offices, and its underwriting, loan servicing, and securitization
experience will establish the Company and the Taxable Subsidiary as a leading
originator and servicer of commercial real estate investments. Most of the
employees are focused on the origination and closing of mortgage loans.
Production personnel are located in New York, Chicago and San Francisco. The
Company intends to establish additional offices in Atlanta and Dallas.
Financial reporting and servicing personnel are located in Chicago, and New
York serves as a headquarters location.

The commercial real estate and mortgage market is highly competitive and
there are participants in the market place that will compete directly with the
Company for the types of customers it desires and the products it will offer.
While the market is competitive, it is a very large market. According to E&Y
Kenneth Leventhal Real Estate Group, CMBS issuances over the last five years
have been in excess of $130,000,000,000. More than $44,300,000,000 of
securities were issued in 1997. Various industry sources project more than
$50,000,000,000 will be offered in 1998. Management believes that the size of
the market will allow for the Company to capture a small but sufficient share
of the market. The Company believes that it will be able to attract
relationships with real estate entrepreneurs and investors in commercial and
multi-family products because it will offer consistent, "one-stop" service for
the broadest array of real estate finance structures. The Company believes
that the ability to develop strategic relationships based on sound investment
strategies and flexible structures will provide consistent flow of investment
opportunities to the Company. There are other competitive factors including
pricing and risk tolerance but the Company believes service is one of the
primary competitive issues cited by customers in the market place in
determining their selection of financing sources. The Company will be very
service driven in its origination and servicing practices.

The Company has a pipeline of investment opportunities in addition to the
existing investments and commitments. The production team is in the market
consistently sourcing investment opportunities from real estate developers and
investors including real estate funds, equity REITs, credit tenant/owners of
properties, brokers and other participants in the real estate market place.
Management believes that the flow of opportunities to invest in targeted
investments will not diminish over time, but will grow as the new offices are
opened and as the Company enhances its presence in the market after the
Offering.

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In addition to the Company's current investments more fully described in
section "--Initial Assets," as of March 31, 1998, the Company has closed but
not funded an additional $35,000,000 facility, and has identified
approximately $780,000,000 of potential investments which are in various
stages of negotiation or due diligence, and expects to close more than
$245,000,000 of commercial mortgage loans by June 30, 1998. Of this pipeline,
the Company had over $185,000,000 of loans in due diligence in the process of
closing. The Company had approximately $295,000,000 undersigned applications
and $300,000,000 in review or with applications out to borrowers for
signature. These investments were comprised of the full range of Targeted
Portfolio Investments, including approximately 63% of permanent Mortgage
Loans, 27% of Bridge Loans, 4% of Construction Loans or Facilities, and 6% of
Preferred Equity and Mezzanine Loans. Most of the Bridge and Construction
Loans have incentives for the borrowers to utilize the Company as the provider
of permanent loans. These incentives consist of exit fees if the permanent
loan is not done with the Company, rights of first refusal and a more
streamlined, cost effective process of converting to a permanent loan.
Mezzanine Loans and Preferred Equity transactions typically have cash flow
participation elements and sharing of sales or refinancing proceeds. Often the
Mezzanine Loans fully amortize during the term of the loans.

The Company has also made commitments to finance the construction and
acquisition of limited service hotels for Creative Hotel Associates, Inc.
within a program structure. Creative Hotel Associates, Inc. has significant
expertise in the limited service hotel business. The executives of the company
have many years of experience and are credited with having revolutionized the
limited service hotel industry. In addition, the sponsors of this program are
investing significant capital in the properties. The loans are all cross-
collateralized and cross-defaulted until stabilized. The Company has an
opportunity to expand this program with Creative Hotel Associates, Inc. if it
determines the opportunity is appropriate in the future.

The Company intends to develop strategic relationships with other
organizations or entities that are active in the net lease market. The Company
believes these relationships will supply a pipeline of lending opportunities
against retail properties that are net leased to investment grade tenants and
to a lesser degree to near investment grade tenants. The Company's loan
program is structured to provide permanent fixed rate, amortizing loans that
can be securitized in pools either as real estate loans or as bondable net
lease structures. The Company intends to expand its activities in the net
lease business and to invest in the equity of properties leased to credit and
unrated tenants.

It is the Company's intent to continue to identify strategic relationships
that provide a source of quality investment opportunities. In pursuing strong
sponsors with sound investment practices, Management believes that the Company
will have a strategic advantage in sourcing consistently performing investment
opportunities for its own portfolio at yields compatible with shareholder
objectives.

Management believes this pipeline and the estimate of additional loans it
expects to originate and close through the remainder of 1998, the
relationships it has in the marketplace, the products it offers to borrowers
and other factors will allow the Company to continue to be competitive and
attract investment opportunities that will increase earnings and opportunities
for securitization transactions. There can be no assurance, however, that the
Company will actually originate such volume.

The Company will originate permanent loans that are subject to call
protection. Prepayments will be subject to a combination of non-call
provisions, yield maintenance and defeasance or other penalty provisions.
Typically, these loans will initially be financed by warehouse facilities such
as the PSCC Warehouse Facility or by the Operating Partnership if the loan is
owned by the Taxable Subsidiary. The warehouse line will be replaced with long
term financing in the form of CMO, REMIC, and FASIT structures as the goal of
the Company is to match financing interest rate and duration to the
characteristics of its investments. The Company expects to be able to continue
to invest in these assets by buying the subordinate tranches of these
structures. Management believes these will be sound investments because the
Company was involved, directly or indirectly through the Taxable Subsidiary,
in originating, underwriting and structuring the underlying mortgages. It is
the intent of the Company to hire PCF to service these loans, therefore senior
management will be closely involved in monitoring the on-going performance of
these investments.

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Senior management has developed, as a result of their many years in the real
estate finance business, a focused approach to analyzing the risks associated
with investing in real estate and mortgages. Two areas of discipline are
critical to the success of real estate investing. The initial investment, and
the underwriting process utilized in making that investment, are critical.
Properly identifying risks and structuring and pricing the risk are important
to the performance. Management will focus on the sponsorship of its borrowers
and partners, the specific property attributes within the market place as well
as the investment level vis-a-vis replacement costs, supply and demand in the
market, market dynamics for growth and demand for the property, legal
structure of the mortgage or partnership documentation, and other factors. The
Company will also use market standards for measuring the liquidity of any
given investment by applying the discipline of securitization underwriting,
syndicating or selling loans from time to time. Syndication and loan sales
will be employed to manage portfolio concentration exposures and to manage
other risks that can be smoothed out by reducing exposure to specific
investments. The second key aspect of managing risk within the portfolio is in
servicing. Management will utilize its employees and systems to monitor all
assets. Early warning sign practices will be employed in all aspect of
portfolio reporting. Site inspections, collection of rent rolls and property
financial data along with aggressive collection practices will be routine
steps in the ongoing portfolio management. Management's experience is that
these practices will mitigate the potential for losses in income from the
properties and loans.

Quality control reviews are conducted by the Company on an ongoing basis to
ensure that Mortgage Loans continue to meet the Company's quality and
performance standards. The frequency and extent of the quality control review
depends on the nature of the borrower and the characteristics of such Mortgage
Loans. In performing a quality control review on a loan, the Company analyzes
the underlying property, lease or occupancy status, any updated appraisals and
credit confirmation. In addition, all documents submitted in connection with
the loan, including insurance policies, tax payment status and other pertinent
property and market specific information are examined for compliance with the
Company's guidelines.

Through its relationships in the market place with developers,
entrepreneurs, investors, and brokers, its experience with rating agencies
with respect to structuring and executing securitization strategies, its loan
underwriting, closing and on-going service practices, Management believes that
it will appeal to a broad customer base and will be able to structure
transactions that will continue to enhance shareholder value.

The Company has a specialized and experienced staff including many members
who have been previously employed by the real estate departments from major
financial institutions and other real estate firms, which will be focused on
structuring, underwriting and making transactional and credit judgments
related to the investments.

THE TAXABLE SUBSIDIARY

The Company has created the Taxable Subsidiary for the purpose of conducting
a variety of financing, servicing and hedging activities. As a result, the
Company will be able to execute the broadest range of on and off-balance sheet
financing structures to service the CMBS and MBS investments it makes and to
execute the most efficient hedging strategies against certain investments. The
Taxable Subsidiary will originate and hold primarily loans that may be
targeted for securitization either under REMIC or FASIT structures. When the
securities are sold, the Operating Partnership may acquire the unrated, IO and
residual strips. The Taxable Subsidiary will seek to become a rated servicer
and to retain the servicing, including special servicing rights. The Operating
Partnership receives 95% of the after-tax income of the Taxable Subsidiary.
Many of the activities of the Operating Partnership will be performed by the
Taxable Subsidiary. Although the Operating Partnership will benefit from this
relationship, such activities will constitute a pre-tax expense to the Taxable
Subsidiary (including any gains on sale completed by the Taxable Subsidiary on
behalf of the Operating Partnership). Conversely, the Operating Partnership
may still realize significant potential revenue from its ownership of the
preferred stock of the Taxable Subsidiary in the form of dividend payments.

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The Taxable Subsidiary is in the business of originating, hedging,
securitizing, and servicing mortgage loans, primarily for the benefit of the
Company. Pursuant to agreements between the Operating Partnership and the
Taxable Subsidiary, the Taxable Subsidiary acts as the origination arm of the
Company for most of its real estate investments. The Operating Partnership has
a right of first refusal to purchase all assets and products originated by the
Taxable Subsidiary; the Operating Partnership is also free to originate its
own transactions. At any time when the Taxable Subsidiary elects to securitize
any of its assets, the Operating Partnership will have a right of first
refusal to purchase all or any portion of each tranche of securities issued.
If the Operating Partnership elects not to exercise its right of first
refusal, the Taxable Subsidiary may elect to purchase any asset for its own
account or through a special purpose subsidiary or to sell to a third party.
The Operating Partnership has agreed to provide funds to the Taxable
Subsidiary for the purchase of additional assets in the form of equity
investments and loans.

The Operating Partnership and the Taxable Subsidiary will enter into an
operating agreement that will provide for the Taxable Subsidiary to act as
originator of loans and other investments for the Operating Partnership on an
exclusive basis. All investment opportunities will be presented to the
investment committees of each entity for their approval. The Taxable
Subsidiary will also act as servicer of investments made by the Operating
Partnership. The Taxable Subsidiary will charge the Operating Partnership
approximately 20 basis points on the assets it services on behalf of the
Operating Partnership. The Taxable Subsidiary will also engage in hedging
activity for the Taxable Subsidiary and, in certain circumstances, for the
Operating Partnership. Mark-ups will be paid by the Operating Partnership for
such services.

The Operating Partnership will make loans available to the Taxable
Subsidiary in two forms. The Company has made a $40,000,000 line of credit
(reflected in two $20,000,000 promissory notes) available to the Taxable
Subsidiary on an unsecured and subordinated basis at a rate of 10% per annum.
These funds will be available to fund haircuts or equity requirements
necessary to meet the standards required by the warehouse line. The Operating
Partnership will make a warehouse line available in the amount necessary to
fund the lending activity of the Taxable Subsidiary. This line will have a
commitment fee associated with it. The commitment fee will be at the rate the
Operating Partnership is charged for its warehouse facilities plus a mark-up
of approximately 25 basis points. The rate of interest charged on the line
will be at a spread over LIBOR and will be at the rate the Operating
Partnership is paying for its warehouse facilities plus a mark-up of
approximately 25 basis points. The line will have a term of approximately one
year and will be renewable upon the payment of additional commitment fees. The
terms and default provisions will be approximately the same as those terms
generally made available to the Operating Partnership by third party lenders.

PCH owns 100% of the common stock of the Taxable Subsidiary (representing
5.0% of the economic interest and all of the voting rights on most matters)
and the Operating Partnership owns 100% of the preferred stock of the Taxable
Subsidiary (representing 95.0% of the economic interest and no voting rights
on most matters). Provided such funds are available, the Operating Partnership
will receive 95% of the economic interest in the Taxable Subsidiary in the
form of an annual dividend and a preferential dividend. The annual dividend on
the preferred stock will have a rate of 8.0% and will be on a cumulative and
participating basis. The Preferred Stock of the Taxable Subsidiary will not be
redeemable by the Taxable Subsidiary or convertible into other securities of
the Taxable Subsidiary. The Operating Partnership will receive the balance of
its 95% economic interest in the Taxable Subsidiary through a preferential
dividend, provided sufficient funds are available. The ownership structure of
the Taxable Subsidiary is necessary to permit the Company to share in the
Taxable Subsidiary's income and also maintain its status as a REIT for federal
income tax purposes. See "Federal Income Tax Considerations--Other Tax
Considerations--Clinton REIT Proposals." Although the Company anticipates
receiving 95% of the economic benefit of the businesses carried on by the
Taxable Subsidiary by virtue of the Company's rights to receive dividends
through the Operating Partnership's investment in the preferred stock of the
Taxable Subsidiary, the Company will not be able to elect the Taxable
Subsidiary's officers or directors and, consequently, will not have the
ability to control the operations of the Taxable Subsidiary or require the
declaration of dividends. See "Risk Factors--Ability of PCH and Certain
Directors of the Company to Influence the Operating Partnership."

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BUSINESS STRATEGY AND INVESTMENT POLICIES

Strategy. The Company has invested and intends to invest primarily in (i)
Mortgage Loans, (ii) Preferred Equity, (iii) Net Leased Real Estate and (iv)
MBS. The Company currently provides and will continue to provide financial
structures to support the investment continuum in real estate assets demanded
by a broad national customer base. The Company will focus on the origination
or purchase of Mortgage Loans involving proven real estate owners, operators
and investors. The Company also intends to provide such borrowers with capital
during the value-added stage of the investment cycle in the form of products
such as Mezzanine Loans, Construction Loans and Preferred Equity. The Company
believes by providing capital during the value-added stage of the investment
cycle it will achieve enhanced returns and create relationships that will
allow the Company to attract a higher quality customer. The Company works to
establish relationships with strategic investors in the real estate community
by providing financing structures to support such investor's investment
objectives. The Company believes that by delivering flexible client driven
products it will fill a need in the market place and therefore be in a
position to capture investments in high quality, high yielding business that
will deliver enhanced returns to the stockholders of the Company. There can be
no assurances that the Company will be able to acquire such investments, that
the terms or results of such investments will be beneficial to the Company, or
that the Company will achieve its objectives. See "Risk Factors."

In addition, the Company may decide to pursue other strategies and other
available acquisition opportunities it deems suitable for the Company's
portfolio, including the acquisition of Distressed Real Property and foreign
real property or investments therein.

The Company will directly originate targeted investments primarily through
its own national origination network. The Company's current regional network
includes offices in New York, Chicago and San Francisco. The Company intends
to expand into other markets, including Atlanta and Dallas. The Company will
also establish relationships with other origination sources. The Company will
focus on portfolio management and servicing, including special servicing, in
order to maintain close relationships with its borrowers and to ensure
property portfolio management decisions that have an impact on yield and loss
experiences of the Company are made directly by the Company.

The Company cannot anticipate with any certainty the percentage of the
proceeds of the Offering that will be invested, through the Operating
Partnership or the Taxable Subsidiary, as the case may be, in each category of
Target Portfolio Investments. The Company has significant discretion in the
manner in which to invest the proceeds of the Offering. There can be no
assurance that the Company will be successful in its investment strategy.

If the Company decides to acquire assets from a prospective seller or other
transferor that would realize significant gain on the sale or other
disposition of those assets, the Company may, in an attempt to make a transfer
of those assets to the Company a more attractive disposition alternative to
the prospective transferor, permit the prospective transferor to contribute
those assets to the Operating Partnership in return for Common Units. The
Common Units would be redeemable, at the option of the holder, for cash or, at
the option of the Company, shares of Common Stock of the Company on a one-for-
one basis following the first anniversary from the date of issuance. The
number of Common Units to be issued to the prospective transferor in exchange
for its contribution of the assets desired by the Company would be determined
by the Company based on its analysis of the value of those assets (that is,
such analysis would be performed in substantially the same manner as if the
Company were considering a purchase of those assets for cash) and the Common
Units are expected to be valued on a per unit basis based on the then current
market price for a share of the Common Stock.

The Company will utilize other statistical based portfolio management
techniques in connection with investment decisions and its ongoing portfolio
performance monitoring. By utilizing in-house and external market research
capabilities, the Company monitors macro- and micro-economic trends and the
impact on sectors of the real estate markets. Quarterly portfolio reviews are
performed on key assets, transactions and exposures in

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the Company's investment portfolio. The interest rate risk management may
utilize caps, collars, interest rate swaps, and other hedging or protection
devices. The senior officers of the Company utilize risk management techniques
with respect to managing interest rate risk, duration risk, and loan
performance risk.

The Company will acquire and finance investments through the use of
leverage, consistent with maintaining an acceptable level of risk. To create
yields commensurate with its investment objectives, the Company intends to
borrow funds through the issuance of non-REMIC CMOs or other borrowing
arrangements. The Company also, in certain limited cases, may securitize
Mortgage Loans by transferring them (directly or through the Taxable
Subsidiary) to a special purpose trust or corporation that elects to be
treated as a REMIC or a FASIT so long as such securitizations do not result in
adverse tax consequences to the Company, including taxation of income from
prohibited transactions. The special purpose entity would issue MBS Pass-
Through Certificates to the Company, which would sell certain classes of
certificates and retain certain non-investment grade and IO classes of
certificates. The Company intends to use the proceeds from securitizations and
borrowings to invest in additional Mortgage Loans, MBS and other assets and,
in turn, to borrow against those newly acquired assets. The Company's strategy
is to repeat this process to the extent opportunities to use leverage are
available and the Company determines that using leverage is prudent and
consistent with maintaining acceptable levels of risk until the Company has
significantly leveraged its portfolio of Mortgage Loans and MBS. The Company
will utilize such leverage techniques in order to match assets and
liabilities. The Company will undertake to access the debt market directly
with lenders, through the public and private securitization market, and will
seek secured and unsecured financing structures for the Company. The Company's
assets and liabilities will be matched with respect to interest rate and term
to the extent possible. It is anticipated the Company will utilize fixed and
floating rate debt and originate fixed and floating rate assets. To the extent
these variables are mismatched, the Company will employ hedging techniques to
reduce the risks associated with the mismatch. There can be no assurances that
the Company will be able to acquire appropriate assets, that the terms or
results of the Company's acquisitions will be beneficial to the Company, or
that the Company will achieve its objectives. See "Risk Factors."

The Company currently does not intend to invest in the securities of other
issuers for the purpose of exercising control, to underwrite securities of
other issuers, to offer securities in exchange for property or to repurchase
or otherwise reacquire the Common Stock.

The Company may change its policies in connection with any of the foregoing
without the approval of the stockholders.

Investment Policies. The Company intends to apply the following
comprehensive investment policies for its acquisition of Targeted Portfolio
Investments. These policies have been adopted by the Company's Board of
Directors, and may be changed from time to time by the Board of Directors. The
investment committee for the Company (the "Investment Committee") will review
all investments for the Operating Partnership and for the Taxable Subsidiary.
The same Investment Committee will serve both entities. Subject to certain
exceptions, each asset purchased must conform to the Company's asset
eligibility requirements with respect to, among other things, loan amount,
type of property, loan-to-value ratio, type and amount of insurance, credit
history of the borrower, income ratios, sources of funds, appraisal and loan
documentation. The Company also performs a legal documentation review prior to
the origination or investment in any asset, and where the seller is not
authorized to participate in one of the Company's delegated programs, the
Company performs a full credit review and analysis to ensure compliance with
its loan eligibility requirements. The latter review specifically includes,
among other things, an analysis of the underlying property and associated
appraisal and an examination of the credit, employment and income history of
the borrower. For assets purchased pursuant to the Company's delegated
underwriting program, the Company relies on the credit review performed by the
seller and the Company's own follow-up quality control procedures.

There is no geographic limitation or requirement of geographic
diversification (either as to size, jurisdictional boundary, zip code or other
geographic measure) as to the properties relating to the Targeted

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Portfolio Investments; the only limitations as to the type of assets that the
Company may acquire and the characteristics thereof being limitations either
(i) imposed by law, (ii) with which the Company must comply as a condition of
maintaining both its status as a REIT and its exemption from regulation under
the Investment Company Act or (iii) restrictions imposed by the Non-Compete
Agreements. In analyzing the acquisition of a Mortgage Loan or MBS in the
future, the Company will consider all data deemed necessary to determine the
proper value of such Mortgage Loan or MBS. To determine whether the price of
Net Leased Real Estate, Preferred Equity or Distressed Real Property is fair,
the Company may consider a number of other factors, which may include an
appraisal by an appraiser who is certified or licensed in the applicable state
and whose compensation is not dependent on the transaction.

The Company may establish additional underwriting criteria for evaluating
potential investments and, if such additional underwriting criteria are
established, the Company may modify such underwriting criteria at any time and
from time to time. The Company's policy generally is to offer a price for any
asset not greater than the price that the Company estimates to be sufficient
to generate an acceptable risk-adjusted return to the Company from the
acquisition of that asset.

The Company may issue commitments ("Commitments") to originators and other
sellers of Mortgage Loans and MBS who follow policies and procedures that
comply with all applicable federal and state laws and regulations and satisfy
the Company's underwriting criteria. Commitments will obligate the Company to
purchase mortgage assets from the holders of the Commitments for a specific
period of time, in a specific aggregate principal amount and at a specified
price and margin over an index. Following the issuance of Commitments, the
Company will be exposed to the risk of interest rate fluctuations.

Mortgage Loans acquired by the Company generally will be held in portfolios
until sale, securitization or maturity. During the holding period, the Company
will be subject to the risks of borrower defaults and bankruptcies, fraud
losses and special hazard losses (such as those occurring from earthquakes,
floods or wind storms) that are not covered by standard hazard insurance. In
the event of a default on any Mortgage Loan held by the Company, the Company
will bear the risk of loss of principal to the extent of any deficiency
between the value of the collateral underlying the Mortgage Loan and the
carrying value of the Mortgage Loan. No assurance can be given that any such
mortgage, fraud or hazard insurance will adequately cover a loss suffered by
the Company. Also during the accumulation period, the costs of financing the
Mortgage Loans through reverse repurchase agreements and other borrowings and
lines of credit with warehouse lenders could exceed the interest income on the
Mortgage Loans. It may not be possible or economical for the Company to
complete the securitization of all Mortgage Loans that the Company holds and
acquires.

When the Company acquires Mortgage Loans, the Company generally requires the
seller to represent and warrant to the Company that there has been no fraud or
misrepresentation during the origination of the Mortgage Loans. The seller
generally agrees to repurchase any loan with respect to which there is fraud
or misrepresentation. The Company will provide similar representations and
warranties when the Company sells or pledges the Mortgage Loans as collateral
for mortgage securities. Although the Company will have recourse to the seller
based on the seller's representations and warranties to the Company, the
Company will be at risk for loss to the extent the seller does not perform its
repurchase obligations.

The Company's due diligence generally includes a review of market studies
for each market where a property is located. The market studies typically will
include area economic data, employment trends, absorption rates and market
rental rates. Due diligence also includes site inspections by the Company's
employees or agents of most properties and a review of all available asset
files and documentation. The review typically includes examinations of
available legal documents, litigation files, correspondence, title reports,
operating statements, appraisals and engineering and environmental reports.
The information compiled is then analyzed to determine a valuation for each
property.

The property valuation process relies upon a variety of sources of
information which may include: (a) current and historical operating
statements; (b) existing appraisals; (c) rent and sales comparables; (d)
industry

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statistics and reports regarding operating expenses such as those compiled by
the Institute of Real Estate Management; (e) rent roll, tenant credit history,
and material lease terms; and (f) deferred maintenance observed during site
inspections or described in structural reports, engineering reports and
correspondence found in the loan files.

The Company develops projections of future net operating income and cash
flows taking into account lease rollovers, tenant improvement costs and
leasing commissions. The Company will compare its estimates of revenue and
expenses to historical operating statements, appraisals and general industry
and regional statistics. Market capitalization rates and discount rates are
then applied to the cash flow projections to estimate values based on a
discounted cash flow model. These values are then compared to available
appraisals and market sale comparables to determine the final value of a
property.

LEVERAGE AND HEDGING

The Company intends to leverage its assets through the use of warehouse
lines of credit, reverse repurchase agreements, bank credit facilities,
secured and unsecured corporate debt, mortgage loans on real estate and other
borrowings, when there is an expectation that such leverage will benefit the
Company. See "The Company." However, the Company does not intend to borrow
funds from its Affiliates. If changes in market conditions cause the cost of
such financing to increase relative to the income that can be derived from
assets purchased with the proceeds thereof, the Company may reduce the amount
of its borrowings.

Leverage creates an opportunity for increased income but, at the same time,
creates special risks. For example, leveraging magnifies changes in the net
worth of the Company and affects the amounts available for distribution to the
Company's stockholders. Although the amount owed will be fixed, the Company's
assets may change in value during the time the debt is outstanding. Leverage
will create interest expenses for the Company which can exceed the revenues
from the assets leveraged.

To the extent the revenues derived from assets acquired with borrowed funds
exceed the interest expenses the Company will have to pay, the Company's net
income will be greater than if borrowing had not been used. Conversely, if the
revenues from the assets acquired with borrowed funds are not sufficient to
cover the cost of borrowing, the net income of the Company will be less than
if borrowing had not been used and, therefore, the amount available for
distribution to the Company's stockholders will be reduced. See "Risk
Factors--Economic and Business Risks--Leverage Can Reduce Income Available for
Distribution."

Under certain circumstances, and notwithstanding adverse interest rate or
market conditions, the Company may use leverage to obtain sufficient cash to
make required distributions of dividends or to fund share repurchases and
tender offers when such leveraging is deemed to be in the best interests of
the Company's stockholders. Such situations may arise if the Company's status
as a REIT or its ability to maintain minimum liquidity levels is endangered.

Reverse Repurchase Agreements. The Company may enter into reverse repurchase
agreements, which are agreements under which the Company would sell assets
consisting of Mortgage Loans or MBS to a third party with the commitment that
the Company repurchase such assets from the purchaser at a fixed price on an
agreed date. Reverse repurchase agreements will be characterized as loans to
the Company from the other party that are secured by the underlying assets.
The repurchase price reflects the purchase price plus an agreed market rate of
interest.

Bank Credit Facilities. The Company intends to borrow money through various
bank credit facilities, which will have varying interest rates, which may be
fixed or adjustable, and varying maturities. See "The Company."

Mortgage Loans on Real Estate and Other Assets Owned by the Company. The
Company expects to borrow funds secured by mortgages on the Company's real
estate, including any Net Leased Real Estate owned by the

Company as well as Distressed Real Property and as well as other assets such
as Preferred Equity. Such funds

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will come from the Company's existing warehouse facilities or new facilities
which the Company intends to establish. See "The Company."

CMOs. The Company intends to continue to acquire Mortgage Loans and to issue
non-REMIC CMOs collateralized by certain of such loans. Moreover, the Company
may issue REMIC or non-REMIC MBS collateralized by previously issued CMOs or
MBS in transactions known as "resecuritizations." The Company will structure a
resecuritization in the same manner as a securitization. The collateral
(whether whole mortgage loans or MBS) will be transferred into a qualified
REIT subsidiary, and that entity (or a special purpose trust or corporation
formed by that entity) will issue non-REMIC CMOs or other MBS. The transaction
will be structured as debt, with the issuer retaining an equity interest in
the collateral. In a non-REMIC CMO transaction, the principal balance of the
collateral (whether whole loans or MBS) will exceed the principal balance of
the CMOs. Thus, once the CMOs are paid in full, the issuer will own the
collateral free of the lien of the CMO debt.

Interest Rate Management Techniques. The Company may engage in a variety of
interest rate management techniques for the purpose of managing the effective
maturity or interest rate of its assets. These techniques also may be used to
attempt to protect against declines in the market value of the Company's
assets resulting from general trends in debt markets. Any such transaction is
subject to risks, and may limit the potential earnings on the Company's
investment in real estate related assets. Such techniques may include puts and
calls on securities or indices of securities, Eurodollar futures contracts and
options on such contracts, interest rate swaps (the exchange of fixed-rate
payments for floating-rate payments), or other such transactions. Applicable
REIT qualification rules may limit the Company's ability to use these
techniques, except through a corporate subsidiary that is fully subject to
corporate income taxation. See "Federal Income Tax Considerations--
Requirements for Qualification--Income Tests."

Hedging. The Company may enter into hedging transactions and may at times be
hedged against indebtedness incurred by the Company to finance its acquisition
and origination of Mortgage Loans and MBS to attempt to provide protection
from interest rate fluctuations or other market movements. With respect to
indebtedness, hedging can be used to limit, fix or cap the interest rate on
any indebtedness.

The Company's hedging activities may include interest rate swaps, interest
rate caps, options, futures contracts, forward rate agreements, and the
purchase of excess servicing rights constituting "real estate assets" for
purposes of the REIT qualification tests under the Code. See "Federal Income
Tax Considerations--Requirements for Qualification--Asset Tests." The Company
may hedge against interest rate increases by purchasing Qualified Hedges. A
"Qualified Hedge" for this purpose is limited to a bona fide interest rate
swap or cap agreement, option, futures contract, forward rate agreement, or
any similar financial instrument entered into by the Company to reduce the
interest rate risks with respect to any indebtedness that the Company has
incurred or may incur to acquire or carry real estate assets. See "Federal
Income Tax Considerations-- Requirements for Qualification--Income Tests." In
certain circumstances, the provisions of the Code regarding the qualification
of an entity as a REIT may restrict the Company's ability to enter into
hedging transactions, except through a fully taxable corporate subsidiary. See
"Federal Income Tax Considerations--Requirements for Qualification--Asset
Tests" and "--Income Tests."

The Company expects to employ a hedging specialist who, among other things,
will be expected to monitor and manage risks associated with derivative
financial investments. The Company does not intend to acquire derivative
financial instruments for speculative purposes.

PRIMARY INVESTMENTS

The discussion below describes the principal categories of assets that the
Company has acquired and intends to acquire in the future.

41
<PAGE>

Before purchasing any Targeted Portfolio Investments, the Company will
consider the expected yield of the investment. The Company considers the
expected yield of an investment to be a benchmark for evaluating profitability
of all types of assets over time. "Yield" or "yield to maturity" is the
interest rate that will make the present value of the future cash flow from an
investment equal to its price. Despite the Company's substantial experience in
evaluating potential yields on Targeted Portfolio Investments, no assurances
can be given that the Company can make an accurate assessment of the actual
yield to be produced by an asset. Many factors beyond the control of the
Company are likely to influence the yield on the Company's investments, as
described in more detail below, such that the actual yield on an investment
may vary substantially from its expected yield.

Mortgage Loans. Although the Company cannot anticipate with any certainty
the percentage of the proceeds of the Offering that will be invested in each
category of Targeted Portfolio Investments, the Company anticipates that a
majority of its assets will consist of Mortgage Loans. The Company intends to
acquire and accumulate fixed and adjustable-rate Mortgage Loans secured by
first or second liens on multifamily, commercial or other real property (or an
interest therein) as a significant part of its investment strategy. As of
March 31, 1998, the Company, through its interest in the Taxable Subsidiary,
held Mortgage Loans of $74,250,000 in aggregate principal amount.

Mortgage Loans may be originated by or purchased from various suppliers of
mortgage assets throughout the United States and abroad, such as savings and
loan associations, banks, mortgage bankers, homebuilders, insurance companies
and other mortgage lenders. The Company expects to originate most of its own
Mortgage Loans and real property portfolios.

The Company's policy is to originate or acquire only Mortgage Loans that
meet the Company's investment criteria. In determining the price of a Mortgage
Loan, the Company reviews and analyzes a number of factors. These factors
include the prior borrowing history of the borrower, market conditions (market
interest rates, the availability of mortgage credit and economic, demographic,
geographic, tax, legal and other factors). They also include a yield to
maturity of the Mortgage Loan, the liquidity of the Mortgage Loan, the
limitations on the obligations of the seller with respect to the Mortgage
Loan, the rate and timing of payments to be made with respect to the Mortgage
Loan, the mortgaged property underlying the Mortgage Loan, the risk of adverse
fluctuations in the market values of that mortgaged property as a result of
economic events or governmental regulations, the historical performance and
other attributes of the property manager responsible for managing the
mortgaged property, relevant laws limiting actions that may be taken with
respect to loans secured by real property and limitations on recourse against
the obligors following realization on the collateral through various means,
risks of timing with respect to Mortgage Loan prepayments, risks associated
with geographic concentration of underlying assets constituting the mortgaged
property for the relevant Mortgage Loan, environmental risks, pending and
threatened litigation, junior liens and other issues relating to title, a
prior history of defaults by affiliated parties on similar and dissimilar
obligations, and other factors.

The Company may invest in or provide Bridge Loans. Bridge Loans are short-
term loans, with terms of two to four years generally, which are secured by
liens on real property or by a pledge of partnership interests in a portfolio
of properties. Bridge Loans are not intended to be permanent debt capital, but
rather interim financing prior to the sale of the property or its refinancing
with permanent loans. The loans generally pay a floating rate of interest
based on LIBOR or a similar floating rate index. Bridge Loans carry a high
sensitivity to default or extension of principal repayment terms due to the
need for refinancing and minimal principal amortization. To some extent, this
risk is mitigated by the shorter term of the loan such that market risks and
underlying asset value may not be affected by market fluctuations. As they
often are associated with transfers of equity ownership, property
repositioning and tenant lease-up, Bridge Loans may bear the risk that
operating strategies may not be successful, economic conditions may
deteriorate and competitors may undertake competing strategies.

In addition, the Company may invest in or provide Mezzanine Loans to owners
of real properties that are encumbered by first lien mortgages, deeds of trust
or deeds to secure debt, but only if the Company's Mezzanine Loans are to be
secured by junior liens on the subject properties. The policy of the Company
is that, at the time

42
<PAGE>

of origination of a Mezzanine Loan, the value of the subject property should
not exceed the sum of the outstanding balances of the debt secured by the
first lien and the maximum amount contemplated to be advanced by the Company
under the Mezzanine Loan. With respect to both Construction Loans and
Mezzanine Loans, the Company may receive not only a stated fixed or variable
interest rate on the loan, but also a percentage of gross revenues or a
percentage of the increase in the fair market value of the property securing
repayment of that Construction Loan or Mezzanine Loan, payable upon maturity
or refinancing of the applicable Construction Loan or Mezzanine Loan or upon
the sale of the property.

The Company intends to originate Construction Loans on a selective basis to
high quality sponsors who have experience in developing properties in markets
where the job growth, demographics and other market conditions support
investment in new product for the market. The Company will look to experienced
developers, leasing staffs, architects and engineers and retain third-party
specialists in reviewing the plans and specifications on any development
project. In addition, all typical due diligence activity will be conducted in
accordance with the Company's policies and procedures. The Company will
administer the construction draw requests in accordance with its policies and
procedures designating the construction draws made under the Construction
Loan.

The Company intends to retain a subordinate interest in the pools of
Mortgage Loans it securitizes and to acquire subordinate interests in pools of
Mortgage Loans securitized by others. The credit quality of Mortgage Loans and
the mortgage securities utilizing Mortgage Loans as the underlying collateral,
depends on a number of factors, including their loan-to-value ratio, their
terms and the geographic diversification of the locations of the properties
securing the Mortgage Loans and, in the case of multi-family and commercial
properties, the creditworthiness of tenants and debt service coverage ratios.

The Company may also invest in Nonperforming Mortgage Loans and
Subperforming Mortgage Loans. The Company may also purchase Nonperforming
Mortgage Loans or Subperforming Mortgage Loans for the purpose of foreclosing
on such Mortgage Loans in order to acquire title to the underlying real
estate. See "Certain Legal Aspects of Mortgage Loans and Real Property
Investments." The foregoing investments also require a detailed underwriting
analysis of the underlying real estate collateral and the real estate market
in which property is located, including the property's historical and
projected operating cash flows, physical condition, appraised value, rent
roll, and competitive position in the market.

The yield to maturity on the Company's investment in Mortgage Loans will
depend upon and be sensitive to, among other things, upon (i) whether there
are any defaults or losses on such Mortgage Loans, (ii) whether and when there
are any prepayments of such Mortgage Loans, (iii) the interest rates on such
Mortgage Loans, and (iv) the purchase price of such Mortgage Loans.

The yield to maturity on all Mortgage Loans will be sensitive to defaults by
the borrower and the severity of the losses that might result from such
defaults. The borrower generally will have an equity investment of 10.0% to
15.0% of total project costs, but if the borrower defaults there can be no
assurance that the Company's losses will not exceed such amount. Because the
borrower's equity may be insufficient to protect the Company's investment, the
Company's yield on such loans may be directly and adversely affected by
defaults.

If the Company acquires a Mortgage Loan at a significant discount from its
outstanding principal balance and the Company estimates the yield on the
Mortgage Loan based on a faster rate of payment of principal than actually
occurs, the Company's yield on that Mortgage Loan will be lower than the
Company anticipated. Conversely, if the Company acquires a Mortgage Loan at a
significant premium to its outstanding principal balance, estimating the yield
on such Mortgage Loan based on a slower rate of payment of principal than
actually occurs, the Company's yield on that Mortgage Loan will be lower than
anticipated.

Whether and when there are any principal prepayments on the Mortgage Loans
will be affected by a variety of factors, including, without limitation, the
credit, liquidity and other attributes of the borrower, the terms of the
Mortgage Loans, the level of prevailing interest rates, the availability of
mortgage credit and economic, tax, legal

43
<PAGE>

and other factors. Principal prepayments on Mortgage Loans secured by
multifamily residential and commercial properties are likely to be affected by
lock-out periods and prepayment premium provisions applicable to each of the
Mortgage Loans, and by the extent to which the Servicer is able to enforce
such prepayment premium provisions. Moreover, the yield to maturity on
Mortgage Loans may also be affected by any extension of the scheduled maturity
dates of the Mortgage Loans as a result of modifications of the Mortgage Loans
by the servicer, if permitted.

Preferred Equity. The Company intends to make Preferred Equity investments
in specific real estate assets (or pools of assets) or in real estate
operating companies. Generally, the Preferred Equity investments will have a
preferred claim against both the operating cash flow and liquidation proceeds
from the specific real estate assets (or pool of assets) or the real estate
operating company. The Company anticipates that Preferred Equity will earn a
stated preferred and cumulative return and, in certain instances, will
participate in any future growth in both the value of the assets (or the
company) and the operating cash flow from the assets (or the company).
Generally, a Preferred Equity investment may be made when the existing owner,
borrower, or real estate operating company requires additional equity to fund
an acquisition, development, refinancing or expansion of the assets (or the
company) and either (i) such equity generally is not available to the
borrower/owner on a common equity basis, or (ii) the owner/borrower desires to
further leverage its assets and is willing to grant the provider of such
leverage a preferred interest in such assets in exchange for retaining a
greater percentage of ownership. Regardless of the underlying rationale of the
investment, the Company's Preferred Equity investments are expected to offer
the potential for a higher risk adjusted yield than is generally available
from the direct purchase of assets or the funding of senior mortgage loans,
although such investments also carry greater risk of loss of principal and the
nonpayment of the preferred return. The Company will attempt to mitigate these
risks with thorough and rigorous underwriting analysis of both the real estate
collateral and the borrower/owner. See "Risk Factors--Risks Related to
Investments in Real Property." With respect to any Preferred Equity investment
in a real estate operating company that is a C corporation, the Company's
investment may not represent (i) more than 10.0% of the voting securities of
the real estate operating company or (ii) more than 5.0% of the value of the
Company's total assets. The Company will structure any such Preferred Equity
investment so as to satisfy such asset tests.

The yield to maturity on the Company's investment in Preferred Equity will
depend upon and be sensitive to, among other things, the price at which such
Preferred Equity is purchased and the timing and aggregate amount of
distributions on such Preferred Equity, which in turn will depend primarily on
(i) the cash flows from the underlying assets as well as whether there are any
default or losses on the underlying assets subject to such preferred claim,
and (ii) the profitability and cash flow of the real estate operating company
in which the Company holds Preferred Equity, as applicable.

The yield on Preferred Equity acquired by the Company will be extremely
sensitive to defaults on the assets in which the Company has a preferred claim
and the severity of losses resulting from such defaults, as well as the timing
of such defaults and actual losses. The Company's right as a holder of
Preferred Equity to distributions of preferred dividends and the return of its
principal investment will be subordinated to the rights of all creditors with
claims against the underlying assets whether secured or unsecured. Actual
losses on the underlying assets (after default, where the proceeds from the
foreclosure sale of the underlying assets are less than the creditors' claims
(secured or unsecured) thereon and disposition costs) will be allocated to the
Preferred Equity prior to being allocated to the creditors with claims
(whether secured or unsecured) against such assets. The Company's investments
in Preferred Equity carry a greater risk of loss of principal and the
nonpayment of the preferred dividend than an investment in debt which is
either secured or unsecured.

Net Leased Real Estate. Subject to certain non-compete agreements, the
Company intends to participate in sale-leaseback transactions, in which the
Company would purchase improved or unimproved real estate, and then lease such
real estate back to the seller under a long-term triple-net lease. As a result
of the restrictions in the Non Compete Agreement between the Company and Prime
Group Realty Trust, the Company's ability to invest in net leased real estate
transactions may be limited. Nothing restricts the Company's ability, however,
to invest

44
<PAGE>

in senior, junior, mezzanine or other forms of debt, or any form of preferred
equity in assets or entities that are considered within the primary businesses
of such publicly-traded companies. See "Certain Relationships and Related
Transactions."

The yield on the Company's investments in Net Leased Real Estate will depend
upon the price that the Company pays for such investments, the costs of capital
improvements and other costs of managing the properties, the level of rents and
other income generated by the properties, the length of time between
acquisition and disposition and the price at which the Company ultimately
disposes of such properties. The party leasing the property from the Company
will be responsible for all operating expenses, real estate taxes, repairs and
maintenance, and all capital expenditures required to maintain the leased
properties in good working condition, reasonable wear and tear excepted. The
yield on the investment will depend upon the lessee's ability to generate
sufficient cash flow to cover such costs as well as rent to the Company. In
addition, the Company's investment in Net Leased Real Estate will also depend
on the lessee's ability to increase revenues over the lease period. In the
event actual revenue increases on leased property are not consistent with the
Company's projected growth in revenues, the yield on such investment may be
adversely affected. The yield on such investments may be adversely affected by
factors beyond the Company's control, such as adverse changes in economic
conditions, neighborhood characteristics and competition from other properties
offering the same or similar services.

MBS. The Company intends to acquire non-investment grade and unrated MBS
(hereinafter referred to as "Subordinated Interests"). MBS typically are
divided into two or more classes, sometimes called "tranches." The senior
classes are higher "rated" securities, which would be rated from low investment
grade "BBB" to higher investment grade "AA" or "AAA." The junior, subordinated
classes typically would include one or more lower rated, non-investment grade
classes, and an unrated, higher-yielding, credit support class (which generally
is required to absorb the first losses on the underlying mortgage loans).

Subordinated Interests carry significant credit risks. Typically, in a
"senior-subordinated" structure, the Subordinated Interests provide credit
protection to the senior classes by absorbing losses from loan defaults or
foreclosures before such losses are allocated to senior classes. Moreover,
typically, as long as the more senior tranches of securities are outstanding,
all prepayments on the mortgage loans generally are paid to those senior
tranches, at least until the end of a lock-out period, which typically is five
years or more. Because of this structuring of the cash flows from the
underlying mortgage loans, Subordinated Interests in a typical securitization
are subject to a substantially greater risk of non-payment than are those more
senior tranches. Accordingly, the Subordinated Interests are assigned lower
credit ratings, or no ratings at all. Neither the Subordinated Interests nor
the underlying mortgage loans are guaranteed by agencies or instrumentalities
of the U.S. government or by other governmental entities and accordingly are
subject to, among other things, credit risks. See "Risk Factors--Risks Related
to Investments in MBS--Subordinated Interests are Subject to Greater Credit
Risks Than More Senior Classes."

The yield to maturity on any class of MBS will depend upon and be sensitive
to, among other things, the price at which such class is purchased, the
interest rate for such class and the timing and aggregate amount of
distributions on the securities of such class, which in turn will depend
primarily on (i) whether there are any defaults or losses on the underlying
loans allocated to such class and (ii) whether and when there are any
prepayments of the related Mortgage Loans (which include both voluntary
prepayments by the obligors on the Mortgage Loans and prepayments resulting
from liquidations due to defaults and foreclosures).

Before acquiring a Subordinated Interest, the Company will perform a number
of due diligence tasks to evaluate the investment and to verify the information
and material provided by the seller. The Company will determine on a loan-by-
loan basis which loans will undergo a full-scope review and which loans will
undergo a more streamlined "desktop analysis." Although the choice is a
subjective one, considerations that influence the choice for scope of review
often include loan size, debt service coverage ratio, loan to value ratio, loan
maturity, lease rollover, property type and geographic location. A full-scope
review may include, among other factors, a property site inspection, tenant-by-
tenant rent roll analysis, review of historical income and expenses for each
property securing the loan, a review of major leases for each property (if
available), recent appraisals (if available), and a review of engineering and
environmental reports (if available). For those loans that are selected

45
<PAGE>

for the more streamlined desktop analysis, the Company's evaluation may include
a review of the property operating statements, summary loan level data, and
third party reports, each as available. If the Company's review of such
information does not reveal any unusual or unexpected characteristics or
factors, no further due diligence is performed. After completing the review of
the documentation and the property inspection, the information compiled will be
analyzed to determine collateral value for each property securing the loans.
Based on these factors, the Company will determine a resolution value for each
loan for purposes of projecting future cash flows after adjustments for
estimated future losses.

Determining a resolution value is a subjective process, requiring,
ultimately, a business judgment. In making this determination, the Company will
evaluate some of the following characteristics: (i) the type of collateral
(multifamily, office, hotel, industrial or retail Mortgage Collateral); (ii)
the payment status of the underlying mortgage (performing, non-performing or
sub-performing); (iii) the actual mortgage prepayment and default history; (iv)
the ratio of the unpaid mortgage balance to the current property value; (v) the
current income and cash flows generated by the Mortgage Collateral as compared
to the debt service requirements and (vi) the region of the country in which
the Mortgage Collateral is located. However, which of these characteristics (if
any) are important and how important each characteristic may be to the
evaluation of a particular MBS depends on the individual circumstances. Because
there are so many characteristics to consider, each Subordinated Interest must
be analyzed individually, taking into consideration both objective data as well
as subjective analysis.

After completing the foregoing evaluations, the Company will model the
structure of the MBS securitization based on the disclosure documents that
reveal the payment structure of the MBS and the characteristics of the
underlying Mortgage Collateral. This modeling is done in order to estimate
future cash flows to be received by the Subordinated Interests, after
adjustments for estimated future losses. Using that information, the Company
will determine the price at which it would effect the purchase of the
Subordinated Interest. Although the Company uses objective data to make this
decision, the decision is in essence a subjective one.

The Company also intends in many instances to acquire Special Servicing
rights with respect to the mortgage loans underlying the securitization in
which the Company owns a Subordinated Interest. Such Special Servicing rights
will give the Company, among other things, some control over the timing of
foreclosures on such mortgage loans, and thus may enable the Company to reduce
losses on such mortgage loans. No assurances can be made, however, that the
Company will be able to acquire such Special Servicing rights or that losses on
the mortgage loans will not exceed the Company's expectations. Although the
Company's strategy is to purchase Subordinated Interests at a price designed to
return the Company's investment and generate a profit thereon, there can be no
assurance that such goal will be met or, indeed, that the Company's investment
in a Subordinated Interest will be returned in full or at all. See "Risk
Factors--Related to Investments in MBS" and

"--Economic and Business Risks."

The terms of Special Servicing agreements vary considerably, and the Company
cannot predict with certainty the precise terms of the Special Servicing
agreements into which it will enter. In general, however, the Company will
attempt to negotiate Special Servicing agreements that will permit the Company
to service, or direct the servicing of, mortgage loans that are more than
ninety days delinquent. At that point, the Company would have the right (and
the obligation) to decide whether to begin foreclosure proceedings or to seek
alternatives to foreclosure, such as forbearance agreements, partial payment
forgiveness, repayment plans, loan modification plans, loan sales and loan
assumption plans. Thus, the Company will have within its control, subject to
obligations to the related senior classes, some ability to minimize losses on
mortgage loans underlying Subordinated Interests owned by the Company.

The Company may invest in other classes of MBS in addition to Subordinated
Interests. For example, the Company may invest in IOs, which are only entitled
to payments of interest (or nominal payments of principal in some cases).

The Company also may invest in Inverse IOs, which bear interest at a floating
rate that varies inversely with (and often at a multiple of) changes in a
specified index. The yield to maturity of a class of Inverse IOs is not only
very sensitive to the rate of prepayments on the underlying Mortgage
Collateral, but also to changes in

46
<PAGE>

the related index. See "Risk Factors--Risks Related to Investments in MBS--
Yields on Subordinated Interests, IOs and POs May Be Affected Adversely by
Interest Rate Changes."

The Company intends to invest in Sub IOs. Interest otherwise allocable to
Sub IOs generally is withheld and used to make payments on more senior classes
or to fund a reserve account for the protection of senior classes until over
collateralization or the balance in the reserve account reaches a specified
level. In those cases, interest on the Sub IO generally will be paid to the
holders of the Sub IO only after the balance in the reserve account reaches
the specified level. Sub IOs of this nature provide credit support to the
senior classes, and thus bear substantial credit risk. Moreover, because a Sub
IO receives only interest payments, its yield is extremely sensitive not only
to default losses but also to changes in the weighted average life of the
class, which in turn is dictated by the rate of prepayments (including as a
result of defaults) on the underlying loans. See "Risk Factors--Risks Related
to Investments in MBS--Yields on Subordinated Interests, IOs and POs May Be
Affected Adversely by Interest Rate Changes."

The Company may invest in POs, which do not provide for payment of periodic
interest, but only provide for payment of the stated principal amount at
maturity or earlier prepayment of the underlying loans. The Company believes
that its POs will be affected adversely by slower than anticipated prepayment
rates. Generally, a rising interest rate environment will result in the
interest rate to be paid by the borrower pursuant to the terms of a fixed rate
loan becoming relatively more favorable to that borrower, decreasing the
likelihood of that borrower making a prepayment on that loan. Slower than
anticipated prepayment rates can result in a significant decrease in the yield
realized by the Company on its investments in POs.

Other Assets. The Company will take an opportunistic approach to its
investments and, accordingly, the Company may invest in assets other than
Targeted Portfolio Investments. For example, subject to the terms of certain
non-compete agreements to which the Company is a party as more fully described
in "Certain Relationships and Related Transactions," the Company may invest in
real estate operating companies and in commercial, multifamily and other real
property on a leveraged basis. The Company may acquire properties acquired at
foreclosure or by deed-in-lieu of foreclosure ("REO Property"), other
underperforming or otherwise distressed real property (all of such
underperforming and distressed real property, together with REO Property, is
herein referred to collectively as "Distressed Real Property") and in small
commercial loans and business loans secured by real estate with principal loan
amounts generally of less than $2,000,000 ("Small Commercial Loans"). In
addition, the Company may invest in real property (or interests therein)
located outside the United States.

47
<PAGE>

INITIAL ASSETS

Listed below is a chart depicting the Company's current assets (in
thousands):

<TABLE>
<CAPTION>
PRINCIPAL
BORROWER INTEREST PERIODIC PRIOR FACE CARRYING DUE AT LOAN
PRINCIPAL(A) RATE(B) MATURITY PAYMENT LIEN AMOUNT AMOUNT MATURITY(D) FEES
- ------------ -------------- -------- ----------- ------ ------- -------- ----------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FIRST MORT-
GAGE LIEN:
OFFICE/RETAIL
Crown Broad-
way, LLC One month 1/1/08 Monthly N/A $45,000 $44,883 $45,000 $125
61 Broadway
Building Libor + 2.10% Interest
New York, NY Only
Convention
Plaza, LLC One month 8/1/99 Monthly N/A 4,750 4,687 4,750 71
Convention
Plaza Office
Bldg Libor + 2.50% Interest
St. Louis, MO Only
Sutphin Blvd
Assoc, LLC One month 9/1/00 Monthly N/A 4,650 4,564 4,650 92
Office Build-
ing Libor + 3.00% Interest
Queens, NY Only
Jennifer
Mall, LTD
(c) 7.22% 3/1/08 Monthly N/A 7,600 7,559 6,014 71
Office/Retail
Building P & I
Washington,
DC 25 Yr Amort
Jennifer
Mall, LTD
(c) One month 9/1/99 Monthly $7,600 500 496 500 N/A
Office/Retail
Building Libor + 11.00% Interest
Washington,
DC Only
APARTMENTS
Habitat
Apartments,
LTD 6.78% 2/1/08 Monthly N/A 7,500 7,499 6,406 N/A
Habitat
Apartments P & I
Boulder, CO 30 Yr Amort
GARAGES
Convention
Plaza Ga-
rage, LLC 7.61% 2/1/05 Monthly N/A 2,800 2,763 2,465 42
Convention
Plaza Park-
ing Garage P & I
St. Louis, MO 25 Yr Amort
11th Street
Garage, LLC One month 8/1/99 Monthly N/A 1,450 1,431 1,450 22
11th Street
Parking Ga-
rage Libor + 2.50% Interest
St. Louis, MO Only
------- ------- ------- ----
Totals $74,250 $73,882 $71,235 $423
======= ======= ======= ====
</TABLE>
- ---------------------

(a) As of May 1, 1998, principal and interest payments on the aforementioned
loans are current. In addition, there have been no write-downs recorded on
the loans.

(b) As of March 31, 1998, LIBOR was 5.69%.

(d) In certain transactions, the borrowers have obligations to pay additional
fees to the Company upon the maturity in refinancing of these loans.

48
<PAGE>

FORMATION AND STRUCTURE OF THE COMPANY

Since 1981, and until recent public offering transactions, PGI was a
diversified real estate company engaged in the ownership, development,
acquisition, operation, leasing, marketing and financing of institutional-
quality commercial and multifamily real estate. Starting in 1994, PGI began
contributing its various operating divisions to separate self-managed and
self-administered publicly-traded REITs and operating companies. Prime Retail,
Inc. (NYSE: PRT) became the successor-in-interest to PGI's retail division in
March 1994 and Prime Residential, Inc. became the successor-in-interest to
PGI's multi-family apartment division in August, 1994. Prime Residential, Inc.
was subsequently merged with and into Apartment Investment and Management
Company ("AIMCO") (NYSE: AIV). Brookdale Living Communities, Inc. (NASD: BLCI)
became the successor-in-interest to PGI's senior independent and assisted
living division in May 1997, and Prime Group Realty Trust (NYSE: PGE) became
the successor-in-interest to PGI's office and industrial division in December
1997. As a result of the foregoing public offering transactions, PGI has
acquired ownership interests in Prime Retail, Inc., Brookdale Living
Communities, Inc. and Prime Group Realty Trust. As of March 31, 1998, these
three public companies had a combined market capitalization, including
outstanding indebtedness and preferred equity, of approximately $2,600,000,000
and PGI's equity interest in these companies had a combined market value of
approximately $311,900,000.

In September 1997, PGI organized PCH as a vehicle to take advantage of real
estate investment opportunities that may not otherwise be suitable for
investment by PGI or the various publicly-traded REITs and operating companies
affiliated with PGI. PCH's business plan was to engage in the origination and
securitization of mortgage loans relating to all forms of income-producing
real estate. PGI and James W. Roiter collectively own substantially all of the
equity interests in PCH. PCH formed a wholly-owned subsidiary, Prime Capital
Funding, LLC ("PCF"), to originate and securitize mortgage loans generally in
excess of $2,000,000. PCF originated these loans through regional offices
located throughout the country and financed such loans through long-term
warehouse lines of credit and by issuing mortgage-backed securities. In
addition, PCH formed certain wholly-owned subsidiaries, such as Prime Capital
Funding I, LLC ("PCF I"), to serve as special purpose vehicles whose sole
purpose was to hold specific assets acquired by or on PCH's behalf.

On March 13, 1998, PCH contributed substantially all of its assets and
businesses to the Company in exchange for which PCH received all of the
outstanding common and preferred stock of the Taxable Subsidiary. PCH
contributed to the Operating Partnership (i) 100% of the outstanding preferred
stock of the Taxable Subsidiary, which represents 95% of the economic value of
the Taxable Subsidiary but includes no voting power on most matters; (ii) a
promissory note issued by the Taxable Subsidiary in the principal amount of up
to $20,000,000, of which $9,900,000 was outstanding, and (iii) a promissory
note issued by PCH in the principal amount of $10,010,000, in exchange for all
of the limited partnership interests in the Operating Partnership. PCH owns
100% of the outstanding common stock of the Taxable Subsidiary, which
represents 5% of the economic value of the Taxable Subsidiary and includes
full voting power. PCH has also agreed to lend up to $20,000,000 to the
Operating Partnership on an unsecured basis. As of March 31, 1998, there were
no amounts outstanding under such agreement. The note bears interest at a per
annum rate of 10% and matures at the time of completion of the Common Stock
Offering.

49
<PAGE>

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Certain conflicts of interest exist between the Company and certain of its
officers and directors. Michael W. Reschke, the Chairman of the Board of the
Company, has substantial commitments to entities other than the Company which
could potentially compete with the Company. The Company intends to enter into
a non-compete agreement with Mr. Reschke, PGI and its Affiliates to minimize
potential conflicts. Certain conflicts of interest also exist between the
Company and PCH. Substantially all of the equity in PCH is owned by Mr.
Reschke and Mr. Roiter, the Chief Executive Officer of the Company. PCH
intends to contribute additional capital to the Operating Partnership in the
amount of $25,000,000 in exchange for 1,344,086 LP Common Units at a price per
unit equal to the Offering Price net of underwriting discounts, and such
units, together with the units already held by PCH, will represent beneficial
ownership of 35.4% of the common equity in the Company. PCH and its Affiliates
will have significant influence over the affairs of the Company, which may
influence certain officers and directors of the Company to make decisions
which may not be in the best interest of all stockholders, in connection with
the (i) operation of the Company's ongoing businesses, including conflicts
associated with the tax consequences to PCH of sales or refinancings of
certain of the assets of the Company contributed by PCH, which, together with
certain provisions of the Partnership Agreement, may influence the Company's
decision to sell or refinance, or to prepay debt secured by, certain assets of
the Company and (ii) enforcement of agreements with Affiliates of the Company.
The Company intends to adopt certain policies that are designed to eliminate
or minimize certain potential conflicts of interest.

PGI and Michael W. Reschke have entered into a Non-Compete Agreement with
each of Prime Retail, Inc., Brookdale Living Communities, Inc., and Prime
Group Realty Trust. Subject to certain conditions and exceptions, the Non-
Compete Agreements will prohibit the Company, as a result of PCH's ownership
interest in the Company, from making investments in assets or entities that
are considered within the primary businesses of such publicly-traded
companies. Nothing restricts the Company's ability, however, to invest in
senior, junior, mezzanine or other forms of debt, or any form of preferred
equity in assets or entities that are considered within the primary businesses
of such publicly-traded companies. A Non-Compete Agreement will apply to the
Company so long as the Company is an affiliate of PGI under such agreement.
Under the Non-Compete Agreements, an affiliate is generally defined as any
entity in which PGI, Prime Group Limited Partnership and Michael W. Reschke,
individually or collectively, own or control, directly or indirectly, fifty
percent or more of the outstanding equity interests or have the right or power
to affect the investment or operational decision-making process. The Non-
Compete Agreements generally provide exceptions for mortgage loans,
subordinated debt financing, sale-leaseback transactions and preferred equity
investments. The primary businesses include the following types of real estate
and interests therein: factory outlet retail properties, senior and assisted
living and semi-acute care properties and office and industrial properties. In
the event one of the Non-Compete Agreements prohibits the Company from making
a potential investment, the Company will seek to obtain a waiver under such
agreement. There can be no assurances that the Company will be successful in
obtaining such a waiver, in which event, the Company's investment will be
prohibited.

The Underwriter, through an Affiliate, has established a short-term credit
facility in favor of the Taxable Subsidiary and PCH to finance the purchase
and/or origination of Mortgage Loans. It is anticipated that a portion of the
net proceeds of the Offering will be used to pay off such credit facility,
which will benefit the Underwriter and PCH. See "Use of Proceeds" and
"Underwriting." The market in which the Company expects to purchase assets is
characterized by rapid evolution of products and services and, thus, there may
in the future be relationships between the Company, PCH, and Affiliates of PCH
in addition to those described herein.

The Company may purchase additional assets from PCH or its subsidiaries in
the future and may participate with PGI or its Affiliates in investments in
the future. See "Risk Factors--Conflicts of Interest in the Business of the
Company May Result in Decisions of the Company That Do Not Fully Reflect the
Interests of the Stockholders of the Company." Any such purchases or
participating investments will be in accordance with the Company's investment
policies.

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<PAGE>

The Underwriter, through an Affiliate, has established a short-term credit
facility in favor of the Taxable Subsidiary and PCH to finance the purchase
and/or origination of Mortgage Loans, including the origination of the
Company's current investments. Any outstanding balances on such credit
facility will become due and payable upon the closing of the Offering. Upon
the closing of the Offering, certain of the net proceeds of the Offering will
be used to pay off such credit facility, which will benefit the Underwriter
and PCH. See "Underwriting."

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<PAGE>

MANAGEMENT OF OPERATIONS

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information about the directors and
executive officers of Prime Capital.

<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD
---- --- ----------------
<C> <C> <S>
Michael W. Reschke... 42 Chairman of the Board of Directors
President and Chief Executive Officer and
James W. Roiter...... 45 Director
Malcolm S. Dorris(1). 43 Independent Director Designee
James W. Kiley(1).... 53 Independent Director Designee
Susan Leonis(1)...... 40 Independent Director Designee
Gary J. Skoien(1).... 44 Independent Director Designee
Brenda J. Mixson..... 45 Executive Vice President, Chief Financial and
Investment Officer
Executive Vice President and Chief Operating
James Glasgow........ 38 Officer
Brian Clark.......... 35 Senior Vice President
Sam Hooker........... 34 Senior Vice President
Michael Magner....... 36 Senior Vice President
James Magnanenzi..... 49 Senior Vice President
Jon Red.............. 35 Senior Vice President
Roger Baker.......... 36 Senior Vice President/Controller
Victoria Cory........ 34 Senior Vice President
Roxanne Veneziano.... 34 Vice President and Credit Officer
</TABLE>
- ---------------------

(1) Prime Capital has designated and intends to elect this individual to serve
as an Independent Director of Prime Capital, and such individual has
accepted this designation and has agreed to serve as an Independent
Director if so elected.

The principal occupation for the last five years of each executive officer
and director of the Company, as well as additional biographical information,
is set forth below.

MICHAEL W. RESCHKE. Michael W. Reschke, age 42, is the Chairman of the Board
of Directors of the Company. Mr. Reschke founded PGI in 1981 and, since that
time, has acted as PGI's Chairman and Chief Executive Officer. Mr. Reschke is
also Chairman of the Board of Prime Retail, Inc. (NYSE: PRT), Brookdale Living
Communities, Inc. (NASD: BLCI), Prime Group Realty Trust (NYSE: PGE) and PCH.
For the last sixteen years, Mr. Reschke has directed and managed the
acquisition, development, finance, construction, leasing, marketing,
renovation and property management activities of PGI. Mr. Reschke is licensed
to practice law in the State of Illinois and is a certified public accountant.
Mr. Reschke is a member of the Chairman's Roundtable and the Executive
Committee of the National Realty Committee and is a full member of the Urban
Land Institute. Mr. Reschke also serves on the Board of Visitors of the
University of Illinois Law School.

JAMES W. ROITER. James W. Roiter, age 45, is President and Chief Executive
Officer of PCH and the Company, where he is responsible for the day-to-day
activities of the Taxable Subsidiary and the Operating Partnership. Prior to
joining PCH in July 1997, Mr. Roiter was a Managing Director of Donaldson,
Lufkin & Jenrette ("DLJ") where he was responsible for all commercial and
residential real estate finance activities where DLJ or one of its
subsidiaries, acted as principal. Under Mr. Roiter's leadership, DLJ became
one of the largest providers of debt capital to the commercial and residential
market, lending over $8.0 billion in debt financings during his tenure at DLJ
(1988-1996) and was consistently one of the largest issuers of CMBS. In
addition to the debt origination business, Mr. Roiter was also responsible for
new issue and secondary trading, structured finance, and contract finance
activities relating to commercial and residential real estate business while
at DLJ. In addition to his role as head of the Real Estate Finance Group, Mr.
Roiter served on the Investment Committee of Donaldson, Lufkin & Jenrette Real
Estate Capital Partners, L.P., a $600.0 million fund established to make
opportunistic real estate investments, and on the Board of Directors of Column
Financial Corporation ("Column"). Column, which Mr. Roiter founded, is one of
the country's largest commercial mortgage

52
<PAGE>

originators and issuers of CMBS. Prior to joining DLJ in 1988, he was a First
Vice President at Shearson Lehman Hutton ("Shearson"). Before joining
Shearson, Mr. Roiter was a First Vice President and Manager of the Whole Loan
Trading Desk at E.F. Hutton, which he joined in 1985 after serving as Director
of Negotiated Transactions with the Federal National Mortgage Association. Mr.
Roiter is a graduate of the University of Rhode Island and holds a J.D. from
George Mason University.

MALCOLM S. DORRIS. Malcolm S. Dorris, age 43, has been designated to serve
as a Director of the Company. Mr. Dorris is licensed to practice law in the
State of New York, and is a partner in the firm of Dechert Price and Rhoads,
where he is Chairman of the firm's securitization group. Mr. Dorris' practice
specializes in the legal issues connected with the entire spectrum of
structured financings, and has written and lectured extensively on the subject
of securitization.

JAMES W. KILEY. James W. Kiley, age 53, has been designated to serve as a
Director of the Company. Mr. Kiley is the Managing Partner of the Chicago
Operations of Weiss, Peck & Greer, LLC, a nationally recognized investment
manager, where he has been employed since 1988. Prior to this, Mr. Kiley has
held several governmental positions with the State of Illinois, where he most
recently served as the Director of the Illinois Housing Development Authority.

SUSAN A. LEONIS. Susan A. Leonis, age 40, has been designated to serve as a
Director of the Company. Ms. Leonis is the Founder and President of the Leonis
Group, a government and community relations consulting company. From 1995
through 1996 Ms. Leonis served as Senior Vice President to PGI, an Affiliate
of the Company, where she developed and directed corporate public relations
and outreach activities. From 1993 through 1995, Ms. Leonis served as the
Executive Assistant to Illinois Governor James Edgar for Local Government. Ms.
Leonis also serves on the Board of Directors of the Chicago Transit Authority
as well as the Board of Retirement Allowance Committee for the Chicago Transit
Authority.

GARY J. SKOIEN. Gary J. Skoien, age 44, has been designated to serve as a
Director of the Company. Mr. Skoien is designated to become the President and
Chief Executive Officer of Horizon Group Properties, Inc. From 1994 through
1997, Mr. Skoien served as Executive Vice President of PGI, an affiliate of
the Company, where he was responsible for managing the industrial land
development and build-to-suit divisions. Prior to this role, Mr. Skoien served
as Senior Vice President and Chief Operating Officer of the Retail Division of
PGI from 1992 through 1993. From 1983 through 1991, Mr. Skoien was the
Executive Director of the Illinois Capital Development Board and from 1980
through 1983, Mr. Skoien was an assistant to Illinois Governor James R.
Thompson. Mr. Skoien is also designated to be elected to the Board of
Directors of Horizon Group Properties, Inc., and serves on the Boards of the
Chicagoland Chamber of Commerce and the Civic Federation.

BRENDA J. MIXSON. Brenda J. Mixson, age 45, is an Executive Vice President,
Chief Financial and Investment Officer of the Company, where she is
responsible for the day-to-day investment activities of the Company. Prior to
joining the Company in December 1997, Ms. Mixson was the global head of ING
Barings' Emerging Markets International Finance Desk from 1996. Ms. Mixson
transferred to this position from the Real Estate Finance Group, where she
served as Portfolio Manager for all real estate investment activity including
distressed mortgage acquisition, equity investments and disposition activities
from 1995. Ms. Mixson has served on the Board of Directors of Bay Apartment
Communities, Inc., a NYSE traded REIT, since its initial public offering in
1994. Prior to joining ING Barings, Ms. Mixson was Executive Vice President
and Chief Operating Officer at Reichmann International, the entity responsible
for managing the real estate assets of the Quantum North America Realty Fund
from 1993. In addition to management, financing and operational
responsibilities for the Fund's portfolio, Ms. Mixson was responsible for
asset management of the portfolio including special oversight of the team
providing property management and services for 4,400 multifamily units held in
Florida. She was also affiliated with Travelers Realty Investment Company, a
wholly owned subsidiary of the Travelers Insurance Co., from 1989 to 1994. Her
duties included strategic planning, investment policy, and responsibility for
the Northeast and Mid-Atlantic Regions Debt & Equity Portfolio investments on
the Eastern Seaboard. Ms. Mixson was associated with Chemical Bank from 1986
to 1989, where she served as Manager and Vice President of the Chicago Region.
Ms. Mixson received a B.S. in Economics from the University of Minnesota.

53
<PAGE>

JAMES GLASGOW. James Glasgow, age 38, is an Executive Vice President and
Chief Operating Officer of the Company with day to day responsibility for the
production of investment opportunities for the Company. Before joining the
Company, Mr. Glasgow was Managing Director of ING Capital Corp., where he was
responsible for all commercial real estate finance activities in North
America. Prior to this, he was President and Chief Operating Officer of MIG
Financial Corp., a commercial mortgage investment management firm with more
than $2 billion in assets. From 1995 to 1997 he more than doubled the size of
the company and managed the production of more than $800 million in commercial
mortgage product for institutional investors. Prior to joining MIG, Mr.
Glasgow held the position of Vice President at The Travelers Group, where he
was responsible for new business activities nationwide and for managing an
existing commercial mortgage portfolio of over $3 billion, where he was
employed from 1990 to 1995. Prior to Travelers Mr. Glasgow was a Vice
President in Chemical Bank's Real Estate Group and was employed there from
1984 to 1989. During his employment he consumed over $800 million in
commercial mortgage transactions. Mr. Glasgow is a graduate of Lebanon Valley
College and earned an M.B.A. from George Washington University.

BRIAN CLARK. Brian Clark, age 35, is a Senior Vice President of the Company.
Prior to joining the Company, Mr. Clark was a member of the Real Estate
Structured Finance Group at ING Capital Corp. Throughout his tenure at ING
Barings and its affiliates from 1993 through 1997, Mr. Clark's
responsibilities included the execution, management and dispositions of real
estate assets which included equity and debt products for ING Barings. In
addition, he spent 1995 at ING Real Estate Investors, Inc., the real estate
asset management unit of ING Barings, where he was responsible for the
management and disposition of mortgages and real estate. Prior to ING, he was
an Associate at Citicorp's Real Estate Investment Bank where he was
responsible for due diligence on portfolios of distressed loans. Prior to
Citibank, Mr. Clark was an associate at Halcyon Ltd., a real estate consulting
company located in Hartford, CT. Mr. Clark received his B.S. from Bryant
College and his M.S. in Real Estate Development from Columbia University.

SAM HOOKER. Sam Hooker, age 34, is a Senior Vice President of the Company.
Prior to joining the Company, Mr. Hooker was Senior Vice President of Harbor
Financial, responsible for the origination of debt and equity investments for
third-party investors and client relations for the mortgage banking company's
California operation. Harbor Financial purchased MIG Financial Corp. in May,
1997, where Mr. Hooker had served since 1995 as Senior Vice President
reporting to the President on strategic initiatives involving the purchase of
a mortgage banking company, the sale of subsidiary company and large loan
transactions. From 1987 through 1995, Mr. Hooker served as Vice President of
loan origination for MIG and the predecessor company, Norris, Beggs and
Simpson where he secured $1 billion in debt and equity investments for
institutional clients, such as John Hancock Mutual Life Insurance Company,
Copley Real Estate Advisors and New England Mutual Life. Mr. Hooker is a
graduate of the University of California--Berkeley.

MICHAEL MAGNER. Michael Magner, age 36, is a Senior Vice President of the
Company. Prior to joining the Company, Mr. Magner was responsible for
overseeing the structuring and underwriting of commercial whole loans and
portfolios for securitization within ING Capital's Real Estate Structured
Finance Group where he was employed from August through November 1997. Prior
to joining ING Capital, he was a Director as CIBC Wood Gundy from May, 1996 to
July, 1997 where he was responsible for coordination of the real estate
securitization program. The responsibilities included the review and approval
of all permanent transactions from origination offices in New York, Chicago
and Los Angeles to ensure proper underwriting, structuring and pricing and the
preparation of a real estate underwriting manual to ensure that all
underwriting requirements were standardized. Prior to joining CIBC Wood Gundy,
Mr. Magner was a Vice President in the Commercial Mortgage-Backed Securities
Group at Smith Barney where he was employed from October, 1995 through April,
1996. Prior to Smith Barney, Mr. Magner worked in the real estate group of
Travelers Insurance. Mr. Magner holds a B.S. degree in Management with a
concentration in finance from the University of Massachusetts at Boston.

JAMES MAGNANENZI. James A. Magnanenzi, age 49, is a Senior Vice President
and Midwest Regional Manager of Prime Capital. Prior to joining the company,
Mr. Magnanenzi was Vice President and Manager of the Midwest Real Estate
Lending office for Yasuda Trust--a Japanese Trust Bank. Mr. Magnanenzi
established

54
<PAGE>

the office in 1989, managed a staff of five and built a book of business
averaging $250 million over eight years. He also managed the Midwest Finance
office for CB Commercial representing 10 correspondents. Prior to that, he
worked for Northwestern Mutual Life for 15 years in capacities ranging from
asset management to loan production including permanent, construction and
structured joint venture financing. Mr. Magnanenzi graduated from the
University of Wisconsin with an M.S. in Real Estate.

JON RED. John Red, age 35, is a Senior Vice President of the Company. Before
joining the Company, Mr. Red was Vice President at ING Capital Corp. and was
responsible for originating loans of $5 to $50 million in the western United
States where he was employed from August, 1997 to December, 1997. Prior to
this, he was employed at ING Barings' Risk Management Department from
December, 1994 to July, 1997, where he managed equity investments made by the
Real Estate Structured Finance Group, trades in REITs, CMBs and Distressed
Real Estate Securities made by the Global Securities Investment Group and
commercial real estate loans made by the Dutch Relationship Department.
Previous experience includes six years as Vice President at National
Westminster Bank's Real Estate Finance and Leasing Departments. Mr. Red has a
B.A. from Hamilton College and an M.B.A. from New York University.

ROGER BAKER. Roger Baker, age 36, is a Senior Vice President and the
Controller of the Company. Prior to joining the Company, Mr. Baker held the
position of Vice President/Controller with Banyan Management Corp. and was
responsible for the company's start-up and ongoing accounting, financial
reporting, cash and payable activities as well as supervision of investor
relations. From 1986 through 1991 Mr. Baker was employed by VMS Realty
Partners where he held the position of Assistant Vice President/Accounting
Manager. From 1983 to 1986 he held various accounting positions with the
Equity Group in Chicago. Mr. Baker holds Bachelors of Business degrees in
Finance and Accounting from Western Illinois University.

VICTORIA CORY. Victoria Cory, age 34, is a Senior Vice President of the
Company. Prior to joining the Company, Ms. Cory previously held the position
of Senior Vice President of Operations and Loan Servicing/Administration at
YIG FInancial Corp. which sold to Harbor Financial since 1995. Ms. Cory was
also a member of the Investment Committee. Her responsibilities included the
review and approval of all mortgage investments, overseeing compliance of
investments and the establishment of loan servicing guidelines, and the
formulation and implementation of investment strategies with loan origination
officers in order to produce and close high quality mortgages within specified
investment parameters. She also wrote and implemented policies, procedures and
handled ongoing management of this group for both core and specialized
servicing. From 1989 through 1995 Ms. Cory held the position of Senior Vice
President with Travelers Insurance Company. Ms. Cory holds a B.S. degree in
Business Administration from San Francisco State University and a Paralegal
Certification.

ROXANE VENEZIANO. Roxane Veneziano, age 34, is a Vice President of the
Company. Prior to joining the company, she was an Associate Director at
Standard & Poor's in the Real Estate FInance group, where she analyzed various
large-loan and conduit real estate assets for securitization. She was emloyed
by The Travelers Group, Inc. from 1991 to 1996, most recently as an Assistant
Director in the New York Real Estate Investment office, where she managed a
$600 million real estate loan portfolio. Her previous responsibilities at
Travelers include real estate sales, real estate loan workouts and external
reporting responsibilities in the office of the Chief Investment Officer. Ms.
Veneziano spent several years as a senior cost accountant before entering the
real estate investment field. She holds a BS in Finance and an M.B.A. from the
University of Connecticut.

COMMITTEES OF THE BOARD OF DIRECTORS

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

55
<PAGE>

Executive Committee. The Bylaws of the Company permit the Board of Directors
of the Company to establish an Executive Committee. Subject to the Company's
conflicts of interest policies, the Executive Committee may be granted certain
authority to acquire and dispose of real property and the power to authorize,
on behalf of the full Board of Directors, the execution of certain contracts
and agreements, including those related to the borrowing of money by the
Company, and, consistent with the Partnership Agreement, to cause the
Operating Partnership to take such actions.

Executive Compensation Committee. At or about the Closing Date of the
Offering, the Board of Directors of the Company will establish an Executive
Compensation Committee to determine compensation for the Company's executive
officers and to implement and administer the Company's Stock Option Plan. The
Executive Compensation Committee will initially consist of two or more
Independent Directors.

ELECTION OF BOARD OF DIRECTORS; COMPENSATION

The Board of Directors has three classes of directors. The initial terms of
the first, second and third classes will expire in 1999, 2000 and 2001,
respectively. Directors for each class will be elected for a three-year term
upon the expiration of the initial term of that class. Subject to the right of
the holders of any Preferred Stock to elect and remove directors in certain
circumstances, the affirmative vote of two-thirds of the outstanding Common
Stock is required to remove a director and a director may be removed only for
cause. All officers serve at the discretion of the Board of Directors. The
Company currently does not have employees. The Company will pay an annual
director's fee to each Independent Director equal to $25,000, with no
additional fee to be paid for the first four meetings of the Board of
Directors. Each Independent Director will be paid a fee of $1,000 for each
additional meeting of the Board of Directors attended in person by such
Independent Director and a fee of $500 for each committee meeting of the Board
of Directors if such meeting is held via telephone and a fee of $1,000 if the
committee meeting is held on a separate day. All Directors will be reimbursed
for their costs and expenses in attending all meetings of the Board of
Directors.

Directors and executive officers of Prime Capital will be required to devote
only so much of their time to the Company's affairs as is necessary or
required for the effective conduct and operation of the Company's business.
However, in their capacities as officers or employees of the Company, they
will devote such portion of their time to the affairs of the Company as is
required for the performance of the duties of the Company.

The Charter and Bylaws of Prime Capital will provide that, except in the
case of a vacancy, the majority of the members of the Board of Directors will
at all times after the issuance of the shares offered hereby be Independent
Directors. Vacancies occurring on the Board of Directors among the Independent
Directors, unless filled at an annual meeting of stockholders, will be filled
by the vote of a majority of the directors, including a majority of the
remaining Independent Directors.

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<PAGE>

EXECUTIVE COMPENSATION

The Company was organized in September 1997, did not conduct any prior
operations and, accordingly, did not pay any compensation to its executive
officers for the year ended December 31, 1996. The following table sets forth
the total compensation actually paid for the year ended December 31, 1997 and
the annual base salary for the year ending December 31, 1998 that the Company
has established for the Chairman of the Board, the Chief Executive Officer and
the six other persons who are expected to be the most highly compensated
executive officers of the Company during 1998. Amounts which relate to periods
prior to March 13, 1998 reflect amounts paid to such individuals by PCH, which
employed such persons prior to the reorganization of the Company on that date,
as described under "Formation and Structure of the Company."

<TABLE>
<CAPTION>
ANNUAL
BASE OTHER ANNUAL
NAME TITLE YEAR SALARY($) BONUS ($)(1) COMPENSATION ($)
- ---- ----- ---- --------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Michael W. Reschke Chairman of the Board of Directors 1997 -0- -- --
1998 72,917(2)
James W. Roiter President and Chief 1997 162,500(3) -- --
Executive Officer 1998 368,750
Brenda J. Mixson Executive Vice President and 1997 16,666(4) -- --
Chief Financial and Investment Officer 1998 229,167 150,000
James Glasgow Executive Vice President and 1997 20,833(5) -- --
Chief Operating Officer 1998 250,000 50,000
Brian Clark Senior Vice President 1997 4,615(6) -- --
1998 150,000 25,000
Sam Hooker Senior Vice President 1997 18,029(7) -- --
1998 139,583
Michael Magner Senior Vice President 1997 12,500(8) -- --
1998 150,000 25,000
Jon Red Senior Vice President 1997 4,615(9) -- --
1998 150,000
</TABLE>
- ---------------------

(1) The 1998 bonus amount reflects only the amount of all bonuses paid to
date, and does not include additional bonus amounts that may be granted
pursuant to the Bonus Plan described below. See "--Bonus Plan."

(2) Mr. Reschke will commence employment with the Company on June 1, 1998.

(3) Mr. Roiter commenced employment with PCH, on July 1, 1997.

(4) Ms. Mixson commenced employment with PCH on December 1, 1997.

(5) Mr. Glasgow commenced employment with PCH on November 24, 1997.

(6) Mr. Clark commenced employment with PCH on December 15, 1997.

(7) Mr. Hooker commenced employment with PCH on November 10, 1997.

(8) Mr. Magner commenced employment with PCH on December 1, 1997.

(9) Mr. Red commenced employment with PCH on December 15, 1997.

EMPLOYMENT AGREEMENTS

The Company will enter employment agreements with each of the executive
officers named in the table above. These agreements provide that the executive
officers shall devote substantially all of their business time to the
operation of the Company, except Mr. Reschke, who shall only be required to
devote such time as he deems necessary to fulfill his duties and obligations
to the Company as Chairman of the Board and Mr. Roiter, who shall be required
to devote a majority of his business time to the operation of the Company. The
agreements establish the initial base salaries set forth in the table above
and provide for an initial term of three years, which, in the case of the
agreements of Mr. Reschke, Mr. Roiter, Ms. Mixson and Mr. Glasgow only, are
automatically

57
<PAGE>

extended for an additional year after expiration of the initial term and any
extension period unless either the Company provides the applicable officer
with at least six months prior written notice or the applicable officer
provides the Company with at least thirty days prior written notice, that such
term shall not be extended. The agreements also contain (i) an agreement not
to solicit, attempt to hire or hire any employee or client of the Company or
solicit any borrower of the Company for two years following termination of
employment.

The agreements also set forth the potential bonuses to which the executive
officers are entitled, which may include the right to receive a discretionary
bonus based on achievement of such corporate and individual goals and
objectives as may be established by the Board of Directors or the Executive
Compensation Committee (the "Compensation Committee"). See "--Bonus Plan."

BONUS PLAN

The Board of Directors of the Company may establish a Bonus Plan for
executive officers and other employees of the Company, which may provide for
discretionary bonuses based on achievement of such corporate and individual
goals as may be established by the Board of Directors or its Compensation
Committee.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Charter limits the liability of its directors and officers to Prime
Capital and its stockholders to the fullest extent permitted from time to time
by Maryland law. Maryland law presently permits the liability of directors and
officers to a corporation or its stockholders for money damages to be limited,
except (i) to the extent that it is proved that the director or officer
actually received an improper benefit or profit in money, property or services
for the amount of the benefit or profit in money, property or services
actually received, or (ii) if a judgment or other final adjudication is
entered in a proceeding based on a finding that the director's or officer's
action, or failure to act, was the result of active and deliberate dishonesty
and was material to the cause of action adjudicated in the proceeding. This
provision does not limit the ability of Prime Capital or its stockholders to
obtain other relief, such as an injunction or rescission.

The Charter and Bylaws require Prime Capital to indemnify and hold harmless
its present and former directors and officers to the fullest extent permitted
from time to time by Maryland law. The MGCL permits a corporation to indemnify
its directors, officers and certain other parties against judgments,
penalties, fines, settlements and reasonable expenses incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service to or at the request of the corporation, unless it is
established that (i) the act or omission of the indemnified party was material
to the matter giving rise to the proceeding and (x) was committed in bad faith
or (y) was the result of active and deliberate dishonesty, (ii) the
indemnified party actually received an improper personal benefit in money,
property or services or (iii) in the case of any criminal proceeding, the
indemnified party had reasonable cause to believe that the act or omission was
unlawful. Indemnification may be made against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by the director or
officer in connection with the proceeding. However, if the proceeding is one
by or in the right of the corporation, indemnification may not be made in
respect of any proceeding in which the director or officer is adjudged to be
liable to the corporation. The termination of any proceeding by conviction, or
upon a plea of nolo contendere or its equivalent, or an entry of any order of
probation prior to judgment, creates a rebuttal presumption that the director
or officer did not meet the requisite standard of conduct required for
indemnification to be permitted. The MGCL requires a corporation (unless its
Charter provides otherwise, which Prime Capital's Charter does not) to
indemnify a director or officer who has been successful, on the merits or
otherwise, in the defense of any proceeding to which he or she is made a party
by reason of service in that capacity. It is the position of the Commission
that indemnification of directors and officers for liabilities arising under
the Securities Act is against public policy and is unenforceable pursuant to
Section 14 of the Securities Act.

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<PAGE>

STOCK OPTION PLAN

The Company expects to establish a Stock Option Plan (the "Stock Option
Plan") for the purpose of attracting and retaining directors, executive
officers and other key employees. The Stock Option Plan will be administered
by the Compensation Committee and will permit the grant of stock options,
stock appreciation rights, restricted stock, restricted units and performance
units to officers and other key employees of the Company, its subsidiaries,
the Operating Partnership, and the Taxable Subsidiary. The Stock Option Plan
also permits the grant of stock options to nonemployee directors ("Independent
Directors"). Although the Stock Incentive Plan will permit the Compensation
Committee to grant a wide variety of awards, it does not obligate the
Compensation Committee to do so. The variety of awards authorized under the
Stock Option Plan is intended to give the Compensation Committee flexibility
to adapt the Company's compensation structure to changes in the business and
regulatory environment.

Under the Stock Option Plan, up to 1,520,161 shares of Common Stock may be
issued or transferred to Participants. The maximum aggregate number of shares
of Common Stock and Stock equivalent units that may be subject to awards
granted during any calendar year to any one participant under the Stock Option
Plan, regardless of the type of awards, will be . This limit will apply
regardless of whether such compensation is paid in Common Stock or in cash.

If any award is canceled, terminates, expires or lapses for any reason, any
Common Stock subject to such award will again be available for grant under the
Stock Option Plan, except that such Common Stock will still be counted for
purposes of the annual individual award limit described above. In the event of
any change in capitalization of the Company, such as a share split, or a
corporate transaction, such as a merger or consolidation or any
reorganization, or any partial or complete liquidation of the Company, an
adjustment may be made in the number and class of shares of Common Stock that
may be delivered under the Stock Option Plan, in the number and class of
and/or price of shares of Common Stock subject to outstanding awards, and in
the annual individual award limit set forth above, as may be determined to be
appropriate and equitable by the Compensation Committee to prevent dilution or
enlargement of rights.

The Compensation Committee is expected to grant options under the Share
Option Plan to purchase shares of Common Stock. The Compensation Committee may
grant "incentive stock options" (within the meaning of Section 422 of the
Code) and/or nonqualified stock options to employees of the Company and its
corporate subsidiaries. Other employees, including employees of the Operating
Partnership and the Taxable Subsidiary, and Independent Directors may only
receive nonqualified stock options. The exercise price of any option will be
at least equal to 100% of the fair market value of a share of Common Stock on
the date the option is granted. Each option will expire no later than the
tenth anniversary of the date of grant.

Upon completion of the Offering, the Compensation Committee is expected to
grant options to purchase Common Stock (the "Initial Grants") to certain key
officers and employees of the Company.

The Initial Grants are expected to vest, subject to certain conditions being
met, at a rate of 33.3% per year over three years commencing on the first
anniversary of their date of grant and will have a term of ten years. The
exercise price of options issued pursuant to the Initial Grants will be the
initial public offering price of the Common Stock. The exercise price for any
option is generally payable in cash or, in certain circumstances, by the
surrender, at the fair market value on the date on which the option is
exercised, of Common Stock.

All unvested options held by an optionee will automatically be forfeited if
the optionee leaves employment for any reason other than the optionee's death
or disability on or after the first anniversary of their date of grant. Upon a
"change in control" (as defined in the Stock Option Plan), all unvested
options will vest. The rights of any participants to exercise an option may
not be transferred in any way other than by will or applicable laws of descent
and distribution.

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<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the Offering (which are estimated to be
approximately $175,000,000 from the Common Stock Offering, approximately
$20,000,000 from the Private Placement and approximately $25,000,000 from the
Capital Contribution), after the deduction of underwriting discounts and
commissions applicable to the Common Stock offered hereby, are approximately
$207,750,000 ($232,163,000 if the Underwriter's over-allotment option is
exercised in full). The Company will use the net proceeds of the Offering to
acquire 9,825,269 GP Common Units (representing a 64.6% general partnership
interest in the Operating Partnership).

The Operating Partnership will use the funds it receives from the sale of GP
Common Units to the Company for an amount equal to the net proceeds of the
Offering after deduction of underwriting discounts and commissions (i) to
repay in full its existing warehouse facility through its investment in the
Taxable Subsidiary (approximately $59,844,000), which has a current interest
rate of approximately 6.687% and a maturity date of May 31, 1998; (ii) for
future acquisitions of Targeted Portfolio Investments and (iii) for working
capital.

If the Underwriter's over-allotment option with respect to the Common Stock
is exercised, the Company will use the proceeds from the exercise of the
option to acquire additional GP Common Units, and the Operating Partnership
will use the funds it receives from the Company for future acquisitions of
Targeted Portfolio Investments, working capital and general corporate
purposes. Until other Targeted Portfolio Investments are identified, the
balance of net proceeds of the Offering will be invested in readily marketable
securities, consistent with maintaining the Company's REIT qualification, or
in interest bearing deposit accounts. Investors should be aware that it may
take considerable time for the Company to find additional Targeted Portfolio
Investments, during which time a portion of the Company's assets may be
invested in relatively low yielding instruments. As a result, the Company's
earnings and dividends could be lower than expected. See "The Company."

DISTRIBUTION POLICY

In order to avoid federal corporate income taxation of the earnings that it
distributes, Prime Capital must distribute to its stockholders each tax year
an amount at least equal to (i) 95.0% of its REIT taxable income (determined
before the deduction for dividends paid and excluding any net capital gain)
plus (ii) 95.0% of the excess of its net income from foreclosure property over
the tax imposed on such income by the Code less (iii) any excess noncash
income (as determined under the Code). See "Federal Income Tax
Considerations." The actual amount and timing of distributions, however, will
be at the discretion of the Board of Directors and will depend upon the
financial condition of Prime Capital in addition to the requirements of the
Code. It is anticipated that the first distribution will be made in January
1999.

Subject to the distribution requirements referred to in the immediately
preceding paragraph, Prime Capital intends, to the extent practicable, to
invest substantially all of the principal from repayments, sales and
refinancings of the Company's Targeted Portfolio Investments in additional
Targeted Portfolio Investments. Prime Capital may, however, under certain
circumstances, make a distribution of principal. Such distributions, if any,
will be made at the discretion of the Board of Directors.

It is anticipated that distributions generally will be taxable as ordinary
income to non-exempt stockholders of Prime Capital, although a portion of such
distributions may be designated by Prime Capital as long-term capital gain or
may constitute a return of capital. Prime Capital will furnish annually to
each of its stockholders a statement setting forth distributions paid during
the preceding year and their federal income tax status. For a

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<PAGE>

discussion of the federal income tax treatment of distributions by Prime
Capital, the impact of the accrual of taxable income in excess of cash flow
arising from OID investments, Distressed Mortgage Loans and certain other
investments and certain adverse tax consequences for stockholders associated
with Non-REMIC and REMIC Residual Interests held by the Company, see "Federal
Income Tax Considerations--Taxation of Prime Capital" and "--Taxation of
Taxable U.S. Stockholders."

DILUTION

Purchasers of the Common Stock offered hereby will experience an immediate
and substantial dilution in the pro forma net tangible book value of the
Common Stock from the Offering Price. Net tangible book value per share
represents the Company's total tangible assets less total liabilities divided
by the total number of shares of Common Stock outstanding. After further
giving effect to the sale by the Company of the 8,750,000 shares of Common
Stock to be sold by the Company in the Offering (after deducting underwriting
discounts and commissions and estimated expenses of the Offering to be paid by
the Company), and the application of the net proceeds as set forth for planned
repayments of indebtedness, the Company's as adjusted pro forma net tangible
book value per share of Common Stock as of March 31, 1998 would have been
$15.20, representing an immediate increase of $4.93 in pro forma net tangible
book value per share to existing shareholders and an immediate dilution of
$4.80 per share to persons purchasing shares in the Common Stock Offering. The
following table illustrates this dilution per share of Common Stock:

<TABLE>
<S> <C> <C>
Initial public offering price(1)................................ $20.00
Pro forma net tangible book value before the Common
Stock Offering(2)..................................... $10.27
Increase in pro forma net tangible book value
attributable to the Offering(3)....................... 4.93
------
Pro forma net tangible book value after the Common Stock
Offering(4).................................................... 15.20
------
Dilution to new investors(5).................................... $ 4.80
======
</TABLE>
- ---------------------

(1) Before deducting the underwriting discounts and commissions and estimated
expenses of the Offering.

(2) Pro forma net tangible book value before the Offering is determined by
dividing the Company's combined net tangible book value of approximately
$13.8 million at March 31, 1998 by 1.344 million shares of Common Stock
issued to PCH (assuming a one for one conversion of LP Common Units for
Common Stock).

(3) Based upon the Offering Price after the deduction of the underwriting
discounts and commissions and estimated expenses of the Offering.

(4) Pro forma net tangible book value after the Offering is determined by
dividing the Company's consolidated net tangible book value of
approximately $149.3 by 9.8 million shares of Common Stock outstanding.

(5) Dilution is determined by subtracting pro forma net tangible book value
after giving effect to the Offering from the Offering Price paid by a new
investor for a share of Common Stock.

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<PAGE>

The following table sets forth the total contributions to be paid to the
Company by purchasers of Common Stock sold in the Offering, the number of
Common Units to be issued and the net tangible book value as of March 31, 1998
of the average contribution per share based on total contributions.

<TABLE>
<CAPTION>
BOOK VALUE OF
COMMON STOCK/ BOOK VALUE OF AVERAGE
COMMON UNITS TOTAL CONTRIBUTIONS
ISSUED(1) CONTRIBUTIONS PER COMMON
--------------------- ------------------- STOCK OR
AMOUNT PERCENT AMOUNT PERCENT COMMON UNIT
---------- ------- -------- ------- -------------
(IN 000'S)
<S> <C> <C> <C> <C> <C>
Common Stock sold by the
Company in the
Offering............... 8,750,000 57.6% $162,750 75.0% $18.60
Common Stock sold to FBR
in the Private
Placement.............. 1,075,269 7.1 20,000 9.2 $18.60
Common Units acquired by
PCH(1)................. 5,376,344(3) 35.3 34,151(2) 15.8 $6.35
---------- ---- -------- ----
Total............... 15,201,613 100% $216,901 100%
========== ==== ======== ====
</TABLE>
- ---------------------

(1) Includes LP Common Units exchangeable into Common Stock or, at the option
of the Company, cash. See "Structure and Formation of the Company."

(2) Based upon the March 31, 1998 book value of the minority interest of the
Operating Partnership, the Capital Contribution of $25.0 million by PCH,
and the proceeds of the note receivable from PCH of $10.0 million (which
had previously reduced reported minority interest), less $14.8 million
attributable to underwriting discounts and commissions and estimated
expenses of the Offering.

(3) Represents the 4.03 million LP Common Units received from the conversion
of PCH's limited partnership interests in the Operating Partnership
concurrently with the closing of the Offering and the 1.35 million LP
Common Units received by PCH as a result of the Capital Contribution.

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<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Prime Capital was organized on September 19, 1997 and through March 31, 1998
its primary activity has consisted of the organization of the Company. See the
financial statements located elsewhere in this Prospectus.

Liquidity and Capital Resources. Prime Capital has been organized and will
elect to qualify as a REIT under the Code and, as such, anticipates
distributing annually at least 95.0% of its taxable income, subject to certain
adjustments. Cash for such distributions is expected to be generated from the
Company's operations, although the Company also may borrow funds to make
distributions. The Company's revenues will be derived from (i) ownership of
Mortgage Loans; (ii) ownership of Preferred Equity; (iii) ownership of Net
Leased Real Estate; (iv) ownership of MBS; (v) other real estate related
assets and (vi) ownership of 100% of the preferred stock of the Taxable
Subsidiary. See "Distribution Policy" and "Federal Income Tax Considerations."

The principal sources of the Company's funds in the near term will be the
net proceeds of the Offering, the issuance of non-REMIC CMOs, reverse
repurchase agreements, borrowings under lines of credit to be arranged on
behalf of the Company, additional bank borrowings, commercial paper
borrowings, mortgage loans on the Company's real estate, sales of mortgage
loans to the Taxable Subsidiary for securitization, and future equity
offerings.

The net proceeds of the Offering initially will be invested in readily
marketable securities. Management of the Company believes that the net
proceeds of the Offering, combined with the cash flow from operations and
borrowings, will be sufficient to enable the Company to meet its anticipated
liquidity and capital requirements. See "The Company" and "Use of Proceeds."

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<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company (based upon
historical financial statements) as of March 31, 1998 and on a pro forma basis
for the Company after giving effect to the Offering and the use of the net
proceeds from the Offering as described under "Use of Proceeds." See the
historical and pro forma financial information relating to the Company set
forth elsewhere in the Prospectus.

<TABLE>
<CAPTION>
PRO
HISTORICAL(2) FORMA(1)
------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Minority interest................................. $13,812 $ 81,583
Stockholders' equity:
Preferred Stock, par value $0.01
Authorized--30,000,000 shares
Outstanding--0 shares, 0 shares as adjusted..... -- --
Common Stock, par value $0.01
Authorized--200,000,000 shares
Outstanding--100 shares, 9,825,269 shares, as
adjusted....................................... -- 98
Additional Paid-in Capital........................ 1 148,976
------- --------
Total Stockholders' equity...................... 1 149,074
------- --------
Total capitalization.......................... $13,813 $230,657
======= ========
</TABLE>
- ---------------------

(1) Assumes no exercise of the Underwriter's over-allotment option to purchase
up to an additional 1,312,500 shares of Common Stock. Does not include
1,520,161 shares of Common Stock reserved for issuance under the Stock
Option Plan and up to 228,024 shares of Common Stock (247,712 shares of
Common Stock if the Underwriter's over-allotment option is exercised in
full) issuable pursuant to a warrant granted to the Underwriter and up to
152,016 shares of Common Stock (165,141 shares of Common Stock if the
Underwriter's over-allotment option is exercised in full) issuable
pursuant to a warrant granted to FBR Asset Investment Corporation.

(2) Assumes the Company consolidates the Operating Partnership for reporting
purposes.

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<PAGE>

PRINCIPAL STOCKHOLDERS OF PRIME CAPITAL

The following table sets forth certain information regarding the beneficial
ownership of the Common Stock and the Common Units immediately following the
consummation of the Offering, by (a) each person known by the Company to be
the beneficial owner of more than 5.0% of the Common Stock or the Common
Units, (b) each director of the Company, (c) each executive officer of the
Company, and (d) all directors and executive officers of the Company as a
group. Unless otherwise indicated in the footnotes, all of such interests are
owned directly, and the indicated person or entity has sole voting and
investment power. The number of shares represents the number of shares of
Common Stock the person holds or the number of shares of Common Stock issuable
upon conversion of the Common Units held by the person. The extent to which a
person holds Common Units as opposed to shares of Common Stock is set forth in
the notes to the following table. The Company's Charter and Bylaws provide
that holders of Common Units may cause such units to be redeemed, subject to
certain limitations and only after the first year following completion of the
Offering, for cash equal to the fair market value of a share of Common Stock
at the time of exchange or, at the option of the Company, Common Stock on a
one-for-one basis.

<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMMON STOCK/ PERCENTAGE OF PERCENTAGE OF ALL
COMMON UNITS ALL COMMON STOCK/
NAME BENEFICIALLY OWNED COMMON STOCK (1) COMMON UNITS (2)
- ---- ------------------ ---------------- -----------------
<S> <C> <C> <C>
Prime Capital Holding,
LLC(3).................. 5,376,344 0% 35.4%
FBR Asset Investment
Corporation(4).......... 1,075,269 10.9% 7.1%
The Prime Group, Inc.(5). 5,376,344 0% 35.4%
Michael W. Reschke(6).... 5,376,344 0% 35.4%
James W. Roiter(7)....... 5,376,344 0% 35.4%
All directors and
executive officers of
the Company (2 persons). 5,376,344 0% 35.4%
</TABLE>
- ---------------------

(1) Excludes conversion of LP Common Units owned by such beneficial owner into
shares of Common Stock on a one for one basis, options granted under the
Stock Option Plan and the warrants issued to the Underwriter and FBR Asset
Investment Corporation.

(2) Assumes conversion of all LP Common Units owned by such beneficial owner
into shares of Common Stock on a one for one basis and excludes options
granted under the Stock Option Plan and the warrants issued to the
Underwriter and FBR Asset Investment Corporation.

(3) Represents 1,344,086 LP Common Units received by PCH in exchange for the
Capital Contribution by PCH, 4,032,258 LP Common Units received by PCH at
the time of the Offering in exchange for PCH's limited partnership
interests in the Operating Partnership.

(4) Represents 1,075,268 shares of Common Stock to be acquired by FBR Asset
Investment Corporation in the Private Placement and excludes 152,016
shares of Common Stock (165,141 shares of Common Stock if the
Underwriter's over-allotment option is exercised in full) issuable upon
the exercise in full of the FBR Warrant.

(5) Represents 5,376,344 Common Units owned by PCH.

(6) Represents 5,376,344 Common Units owned by PCH.

(7) Represents 5,376,344 Common Units owned by PCH.

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<PAGE>

DESCRIPTION OF CAPITAL STOCK

The Company was incorporated under the laws of the State of Maryland. Rights
of stockholders are governed by the MGCL and by the Charter and Bylaws. The
following summary of the terms of the shares of capital stock of the Company
does not purport to be complete and is subject to and qualified in its
entirety by reference to the Charter and Bylaws, forms of which are filed as
exhibits to the Registration Statement of which this Prospectus is a part.
Immediately prior to the closing of the Offering, the Company will amend and
restate its Charter to authorize the capitalization described below.

AUTHORIZED SHARES

The Charter provides that the Company may issue up to 200,000,000 shares of
Common Stock, par value $0.01 per share, 65,000,000 shares of Excess Shares,
par value $0.01 per share ("Excess Shares"), and 30,000,000 shares of
Preferred Stock, par value $0.01 per share. Excess Shares are to be issued
automatically upon any automatic conversion of shares of Common Stock or
Preferred Stock which are purported to be held, transferred or acquired by any
person in violation of the ownership limitations contained in the Charter. See
"--Restrictions on Ownership and Transfer." As of September 24, 1997, in
connection with the formation of the Company, 100 shares of Common Stock were
issued to Mr. Reschke and are outstanding. Upon completion of the Offering,
there will be 9,825,268 shares of Common Stock issued and outstanding,
excluding 1,312,500 shares which are subject to the Underwriter's over-
allotment option, and 5,376,344 LP Common Units issued and outstanding.

COMMON STOCK

All outstanding shares of Common Stock offered hereby will be duly
authorized, fully paid and nonassessable upon the Closing. Subject to the
preferential rights of any other shares or series of shares of capital stock,
holders of Common Stock are entitled to receive non-cumulative dividends if
and when authorized and declared by the Board of Directors of Prime Capital
out of assets legally available therefor and to share ratably in the assets of
Prime Capital legally available for distribution to its stockholders in the
event of its liquidation, dissolution or winding-up after payment of, or
adequate provision for, all known debts and liabilities of Prime Capital.
Prime Capital intends to pay quarterly dividends.

Each outstanding share of Common Stock entitles the holder to one vote on
all matters submitted to a vote of stockholders, including the election of
directors, and, except as otherwise required by law or except as provided with
respect to any other class or series of shares of capital stock, the holders
of Common Stock will possess the exclusive voting power. There is no
cumulative voting in the election of directors, which means in all elections
of directors, each holder of Common Stock has the right to cast one vote for
each share of stock for each candidate. For a discussion of the voting rights
of holders of the Common Stock, including the provisions specifying the vote
required by security holders to take action, see "Certain Provisions of
Maryland Law and of Prime Capital's Charter and Bylaws."

No holder of any Common Stock shall have any preemptive right to subscribe
for or purchase any stock or other securities of Prime Capital other than
such, if any, as the Board of Directors, in its sole discretion, may
determine.

Certain provisions of Prime Capital's Charter and Bylaws and certain
provisions of Maryland law could have the effect of delaying, deferring or
preventing a change in control of Prime Capital. See "Certain Provisions of
Maryland Law and of Prime Capital's Charter and Bylaws."

REGISTRATION RIGHTS

The Company has granted FBR Asset Investment Corporation, an Affiliate of
the Underwriter, certain "demand" and "piggyback" registration rights with
respect to shares of Common Stock acquired by it upon the exercise of the FBR
Warrant. Subject to certain conditions, such demand registration rights permit
holders of

66
<PAGE>

such shares to request one demand registration. Subject to certain conditions,
such piggyback registration rights permit the holders of such shares to
include their shares of Common Stock in the registration by the Company of its
equity securities other than in connection with the registration by the
Company under the Securities Act of any of its securities (i) pursuant to a
shelf registration statement, (ii) in connection with mergers or acquisitions
or (iii) in connection with an employee benefit, share dividend, share
ownership or dividend reinvestment plan.

SHARES OF PREFERRED STOCK

Shares of Preferred Stock may be issued from time to time, in one or more
series, as authorized by the Board of Directors without the approval of the
Company's stockholders. No shares of Preferred Stock are currently issued or
outstanding. Prior to the issuance of shares of each series of Preferred
Stock, the Board of Directors is required by the MGCL and the Charter to fix
for each series the terms, preferences, conversion or other rights, voting
powers, restrictions, limitations as to distributions, qualifications and
terms or conditions of redemption, as permitted by Maryland law. Because the
Board of Directors has the power to establish the preferences and rights of
each class or series of Preferred Stock, the Board of Directors may afford the
holders of any series or class of Preferred Stock preferences, powers and
rights, voting or otherwise, senior to the rights of the holders of Common
Stock. The Board of Directors could authorize the issuance of Preferred Stock
with terms and conditions which could have the effect of discouraging a
takeover or other transaction which holders of some, or a majority, of the
shares of Common Stock might believe to be in their best interests or in which
holders of some, or a majority, of the shares of Common Stock might receive a
premium for their shares of Common Stock over the then market price of such
shares of Common Stock. The Board of Directors has no present plans to issue
any additional series of Preferred Stock.

RESTRICTIONS ON TRANSFER

For Prime Capital to qualify as a REIT under the Code, it must meet certain
requirements concerning the ownership of its outstanding shares of capital
stock. Specifically, not more than 50.0% in value of Prime Capital's
outstanding capital stock may be owned, directly or indirectly, by five or
fewer individuals (as defined in the Code to include certain entities) during
the last half of a taxable year (other than its first REIT taxable year), and
Prime Capital must be beneficially owned by 100 or more persons during at
least 335 days of a taxable year of 12 months or during a proportionate part
of a shorter taxable year (other than its first REIT taxable year). In
addition, if Prime Capital, or an owner of 10.0% or more of Prime Capital,
actually or constructively owns 10.0% or more of a tenant of Prime Capital (or
a tenant of any partnership in which Prime Capital is a partner), the rent
received by Prime Capital (either directly or through any such partnership)
from such tenant will not be qualifying income for purposes of the REIT gross
income tests of the Code. See "Federal Income Tax Considerations--Requirements
for Qualification."

Because Prime Capital expects to qualify as a REIT, the Charter contains
restrictions on the ownership and transfer of both Common Stock and Preferred
Stock which are intended to assist Prime Capital in complying with these
requirements. The Ownership Limit set forth in the Charter provides that,
subject to certain specified exceptions, no person or entity other than PCH
and FBR Asset Investment Corporation may own, or be deemed to own by virtue of
the applicable constructive ownership provisions of the Code, more than (i)
9.9% of the number of outstanding shares of Common Stock or (ii) 9.9% of the
number of outstanding shares of Preferred Stock of any class or series (the
"Ownership Limit"). The constructive ownership rules of the Code are complex,
and may cause Common Stock or Preferred Stock owned actually or constructively
by a group of related individuals and/or entities to be deemed to be
constructively owned by one individual or entity. As a result, the acquisition
of Common Stock in an amount less than the Ownership Limit (or the acquisition
of an interest in an entity that owns, actually or constructively, Common
Stock or Preferred Stock) by an individual or entity, could, nevertheless
cause that individual or entity, or another individual or entity, to be deemed
to own constructively Common Stock or Preferred Stock in excess of the
Ownership Limit, or such other limit as provided in the Charter or as
otherwise permitted by the Board of Directors. Pension plans and mutual funds
are among the

67
<PAGE>

entities that are not treated as holders of stock under the "five or fewer
requirement" and instead the beneficial owners of such entities are counted as
holders of stock for this purpose. The Board of Directors may, but in no event
will be required to, waive the Ownership Limit or such other limit as provided
in the Charter, as applicable, with respect to a particular stockholder if it
determines that such ownership will not jeopardize Prime Capital's status as a
REIT and the Board of Directors otherwise decides such action would be in the
best interest of Prime Capital. As a condition of such waiver, the Board of
Directors may require a ruling from the IRS or an opinion of counsel
satisfactory to it and/or undertakings or representations from the applicant
with respect to preserving the REIT status of Prime Capital. The Board of
Directors has waived the Ownership Limit for FBR Asset Investment Corporation,
which may own up to 10.9% of the Common Stock.

Subject to certain exceptions described below, the Charter further prohibits
any purported transfer of shares of Common Stock or Preferred Stock that would
(i) result in any person owning, directly or indirectly, shares of Common
Stock or Preferred Stock in excess of the Ownership Limit, (ii) result in the
shares of Common Stock and Preferred Stock, collectively, being owned by fewer
than 100 persons (determined without reference to any rules of attribution),
(iii) result in Prime Capital being "closely held" within the meaning of
section 856(h) of the Code, or (iv) cause Prime Capital to own, actually or
constructively, 10.0% or more of the ownership interests in a tenant of the
Company's real property, within the meaning of section 856(d)(2)(B) of the
Code. Any person who acquires or attempts or intends to acquire actual or
constructive ownership of shares of Common Stock of Prime Capital that will or
may violate any of the foregoing restrictions on transferability of ownership
is required to give notice immediately to Prime Capital and provide Prime
Capital with such other information as Prime Capital may request in order to
determine the effect of such transfer on Prime Capital's status as a REIT.

Pursuant to the Charter, if any purported transfer of Common Stock or
Preferred Stock of Prime Capital or any other event would otherwise result in
any person violating the Ownership Limit or such other limit as provided in
the Charter, as applicable, then any such purported transfer will be void and
of no force or effect with respect to the purported transferee (the
"Prohibited Transferee") as to that number of shares in excess of the
Ownership Limit or such other limit as provided in the Charter, as applicable,
and the Prohibited Transferee shall acquire no right or interest (or, in the
case of any event other than a purported transfer, the person or entity
holding record title to any such shares in excess of the Ownership Limit or
such other limit as provided in the Charter, as applicable (the "Prohibited
Owner") shall cease to own any right or interest) in such excess shares. Any
such excess shares described above will automatically become an equal number
of Excess Shares (the "Shares-in-Trust") and be transferred automatically, by
operation of law, to a trust (the "Share Trust"), the beneficiary of which
will be a qualified charitable organization selected by Prime Capital (the
"Beneficiary"). Such automatic transfer shall be deemed to be effective as of
the close of business on the business day prior to the date of such violative
transfer. Within 20 days of receiving notice from Prime Capital of the
transfer of shares to the Share Trust, the trustee of the Share Trust (who
shall be designated by Prime Capital and be unaffiliated with Prime Capital or
any Prohibited Transferee or Prohibited Owner) will be required to sell such
Shares-in-Trust to a person or entity who could own such shares without
violating the Ownership Limit, or such other limit as provided in the Charter,
and distribute to the Prohibited Transferee an amount equal to the lesser of
the price paid by the Prohibited Transferee for such Shares-in-Trust or the
sales proceeds received by the Share Trust for such Shares-in-Trust. In the
case of any Shares-in-Trust issued as a result of any event other than a
transfer, or from a transfer for no consideration (such as a gift), the
trustee will be required to sell such Shares-in-Trust to a qualified person or
entity and distribute to the Prohibited Owner an amount equal to the lesser of
the Market Price (as defined in the Charter) of such Shares-in-Trust as of the
date of such event or the sales proceeds received by the trust for such
Shares-in-Trust. In either case, any proceeds in excess of the amount
distributable to the Prohibited Transferee or Prohibited Owner, as applicable,
will be distributed to the Beneficiary. Prior to a sale of any such Shares-in-
Trust by the Share Trust, the trustee will be entitled to receive, in trust
for the Beneficiary, all dividends and other distributions paid by Prime
Capital with respect to such Shares-in-Trust, and also will be entitled to
exercise all voting rights with respect to such Shares-in-Trust. Subject to
Maryland law, effective as of the date that such Shares-in-Trust have been
transferred to the Share Trust, the trustee shall have the authority (at the
trustee's sole discretion) (i) to rescind as void any vote cast by a
Prohibited Transferee or Prohibited Owner, as applicable, prior to the
discovery by Prime Capital that such Shares-in-Trust have been

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transferred to the Share Trust and (ii) to recast such vote in accordance with
the desires of the trustee acting for the benefit of the Beneficiary. However,
if Prime Capital has already taken irreversible trust action, then the trustee
shall not have the authority to rescind and recast such vote. Any dividend or
other distribution paid to the Prohibited Transferee or Prohibited Owner
(prior to the discovery by Prime Capital that such Shares-in-Trust have been
automatically transferred to the Share Trust as described above) will be
required to be repaid to the trustee upon demand for distribution to the
Beneficiary, and any dividend declared but unpaid shall be rescinded. In the
event that the transfer to the Share Trust as described above is not
automatically effective (for any reason) to prevent violation of the Ownership
Limit or such other limit as provided in the Charter, then the Charter
provides that the transfer of the Common Stock or Preferred Stock in excess of
the Ownership Limit will be void.

In addition, Shares-in-Trust held in the Share Trust shall be deemed to have
been offered for sale to Prime Capital, or its designee, at a price per share
equal to the lesser of (i) the price per share in the transaction that
resulted in such transfer to the Share Trust (or in the case of a devise or
gift, the Market Price at the time of such devise or gift) and (ii) the Market
Price on the date Prime Capital, or its designee, accepts such offer. Prime
Capital shall have the right to accept such offer until the trustee has sold
the Shares-in-Trust. Upon such a sale to Prime Capital, the interest of the
Beneficiary in the Shares-in-Trust sold shall terminate and the trustee shall
distribute the net proceeds of the sale to the Prohibited Transferee or
Prohibited Owner.

If any purported transfer of Common Stock or Preferred Stock would cause
Prime Capital to be beneficially owned by fewer than 100 persons, such
transfer will be null and void in its entirety and the intended transferee
will acquire no rights to Common Stock or Preferred Stock.

The foregoing restrictions on transferability and ownership will not apply
if the Board of Directors determines that it is no longer in the best interest
of Prime Capital to attempt to qualify, or to continue to qualify, as a REIT
and such determination is approved by an affirmative vote of two-thirds of the
votes entitled to be cast on such matter at a regular or special meeting of
the shareholders of Prime Capital. Except as otherwise described above, any
change in the Ownership Limit would require an amendment to the Charter.
Amendments to the Charter require the affirmative vote of holders owning at
least two-thirds of the shares of the Common Stock of Prime Capital
outstanding and entitled to vote thereon.

All certificates representing shares of Common Stock of Prime Capital will
bear a legend referring to the restrictions described above.

If the foregoing transfer restrictions are determined to be void or invalid
by virtue of any legal decision, statute, rule or regulation, then the
intended transferee of any Excess Shares may be deemed, at the option of Prime
Capital to have acted as agent on behalf of Prime Capital in acquiring such
Excess Shares and to hold such Excess Shares on behalf of Prime Capital.

Under the Charter, every owner of more than 5.0% (or such lower percentage
as required by the Code or the income tax regulations promulgated under the
Code (the "Treasury Regulations") of the outstanding Common Stock or Preferred
Stock must file a written notice with Prime Capital containing information
regarding their ownership of such shares, as set forth in the Treasury
Regulations. Under current Treasury Regulations, the percentage will be set
between one-half of 1.0% and 5.0%, depending upon the number of record holders
of Prime Capital's shares. Further, each stockholder shall upon demand be
required to disclose to Prime Capital in writing such information as Prime
Capital may request in order to determine the effect, if any, of such
stockholder's actual and constructive ownership of Common Stock or Preferred
Stock on Prime Capital's status as a REIT.

The foregoing ownership limitations may have the effect of precluding
acquisition of control of Prime Capital without the consent of the Board of
Directors and, consequently, stockholders may be unable to realize a premium
for their shares over the then-prevailing market price which is customarily
associated with such acquisitions and to ensure compliance with the Ownership
Limit, or such other limit as provided in the Charter.

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DIVIDEND REINVESTMENT PLAN

Prime Capital may implement a dividend reinvestment plan whereby
stockholders may automatically reinvest their dividends in Prime Capital's
Common Stock. Details about any such plan would be sent to Prime Capital's
stockholders following adoption thereof by the Board of Directors.

REPORTS TO STOCKHOLDERS

Prime Capital will furnish its stockholders with annual reports containing
information regarding the business and performance of the Company, including
audited financial statements certified by independent public accountants and
distribute quarterly reports containing unaudited financial information for
each of the first three quarters of the year.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is LaSalle National
Bank.

LISTING OF THE COMMON STOCK

The Company intends to apply for listing on The New York Stock Exchange
under the symbol " ".

CERTAIN PROVISIONS OF MARYLAND LAW AND

OF PRIME CAPITAL'S CHARTER AND BYLAWS

The following summary of certain provisions of Maryland law and of the
Charter and Bylaws of Prime Capital does not purport to be complete and is
subject to and qualified in its entirety by reference to Maryland law and the
Charter and Bylaws of Prime Capital. Certain provisions of Maryland law and
the Charter and Bylaws are described in "Risk Factors" beginning on page 14 in
this Prospectus.

CLASSIFICATION OF THE BOARD OF DIRECTORS

The Charter provides that the number of directors of Prime Capital shall be
three, but may be increased or decreased pursuant to the Bylaws but shall not
be less than the minimum number required by the MGCL. Any vacancy (other than
a vacancy created by stockholders' removal of a director) will be filled, at
any regular meeting or at any special meeting called for that purpose, by a
majority of the remaining directors, or in the case of a vacancy resulting
from an increase in the number of directors, by a majority of the entire Board
of Directors.

Pursuant to the terms of the Charter, the directors are divided into three
classes as nearly equal in size as practicable (except for directors elected
by a series of Preferred Stock, if any). One class will hold office initially
for a term expiring at the annual meeting of stockholders to be held in 1999,
another class will hold office initially for a term expiring at the annual
meeting of stockholders to be held in 2000 and another class will hold office
initially for a term expiring at the annual meeting of stockholders to be held
in 2001. As the term of each class expires, directors in that class will be
elected for a term of three years and until their successors are duly elected
and qualified, and the directors in the other two classes will continue in
office. Prime Capital believes that classification of the Board of Directors
will help to assure the continuity and stability of the Prime Capital business
strategies and policies as determined by the Board of Directors.

The classified director provision could have the effect of making the
removal of incumbent directors more time-consuming and difficult, which could
discourage a third party from making a tender offer or otherwise attempting to
obtain control of Prime Capital, even though such an attempt might be
beneficial to Prime Capital and its stockholders. At least two annual meetings
of stockholders, instead of one, will generally be required to effect a change
in a majority of the Board of Directors. Thus, the classified board provision
could increase the

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likelihood that incumbent directors will retain their positions. Holders of
Common Stock will have no right to cumulative voting for the election of
directors. Consequently, at each annual meeting of stockholders, the holders
of a majority of the shares of Common Stock will be able to elect all of the
successors of the class of director whose term expires at that meeting.

REMOVAL OF DIRECTORS

While the Bylaws and the MGCL empower the stockholders to fill vacancies in
the Board of Directors that are caused by the removal of a director, the
Charter and the MGCL provide that a director may be removed only for cause and
only by the affirmative vote of at least a majority of the votes then entitled
to be cast in the election of directors. Under the MGCL, the term "cause" is
not defined and is, therefore, subject to Maryland common law and to judicial
interpretation and review in the context of the unique facts and circumstances
of any particular situation.

BUSINESS COMBINATIONS

Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between the Company and
any Interested Stockholder or an affiliate thereof are prohibited for five
years after the most recent date on which the Interested Stockholder became an
Interested Stockholder. Thereafter, any such business combination must be
recommended by the Board of Directors and approved by the affirmative vote of
at least (a) 80% of the votes entitled to be cast by holders of outstanding
voting shares of the Company's voting stock and (b) two-thirds of the votes
entitled to be cast by holders of outstanding voting shares of the Company's
voting stock other than shares held by the Interested Stockholder with whom
(or with whose Affiliate) the business combination is to be effected, unless,
among other things, the Company's stockholders receive a minimum price (as
defined in the MGCL) for their shares of stock and the consideration is
received in cash or in the same form as previously paid by the Interested
Stockholder for its shares. These provisions of the MGCL do not apply,
however, to business combinations that are approved or exempted by the board
of directors of the corporation prior to the time that the Interested
Stockholder becomes an Interested Stockholder. As permitted by the MGCL, the
Board of Directors of the Company has opted out of the business combinations
provisions of the MGCL with respect to any business combinations involving PGI
or any of its Affiliates (including PCH and Mr. Reschke).

CONTROL SHARE ACQUISITIONS

The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the
matter, excluding shares of stock owned by the acquiror or by officers or
directors who are employees of the corporation. "Control Shares" are voting
shares of stock which, if aggregated with all other such shares of stock
previously acquired by the acquiror, or in respect of which the acquiror is
able to exercise or direct the exercise of voting power (except solely by
revocable proxy), would entitle the acquiror to exercise voting power in
electing directors within one of the following ranges of voting power: (i)
one-fifth or more but less than one-third, (ii) one-third or more but less
than a majority, or (iii) a majority of all voting power. Control Shares do
not include shares of stock the acquiring person is then entitled to vote as a
result of having previously obtained stockholder approval. A "control share
acquisition" means the acquisition of Control Shares, subject to certain
exceptions.

A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the Board of Directors to call a special meeting of stockholders to
be held within 50 days of demand to consider the voting rights of the shares.
If no request for a meeting is made, the corporation may itself present the
question at any stockholders' meeting.

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If voting rights are not approved at the stockholders' meeting or if the
acquiring person does not deliver an acquiring person statement as required by
the MGCL, then, subject to certain conditions and limitations, the corporation
may redeem any or all of the Control Shares (except those for which voting
rights have previously been approved) for fair value determined, without
regard to the absence of voting rights for the Control Shares, as of the date
of the last control share acquisition by the acquiror or of any meeting of
stockholders at which the voting rights of such shares of stock are considered
and not approved. If voting rights for Control Shares are approved at a
stockholders' meeting and the acquiror becomes entitled to vote a majority of
the shares of stock entitled to vote, all other stockholders may exercise
appraisal rights. The fair value of the shares of stock as determined for
purposes of such appraisal rights may not be less than the highest price per
share paid by the acquiror in the control share acquisition, and certain
limitations and restrictions otherwise applicable to the exercise of
dissenters' rights do not apply in the context of a control share acquisition.

The control share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if the corporation is a party to the
transaction or to acquisitions approved or exempted by the corporation's
charter or bylaws.

Prime Capital's Bylaws contain a provision exempting from the control shares
acquisition statute any and all acquisitions by any person of the Prime
Capital shares of stock. There can be no assurance that such provision will
not be amended or eliminated by the Board of Directors at any point in the
future.

If the foregoing exemption in the Bylaws is rescinded, the control shares
acquisition statute could have the effect of discouraging offers to acquire
Prime Capital and of increasing the difficulty of consummating any such offer.

AMENDMENT TO THE CHARTER AND BYLAWS

Prime Capital reserves the right from time to time to make any amendment to
its Charter now or hereafter authorized by law, including any amendments which
alter the contract rights as expressly set forth in the Charter of any shares
of outstanding stock, provided that no such amendment which changes the terms
or contract rights of any of its outstanding stock shall be valid unless such
amendment shall have been authorized by not less than a majority of the
outstanding shares entitled to vote thereon. The Charter provides that
provisions relating to Prime Capital's election to be taxed as a REIT,
approval of certain matters by the Independent Directors, dissolution of the
Company and certain restrictions on the transferability of Common Stock or
Preferred Stock cannot be amended without the affirmative vote of at least
two-thirds of all of the votes ordinarily entitled to be cast in the election
of Directors voting together as a single class. The Bylaws may be amended by a
majority of the Board of Directors or by the affirmative vote of at least two-
thirds of all of the votes ordinarily entitled to be cast in the election of
Directors voting together as a single class. The Charter provides that any
amendment of the provisions of the Charter relating to indemnification of
officers and directors shall not retroactively affect any act or failure to
act that occurred prior to the amendment.

ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS

The Bylaws provide that (a) with respect to an annual meeting of
stockholders, nominations of persons for election to the Board of Directors
and the proposal of business to be considered by stockholders may be made only
(i) pursuant to Prime Capital's notice of the meeting, (ii) by or at the
direction of the Board of Directors or (iii) by a stockholder who is entitled
to vote at the meeting and has complied with the advance notice procedures set
forth in the Bylaws and (b) with respect to special meetings of stockholders,
only the business specified in Prime Capital's notice of meeting may be
brought before the meeting of stockholders.

MEETINGS OF STOCKHOLDERS

The Company's Bylaws provide for annual meetings of stockholders, commencing
with the year 1999, to elect the Board of Directors and transact such other
business as may properly be brought before the meeting. According to the
Bylaws, special meetings of stockholders may be called by the President, the
Chief Executive

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Officer or the Board of Directors and shall be called at the request in
writing of the holders of 25.0% or more of the outstanding stock of Prime
Capital entitled to vote.

POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
CHARTER AND BYLAWS

The business combination provisions of the MGCL, the provisions of the
Charter on removal of directors and the advance notice provisions of the
Bylaws could delay, defer or prevent a change in control of Prime Capital or
any other transaction that might involve a premium price for holders of Common
Stock or otherwise may let be in their best interests. In addition, if the
current provision in the Bylaws exempting acquisitions from the control shares
acquisition provision of the MGCL were amended or eliminated, the control
shares acquisition provision of the MGCL could have the effect of discouraging
offers to acquire Prime Capital and of increasing the difficulty of
consummating any such offer. See "Risk Factors--Certain Anti-Takeover
Provisions May Inhibit a Change in Control of the Company."

COMMON STOCK AVAILABLE FOR FUTURE SALE

GENERAL

Prior to the date of this Prospectus, there has been no public market for
shares of Common Stock. The Company intends to apply for listing of its shares
of Common Stock on the New York Stock Exchange. No prediction can be made as
to the effect, if any, that future sales of shares of Common Stock (including
sales pursuant to Rule 144 under the Securities Act), or the availability of
shares of Common Stock for future sale, will have on the market price
prevailing from time to time. Sales of substantial amounts of shares of Common
Stock (including shares of Common Stock issued upon the exercise of options,
warrants or conversion of shares of preferred stock), or the perception that
such sales could occur, may affect adversely prevailing market prices of
shares of Common Stock and impair the Company's ability to obtain additional
capital through the sale of equity securities.

Upon the closing of the Offering, Prime Capital will have outstanding
9,825,268 shares of Common Stock (assuming that the Underwriter's over-
allotment option is not exercised). Of these shares, the 8,750,000 shares of
Common Stock sold in the Common Stock Offering will be freely tradeable by
persons other than "affiliates" of the Company without restriction under the
Securities Act, subject to certain limitations on ownership set forth in the
Charter. See "Description of Capital Stock--Restrictions on Transfer." The
remaining 1,075,268 shares of Common Stock outstanding will be restricted
securities ("Restricted Securities") within the meaning of Rule 144 under the
Securities Act. In addition, the Company has reserved 5,376,344 shares of
Common Stock for issuance upon the exchange of LP Common Units held by limited
partners of the Operating Partnership. The LP Common Units may be redeemed for
cash or, at the option of the Company, for shares of Common Stock on a one-
for-one basis one year after their date of issuance.

Additionally, upon the closing of the Offering, an outstanding warrant will
entitle the Underwriter to purchase up to 228,024 shares of Common Stock
(247,712 shares if the Underwriter exercises its over-allotment option in
full) at a price per share of $18.60. The warrant may not be sold,
transferred, assigned or hypothecated for a period of one year from the
Closing Date of the Offering and will be exercisable for a period of five
years from the Closing Date of the Offering. The Company is obligated to
effect a registration statement with respect to the shares of Common Stock
issuable upon exercise of the warrant to the effect that any and all of such
shares of Common Stock will be freely tradeable upon issuance.

Additionally, upon the closing of the Offering, an outstanding warrant will
entitle FBR Asset Investment Corporation to purchase up to 152,016 shares of
Common Stock (165,141 shares if the Underwriter exercises its over-allotment
option in full) at a price per share of $18.60 after the first anniversary of
the Offering at the Offering Price net of underwriting discount and will be
exercisable for a period of five years from the Closing Date of the Offering.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated with them in accordance with Rule 144) who has
beneficially owned "restricted securities" (defined generally as

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securities acquired from the issuer or an affiliate of the issuer in a
transaction not involving a public offering) for at least one year, would be
entitled to sell within any three-month period a number of shares of Common
Stock that does not exceed the greater of 1.0% of the then-outstanding number
of shares of Common Stock or 1.0% of the average weekly trading volume of the
shares of Common Stock, during the four calendar weeks preceding the date on
which notice of the sale is filed with the Commission. Sales under Rule 144
are also subject to certain manner of sale provisions, notice requirements and
the availability of current public information about the Company. Any person
(or persons whose shares are aggregated with them in accordance with Rule 144)
who is not deemed to have been an affiliate of the Company at any time during
the three months preceding a sale, and who has beneficially owned shares for
at least two years would be entitled to sell such shares under Rule 144(k)
without regard to the volume limitations, manner of sale provisions, notice
requirements or public information requirements. An "affiliate" of the Company
is a person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or under common control with, the Company.

The Company and its directors and executive officers have agreed not to
offer, sell, contract to sell or otherwise dispose of any shares of Common
Stock of Prime Capital without the prior written consent of the Underwriter
for a period of 180 days from the date of this Prospectus.

Additionally, upon the closing of the Offering, it is contemplated that
there will be outstanding stock options that will be granted at the Offering
Price, to certain executive officers, directors and employees of the Company,
none of which will be exercisable until one year from the date of grant. The
number of shares to be subject to such stock options will be 10% of the number
of shares to be issued pursuant to the Offering, assuming the Underwriter
fully exercises its over-allotment option.

No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price prevailing from time to time. Sales of substantial amounts of Common
Stock, or the perception that such sales could occur, may affect adversely
prevailing market prices of the Common Stock.

REGISTRATION RIGHTS

The Company has granted registration rights to FBR Asset Investment
Corporation in connection with shares issuable upon exercise of the FBR
Warrant. The Company will bear expenses arising from exercise of all of the
foregoing registration rights, except that the Company shall not pay any
underwriting discounts or commissions, transfer taxes, relating to
registration of such shares of Common Stock.

PARTNERSHIP AGREEMENT

The following summary of the Amended and Restated Agreement of Limited
Partnership of Prime Capital Investment, L.P. (the "Partnership Agreement"),
and the descriptions of certain provisions set forth elsewhere in this
Prospectus, are qualified in their entirety by reference to the Partnership
Agreement, which is filed as an exhibit to the Registration Statement of which
this Prospectus is a part. See "Additional Information."

MANAGEMENT

The Operating Partnership is organized as a Delaware limited partnership
pursuant to the terms of the Partnership Agreement. The Company will be the
managing general partner of, and will initially hold approximately 64.6% of
the economic interests in, the Operating Partnership. The Company will conduct
substantially all of its business through the Operating Partnership, except
for origination, warehousing, securitization, structuring, hedging and
servicing of certain Mortgage Loans, which will be conducted through the
Taxable Subsidiary in order to preserve the Company's REIT status. The
Operating Partnership will own a 95.0% economic interest in the Taxable
Subsidiary through the ownership of 100.0% of the Taxable Subsidiary's
preferred stock. Generally, pursuant to the Partnership Agreement, the
Company, as the managing general partner of the Operating Partnership, will
have full, exclusive and complete responsibility and discretion in the

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management and control of the Operating Partnership, including the ability to
cause the Operating Partnership to enter into certain major transactions,
including acquisitions, dispositions and refinancings and to cause changes in
the Operating Partnership's line of business and distribution policies.

The limited partners in their capacities as limited partners of the
Operating Partnership will have no authority to transact business for, or
participate in the management or decisions of, the Operating Partnership,
except as provided in the Partnership Agreement and as required by applicable
law. However, any decision of the Operating Partnership to effect certain
amendments to the Partnership Agreement, to take title to any property other
than in the name of the Operating Partnership or, to institute any proceeding
for bankruptcy or make a general assignment for the benefit of creditors
generally would require the consent of a majority in interest of the Common
Units (including the interests of the Company, which will represent
approximately 64.6% of the general partnership interests upon completion of
the Offering). Further, the Operating Partnership may not be dissolved prior
to December 31, 2050 (which is the expiration of the Operating Partnership's
term) without the consent of a majority of the holders of the Common Units.
The limited partners have no right to remove the Company from its capacity as
general partner of the Operating Partnership.

INDEMNIFICATION

To the extent permitted by law, the Partnership Agreement provides for
indemnification of the Company, as managing general partner, its directors,
officers and such other persons as the Company may designate to the same
extent indemnification is provided to officers and directors of the Company in
the Charter, and limits the liability of the Company and its officers and
directors to the Operating Partnership to the same extent liability of
officers and trustees of the Company is limited under the Charter.

TRANSFERABILITY OF INTERESTS

Except for a transaction described in the following two paragraphs, the
Partnership Agreement provides that the Company may not withdraw from the
Operating Partnership or transfer or assign its general partner interest in
the Operating Partnership, nor may another general partner be admitted to the
Operating Partnership, without the consent of the existing general partner. A
limited partner may transfer its interests in the Operating Partnership to a
transferee subject to certain conditions, including that such transferee
assumes all obligations of the transferor limited partner and provided further
that such transfer does not cause a termination of the Operating Partnership
for federal or state income tax purposes and does not cause the Company to
cease to comply with requirements under the Code for qualification as a REIT.

EXTRAORDINARY TRANSACTIONS

The Partnership Agreement provides that the Company may not generally engage
in any merger, consolidation or other combination with or into another person
or sale of all or substantially all of its assets, or any reclassification,
recapitalization or change of outstanding Common Stock (a "Business
Combination"), unless the holders of Common Units will receive, or have the
opportunity to receive, the same consideration per Common Unit as holders of
Common Stock receive per share of Common Stock in the transaction; if holders
of Common Units will not be treated in such manner in connection with a
proposed Business Combination, the Company may not engage in such transaction
unless limited partners holding more than 50.0% of the Common Units vote to
approve the Business Combination. In addition, as provided in the Operating
Partnership Agreement, the Company will not consummate a Business Combination
in which the Company conducted a vote of the shareholders unless the matter
would have been approved had holders of Common Units been able to vote
together with the shareholders on the transaction. The foregoing provision of
the Partnership Agreement would under no circumstances enable or require the
Company to engage in a Business Combination which required the approval of the
Company's shareholders if the Company's shareholders did not in fact give the
requisite approval. Rather, if the Company's shareholders did approve a
Business Combination, the Company would not consummate the transaction unless
(i) the Company as managing general partner first conducts a vote of holders
of Common Units (including the Company) on the matter, (ii) the Company votes
the Common Units held by it in the same proportion as the shareholders of the
Company voted on the matter at the shareholder vote and (iii)

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the result of such vote of the Common Unit holders (including the
proportionate vote of the Company's Common Units) is that had such vote been a
vote of shareholders, the Business Combination would have been approved by the
shareholders. As a result of these provisions of the Operating Partnership, a
third party may be inhibited from making an acquisition proposal that it would
otherwise make, or the Company, despite having the requisite authority under
its Charter, may not be authorized to engage in a proposed Business
Combination.

ISSUANCE OF ADDITIONAL COMMON UNITS

As managing general partner of the Operating Partnership, the Company has
the ability to cause the Operating Partnership to issue additional Common
Units representing general and limited partnership interests in the Operating
Partnership, including preferred Common Units of limited partnership
interests.

CAPITAL CONTRIBUTIONS

The Partnership Agreement provides that if the Operating Partnership
requires additional funds at any time or from time to time in excess of funds
available to the Operating Partnership from borrowings or capital
contributions, the Company may borrow such funds from a financial institution
or other lender or through public or private debt offerings and lend such
funds to the Operating Partnership on comparable terms and conditions as are
applicable to the Company's borrowing of such funds. As an alternative to
borrowing funds required by the Operating Partnership, the Company may
contribute the amount of such required funds as an additional capital
contribution to the Operating Partnership. The Partnership Agreement and the
Stock Option Plan also provide that in the event the Company issues additional
shares of capital stock (including any issuance of Common Stock pursuant to
the Company's Stock Option Plan), the Company is required to contribute to the
Operating Partnership as an additional capital contribution any net proceeds
from such issuance in exchange for additional partnership interests with
preferences and rights corresponding to the beneficial interests so issued. If
the Company so contributes additional capital to the Operating Partnership,
the Company's partnership interest in the Operating Partnership will be
increased on a proportionate basis. Conversely, the partnership interests of
the limited partners will be decreased on a proportionate basis in the event
of additional capital contributions by the Company.

AWARDS UNDER THE STOCK OPTION PLAN

If options granted in connection with the Stock Option Plan are exercised at
any time or from time to time, the Partnership Agreement requires the Company
to contribute to the Operating Partnership as an additional contribution the
exercise price received by the Company in connection with the issuance of
Common Stock to such exercising participant. Upon such contribution the
Company will be issued a number of Common Units in the Operating Partnership
equal to the number of Common Stock so issued, subject to certain adjustments.

OPERATIONS

The Partnership Agreement requires that the Operating Partnership be
operated in a manner that will enable the Company to satisfy the requirements
for being classified as a REIT and to avoid any federal income or excise tax
liability. The Partnership Agreement provides that the net operating cash
revenues of the Operating Partnership, as well as net sales and refinancing
proceeds, will be distributed from time to time as determined by the Company
(but not less frequently than quarterly) pro rata in accordance with the
partners' respective percentage interests. Pursuant to the Partnership
Agreement, the Operating Partnership will assume and pay when due, or
reimburse the Company for payment of, all expenses it incurs relating to the
ownership and operation of, or for the benefit of, the Operating Partnership
and all costs and expenses relating to the operations of the Company.

LIMITED PARTNER EXCHANGE RIGHTS

Subject to certain conditions beginning twelve months following completion
of the Offering, each Common Unit held by a limited partner may be exchanged
for one Common Stock (subject to adjustment) or, at the option of the Company,
cash equal to the fair market value of a Common Stock at the time of exchange.
However, no

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limited partner may exchange any Common Units for Common Stock if such
entity's actual or constructive ownership of such Common Stock would violate
the Ownership Limit with respect to the Common Stock. Following the expiration
of the foregoing restrictions, any Common Stock issued to the limited partners
upon exchange of their respective Common Units may be sold in the public
market pursuant to the registration statements which the Company will be
obligated to file pursuant to the exercise of registration rights that have
been granted by the Company or available exemptions from registration.

TAX MATTERS

Pursuant to the Partnership Agreement, the Company will be the "tax matters
partner" of the Operating Partnership and, as such, will have authority to
make certain tax decisions under the Code on behalf of the Operating
Partnership.

The net income or net loss of the Operating Partnership generally will be
allocated to each class of Partners in accordance with the relative aggregate
percentage interests of each such class, and within each class, to the
Partners in accordance with their respective percentage interests in such
class, subject to compliance with the provisions of Sections 704(b),
respecting allocations generally, and 704(c), respecting allocations with
respect to contributed properties, of the Code and the applicable Treasury
Regulations. For further discussion of such allocations, see "Federal Income
Tax Considerations--Income Taxation of the Operating Partnership and Its
Partners."

DUTIES AND CONFLICTS

Except as otherwise set forth in "Certain Relationships and Related
Transactions" any limited partner may engage in other business activities
outside the Operating Partnership, including business activities that directly
compete with the Operating Partnership.

REDEMPTION RIGHTS

It is anticipated that pursuant to the Partnership Agreement, the limited
partners will have the right (the "Redemption Rights") to cause the Operating
Partnership to redeem their Common Units for cash or, at the election of the
General Partner, shares of Common Stock on a one-for-one basis. The redemption
price will be paid in cash in the discretion of the Company or in the event
that the issuance of shares of Common Stock to the redeeming limited partner
would (i) result in any person owning, directly or indirectly, shares of
Common Stock in excess of the Ownership Limit, (ii) result in shares of
capital stock of the Company being owned by fewer than 100 persons (determined
without reference to any rules of attribution), (iii) result in the Company
being "closely held" within the meaning of section 856(h) of the Code, (iv)
cause the Company to own, actually or constructively, 10% or more of the
ownership interests in a tenant of the Company's or the Operating
Partnership's real property, within the meaning of section 856(d)(2)(B) of the
Code, or (v) cause the acquisition of shares of Common Stock by such redeeming
limited partner to be "integrated" with any other distribution of shares of
Common Stock for purposes of complying with the Securities Act.

DISTRIBUTIONS

It is anticipated that the Partnership Agreement will provide that the
Operating Partnership shall distribute cash from operations (including net
sale or refinancing proceeds, but excluding net proceeds from the sale of the
Operating Partnership's property in connection with the liquidation of the
Operating Partnership) on a quarterly (or, at the election of the General
Partner, more frequent) basis, in amounts determined by the General Partner in
its sole discretion, to the partners in accordance with their respective
percentage interests in the Operating Partnership. Upon liquidation of the
Operating Partnership, after payment of, or adequate provision for, debts and
obligations of the Operating Partnership, including any partner loans, it is
anticipated that any remaining assets of the Operating Partnership will be
distributed to all partners with positive capital accounts in accordance with
their respective positive capital account balances. If the General Partner has
a negative balance in its capital account following a liquidation of the
Operating Partnership, it will be obligated to contribute cash to the
Operating Partnership equal to the negative balance in its capital account.

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TERM

The Operating Partnership will continue in full force and effect until
December 31, 2050 or until sooner dissolved and terminated upon the
dissolution, bankruptcy, insolvency or termination of the Company (unless the
limited partners elect to continue the Operating Partnership), the election of
the Company with the consent of a majority in interest of the limited
partners, the sale or other disposition of all or substantially all the assets
of the Operating Partnership or by operation of law.

FEDERAL INCOME TAX CONSIDERATIONS

The following is a summary of material federal income tax considerations
that may be relevant to a prospective holder of Common Stock who purchases
such stock in the Offering. Winston & Strawn has acted as tax counsel ("Tax
Counsel") to Prime Capital in connection with the Offering and the preparation
of this Prospectus. This summary should not be construed as tax advice. The
discussion contained herein does not address all aspects of federal income
taxation that may be relevant to particular holders in light of their personal
investment or tax circumstances, or to certain types of holders (including,
without limitation, insurance companies, financial institutions, broker-
dealers, persons whose functional currency is other than the United States
dollar, persons who hold the Common Stock as part of a straddle, hedging, or
conversion transaction or, except as specifically described herein, tax-exempt
entities and foreign persons) who are subject to special treatment under the
federal income tax laws. In addition, this summary is generally limited to
investors who will hold the shares of Common Stock as "capital assets"
(generally, property held for investment) within the meaning of section 1221
of the Code.

The statements in this summary are based on current provisions of the Code,
Treasury Regulations promulgated thereunder, and administrative and judicial
interpretations thereof, as of the date hereof, all of which are subject to
change, possibly with retroactive effect. The provisions of the Code, the
Treasury Regulations promulgated thereunder and the administrative and
judicial interpretations thereof that concern REITs are highly technical and
complex and this summary is qualified in its entirety by such Code provisions,
Treasury Regulations, and administrative and judicial interpretations. No
assurance can be given that future legislative, judicial, or administrative
actions or decisions will not affect the accuracy of any statements in this
summary. In addition, no ruling will be sought from the Internal Revenue
Service (the "IRS") with respect to any matter discussed herein, and there can
be no assurance that the IRS or a court will agree with the statements made
herein.

EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE,
OWNERSHIP, AND SALE OF COMMON STOCK AND OF PRIME CAPITAL'S ELECTION TO BE
TAXED AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE, AND ELECTION AND OF POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.

GENERAL

Prime Capital intends to make an election to be taxed as a REIT under
sections 856 through 860 of the Code and the applicable Treasury Regulations
promulgated thereunder, which together set forth the requirements for
qualifying as a REIT (the "REIT Requirements"), beginning with its taxable
year beginning on January 1, 1998 and ending on December 31, 1998. Prime
Capital believes that it will be organized and will operate in such a manner
to qualify for taxation as a REIT under the Code. No assurance can be given,
however, that Prime Capital actually will operate in such a manner to so
qualify as a REIT or will continue to operate in such a manner so as to remain
qualified as a REIT.

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Subject to the qualifications stated herein and in its opinion, Tax Counsel
has given Prime Capital an opinion that Prime Capital will qualify to be taxed
as a REIT under the Code beginning with its taxable year ending December 31,
1998 and that its organization and proposed method of operation will enable it
to qualify as a REIT in the future. An opinion of counsel is not binding on
the IRS or a court and there can be no assurance that the IRS or a court will
not take a position different from that expressed by Tax Counsel. It also must
be emphasized that Tax Counsel's opinion is based on various assumptions and
is conditioned upon numerous representations made by Prime Capital as to
factual matters, including those related to its businesses and properties as
set forth in this Prospectus. Tax Counsel has not independently verified Prime
Capital's representations. Moreover, Prime Capital's qualification and
taxation as a REIT depend upon Prime Capital's ability to meet on a continuing
basis the actual operating results, distribution levels, diversity of stock
ownership and the various other qualification tests imposed by the Code as
discussed below. Tax Counsel will not review Prime Capital's compliance with
these tests on a continuing basis. Accordingly, no assurance can be given that
the actual results of Prime Capital's operations for any given taxable year
will satisfy the requirements for qualification and taxation as a REIT. See
"--Requirements for Qualification--Failure to Qualify."

TAXATION OF PRIME CAPITAL

For any taxable year in which Prime Capital qualifies for taxation as a
REIT, it generally will not be subject to federal corporate income tax on that
portion of its ordinary income or capital gain that is currently distributed
to its stockholders. The REIT provisions of the Code generally allow a REIT to
deduct dividends paid to its stockholders. This deduction for dividends paid
to stockholders substantially eliminates the federal "double taxation" on
earnings (once at the corporate level and once again at the stockholder level)
that generally results from an investment in a corporation.

Even if Prime Capital continues to qualify for taxation as a REIT, it may be
subject to federal income tax in certain circumstances. First, Prime Capital
will be taxed at regular corporate rates on any undistributed "REIT taxable
income" and undistributed net capital gains. Second, under certain
circumstances, Prime Capital may be subject to the corporate "alternative
minimum tax" on its undistributed items of tax preference, if any. Third, if
Prime Capital has (i) net income from the sale or other disposition of
"foreclosure property" which is held primarily for sale to customers in the
ordinary course of business or (ii) other nonqualifying income from
foreclosure property, Prime Capital will be subject to tax on such income at
the highest regular corporate rate (currently, 35.0%). Fourth, if Prime
Capital has net income from prohibited transactions (which are, in general,
certain sales or other dispositions of property held primarily for sale to
customers in the ordinary course of business, other than foreclosure property
or property that is involuntarily converted), such income will be subject to a
100% tax. Fifth, if Prime Capital should fail to satisfy the 75.0% gross
income test or the 95.0% gross income test (as discussed below), but
nonetheless maintain its qualification as a REIT because certain other
requirements are met, Prime Capital will be subject to a 100% tax on the gross
income attributable to the greater of the amount by which Prime Capital fails
the 75.0% or the 95.0% test, multiplied by a fraction intended to reflect
Prime Capital's profitability. Sixth, if Prime Capital should fail to
distribute for each calendar year at least the sum of (i) 85.0% of its REIT
ordinary income for such year, (ii) 95.0% of its REIT capital gain net income
for such year, and (iii) any undistributed taxable income from prior periods,
Prime Capital will be subject to a 4.0% excise tax on the excess of such
required distribution over the amounts actually distributed. However, to the
extent Prime Capital elects to retain and pay income tax on net long-term
capital gains it received during the year such amounts will be treated as
having been distributed for purposes of the 4.0% excise tax. Finally, if Prime
Capital acquires any asset from a C corporation (i.e., generally a corporation
subject to full corporate level tax) in a transaction in which the basis of
the asset in Prime Capital's hands is determined by reference to the basis of
the asset (or any other property) in the hands of the C corporation, and Prime
Capital subsequently recognizes gain on the disposition of such asset during
the 10-year period (the "Recognition Period") beginning on the date on which
the asset was acquired by Prime Capital, then, pursuant to guidelines issued
by the IRS, the excess of (i) the fair market value of the asset as of the
beginning of the applicable Recognition Period, over (ii) Prime Capital's
adjusted basis in such asset as of the beginning of such Recognition Period
(i.e., "built-in gain") will be subject to tax at the highest regular
corporate rate. The results described above with respect to the tax on

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"built-in-gain" assume that Prime Capital will elect pursuant to IRS Notice
88-19 to be subject to the rules described in the preceding sentence if it
were to make any such acquisition. Upon the acquisition of a corporation which
is a "qualified REIT subsidiary" Prime Capital also would be taxed on any
built-in gain attributable to the built-in gain associated with the Qualified
REIT Subsidiary's assets. See "--Requirements for Qualification--Qualified
REIT Subsidiary."

Prime Capital will be subject to tax at the highest marginal corporate rate
on the portion of any excess inclusion (see "Taxation of Taxable U.S.
Stockholders" for a fuller discussion of Excess Inclusion income) derived by
Prime Capital from REMIC Residual Interests ("Excess Inclusion") equal to the
percentage of the stock of Prime Capital held by the United States, any state
or political subdivision thereof, any foreign government, any international
organization, any agency or instrumentality of any of the foregoing, any other
tax-exempt organization (other than a farmer's cooperative described in
section 521 of the Code) that is exempt from taxation under the unrelated
business taxable income provisions of the Code, or any rural electrical or
telephone cooperative (each, a "Disqualified Organization"). Any such tax on
the portion of any Excess Inclusion allocable to stock of Prime Capital held
by a Disqualified Organization will reduce the cash available for distribution
from Prime Capital to all stockholders.

If Prime Capital invests in properties in foreign countries, Prime Capital's
profits from such investments will generally be subject to tax in the
countries where such properties are located. The precise nature and amount of
any such taxation will depend on the laws of the countries where the
properties are located. If Prime Capital satisfies the annual distribution
requirements for qualification as a REIT and is therefore not subject to
federal corporate income tax on that portion of its ordinary income and
capital gain that is currently distributed to its stockholders, Prime Capital
will generally not be able to recover the cost of any foreign tax imposed on
profits from its foreign investments by claiming foreign tax credits against
its U.S. tax liability on such profits. Moreover, a REIT is not able to pass
foreign tax credits through to its stockholders.

Prime Capital will use the calendar year for both federal income tax
purposes and financial reporting purposes.

REQUIREMENTS FOR QUALIFICATION

To qualify as a REIT, Prime Capital must meet and continue to meet the
requirements, discussed below, relating to Prime Capital's organization, the
sources of its gross income, the nature of its assets, and the level of
distributions to its stockholders.

ORGANIZATIONAL REQUIREMENTS

The Code requires that a REIT be a corporation, trust, or association:

(i) which is managed by one or more trustees or directors;

(ii) the beneficial ownership of which is evidenced by transferable
shares or by transferable certificates of beneficial interest;

(iii) which would be taxable as a domestic corporation but for compliance
with the REIT Requirements;

(iv) which is neither a financial institution nor an insurance company
subject to certain special provisions of the Code;

(v) the beneficial ownership of which is held by 100 or more persons;

(vi) at no time during the last half of each taxable year is more than
50.0% in value of the outstanding stock owned, directly or indirectly
through the application of certain attribution rules, by or for five or
fewer individuals (as defined in the Code to include certain tax-exempt
entities other than, in general, qualified domestic pension funds)(the
"5/50 Rule");

(vii) that makes an election to be a REIT (or has made such election for
a previous taxable year) and satisfies all relevant filing and other
administrative requirements established by the IRS that must be met in
order to elect and maintain REIT status;

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(viii) that uses a calendar year for federal income tax purposes and
complies with the recordkeeping requirements of the Code and Treasury
Regulations promulgated thereunder; and

(ix) which meets certain other tests, described below, regarding the
nature of its income and assets.

The Code provides that conditions (i) through (iv), inclusive, must be met
during the entire taxable year and that condition (v) must be met during at
least 335 days of a taxable year of 12 months, or during a proportionate part
of a taxable year of less than 12 months. Conditions (v) and (vi) do not apply
until after the first taxable year for which a REIT election is made. For
purposes of determining stock ownership under the 5/50 Rule, a supplemental
unemployment compensation benefits plan, a private foundation, or a portion of
a trust permanently set aside or used exclusively for charitable purposes
generally is considered an individual. A trust that is a qualified trust under
Code section 401(a), however, generally is not considered an individual and
beneficiaries of such trust are treated as holding shares of a REIT in
proportion to their actuarial interests in such trust for purposes of the 5/50
Rule.

Prime Capital anticipates issuing sufficient Common Stock with sufficient
diversity of ownership pursuant to the Offering to allow it to satisfy
requirements (v) and (vi). In addition, Prime Capital's Charter provides for
restrictions regarding the transfer of the Common Stock that are intended to
assist Prime Capital in continuing to satisfy the share ownership requirements
described in clauses (v) and (vi) above. Such transfer restrictions are
described in "Description of Common Stock--Restrictions on Transfer." For
purposes of determining ongoing compliance with the 100 holder requirement,
Treasury Regulations require Prime Capital to issue letters to certain
stockholders demanding information regarding the amount of shares each such
stockholder actually or constructively owns ("stockholder demand letters"). If
Prime Capital fails to comply with these regulatory rules it will be subject
to a $25,000 penalty ($50,000 for intentional violations).

As set forth in (vi) above, to qualify as a REIT, Prime Capital must also
satisfy the requirement set forth in Section 856(a)(6) of the Code that it not
be closely held. Prime Capital will not be closely held so long as at all
times during the last half of any taxable year of Prime Capital (other than
the first taxable year for which the REIT election is made) not more than
50.0% in value of its outstanding stock is owned, directly or constructively
under the applicable attribution rules of the Code, by five or fewer
individuals (as defined in the Code to include certain tax-exempt entities,
other than, in general, qualified domestic pension funds). Although the
Charter of Prime Capital contains certain restrictions on the ownership and
transfer of the Common Stock, the restrictions do not ensure that Prime
Capital will be able to satisfy the 5/50 Rule requirement. If Prime Capital
fails to satisfy the 5/50 Rule, Prime Capital's status as a REIT will
terminate, and Prime Capital will not be able to prevent such termination.
However, if Prime Capital complies with the procedures prescribed in the
Treasury Regulations for issuing stockholder demand letters and does not know,
or with the exercise of reasonable diligence would not have known, that the
5/50 Rule was violated, the requirement will be deemed to be satisfied for the
year. See "Requirements for Qualification--Failure to Qualify."

QUALIFIED REIT SUBSIDIARY

If a REIT owns a corporate subsidiary that is a "qualified REIT subsidiary,"
within the meaning of section 856(i) of the Code that subsidiary is
disregarded for Federal income tax purposes, and all assets, liabilities, and
items of income, deduction, and credit of the subsidiary are treated as
assets, liabilities and such items of the REIT itself. A "qualified REIT
subsidiary" is a corporation all of the capital stock of which is owned by the
REIT. However, if an existing corporation is acquired by a REIT and is a
"qualified REIT subsidiary", all of its pre-REIT earnings and profits must be
distributed before the end of the REIT's taxable year. Prime Capital currently
does not own any qualified REIT subsidiaries.

OWNERSHIP OF A PARTNERSHIP INTEREST

In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT is deemed to own its proportionate share of
the assets of the partnership corresponding to the REIT's capital interest

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in such partnership and is deemed to be entitled to the income of the
partnership attributable to such proportionate share. In addition, the
character of the assets and gross income of the partnership retain the same
character in the hands of the REIT for purposes of the REIT requirements,
including satisfying the gross income tests and the asset tests. Currently,
Prime Capital is a partner in the Operating Partnership.

Accordingly, Prime Capital's proportionate share of the assets, liabilities
and items of income of the Operating Partnership are treated as assets,
liabilities and items of income of Prime Capital for purposes of applying the
REIT Requirements, provided that the Operating Partnership is treated as a
partnership for federal income tax purposes. See "--Tax Aspects of Prime
Capital's Investment in the Operating Partnership--Partnership
Classification."

INCOME TESTS

To maintain its qualification as a REIT, Prime Capital must satisfy two
gross income requirements annually. First, at least 75% of Prime Capital's
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived directly or indirectly from investments relating
to real property or mortgages on real property (including "rents from real
property" and, in certain circumstances, interest) or from certain types of
temporary investments. Second, at least 95.0% of Prime Capital's gross income
(excluding gross income from prohibited transactions) for each taxable year
must be derived from such real property investments and from dividends,
interest, and gain from the sale or disposition of stock or securities or from
any combination of the foregoing.

The term "interest," as defined for purposes of the 75.0% and 95.0% gross
income tests, generally does not include any amount received or accrued
(directly or indirectly) if the determination of such amount depends in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "interest" solely by
reason of being based on a fixed percentage or percentages of receipts or
sales. In addition, an amount received or accrued generally will not be
excluded from the term "interest" solely by reason of being based on the
income or profits of a debtor if the debtor derives substantially all of its
gross income from the related property through the leasing of substantially
all of its interests in the property, to the extent the amounts received by
the debtor would be characterized as rents from real property if received by a
REIT. Furthermore, to the extent that interest from a loan that is based on
the cash proceeds from the sale of the property securing the loan constitutes
a "shared appreciation provision" (as defined in the Code), income
attributable to such participation feature will be treated as gain from the
sale of the secured property, which generally is qualifying income for
purposes of the 75.0% and 95.0% gross income tests.

Interest on obligations secured by mortgages on real property or on
interests in real property generally is qualifying income for purposes of the
75.0% gross income test. Any amount includible in gross income with respect to
a regular or residual interest in a REMIC generally is treated as interest on
an obligation secured by a mortgage on real property. If, however, less than
95.0% of the assets of a REMIC consists of real estate assets (determined as
if Prime Capital held such assets), Prime Capital will be treated as receiving
directly its proportionate share of the income of the REMIC. In addition, if
Prime Capital receives interest income with respect to a mortgage loan that is
secured by both real property and other property and the highest principal
amount of the loan outstanding during a taxable year exceeds the fair market
value of the real property on the date Prime Capital purchased the mortgage
loan, the interest income will be apportioned between the real property and
the other property, which apportionment may cause Prime Capital to recognize
income that is not qualifying income for purposes of the 75.0% gross income
test.

Winston & Strawn is of the opinion that the interest, OID, and any market
discount income that Prime Capital derives from its investments in MBS and
Mortgage Loans generally will be qualifying interest income for purposes of
both the 75.0% and the 95.0% gross income tests, except to the extent that
less than 95.0% of the assets of a REMIC in which Prime Capital holds an
interest consists of real estate assets (determined as if Prime Capital held
such assets), and Prime Capital's proportionate share of the income of the
REMIC includes income that is not qualifying income for purposes of the 75.0%
and 95.0% gross income tests. Most of the

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income that Prime Capital recognizes with respect to its investments in
Mortgage Loans will be qualifying income for purposes of both gross income
tests. In some cases, however, the loan amount of a Mortgage Loan,
particularly with respect to a Distressed Mortgage Loan or any Subordinated
Interest, may exceed the value of the real property securing the loan, which
will result in a portion of the interest income from the loan being classified
as qualifying income for purposes of the 95.0% gross income test, but not for
purposes of the 75.0% gross income test. It is also possible that, in some
instances, the interest income from a Mortgage Loan, particularly a Distressed
Mortgage Loan, may be based in part on the borrower's profits or net income,
which generally will disqualify the income from the loan for purposes of both
the 75.0% and the 95.0% gross income tests.

Prime Capital may originate or acquire Construction or Mezzanine Loans that
have shared appreciation provisions. To the extent interest from a loan that
is based on the cash proceeds from the sale of property constitutes a "shared
appreciation provision" (as defined in the Code), income attributable to such
participation feature will be treated as gain from the sale of the secured
property, which generally is qualifying income for purposes of the 75.0% and
95.0% gross income tests. Also, Prime Capital may be required to recognize
income from a shared appreciation provision over the term of the related loan
using the constant yield method pursuant to certain Treasury Regulations.

Prime Capital may originate or acquire Mortgage Loans and securitize such
loans through the issuance of non-REMIC CMOs. As a result of such
transactions, Prime Capital will retain an equity ownership interest in the
Mortgage Loans that has economic characteristics similar to those of a MBS or
a Subordinated Interest. In addition, Prime Capital may securitize MBS (or
non-REMIC CMOs) through the issuance of non-REMIC CMOs, retaining an equity
interest in the MBS used as collateral in the resecuritization transaction.
Such transactions will not cause Prime Capital to fail to satisfy the gross
income tests or the asset tests described below.

Prime Capital may receive income not described above that is not qualifying
income for purposes of either or both of the 75.0% and 95.0% gross income
tests. Prime Capital will monitor the amount of nonqualifying income produced
by its assets and has represented that it will manage its portfolio in order
to comply at all times with both the 75.0% and the 95.0% gross income tests.
It is contemplated that the Taxable Subsidiary will undertake certain of the
activities which would produce nonqualifying income. Dividends received by
Prime Capital from the Taxable Subsidiary will constitute qualifying income
for purposes of the 95% test, but not the 75% test. The amount of dividends
available for distribution to Prime Capital by the Taxable Subsidiary will be
less than the comparable amount of income that Prime Capital otherwise would
receive if it engaged in the nonqualifying activities directly because the
Taxable Subsidiary will be subject to a corporate level tax on its taxable
income, thereby reducing the amount of cash available for distribution. The
existing REIT qualification rules prohibit Prime Capital from owning more than
10% of the voting stock of the Taxable Subsidiary or owning a combined stock
and debt interest in the Taxable Subsidiary which exceeds 5% of the value of
Prime Capital's total assets. Moreover, REIT legislation proposed by the
Clinton administration and currently being considered by Congress, if enacted,
would either limit Prime Capital's ownership of the Taxable Subsidiary or
restrict the future level of operations of the Taxable Subsidiary. In either
event, the economic benefit to Prime Capital from the Taxable Subsidiary would
be substantially reduced. Such REIT qualification rules, whether under
existing law or, if enacted, the administration's REIT proposals, would
similarly adversely affect the ability of Prime Capital to receive the
economic benefit of any corporation performing nonqualifying income-producing
activities. See "--Other Tax Considerations--Clinton REIT Proposals."

Rents received by Prime Capital will qualify as "rents from real property"
in satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent received or accrued with
respect to any property must not be based in whole or in part on the income or
profits derived by any person from such property, although an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of gross receipts or gross sales. Rents received from a tenant that are based
on the tenant's income from the property will

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not be treated as rents based on income or profits and thus excluded from the
term "rents from real property" if the tenant derives substantially all of its
income with respect to such property from the leasing or subleasing of
substantially all of such property, provided that the tenant receives from
subtenants only amounts that would be treated as rents from real property if
received directly by a REIT. Second, rents received from a tenant will not
qualify as "rents from real property" in satisfying the gross income tests if
the REIT, or an owner of 10.0% or more of the REIT, directly or constructively
owns 10.0% or more of such tenant (a "Related Party Tenant"). Third, if rent
attributable to personal property, leased in connection with a lease of real
property, is greater than 15.0% of the total rent received under the lease,
then the portion of rent attributable to such personal property will not
qualify as "rents from real property." Finally, a REIT generally must not
operate or manage the property or furnish or render services to the tenants of
such property, other than through an "independent contractor" from whom the
REIT derives no income. The independent contractor requirement, however, does
not apply to the extent the services rendered by the REIT are customarily
furnished or rendered in connection with the rental of the real property such
that they are services that a tax-exempt organization could provide to its
tenants without causing its rental income to be unrelated business taxable
income under the Code. A tax-exempt organization may provide services which
are "usually or customarily rendered" in connection with the rental of space
for occupancy only and are not otherwise considered "rendered to the
occupant," without incurring unrelated business taxable income. A de minimis
exception allows a REIT to provide non-customary services to its tenants and
not disqualify income as rents from real property so long as the value of the
impermissible services does not exceed 1.0% of the Company's gross income from
the property. The amount the Company receives that is attributable to
impermissible services cannot be valued at less than 150.0% of the direct cost
to the REIT of providing these services.

Prime Capital has represented that it will not charge rent for any portion
of any real property that is based, in whole or in part, on the income or
profits of any person (except by reason of being based on a fixed percentage
or percentages of receipts of sales, as described above) to the extent that
the receipt of such rent would jeopardize Prime Capital's status as a REIT. In
addition, Prime Capital has represented that, to the extent that it receives
rent from a Related Party Tenant, such rent will not cause Prime Capital to
fail to satisfy either the 75.0% or 95.0% gross income test. Prime Capital
also has represented that it will not allow the rent attributable to personal
property leased in connection with any lease of real property to exceed 15.0%
of the total Rent received under the lease, if the receipt of such Rent would
cause Prime Capital to fail to satisfy either the 75.0% or 95.0% gross income
test. Finally, Prime Capital has represented that it will not operate or
manage its real property or furnish or render noncustomary services to the
tenants of its real property other than through an "independent contractor,"
to the extent that such operation or the provision of such services would
jeopardize Prime Capital's status as a REIT.

If Prime Capital acquires Preferred Equity, the tax treatment of the income
from such investment will depend upon whether the underlying real estate
operating company that issued such equity is classified as a partnership or a
corporation for tax purposes. If the real estate operating company issuing
such Preferred Equity is classified as a partnership for tax purposes so that
Prime Capital is treated as being a partner in a partnership, Prime Capital's
allocable share of the income of such entity will have the same character it
would have if Prime Capital was conducting such activity directly. In such
situation, while real estate rental income received by such real estate
operating company will generally constitute qualifying income, Prime Capital
could potentially receive income which would not constitute qualifying income
for purposes of the gross income tests if the real estate operating company
provides noncustomary services to the tenants of the property that are above
the acceptable de minimis amount, or rent from the real property otherwise
fails to qualify as "rents from real property," as described above.

If the real estate operating company issuing such Preferred Equity is
classified as a corporation for tax purposes so that Prime Capital is a
stockholder in a corporation, the income that Prime Capital will receive from
such investment will constitute dividend income (or, under certain
circumstances, capital gain). While this dividend income (or capital gain)
would constitute qualifying income for purposes of the 95.0% test, this
dividend income (or capital gain) will not constitute qualifying income for
purposes of the 75.0% test unless

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such real estate operating company is also a qualified REIT. In addition, if
such real estate operating company is classified as a corporation then such
investment will also be structured so that (i) Prime Capital does not own
10.0% or more of the voting securities of such company and (ii) the value of
Prime Capital's investment in such company does not constitute more than 5.0%
of the value of Prime Capital's total assets. See "--Requirements for
Qualification--Asset Tests."

If Prime Capital makes a Loan that is secured by an equity interest in a
real estate operating company, the interest received on the Loan will
constitute qualifying income for purposes of the 95.0% test, but will not
constitute qualifying income for purposes of the 75.0% test if the real estate
operating company is classified as a corporation for tax purposes. If,
however, the real estate operating company is classified as a partnership for
tax purposes, the interest income may constitute qualifying income depending
upon the nature of the underlying assets of the partnership. If the Company
acquires an equity interest in a real estate operating company through
foreclosure, the determination of whether the income resulting from such
equity investment will constitute qualifying income for purposes of the 95.0%
and 75.0% tests will be made in the same manner as applies to investments in
Preferred Equity, as discussed above. In such event, if the real estate
operating company would be classified as a partnership for tax purposes, the
income from such investment may not constitute qualifying income if the real
estate operating company provides noncustomary services to the tenants of the
property that are above the acceptable de minimis amount. If any foreclosure
would cause such a problem, the Company may be required to hire an independent
contractor, from which the Company receives no income, to operate the property
on behalf of Prime Capital.

REITs generally are subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualifying
income for purposes of the 75.0% gross income test), less expenses directly
connected with the production of such income. "Foreclosure property" is
defined as any real property (including interests in real property) and any
personal property incident to such real property (i) that is acquired by a
REIT as the result of such REIT having bid on such property at foreclosure, or
having otherwise reduced such property to ownership or possession by agreement
or process of law, after there was a default (or default was imminent) on a
lease of such property or on an indebtedness owed to the REIT that such
property secured, (ii) for which the related loan was acquired by the REIT at
a time when default was not imminent or anticipated, and (iii) for which such
REIT makes a proper election to treat such property as foreclosure property.
Prime Capital does not anticipate that it will receive any income from
foreclosure property that is not qualifying income for purposes of the 75.0%
and 95.0% gross income tests, but, if Prime Capital does receive any such
income, Prime Capital will make an election to treat the related property as
foreclosure property.

If property is not eligible for the election to be treated as foreclosure
property ("Ineligible Property") because the related loan was acquired by the
REIT at a time when default was imminent or anticipated, income received with
respect to such Ineligible Property may not be qualifying income for purposes
of the 75.0% or 95.0% gross income test. Prime Capital anticipates that any
income it receives with respect to Ineligible Property will be qualifying
income for purposes of the 75.0% and 95.0% gross income tests.

It is possible that, from time to time, Prime Capital will enter into
hedging transactions with respect to one or more of its assets or liabilities.
Any such hedging transactions could take a variety of forms, including
interest rate swap contracts, interest rate cap or floor contracts, futures or
forward contracts, and options. To the extent that Prime Capital enters into
an interest rate swap or cap agreement, option, futures contract, forward rate
agreement, or any similar financial instrument to reduce its interest rate
risk with respect to debt that was or will be incurred to acquire or carry
real estate assets, any periodic income or gain from the disposition of such
contract should be qualifying income for purposes of the 95.0% gross income
test, but not the 75.0% gross income test. To the extent that Prime Capital
hedges with other types of financial instruments that are not similar to the
above or in other situations, it may not be entirely clear how the income from
those transactions will be treated for purposes of the various income tests
that apply to REITs under the Code. Prime Capital intends to structure any
hedging transactions in a manner that does not jeopardize its status as a
REIT. If necessary, Prime Capital may conduct some or all of its hedging
activities through the Taxable Subsidiary.

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If Prime Capital fails to satisfy one or both of the 75.0% or the 95.0%
gross income tests for any taxable year, it may nevertheless qualify as a REIT
for such year if it is entitled to relief under certain provisions of the
Code. These relief provisions generally will be available if (i) Prime
Capital's failure to meet such test(s) was due to reasonable cause and not due
to willful neglect, (ii) Prime Capital reported the nature and amount of each
item of its income included in the test(s) for such taxable year on a schedule
attached to its return, and (iii) any incorrect information on the schedule
was not due to fraud with intent to evade tax. It is not possible, however, to
state whether, in all circumstances, Prime Capital would be entitled to the
benefit of these relief provisions. For example, if Prime Capital fails to
satisfy the gross income tests because nonqualifying income that Prime Capital
intentionally earns exceeds the limits on such income, the IRS could conclude
that Prime Capital's failure to satisfy the tests was not due to reasonable
cause. As discussed above in "Federal Income Tax Considerations--Taxation of
Prime Capital" even if these relief provisions apply, Prime Capital will still
be subject to a 100% tax on the gross income attributable to the greater of
the amount of by which Prime Capital failed the 75.0% or the 95.0% test,
multiplied by a fraction intended to reflect Prime Capital's profitability.

ASSET TESTS

Prime Capital, at the close of each quarter of each taxable year, also must
satisfy two tests relating to the nature of its assets. First, at least 75.0%
of the value of Prime Capital's total assets must be represented by cash or
cash items (including certain receivables), government securities, "real
estate assets," or, in cases where Prime Capital raises new capital through
stock or long-term (at least five-year) debt offerings, temporary investments
in stock or debt instruments during the one-year period following Prime
Capital's receipt of such capital. The term "real estate assets" includes
interests in real property, interests in mortgages on real property to the
extent the principal balance of a mortgage does not exceed the fair market
value of the associated real property, regular or residual interests in a
REMIC (except that, if less than 95.0% of the assets of a REMIC consists of
"real estate assets" (determined as if Prime Capital held such assets), Prime
Capital will be treated as holding directly its proportionate share of the
assets of such REMIC), and shares of other REITs. For purposes of the 75.0%
asset test, the term "interest in real property" includes an interest in
mortgage loans or land and improvements thereon, such as buildings or other
inherently permanent structures (including items that are structural
components of such buildings or structures), a leasehold of real property, and
an option to acquire real property (or a leasehold of real property). An
"interest" in real property also generally includes an interest in mortgage
loans secured by controlling equity interests in entities treated as
partnerships for federal income tax purposes that own real property, to the
extent that the principal balance of the mortgage does not exceed the fair
market value of the real property that is allocable to the equity interest.
Second, of the investments not included in the 75.0% asset class, the value of
any one issuer's securities owned by Prime Capital may not exceed 5.0% of the
value of Prime Capital's total assets, and Prime Capital may not own more than
10.0% of any one issuer's outstanding voting securities (except for its
interests in any qualified REIT subsidiary). See "--Other Tax Considerations--
Clinton REIT Proposals."

Prime Capital expects that any Mortgage Loans, MBS, including IOs and
Inverse IOs, Net Leased Real Estate and temporary investments that it acquires
generally will be qualifying assets for purposes of the 75.0% asset test,
except to the extent that less than 95.0% of the assets of a REMIC in which
Prime Capital owns an interest consists of "real estate assets" and Prime
Capital's proportionate share of those assets includes assets that are non-
qualifying assets for purposes of the 75.0% asset test. In addition, to the
extent that the principal balance of a Mortgage Loan exceeds the fair market
value of the real property securing such loan, such loan will not be a
qualifying asset for purposes of the 75.0% test. Prime Capital expects that
any Preferred Equity investments in partnerships or other pass-through
entities that own real estate also will be treated as qualifying real estate
assets for such purposes as long as the assets of each partnership or pass-
through entity are qualifying real estate assets. A Preferred Equity
investment in a corporation will not be a qualifying real estate asset.
Instead, Prime Capital would be subject to the 5.0% and 10.0% asset tests
described above with respect to any such investment. Through the Operating
Partnership, Prime Capital owns 100% of the preferred stock of the Taxable
Subsidiary, representing 95% of the value of the outstanding stock of the
Taxable Subsidiary, and notes issued by the Taxable Subsidiary in the
principal amount of $20,000,000. Prime Capital does not own, directly

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or indirectly, any of the voting common stock of the Taxable Subsidiary, and
Prime Capital believes that the value of its combined equity and debt
ownership interest in the Taxable Subsidiary will not exceed 5% of the value
of its total assets. Prime Capital will monitor the status of the assets that
it acquires for purposes of the various asset tests and has represented that
it will manage its portfolio in order to comply at all times with such tests.

If Prime Capital should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied the asset tests at the close of the preceding calendar
quarter and (ii) the discrepancy between the value of Prime Capital's assets
and the asset test requirements arose from changes in the market values of its
assets and was not wholly or partly caused by the acquisition of one or more
non-qualifying assets. If the condition described in clause (ii) of the
preceding sentence were not satisfied, Prime Capital still could avoid
disqualification by eliminating any discrepancy within 30 days after the close
of the calendar quarter in which it arose.

ANNUAL DISTRIBUTION REQUIREMENTS

To qualify as a REIT, Prime Capital is required to distribute dividends
(other than capital gain dividends and retained capital gains) to its
stockholders each year in an amount at least equal to (i) the sum of (A) 95.0%
of Prime Capital's "REIT taxable income" (computed without regard to the
dividends paid deduction and Prime Capital's net capital gain) plus (B) 95.0%
of the net income (after tax), if any, from foreclosure property, minus (ii)
the sum of certain items of non-cash income. Such distributions must be paid
in the taxable year to which they relate, or in the following taxable year if
declared before Prime Capital timely files its tax return for such year and if
paid on or before the first regular dividend payment after such declaration. A
distribution which is not pro rata within a class of stock entitled to a
dividend or which is not consistent with the rights to distributions between
classes of stock (a "preferential dividend") is not taken into consideration
for the purpose of meeting the distribution requirement. Accordingly, the
payment of a preferential dividend could affect Prime Capital's ability to
meet this distribution requirement.

To the extent that Prime Capital does not distribute all of its net capital
gain or distributes at least 95.0%, but less than 100%, of its "REIT taxable
income," as adjusted, it will be subject to tax on the undistributed amount at
regular capital gains or ordinary corporate tax rates, as the case may be.
Furthermore, if Prime Capital should fail to distribute for each calendar year
at least the sum of (i) 85.0% of its REIT ordinary income for such year, (ii)
95.0% of its REIT capital gain net income for such year, plus (iii) any
undistributed taxable income from prior periods, Prime Capital will be subject
to a 4.0% excise tax on the excess of such required distribution over the
amounts actually distributed. However, to the extent Prime Capital elects to
retain and pay income tax on net long-term capital gains it received during
the year such amounts will be treated as having been distributed for purposes
of the 4.0% excise tax.

It is possible that, from time to time, Prime Capital may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of
such expenses in arriving at its REIT taxable income. For example, Prime
Capital will recognize taxable income in excess of its cash receipts when, as
generally happens, OID accrues with respect to its Subordinated Interests.
Furthermore, some Distressed and Participating Mortgage Loans, may be deemed
to have OID, in which case Prime Capital will be required to recognize taxable
income in advance of the related cash flow. OID generally will be accrued
using a methodology that does not allow credit losses to be reflected until
they are actually incurred. In addition, Prime Capital may recognize taxable
market discount income upon the receipt of proceeds from the disposition of,
or principal payments on, Subordinated Interests and Mortgage Loans that are
"market discount bonds" (i.e., obligations with a stated redemption price at
maturity that is greater than Prime Capital's tax basis in such obligations),
although such proceeds often will be used to make non-deductible principal
payments on related borrowings. Prime Capital also may recognize Excess
Inclusion or other "phantom" taxable income from REMIC Residual Interests. It
also is possible that, from time to time, Prime Capital may recognize net
capital gain attributable to the sale of depreciated property that exceeds its
cash

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receipts from the sale. In addition, pursuant to certain Treasury Regulations,
Prime Capital may be required to recognize the amount of any payment to be
made pursuant to a shared appreciation provision over the term of the related
loan using the constant yield method. Also, because Prime Capital is an
accrual-basis taxpayer, it may have to recognize income on Distressed Mortgage
Loans even though the borrower is unable to pay the full amount due. Finally,
Prime Capital may recognize taxable income without receiving a corresponding
cash distribution if it forecloses on or makes a "significant modification"
(as defined in Regulations section 1.1001-3(e)) to a loan, to the extent that
the fair market value of the underlying property or the principal amount of
the modified loan, as applicable, exceeds Prime Capital's basis in the
original loan. Although the Code allows certain items of excess noncash income
(including OID and Excess Inclusion) to be disregarded for purposes of the
distribution requirements, Prime Capital may have less cash than is necessary
to meet its annual 95.0% distribution requirement or to avoid corporate income
tax or the excise tax imposed on certain undistributed income. In such a
situation, Prime Capital may find it necessary to arrange for short-term (or
possibly long-term) borrowings or to raise funds through the issuance of
Preferred Stock or additional Common Stock.

If Prime Capital fails to meet the 95.0% distribution requirement as a
result of an adjustment to Prime Capital's tax return by the IRS upon audit,
Prime Capital may retroactively cure the failure by paying "deficiency
dividends" to its stockholders in a later year, which may then be included in
Prime Capital's deduction for dividends paid for the earlier year. Prime
Capital may thus be able to avoid being taxed on amounts distributed as
deficiency dividends; however, Prime Capital will be required to pay interest
to the IRS based upon the amount of any deduction taken for deficiency
dividends.

PENALTY TAX ON PROHIBITED TRANSACTIONS

Any gross income derived from a prohibited transaction is not taken into
account in applying the 95.0% and 75.0% gross income tests necessary to
qualify as a REIT (but the net income from such a transaction is subject to a
100% tax). The term "prohibited transaction" generally includes a sale or
other disposition of property (other than foreclosure property or property
that was involuntarily converted) that is held primarily for sale to customers
in the ordinary course of a trade or business. Prime Capital believes that no
asset owned by Prime Capital will be held for sale to customers and that a
sale of any such asset will not be in the ordinary course of Prime Capital's
business. Whether property is held "primarily for sale to customers in the
ordinary course of a trade or business" depends, however, on the facts and
circumstances in effect from time to time, including those related to a
particular property. When relevant, Prime Capital will attempt to comply with
the terms of safe-harbor provisions in the Code prescribing when asset sales
will not be characterized as prohibited transactions. Complete assurance
cannot be given, however, that Prime Capital can comply with the safe-harbor
provisions of the Code or avoid owning property that may be characterized as
property held "primarily for sale to customers in the ordinary course of a
trade or business." To the extent necessary, transactions which may constitute
prohibited transactions (e.g., certain REMIC securitizations or whole loan
sales) will be undertaken by the Taxable Subsidiary rather than by Prime
Capital.

FAILURE TO QUALIFY

If Prime Capital fails to qualify for taxation as a REIT in any taxable year
and the relief provisions do not apply, Prime Capital will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to stockholders in any year in which
Prime Capital fails to qualify as a REIT will not be required and, if made,
will not be deductible by Prime Capital. As a result, Prime Capital's failure
to qualify as a REIT will reduce the cash available for distribution by Prime
Capital to its stockholders. In addition, if Prime Capital fails to qualify as
a REIT, all distributions to Prime Capital's stockholders will be taxable as
ordinary dividend income to the extent of Prime Capital's then current and
accumulated earnings and profits, and, subject to certain limitations in the
Code, corporate distributees may be eligible for the dividends-received
deduction. Unless entitled to relief under specific statutory provisions,
Prime Capital also will be ineligible for qualification as a REIT for the four
taxable years following the year during which qualification was lost. It is
not possible to determine whether Prime Capital would be entitled to such
statutory relief in all circumstances.

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TAXATION OF TAXABLE SUBSIDIARY

It is contemplated that the Taxable Subsidiary will undertake certain
activities which, if performed by Prime Capital, could produce nonqualifying
income for purposes of the 75% and 95% gross income tests. Such activities may
include, for example, certain securitization transactions (e.g., through
REMICs or FASITs), whole loan sales, certain hedging activities, and servicing
of mortgage loans or other real estate assets which are not owned by Prime
Capital. The income of the Taxable Subsidiary will be subject to all
applicable federal and state income taxes. Because the Taxable Subsidiary is
not a qualified REIT subsidiary, Prime Capital will include in its income only
the dividends it receives on the Taxable Subsidiary stock owned by Prime
Capital. Such dividend income is qualifying income for purposes of the 95%
test, but not the 75% test.

TAX ASPECTS OF PRIME CAPITAL'S INVESTMENT IN THE OPERATING PARTNERSHIP

Prime Capital holds a direct interest in the Operating Partnership. The
following discussion summarizes certain federal income tax considerations
applicable solely to Prime Capital's investment in the Operating Partnership.
The discussion does not address state or local tax laws or any federal tax
laws other than income tax laws.

Partnership Classification

Prime Capital is entitled to include in its income its distributive share of
the income, and to deduct its distributive share of the losses, of the
Operating Partnership only if the Operating Partnership is classified for
federal income tax purposes as a partnership rather than as an association (or
publicly-traded partnership) taxable as a corporation. Under Treasury
Regulations, an entity with two or more members formed as a partnership under
relevant state law will be taxed as a partnership for federal income tax
purposes unless it specifically elects otherwise. Prime Capital believes that
the Operating Partnership will be treated as a partnership for federal income
tax purposes because it was formed as a partnership under state law and has
two or more partners.

Additionally, Prime Capital believes that the Operating Partnership will not
be treated as a publicly traded partnership within the meaning of Code section
7704 that is taxed as a corporation for federal income tax purposes because,
under the applicable Treasury Regulations, none of the interests in the
Operating Partnership are registered under the Securities Act or traded on an
established securities market and the Operating Partnership does not have more
than 100 partners for purposes of Code Section 7704 (or will otherwise fall
within one of the other "safe harbors" for the Operating Partnership to avoid
being treated as having interests which are "readily tradeable on a secondary
market (or the substantial equivalent thereof)").

If for any reason the Operating Partnership were taxable as a corporation
rather than as a partnership for federal income tax purposes, the character of
Prime Capital's assets and items of gross income would change, and, as a
result, Prime Capital would most likely be unable to satisfy the income and
asset tests, which would thus prevent Prime Capital from qualifying as a REIT.
In addition, any change in the status for tax purposes of the Operating
Partnership might be treated as a taxable event, in which case Prime Capital
could incur a tax liability without any related cash distribution. Further, if
the Operating Partnership were to be treated as an association taxable as a
corporation, items of income, gain, loss, deduction and credit of the
Operating Partnership would not pass through to its partners; instead, the
Operating Partnership would be taxable as a corporation, subject to entity-
level taxation on its net income at regular corporate tax rates. The partners
of the Operating Partnership would be treated for federal income tax purposes
as stockholders, with distributions to such partners being treated as
dividends. See "--Requirements for Qualification--Income Tests" and "--Asset
Tests."

INCOME TAXATION OF THE OPERATING PARTNERSHIP AND ITS PARTNERS

Partners, Not Partnerships, Subject to Tax

A partnership (that is not a publicly traded partnership) is not subject to
tax as an entity for federal income tax purposes. Rather, partners are
allocated their proportionate share of the items of income, gain, loss,
deduction

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and credit of the partnership, and are potentially subject to tax thereon,
without regard to whether the partners receive any distributions form the
partnership. Prime Capital will be required to take into account its allocable
share of the foregoing items of the Operating Partnership for purposes of the
various REIT income tests and in the computation of its "REIT taxable income."
See "--Requirements for Qualification--Income Tests."

Partnership Allocations

Although a partnership agreement will generally determine the allocation of
a partnership's income and losses among the partners, such allocations will be
disregarded for tax purposes under Section 704(b) of the Code if they do not
comply with the provisions of Section 704(b) and the Treasury Regulations
promulgated thereunder. If an allocation is not recognized for federal income
tax purposes, the item subject to the allocation will be reallocated in
accordance with the partners' interests in the partnership, which will be
determined by taking into account all of the facts and circumstances relating
to the economic arrangement of the partners with respect to such item. Prime
Capital believes that the allocations of taxable income and loss contained in
the partnership agreements for the Operating Partnership complies with the
requirements of Section 704(b) of the Code and the Treasury Regulations
promulgated thereunder.

Tax Allocations With Respect to the Properties

Pursuant to Section 704(c) of the Code, income, gain, loss, and deduction
attributable to appreciated or depreciated property that is contributed to a
partnership in exchange for an interest in the partnership must be allocated
for federal income tax purposes in a manner such that the contributing partner
is charged with, or benefits from, respectively, the unrealized gain or
unrealized loss associated with the property at the time of the contribution.
The amount of such unrealized gain or unrealized loss is generally equal to
the difference between the fair market value of the contributed property at
the time of contribution and the adjusted tax basis of such property at the
time of contribution (a "Book-Tax Difference"). Such allocations are solely
for federal income tax purposes and do not affect the book capital accounts or
other economic or legal arrangements among the partners.

The Operating Partnership was formed by way of contributions, including
contributions of appreciated property by PCH. Consequently the Partnership
Agreement requires allocations of income, gain, loss and deduction
attributable to such contributed property to be made in a manner that is
consistent with Section 704(c) of the Code.

In general, these allocations tend to eliminate the Book-Tax Differences
over the life of the Operating Partnership by allocating to PCH, solely for
tax purposes, lower amounts of depreciation deductions and increased taxable
income and gain on the sale by the Operating Partnership of the property
contributed by PCH than would ordinarily be the case for economic or book
purposes. The Operating Partnership and Prime Capital will elect to use the
"traditional method" under Treasury Regulation section 1.704-3(c) as the
method of accounting for the Book-Tax Differences with respect to properties
contributed to the Operating Partnership. However, this allocation method may
not always entirely rectify a Book-Tax Difference on an annual basis or with
respect to a specific taxable transaction such as a sale. Moreover, the
application of Section 704(c) principles in tiered partnership arrangements is
not entirely clear. Accordingly, the IRS may assert that a different
allocation should be used to eliminate any such Book-Tax Difference.

With respect to any property purchased by the Operating Partnership
subsequent to this Offering, such property will initially have a tax basis
equal to its fair market value and Section 704(c) of the Code will not apply.

Basis in Partnership Interest

Prime Capital's adjusted tax basis in its partnership interest in the
Operating Partnership is generally (i) equal to the amount of cash and the
basis of any property contributed to the Operating Partnership by Prime

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Capital, (ii) increased by (A) Prime Capital's allocable share of the
Operating Partnership's income and (B) Prime Capital's allocable share of
indebtedness of the Operating Partnership, and (iii) reduced, but not below
zero, by (A) Prime Capital's allocable share of the Operating Partnership's
losses and (B) the amount of cash and the basis of any other property
distributed by the Operating Partnership to Prime Capital, including any
constructive cash distributions resulting from a reduction in Prime Capital's
allocable share of indebtedness of the Operating Partnership.

If the allocation to Prime Capital of its distributive share of any loss of
the Operating Partnership would reduce the adjusted tax basis in its
partnership interest in the Operating Partnership below zero, the recognition
of such excess loss will be deferred until such time and to the extent that
Prime Capital has sufficient tax basis in its partnership interest so that the
recognition of such loss would not reduce the amount of such tax basis below
zero. To the extent that the Operating Partnership's distributions, or any
decrease in Prime Capital's share of the indebtedness of the Operating
Partnership (each such decrease being considered a constructive cash
distribution to Prime Capital), would reduce Prime Capital's adjusted tax
basis in its partnership interest below zero, such excess distributions
(including such constructive distributions) would constitute taxable income to
Prime Capital. Such distributions and constructive distributions will normally
be characterized as a capital gain, and if Prime Capital has held its
partnership interest in the Operating Partnership for longer than the long-
term capital gain holding period (currently one year), the distributions and
constructive distributions will constitute long-term capital gains.

TAXATION OF TAXABLE U.S. STOCKHOLDERS

As used herein, the term "U.S. Stockholder" means a holder of shares of
Common Stock who (for United States federal income tax purposes) (i) is a
citizen or resident of the United States, (ii) is a corporation, partnership,
or other entity created or organized in or under the laws of the United States
or of any political subdivision thereof, (iii) is an estate whose income is
subject to taxation in the United States regardless of its connection with the
conduct of a U.S. trade or business or (iv) is a trust if a court within the
United States is able to exercise primary supervision over the administration
of the trust and one or more United States persons have the authority to
control all substantial decisions of the trust.

As long as Prime Capital continues to qualify as a REIT, distributions made
by Prime Capital out of its current or accumulated earnings and profits (and
not designated as capital gain dividends or retained capital gains) will
constitute dividends taxable to its U.S. Stockholders as ordinary income. Such
distributions will not be eligible for the dividends-received deduction in the
case of U.S. Stockholders that are corporations.

Dividends paid to U.S. Stockholders will be treated as portfolio income.
Such income, therefore, will not be subject to reduction by losses from
passive activities (i.e., any interest in a rental activity or in a trade or
business in which the holder does not materially participate, such as certain
interests held as a limited partner) of any holder who is subject to the
passive activity loss rules. Such distributions will, however, be considered
investment income which may be offset by certain investment expense
deductions.

Distributions made by Prime Capital that are properly designated by Prime
Capital as capital gain dividends will be taxable to U.S. Stockholders as
long-term capital gains (to the extent that they do not exceed Prime Capital's
actual net capital gain for the taxable year) without regard to the period for
which a U.S. Stockholder has held his/her shares of Common Stock. The highest
marginal individual income tax rate currently is 39.6%. The maximum tax rate
on long-term capital gains applicable to noncorporate taxpayers is 28.0% for
sales and exchange of assets held for more than one year but not more than 18
months and 20.0% for sales and exchange of assets held for more than 18
months. The maximum tax rate applicable to noncorporate taxpayers on long-term
capital gain from the sale or exchange of "section 1250 property" (i.e.,
depreciable real property) held for more than 18 months is 25.0% to the extent
that such gain would have been treated as ordinary income if the property were
"section 1245 property." With respect to distributions designated by Prime
Capital as capital gain dividends and retained capital gains that Prime
Capital is deemed to distribute, Prime Capital may designate (subject to
certain limits) whether the distribution is taxable to its noncorporate
stockholders at a 20.0%, 25.0%,

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or 28.0% rate. Thus, the tax rate differential between capital gain and
ordinary income for noncorporate taxpayers may be significant. In addition,
the characterization of income as capital gain or ordinary income may affect
the deductibility of capital losses. Capital losses not offset by capital
gains may be deducted against noncorporate taxpayers' ordinary income only up
to a maximum annual amount of $3,000. Unused capital losses may be carried
forward indefinitely by individuals. All net capital gain of a corporate
taxpayer is subject to tax at ordinary corporate rates. A corporate taxpayer
can deduct capital losses only to the extent of capital gains, with unused
losses being carried back three years and forward five years. U.S.
Stockholders that are corporations may, however, be required to treat up to
20.0% of certain capital gain dividends as ordinary income.

Prime Capital may elect to retain amounts representing long-term capital
gain income on which Prime Capital will be taxed at regular corporate rates.
In that case, each stockholder will be taxed on a proportionate share of the
total long-term capital gains retained by Prime Capital and will also receive
a credit for a proportionate share of the tax paid by Prime Capital. Finally,
each stockholder shall increase the adjusted basis in his/her shares by the
difference between the allocable amount of long-term capital gain and the tax
deemed paid by the stockholder. If Prime Capital should elect to retain long-
term capital gains, it will notify each stockholder of the relevant tax
information within 60 days after the close of the taxable year.

To the extent that Prime Capital makes distributions (not designated as
capital gain dividends or retained capital gains) in excess of its current and
accumulated earnings and profits, such distributions will be treated first as
a tax-free return of capital to each U.S. Stockholder, reducing the adjusted
basis which such U.S. Stockholder has in his/her shares of Common Stock for
tax purposes by the amount of such distribution (but not below zero), with
distributions in excess of a U.S. Stockholder's adjusted basis in his/her
shares taxable as capital gains (provided that the shares have been held as a
capital asset). Dividends declared by Prime Capital in October, November, or
December of any year and payable to a stockholder of record on a specified
date in any such month shall be treated as both paid by Prime Capital and
received by the stockholder on December 31 of such year, provided that the
dividend is actually paid by Prime Capital on or before January 31 of the
following calendar year. Stockholders may not include in their own income tax
returns any net operating losses or capital losses of Prime Capital.

Prime Capital's investment in Subordinated Interests and certain types of
MBS may cause it under certain circumstances to recognize taxable income in
excess of its economic income ("phantom income") and to experience an
offsetting excess of economic income over its taxable income in later years.
As a result, stockholders may from time to time be required to pay federal
income tax on distributions that economically represent a return of capital,
rather than a dividend. Such distributions would be offset in later years by
distributions representing economic income that would be treated as returns of
capital for federal income tax purposes. Accordingly, if Prime Capital
receives phantom income, its stockholders may be required to pay federal
income tax with respect to such income on an accelerated basis, i.e., before
such income is realized by the stockholders in an economic sense. Taking into
account the time value of money, such an acceleration of federal income tax
liabilities would cause stockholders to receive an after-tax rate of return on
an investment in Prime Capital that would be less than the after-tax rate of
return on an investment with an identical before-tax rate of return that did
not generate phantom income. For example, if an investor subject to an
effective income tax rate of 30% purchased a bond (other than a tax-exempt
bond) with an annual interest rate of 10.0% for its face value, his before-tax
return on his investment would be 10.0%, and his after-tax return would be
7.0%. However, if the same investor purchased stock of Prime Capital at a time
when the before-tax rate of return was 10.0%, his after-tax rate of return on
his stock might be somewhat less than 7.0% as a result of Prime Capital's
phantom income. In general, as the ratio of Prime Capital's phantom income to
its total income increases, the after-tax rate of return received by a taxable
stockholder of Prime Capital will decrease. Prime Capital will consider the
potential effects of phantom income on its taxable stockholders in managing
its investments.

Because Prime Capital expects to own REMIC Residual Interests, it is likely
that stockholders will not be permitted to offset certain portions of the
dividend income they derive from Prime Capital with their current deductions
or net operating loss carryovers or carrybacks. The portion of a stockholder's
dividends that will be

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subject to this limitation will equal his allocable share of any Excess
Inclusion income derived by Prime Capital with respect to the REMIC Residual
Interests. Prime Capital's Excess Inclusion income for any calendar quarter
will equal the excess of its income from REMIC Residual Interests over its
"daily accruals" with respect to such REMIC Residual Interests for the
calendar quarter. Daily accruals for a calendar quarter are computed by
allocating to each day on which a REMIC Residual Interest is owned a ratable
portion of the product of (i) the "adjusted issue price" of the REMIC Residual
Interest at the beginning of the quarter and (ii) 120% of the long-term
federal interest rate (adjusted for quarterly compounding) on the date of
issuance of the REMIC Residual Interest. The adjusted issue price of a REMIC
Residual Interest at the beginning of a calendar quarter equals the original
issue price of the REMIC Residual Interest, increased by the amount of daily
accruals for prior quarters and decreased by all prior distributions to Prime
Capital with respect to the REMIC Residual Interest. To the extent provided in
future Treasury regulations, the Excess Inclusion income with respect to any
REMIC Residual Interests owned by Prime Capital that do not have significant
value will equal the entire amount of the income derived from such REMIC
Residual Interests. Furthermore, to the extent that Prime Capital (or a
qualified REIT subsidiary) acquires or originates Mortgage Loans and uses
those loans to collateralize one or more multiple-class offerings of CMOs for
which no REMIC election is made ("Non-REMIC Transactions"), it is possible
that, to the extent provided in future Treasury regulations, stockholders will
not be permitted to offset certain portions of the dividend income that they
derive from Prime Capital that are attributable to Non-REMIC Transactions with
current deductions or net operating loss carryovers or carrybacks. Although no
applicable Treasury regulations have yet been issued, no assurance can be
provided that such regulations will not be issued in the future or that, if
issued, such regulations will not prevent Prime Capital's stockholders from
offsetting some portion of their dividend income with deductions or losses
from other sources.

Upon any sale or other disposition of shares of Common Stock, the holder
will generally recognize gain or loss for federal income tax purposes in an
amount equal to the difference between (i) the amount of cash and the fair
market value of any property received on such sale or other disposition, and
(ii) the holder's adjusted basis in the shares of stock. Such gain or loss
will generally be capital gain or loss and will be long-term gain, taxable at
a rate of 20.0%, or loss if such shares have been held for more than eighteen
months. In general, any loss recognized by a U.S. Stockholder upon the sale or
other disposition of shares of Common Stock that have been held for six months
or less (after applying certain holding period rules) will be treated as a
long-term capital loss, to the extent of distributions received by such U.S.
Stockholder from Prime Capital which were required to be treated as long-term
capital gains.

TAXATION OF TAX-EXEMPT STOCKHOLDERS

Tax-exempt entities, including qualified employee pension and profit sharing
trusts and individual retirement accounts ("Exempt Organizations"), generally
are exempt from federal income taxation. However, they are subject to taxation
on their unrelated business taxable income ("UBTI"). While many investments in
real estate generate UBTI, the IRS has issued a published ruling that dividend
distributions from a REIT to an exempt employee pension trust do not
constitute UBTI, provided that the shares of the REIT are not otherwise used
in an unrelated trade or business of the exempt employee pension trust. Based
on that ruling, amounts distributed by Prime Capital to Exempt Organizations
generally should not constitute UBTI. However, if an Exempt Organization
finances its acquisition of the Common Stock with debt, a portion of its
income from Prime Capital will constitute UBTI pursuant to the "debt-financed
property" rules. Furthermore, social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts, and qualified group
legal services plans that are exempt from taxation under paragraphs (7), (9),
(17), and (20), respectively, of Code section 501(c) are subject to different
UBTI rules, which generally will require them to characterize distributions
from Prime Capital as UBTI.

Special rules apply to certain tax-exempt pension funds (including 401(k)
plans but excluding IRAs or government pension plans) that own more than 10%
(measured by value) of a "pension held REIT" at any time during a taxable
year. Such a pension fund must treat a certain percentage of all dividends
received from the REIT during the year as unrelated business taxable income.
The percentage is equal to the ratio of the REIT's

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gross income (less direct expenses related thereto) derived from the conduct
of unrelated trades or businesses determined as if the REIT were a tax-exempt
pension fund, to the REIT's gross income (less direct expenses related
thereto) from all sources. The special rules will not apply to require a
pension fund to recharacterize a portion of its dividends as unrelated
business taxable income unless the percentage computed is at least 5.0%.

A REIT will be treated as a "pension held REIT" if the REIT is predominantly
held by tax-exempt pension funds and if the REIT would fail to satisfy the
5/50 Rule discussed above, see "Federal Income Tax Considerations--
Requirements for Qualification--Organizational Requirements," if the stock of
the REIT held by such tax-exempt pension funds were not treated as held
directly by their respective beneficiaries. A REIT is predominantly held by
tax-exempt pension funds if at least one tax-exempt pension fund holds more
than 25.0% (measured by value) of the REIT's stock, or if one or more tax-
exempt pension funds (each of which owns more than 10% (measured by value) of
the REIT's stock) own in the aggregate more than 50.0% (measured by value) of
the REIT's stock. Prime Capital believes that it will not be treated as a
pension-held REIT. However, because the shares of Prime Capital will be
publicly traded, no assurance can be given that Prime Capital is not or will
not become a pension-held REIT.

Any dividends received by an Exempt Organization that are allocable to
Excess Inclusion will be treated as UBTI. In addition, Prime Capital will be
subject to tax at the highest marginal corporate rate on the portion of any
Excess Inclusion income derived by Prime Capital from REMIC Residual Interests
that is allocable to stock of Prime Capital held by Disqualified
Organizations. Any such tax would be deductible by Prime Capital against its
income that is not Excess Inclusion income.

If Prime Capital derives Excess Inclusion income from REMIC Residual
Interests, a tax similar to the tax on Prime Capital described in the
preceding paragraph may be imposed on stockholders who are (i) pass-through
entities (i.e., partnerships, estates, trusts, regulated investment companies,
REITs, common trust funds, and certain types of cooperatives (including
farmers' cooperatives described in section 521 of the Code)) in which a
Disqualified Organization is a record holder of shares or interests and (ii)
nominees who hold Common Stock on behalf of Disqualified Organizations.
Consequently, a brokerage firm that holds shares of Common Stock in a "street
name" account for a Disqualified Organization may be subject to federal income
tax on the Excess Inclusion income derived from those shares.

The Treasury Department has been authorized to issue regulations regarding
issuances by a REIT of CMOs in Non-REMIC transactions. If such Treasury
regulations are issued in the future preventing taxable stockholders from
offsetting some percentage of the dividends paid by Prime Capital with
deductions or losses from other sources, that same percentage of Prime
Capital's dividends would be treated as UBTI for stockholders that are Exempt
Organizations. See "Federal Income Tax Considerations--Taxation of Taxable
U.S. Stockholders."

TAXATION OF NON-U.S. STOCKHOLDERS

The rules governing United States federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships, foreign trusts
and estates and other foreign stockholders (collectively, "Non-U.S.
Stockholders") are highly complex, and the following discussion is intended
only as a summary of such rules. PROSPECTIVE NON-U.S. STOCKHOLDERS SHOULD
CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE THE IMPACT OF UNITED STATES
FEDERAL, STATE, AND LOCAL INCOME TAX LAWS ON AN INVESTMENT IN SHARES OF COMMON
STOCK, INCLUDING ANY REPORTING REQUIREMENTS.

In general, Non-U.S. Stockholders are subject to regular United States
income tax with respect to their investment in shares of Common Stock in the
same manner as a U.S. Stockholder if such investment is "effectively
connected" with the Non-U.S. Stockholder's conduct of a trade or business in
the United States. A corporate Non-U.S. Stockholder that receives income with
respect to its investment in Common Stock that is (or is treated as)
effectively connected with the conduct of a trade or business in the United
States also may be subject to the 30% branch profits tax imposed by the Code,
which is payable in addition to regular United States

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corporate income tax. The following discussion addresses only the United
States taxation of Non-U.S. Stockholders whose investment in shares of Common
Stock is not effectively connected with the conduct of a trade or business in
the United States.

Distributions made by Prime Capital that are not attributable to gain from
the sale or exchange by Prime Capital of United States real property interests
and that are not designated by Prime Capital as capital gain dividends will be
treated as ordinary income dividends to the extent made out of current or
accumulated earnings and profits of Prime Capital. Generally, such ordinary
income dividends will be subject to United States withholding tax at the rate
of 30.0% on the gross amount of the dividends paid unless reduced or
eliminated by an applicable United States income tax treaty. Prime Capital
expects to withhold United States income tax at the rate of 30.0% on the gross
amount of any such dividends paid to a Non-U.S. Stockholder unless a lower
treaty rate applies and the Non-U.S. Stockholder has filed an IRS Form 1001
with Prime Capital certifying the Non-U.S. Stockholder's entitlement to treaty
benefits. The IRS has issued final regulations regarding the backup
withholding rules as applied to Non-U.S. Stockholders. Those regulations alter
the current system of backup withholding compliance and are effective for
distributions made after December 31, 1999.

Distributions made by Prime Capital in excess of its current and accumulated
earnings and profits will be treated first as a tax-free return of capital to
each Non-U.S. Stockholder, reducing the adjusted basis which such Non-U.S.
Stockholder has in his shares of Common Stock for U.S. tax purposes by the
amount of such distribution (but not below zero), with distributions in excess
of a Non-U.S. Stockholder's adjusted basis in his shares being treated as gain
from the sale or exchange of such shares, the tax treatment of which is
described below. If it cannot be determined at the time a distribution is made
whether or not such distribution will be in excess of Prime Capital's current
and accumulated earnings and profits, the distribution will be subject to
withholding at the rate applicable to a dividend distribution. However, the
Non-U.S. Stockholder may seek a refund from the IRS of any amount withheld if
it is subsequently determined that such distribution was, in fact, in excess
of Prime Capital's then current and accumulated earnings and profits.

If Prime Capital derives Excess Inclusion income from REMIC Residual
Interests, the portion of the dividends paid to Non-U.S. Stockholders that is
allocable to the Excess Inclusion income may not be eligible for exemption
from the 30.0% withholding tax or a reduced treaty rate. In addition, the U.S.
Treasury Department has been authorized to issue regulations regarding
issuances by a REIT of CMOs in Non-REMIC Transactions. If Treasury Regulations
are issued in the future preventing taxable stockholders from offsetting some
percentage of the dividends paid by Prime Capital with deductions or losses
from other sources, that same percentage of Prime Capital's dividends would
not be eligible for exemption from the 30.0% withholding tax or a reduced
treaty rate. See "--Taxation of Taxable U.S. Stockholders."

As long as Prime Capital continues to qualify as a REIT, distributions made
by Prime Capital that are attributable to gain from the sale or exchange by
Prime Capital of United States real property interests will be taxed to a Non-
U.S. Stockholder under the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, such distributions are taxed to a Non-U.S.
Stockholder as if such distributions were gains "effectively connected" with
the conduct of a trade or business in the United States. Accordingly, a Non-
U.S. Stockholder will be taxed on such distributions at the same capital gain
rates applicable to U.S. Stockholders (subject to any applicable alternative
minimum tax and a special alternative minimum tax in the case of non-resident
alien individuals). Distributions subject to FIRPTA also may be subject to the
30.0% branch profits tax in the case of a corporate Non-U.S. Stockholder that
is not entitled to treaty relief or exemption. Prime Capital will be required
to withhold tax from any distribution to a Non-U.S. Stockholder that could be
designated by Prime Capital as a capital gain dividend in an amount equal to
35.0% of the gross distribution. The amount of tax withheld is fully
creditable against the Non-U.S. Stockholder's FIRPTA tax liability, and if
such amount exceeds the Non-U.S. Stockholder's federal income tax liability
for the applicable taxable year, the Non-U.S. Stockholder may seek a refund of
the excess from the IRS. In addition, if Prime Capital designates prior
distributions as capital gain dividends, subsequent distributions, up to the
amount of such prior distributions, will be treated as capital gain dividends
for purposes of withholding.

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Gain recognized by a Non-U.S. Stockholder upon the sale or exchange of
shares of Common Stock generally will not be subject to United States taxation
unless the Common Stock constitutes a "United States real property interest"
within the meaning of FIRPTA. The Common Stock will not constitute a "United
States real property interest" so long as Prime Capital is a "domestically
controlled REIT." A "domestically controlled REIT" is a REIT in which at all
times during a specified testing period less than 50.0% in value of its stock
is held directly or indirectly by Non-U.S. Stockholders. However, because the
shares of Common Stock will be publicly traded, no assurance can be given that
Prime Capital is or will continue to be a "domestically-controlled REIT."
Notwithstanding the foregoing, gain from the sale or exchange of shares of
Common Stock not otherwise subject to FIRPTA will be taxable to a Non-U.S.
Stockholder if the Non-U.S. Stockholder is a nonresident alien individual who
is present in the United States for 183 days or more during the taxable year
and has a "tax home" in the United States. In such case, the nonresident alien
individual will be subject to a 30.0% United States withholding tax on the
amount of such individual's gain.

If Prime Capital did not constitute a "domestically-controlled REIT," gain
arising from the sale or exchange by a Non-U.S. Stockholder of shares of
Common Stock would be subject to United States taxation under FIRPTA as a sale
of a "United States real property interest" only if the selling Non-U.S.
Stockholder's interest in Prime Capital exceeded 5.0% at any time during the 5
years preceding the sale or exchange. If gain on the sale or exchange of
shares of the Common Stock were subject to taxation under FIRPTA, the Non-U.S.
Stockholder would be subject to regular United States income tax with respect
to such gain in the same manner as a U.S. Stockholder (subject to any
applicable alternative minimum tax, a special alternative minimum tax in the
case of nonresident alien individuals and the possible application of the
30.0% branch profits tax in the case of foreign corporations), and the
purchaser of the Common Stock (including Prime Capital in a redemption
transaction) would be required to withhold and remit to the IRS 10.0% of the
purchase price. Additionally, in such case, distributions on the Common Stock
to the extent they represent a return of capital or capital gain from the sale
of the stock, rather than dividends, would be subject to a 10.0% withholding
tax.

INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX

Prime Capital will report to its U.S. Stockholders and to the IRS the amount
of dividends paid during each calendar year and the amount of tax withheld, if
any, with respect thereto. Under the backup withholding rules, a U.S.
Stockholder may be subject to backup withholding at the rate of 31.0% on
dividends paid unless such U.S. Stockholder (i) is a corporation or falls
within certain other exempt categories and, when required, can demonstrate
this fact, or (ii) provides a taxpayer identification number, certifies as to
no loss of exemption from backup withholding, and otherwise complies with
applicable requirements of the backup withholding rules. A U.S. Stockholder
who does not provide Prime Capital with his correct taxpayer identification
number also may be subject to penalties imposed by the IRS. Any amount paid as
backup withholding will be creditable against the U.S. Stockholder's federal
income tax liability. In addition, Prime Capital may be required to withhold a
portion of any capital gain distributions made to U.S. Stockholders who fail
to certify their non-foreign status to Prime Capital. See "Federal Income Tax
Considerations--Taxation of Non-U.S. Stockholders." The IRS has issued final
regulations regarding the backup withholding rules as applied to Non-U.S.
Stockholders. Those regulations alter the current system of backup withholding
compliance and are effective for distributions made after December 31, 1999.

Additional issues may arise pertaining to information reporting and backup
withholding with respect to Non-U.S. Stockholders, and Non-U.S. Stockholders
should consult their tax advisors with respect to any such information
reporting and backup withholding requirements.

OTHER TAX CONSIDERATIONS

CLINTON REIT PROPOSALS

The Clinton Administration budget proposals for fiscal year 1999 include
various proposed changes with respect to the REIT federal income tax laws.
Most significant to Prime Capital is a proposal that would prohibit

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a REIT from owning more than 10% of the voting power or value of the
outstanding stock of any C corporation (other than a qualified REIT
subsidiary). Under current law, a REIT is only prohibited from owning more
than 10% of the voting stock of a corporation. Prime Capital's ownership of
all of the non-voting preferred stock of the Taxable Subsidiary complies with
current REIT qualification rules while allowing Prime Capital to receive
substantially all of the economic benefit (i.e., 95%) of the Taxable
Subsidiary's income-producing activities on an after-tax basis. If enacted,
the administration's proposal either could limit the value of Prime Capital's
investment in the Taxable Subsidiary to no more than 10% of such economic
benefits or, if transition rules are enacted could limit the future ability of
the Taxable Subsidiary to increase its level of operations or acquire new
assets.

The Clinton Administration proposals would also eliminate the ability of an
existing C corporation which elects REIT status to defer recognition of built-
in gain on assets until such assets are disposed of during a 10 year period
(under current law, thereafter no gain is recognized). The proposal would
eliminate the availability of that built-in gain deferral provision for large
C corporations (i.e., corporations the value of whose stock is more than
$5,000,000). This proposal, if enacted, could adversely affect the ability of
Prime Capital to acquire substantially all of the assets of existing C
corporations and thus potentially limit Prime Capital's growth.

No prediction can be made as to the likelihood of passage into law of the
administration's REIT proposals or as to the effective date of any changes.

OTHER POSSIBLE LEGISLATIVE OR OTHER ACTIONS AFFECTING TAX CONSEQUENCES

In addition to the recent administrative REIT proposals, prospective holders
should recognize that the present federal income tax treatment of Prime
Capital may be modified by future legislative, judicial or administrative
actions or decisions at any time, which may be retroactive in effect, and, as
a result, any such action or decision may affect investments and commitments
previously made. The rules dealing with federal income taxation are constantly
under review by persons involved in the legislative process and by the IRS and
the Treasury Department, resulting in statutory changes as well as
promulgation of new, or revisions to existing, regulations and revised
interpretations of established concepts. No prediction can be made as to the
likelihood of passage of any new tax legislation or other provisions either
directly or indirectly affecting Prime Capital or its stockholders. Revisions
in federal income tax laws and interpretations thereof could adversely affect
the tax consequences of an investment in the Common Stock.

Prime Capital or Prime Capital's stockholders may be subject to state and
local tax in various states and localities, including those states and
localities in which it or they transact business, own property, or reside. The
state and local tax treatment of Prime Capital and its stockholders in such
jurisdictions may differ from the federal income tax treatment described
above. Consequently, prospective stockholders should consult their own tax
advisors regarding the effect of state and local tax laws upon an investment
in the Common Stock.

ERISA CONSIDERATIONS

The following is a summary of material considerations arising under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the
prohibited transaction provisions of section 4975 of the Code that may be
relevant to a prospective purchaser (including, with respect to the discussion
contained in "--Status of Prime Capital under ERISA," to a prospective
purchaser that is not an employee benefit plan, another tax-qualified
retirement plan, or an individual retirement account ("IRA")). The discussion
does not purport to deal with all aspects of ERISA or section 4975 of the Code
that may be relevant to particular stockholders (including plans subject to
Title I of ERISA, other retirement plans and IRAs subject to the prohibited
transaction provisions of section 4975 of the Code, and governmental plans or
church plans that are exempt from ERISA and section 4975 of the Code but that
may be subject to state law requirements) in light of their particular
circumstances.

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The discussion is based on current provisions of ERISA and the Code,
existing and currently proposed regulations under ERISA and the Code, the
legislative history of ERISA and the Code, existing administrative rulings of
the Department of Labor ("DOL") and reported judicial decisions. No assurance
can be given that legislative, judicial, or administrative changes will not
affect the accuracy of any statements herein with respect to transactions
entered into or contemplated prior to the effective date of such changes.

A FIDUCIARY MAKING THE DECISION TO INVEST IN THE COMMON STOCK ON BEHALF OF A
PROSPECTIVE PURCHASER THAT IS AN EMPLOYEE BENEFIT PLAN, A TAX QUALIFIED
RETIREMENT PLAN, OR AN IRA SHOULD CONSULT ITS OWN LEGAL ADVISOR REGARDING THE
SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE CODE, AND
STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP, OR SALE OF THE COMMON STOCK
BY SUCH PLAN OR IRA.

EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS AND IRAS

Each fiduciary of a pension, profit-sharing, or other employee benefit plan
(a "Plan") subject to Title I of ERISA should consider carefully whether an
investment in the Common Stock is consistent with his fiduciary
responsibilities under ERISA. In particular, the fiduciary requirements of
Part 4 of Title I of ERISA require a Plan's investment to be (i) prudent and
in the best interests of the Plan, its participants, and its beneficiaries,
(ii) diversified in order to minimize the risk of large losses, unless it is
clearly prudent not to do so, and (iii) authorized under the terms of the
Plan's governing documents (provided the documents are consistent with ERISA).
In determining whether an investment in the Common Stock is prudent for
purposes of ERISA, the appropriate fiduciary of a Plan should consider all of
the facts and circumstances, including whether the investment is reasonably
designed, as a part of the Plan's portfolio for which the fiduciary has
investment responsibility, to meet the objectives of the Plan, taking into
consideration the risk of loss and opportunity for gain (or other return) from
the investment, the diversification, cash flow, and funding requirements of
the Plan's portfolio. A fiduciary also should take into account the nature of
the Company's business, the management of the Company, the length of the
Company's operating history, the fact that certain investment assets may not
have been identified yet, and the possibility of the recognition of UBTI.

The fiduciary of an IRA or of a qualified retirement plan not subject to
Title I of ERISA because it is a governmental or church plan or because it
does not cover common law employees (a "Non-ERISA Plan") should consider that
such an IRA or Non-ERISA Plan may only make investments that are authorized by
the appropriate governing documents and under applicable state law.

Fiduciaries of Plans and persons making the investment decision for an IRA
or other Non-ERISA Plan should consider the application of the prohibited
transaction provisions of ERISA and the Code in making their investment
decision. A "party in interest" or "disqualified person" with respect to a
Plan or IRA subject to Code section 4975 is subject to (i) an initial 15%
excise tax on the amount involved in any prohibited transaction involving the
assets of the plan or IRA and (ii) an excise tax equal to 100% of the amount
involved if any prohibited transaction is not corrected. If the disqualified
person who engages in the transaction is the individual on behalf of whom an
IRA is maintained (or his beneficiary), the IRA will lose its tax-exempt
status and its assets will be deemed to have been distributed to such
individual in a taxable distribution (and no excise tax will be imposed) on
account of the prohibited transaction. In addition, a fiduciary who permits a
Plan to engage in a transaction that the fiduciary knows or should know is a
prohibited transaction may be liable to the Plan for any loss the Plan incurs
as a result of the transaction or for any profits earned by the fiduciary in
the transaction.

STATUS OF PRIME CAPITAL UNDER ERISA

The following section discusses certain principles that apply in determining
whether the fiduciary requirements of ERISA and the prohibited transaction
provisions of ERISA and the Code apply to an entity because one or more
investors in the equity interests in the entity is a Plan or is a Non-ERISA
Plan or IRA

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subject to section 4975 of the Code. A Plan fiduciary also should consider the
relevance of those principles to ERISA's prohibition on improper delegation of
control over or responsibility for "plan assets" and ERISA's imposition of co-
fiduciary liability on a fiduciary who participates in, permits (by action or
inaction) the occurrence of, or fails to remedy a known breach by another
fiduciary.

If the assets of the Company are deemed to be "plan assets" under ERISA, (i)
the prudence standards and other provisions of Part 4 of Title I of ERISA
would be applicable to any transactions involving the Company's assets, (ii)
persons who exercise any authority over the Company's assets, or who provide
investment advice to the Company, would (for purposes of the fiduciary
responsibility provisions of ERISA) be fiduciaries of each Plan that acquires
Common Stock, and transactions involving the Company's assets undertaken at
their direction or pursuant to their advice might violate their fiduciary
responsibilities under ERISA, especially with regard to conflicts of interest,
(iii) a fiduciary exercising his investment discretion over the assets of a
Plan to cause it to acquire or hold the Common Stock could be liable under
Part 4 of Title I of ERISA for transactions entered into by the Company that
do not conform to ERISA standards of prudence and fiduciary responsibility,
and (iv) certain transactions that the Company might enter into in the
ordinary course of its business and operations might constitute "prohibited
transactions" under ERISA and the Code.

Regulations of the DOL defining "plan assets" (the "Plan Asset Regulations")
generally provide that when a Plan or Non-ERISA Plan or IRA acquires a
security that is an equity interest in an entity and the security is neither a
"publicly-offered security" nor a security issued by an investment company
registered under the Investment Company Act of 1940, the Plan's or Non-ERISA
Plan's or IRA's assets include both the equity interest and an undivided
interest in each of the underlying assets of the issuer of such equity
interest, unless one or more exceptions specified in the Plan Asset
Regulations are satisfied.

The Plan Asset Regulations define a publicly-offered security as a security
that is "widely-held," "freely transferable," and either part of a class of
securities registered under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), or sold pursuant to an effective registration statement
under the Securities Act (provided the securities are registered under the
Exchange Act within 120 days after the end of the fiscal year of the issuer
during which the offering occurred). The Common Stock is being sold in an
offering registered under the Securities Act and will be registered under the
Exchange Act. The Plan Asset Regulations provide that a security is "widely
held" only if it is part of a class of securities that is owned by 100 or more
investors independent of the issuer and of one another. A security will not
fail to be widely held because the number of independent investors falls below
100 subsequent to the initial public offering as a result of events beyond the
issuer's control. The Company anticipates that upon completion of this
offering, the Common Stock will be "widely held."

The Plan Asset Regulations provide that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The Plan Asset Regulations further provide
that where a security is part of an offering in which the minimum investment
is $10,000 or less (as is the case with this offering), certain restrictions
ordinarily will not, alone or in combination, affect a finding that such
securities are freely transferable. The restrictions on transfer enumerated in
the Plan Asset Regulations as not affecting that finding include: (i) any
restriction on or prohibition against any transfer or assignment that would
result in the termination or reclassification of an entity for federal or
state tax purposes, or that otherwise would violate any federal or state law
or court order, (ii) any requirement that advance notice of a transfer or
assignment be given to the issuer, (iii) any administrative procedure that
establishes an effective date, or an event (such as completion of an
offering), prior to which a transfer or assignment will not be effective, and
(iv) any limitation or restriction on transfer or assignment that is not
imposed by the issuer or a person acting on behalf of the issuer. The Company
believes that the restrictions imposed under the Charter on the transfer of
the Company's stock will not result in the failure of the Common Stock to be
"freely transferable." The Company also is not aware of any other facts or
circumstances limiting the transferability of the Common Stock that are not
enumerated in the Plan Asset Regulations as those not affecting free
transferability, and no assurance can be given that the DOL or the Treasury
Department will not reach a contrary conclusion.

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Assuming that the Common Stock will be "widely held" and that no other facts
and circumstances other than those referred to in the preceding paragraph
exist that restrict transferability of the Common Stock, the shares of Common
Stock should be publicly offered securities and the assets of the Company
should not be deemed to be "plan assets" of any Plan, IRA, or Non-ERISA Plan
that invests in the Common Stock.

CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
AND REAL PROPERTY INVESTMENTS

The Company intends to acquire Mortgage Loans as well as MBS and other real
property. Even though the Company will not own Mortgage Loans directly in
connection with its acquisition of MBS, its return thereon will depend upon,
among other things, the ability of the servicer of the underlying Mortgage
Loans to foreclose upon those Mortgage Loans in default and sell the
underlying real property. There are a number of legal considerations involved
in the acquisition of Mortgage Loans or real property or the foreclosure and
sale of defaulted Mortgage Loans (whether individually or as part of a series
of MBS). The following discussion provides general summaries of certain legal
aspects of mortgage loans and real property. Because such legal aspects are
governed by applicable state law (which laws vary from state to state), the
summaries do not purport to be complete, to reflect the laws of any particular
state, or to encompass the laws of all states. Accordingly, the summaries are
qualified in their entirety by reference to the applicable laws of the states
where the property is located.

GENERAL

Each mortgage loan will be evidenced by a note or bond and secured by an
instrument granting a security interest in real property, which may be a
mortgage, deed of trust or a deed to secure debt, depending upon the
prevailing practice and law in the state in which the related Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as "mortgages." A mortgage creates a lien
upon, or grants a title interest in, the real property covered thereby, and
represents the security for the repayment of the indebtedness customarily
evidenced by a promissory note. The priority of the lien created or interest
granted will depend on the terms of the mortgage and, in some cases, on the
terms of separate subordination agreements or intercreditor agreements with
others that hold interests in the real property, the knowledge of the parties
to the mortgage and, generally, the order of recordation of the mortgage in
the appropriate public recording office. However, the lien of a recorded
mortgage will generally be subordinate to later-arising liens for real estate
taxes and assessments and other charges imposed under governmental police
powers.

TYPES OF MORTGAGE INSTRUMENTS

There are two parties to a mortgage: a mortgagor (the borrower and usually
the owner of the subject property) and a mortgagee (the lender). In contrast,
a deed of trust is a three-party instrument, among a trustor (the equivalent
of a borrower), a trustee to whom the real property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. Under a
deed of trust, the trustor grants the property, irrevocably until the debt is
paid, in trust and generally with a power of sale, to the trustee to secure
repayment of the indebtedness evidenced by the related note. A deed to secure
debt typically has two parties. The grantor (the borrower) conveys title to
the real property to the grantee (the lender), generally with a power of sale,
until such time as the debt is repaid. The mortgagee's authority under a
mortgage, the trustee's authority under a deed of trust and the grantee's
authority under a deed to secure debt are governed by the express provisions
of the related instrument, the law of the state in which the real property is
located, certain federal laws and, in some deed of trust transactions, the
directions of the beneficiary.

INTERESTS IN REAL PROPERTY

The interests in real property typically covered by a mortgage, deed of
trust or deed to secure debt is most often the fee simple estate in land and
improvements. However, such instruments may encumber other interests in real
property, such as a tenant's interest in the lease of land or improvements, or
both, and the leasehold estate

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created by such lease. An instrument covering an interest in real property
other than the fee estate requires special provisions in the instrument
creating such interest or in the mortgage, deed of trust or deed to secure
debt, to protect the mortgagee against termination of such interest before the
mortgage, deed of trust or deed to secure debt is paid.

LEASES AND RENTS

Mortgages that encumber income-producing property often contain an
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease
and the income derived therefrom, while (unless rents are to be paid directly
to the lender) retaining a revocable license to collect the rents for so long
as there is no default. If the borrower defaults, the license terminates and
the lender is entitled to collect the rents. Local law may require that the
lender take possession of the property and/or obtain a court-appointed
receiver before becoming entitled to collect the rents.

The potential payments from a property may be less than the periodic
payments due under the mortgage. For example, the net income that would
otherwise be generated from the property may be less than the amount that
would be needed to service the debt if the leases on the property are at
below-market rents, the market rents have fallen since the original financing,
vacancies have increased, or as a result of excessive or increased
maintenance, repair or other obligations to which a lender succeeds as
landlord.

CONDEMNATION AND INSURANCE

The form of the mortgage or deed of trust used by many lenders confers on
the mortgagee or beneficiary the right both to receive all proceeds collected
under any hazard insurance policy and all awards made in connection with any
condemnation proceedings, and to apply such proceeds and awards to any
indebtedness secured by the mortgage or deed of trust, in such order as the
mortgagee or beneficiary may determine. Thus, in the event improvements on the
property are damaged or destroyed by fire or other casualty, or in the event
the property is taken by condemnation, the mortgagee or beneficiary under the
senior mortgage or deed of trust will have the prior right to collect any
insurance proceeds payable under a hazard insurance policy and any award of
damages in connection with the condemnation and to apply the same to the
indebtedness secured by the senior mortgage or deed of trust. Proceeds in
excess of the amount of senior mortgage indebtedness will, in most cases, be
applied to the indebtedness of a junior mortgage or trust deed to the extent
the junior mortgage or deed of trust so provides. The laws of certain states
may limit the ability of mortgagees or beneficiaries to apply the proceeds of
hazard insurance and partial condemnation awards to the secured indebtedness.
In such states, the mortgagor or trustor must be allowed to use the proceeds
of hazard insurance to repair the damage unless the security of the mortgagee
or beneficiary has been impaired. Similarly, in certain states, the mortgagee
or beneficiary is entitled to the award for a partial condemnation of the real
property security only to the extent that its security is impaired.

FORECLOSURE

General. Foreclosure is a legal procedure that allows the lender to recover
its mortgage debt by enforcing its rights and available legal remedies under
the mortgage. If the borrower defaults in payment or performance of its
obligations under the note or mortgage, the lender has the right to institute
foreclosure proceedings to sell the real property at public auction to satisfy
the indebtedness.

Foreclosure procedures vary from state to state. Two primary methods of
foreclosing a mortgage are judicial foreclosure, involving court proceedings,
and non-judicial foreclosure pursuant to a power of sale granted in the
mortgage instrument. Other foreclosure procedures are available in some
states, such as strict foreclosure, but they are either infrequently used or
available only in limited circumstances.

Judicial Foreclosure. A judicial foreclosure proceeding is conducted in a
court having jurisdiction over the mortgaged property. Generally, the action
is initiated by the service of legal pleadings upon all parties having a

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subordinate interest of record in the real property and all parties in
possession of the property, under leases or otherwise, whose interests are
subordinate to the mortgage. A foreclosure action is subject to most of the
delays and expenses of other lawsuits if defenses are raised or counterclaims
are interposed, and sometimes requires several years to complete. When the
lender's right to foreclose is contested, the legal proceedings can be time-
consuming. Upon successful completion of a judicial foreclosure proceeding,
the court generally issues a judgment of foreclosure and appoints a referee or
other officer to conduct a public sale of the mortgaged property, the proceeds
of which are used to satisfy the judgment. Such sales are made in accordance
with procedures that vary from state to state.

Public Sale. A third party may be unwilling to purchase a mortgaged property
at a public sale following judicial foreclosure because of the difficulty in
determining the value of such property at the time of sale, due to, among
other things, redemption rights which may exist and the possibility of
physical deterioration of the property during the foreclosure proceedings. For
these reasons, it is common for the lender to purchase the mortgaged property
for an amount equal to or less than the underlying debt and accrued and unpaid
interests plus the expenses of foreclosure. Generally, state law controls the
amount of foreclosure costs and expenses which may be recovered by a lender.
Thereafter, subject to the mortgagors right in some states to remain in
possession during a redemption period, if applicable, the lender will become
the owner of the property and have both benefits and burdens of ownership of
the mortgaged property. For example, the lender will have the obligation to
pay debt service on any senior mortgages, to pay taxes, obtain casualty
insurance and make such repairs at its own expense as are necessary to render
the property suitable for sale. The costs of operating and maintaining a
commercial or multifamily residential property may be significant and may be
greater than the income derived from that property.

Non-Judicial Foreclosure/Power of Sale. Foreclosure of a deed of trust is
generally accomplished by a non-judicial trustee's sale pursuant to a power of
sale typically granted in the deed of trust. A power of sale may also be
contained in any other type of mortgage instrument if applicable law so
permits. A power of sale under a deed of trust allows a non-judicial public
sale to be conducted generally following a request from the beneficiary/lender
to the trustee to sell the property upon default by the borrower and after
notice of sale is given in accordance with the terms of the mortgage and
applicable state law. The borrower or junior lienholder may then have the
right, during a reinstatement period required in some states, to cure the
default by paying the entire actual amount in arrears (without regard to the
acceleration of the indebtedness), plus the lender's expenses incurred in
enforcing the obligation. In other states, the borrower or the junior
lienholder is not provided a period to reinstate the loan, but has only the
right to pay off the entire debt to prevent the foreclosure sale. Generally,
state law governs the procedure for public sale, the parties entitled to
notice, the method of giving notice and the applicable time periods.

Equitable Limitations on Enforceability of Certain Provisions. United States
courts traditionally have imposed general equitable principles to limit the
remedies available to lenders in foreclosure actions. These principles are
generally designed to relieve borrowers from the effects of mortgage defaults
perceived as harsh or unfair. Relying on such principles, a court may alter
the specific terms of a loan to the extent it considers necessary to prevent
or remedy an injustice, undue oppression or overreaching, or may require the
lender to undertake affirmative actions to determine the cause of the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's and have required that lenders reinstate loans or recast payment
schedules in order to accommodate borrowers who are suffering from a temporary
financial disability. In other cases, courts have limited the right of the
lender to foreclose in the case of a non-monetary default, such as a failure
to adequately maintain the mortgaged property or an impermissible further
encumbrance of the mortgaged property.

Even if the lender is successful in the foreclosure action and is able to
take possession of the property, the costs of operating and maintaining a
commercial or multifamily property may be significant and may be greater than
the income derived from that property. The costs of management and operation
of those mortgaged properties which are hotels, motels, restaurants, nursing
homes, convalescent homes or hospitals may be

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particularly significant because of the expertise, knowledge and, with respect
to nursing or convalescent homes, regulatory compliance, required to run such
operations and the effect which foreclosure and a change in ownership may have
with respect to consent requirements and on the public's and the industry's
(including franchisors') perception of the quality of such operations. The
lender also will commonly obtain the services of a real estate broker and pay
the broker's commission in connection with the sale or lease of the property.
Depending upon market conditions, the ultimate proceeds of the sale of the
property may not equal the lender's investment in the property. Moreover,
because of the expenses associated with acquiring, owning and selling a
mortgaged property, a lender could realize an overall loss on a mortgage loan
even if the mortgaged property is sold at foreclosure, or resold after it is
acquired through foreclosure, for an amount equal to the full outstanding
principal amount of the loan plus accrued interest.

The holder of a junior mortgage that forecloses on a mortgaged property does
so subject to senior mortgages and any other prior liens, and may be obliged
to keep senior mortgage loans current in order to avoid foreclosure of its
interest in the property. In addition, if the foreclosure of a junior mortgage
triggers the enforcement of a "due-on-sale" clause contained in a senior
mortgage, the junior mortgagee could be required to pay the full amount of the
senior mortgage indebtedness or face foreclosure.

Post-Sale Redemption. In a majority of states, after sale pursuant to a deed
of trust or foreclosure of a mortgage, the borrower and foreclosed junior
lienors are given a statutory period in which to redeem the property. In some
states, statutory redemption may occur only upon payment of the foreclosure
sale price. In other states, redemption may be permitted if the former
borrower pays only a portion of the sums due. In some states, the borrower
retains possession of the property during the statutory redemption period. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property because the exercise of a right of
redemption would defeat the title of any purchaser through a foreclosure.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has expired. In some states, a post-sale statutory right of
redemption may exist following a judicial foreclosure, but not following a
trustee's sale under a deed of trust.

Anti-Deficiency Legislation. Any commercial or multi-family residential
mortgage loans acquired by the Company are likely to be nonrecourse loans, as
to which recourse in the case of default will be limited to the property and
such other assets, if any, that were pledged to secure the mortgage loan.
However, even if a mortgage loan by its terms provides for recourse to the
borrower's other assets, a lender's ability to realize upon those assets may
be limited by state law. For example, in some states a lender cannot obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust or by nonjudicial means. Other statutes may require the lender
to exhaust the security afforded under a mortgage before bringing a personal
action against the borrower. In certain other states, the lender has the
option of bringing a personal action against the borrower on the debt without
first exhausting such security; however, in some of those states, the lender,
following judgment on such personal action, may be deemed to have elected a
remedy and thus may be precluded from foreclosing upon the security.
Consequently, lenders in those states where such an election of remedy
provision exists may choose to proceed first against the security. Finally,
other statutory provisions, designed to protect borrowers from exposure to
large deficiency judgments that might result from bidding at below-market
values at the foreclosure sale, limit any deficiency judgment to the excess of
the outstanding debt over the fair market value of the property at the time of
the sale.

Cooperatives. Mortgage loans may be secured by a security interest on the
borrower's ownership interest in shares, and the proprietary leases
appurtenant thereto (or cooperative contract rights), allocable to cooperative
dwelling units that may be vacant or occupied by non-owner tenants. Such loans
are subject to certain risks not associated with mortgage loans secured by a
lien on the fee estate of a borrower in real property. Such a loan typically
is subordinate to the mortgage, if any, on the cooperative's building which,
if foreclosed, could extinguish the equity in the building and the proprietary
leases of the dwelling units derived from ownership of the shares of the
cooperative. Further, transfer of shares in a cooperative are subject to
various regulations as well as to restrictions (including transfer
restrictions) under the governing documents of the cooperative, and the

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shares may be canceled in the event that associated maintenance charges due
under the related proprietary leases are not paid. Typically, a recognition
agreement between the lender and the cooperative provides, among other things,
the lender with an opportunity to cure a default under a proprietary lease but
such recognition agreements may not have been obtained in the case of all the
mortgage loans secured by cooperative shares (or contract rights).

Under the laws applicable in many states, "foreclosure" on cooperative
shares is accomplished by a sale in accordance with the provisions of Article
9 of the Uniform Commercial Code (the "UCC") and the security agreement
relating to the shares. Article 9 of the UCC requires that a sale be conducted
in a "commercially reasonable" manner, which may be dependent upon, among
other things, the notice given to the debtor and the method, manner, time,
place and terms of the sale. Article 9 of the UCC provides that the proceeds
of the sale will be applied first to pay the costs and expenses of the sale
and then to satisfy the indebtedness secured by the lender's security
interest. A recognition agreement, however, generally provides that the
lender's right to reimbursement is subject to the right of the cooperative to
receive sums due under the proprietary leases.

GROUND LEASE RISKS

Mortgage Loans may be secured by a mortgage on a ground lease. Leasehold
mortgages are subject to certain risks not associated with Mortgage Loans
secured by a fee estate. The most significant of these risks is that the
ground lease creating the leasehold estate could terminate, leaving the
leasehold mortgagee without its security. The ground lease may terminate if,
among other reasons, the ground lessee breaches or defaults in its obligations
under the ground lease or there is a bankruptcy of the ground lessee or the
ground lessor. This risk may be minimized if the ground lease contains certain
provisions protective of the mortgagee, but the ground leases that secure
Mortgage Loans may not contain some of these protective provisions.

BANKRUPTCY LAWS

Operation of Title 11 of the United States Code, as amended (the "Bankruptcy
Code") and related state laws may interfere with or affect the ability of a
lender to realize upon collateral and/or to enforce a deficiency judgment. For
example, under the Bankruptcy Code, virtually all actions (including
foreclosure actions and deficiency judgment proceedings) to collect a debt are
automatically stayed upon the filing of the bankruptcy petition and, often, no
interest or principal payments are made during the course of the bankruptcy
case. The delay and the consequences thereof caused by such automatic stay can
be significant. Also, under the Bankruptcy Code, the filing of a petition in
bankruptcy by or on behalf of a junior lien or may stay the senior lender from
taking action to foreclose out such junior lien.

Under the Bankruptcy Code, provided certain substantive and procedural
safeguards protective of the lender are met, the amount and terms of a
mortgage loan secured by a lien on property of the debtor may be modified
under certain circumstances. For example, the outstanding amount of the loan
may be reduced to the then-current value of the property (with a corresponding
partial reduction of the amount of lender's security interest) pursuant to a
confirmed plan or lien avoidance proceeding, thus leaving the lender a general
unsecured creditor for the difference between such value and the outstanding
balance of the loan. Other modifications may include the reduction in the
amount of each scheduled payment, by means of a reduction in the rate of
interest and/or an alteration of the repayment schedule (with or without
affecting the unpaid principal balance of the loan, and/or by an extension (or
shortening) of the term to maturity.

Federal bankruptcy law may also have the effect of interfering with or
affecting the ability of the secured lender to enforce the borrower's
assignment of rents and leases related to the mortgaged property. Under
section 362 of the Bankruptcy Code, the lender will be stayed from enforcing
the assignment, and the legal proceedings necessary to resolve the issue could
be time-consuming, with resulting delays in the lender's receipt of the rents.
In addition, the Bankruptcy Code has been amended to provide that a lender's
perfected pre-petition security interest in leases, rents and hotel revenues
continues in the post-petition leases, rents and hotel revenues, unless a
bankruptcy court orders to the contrary "based on the equities of the case."

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In a bankruptcy or similar proceeding, action may be taken seeking the
recovery as a preferential transfer of any payments made by the mortgagor
under the related mortgage loan to the owner of such mortgage loan. Payments
on long-term debt may be protected from recovery as preferences if they are
payments in the ordinary course of business made on debts incurred in the
ordinary course of business. Whether any particular payment would be protected
depends upon the facts specific to a particular transaction.

A trustee in bankruptcy, in some cases, may be entitled to collect its costs
and expenses in preserving or selling the mortgaged property ahead of payment
to the lender. In certain circumstances, a debtor in bankruptcy may have the
power to grant liens senior to the lien of a mortgage, and analogous state
statutes and general principles of equity may also provide a mortgagor with
means to halt a foreclosure proceeding or sale and to force a restructuring of
a mortgage loan on terms a lender would not otherwise accept. Moreover, the
laws of certain states also give priority to certain tax liens over the lien
of a mortgage or deed of trust. Under the Bankruptcy Code, if the court finds
that actions of the mortgagee have been unreasonable, the lien of the related
mortgage may be subordinated to the claims of unsecured creditors.

The Company's acquisition of real property, particularly REO Property, may
be affected by many of the considerations applicable to mortgage loan lending.
For example, the Company's acquisition of certain property at foreclosure sale
could be affected by a borrower's post-sale right of redemption. In addition,
the Company's ability to derive income from real property generally will be
dependent on its receipt of rent payments under leases of the related
property. The ability to collect rents may be impaired by the commencement of
a bankruptcy proceeding relating to a lessee under such lease. Under the
Bankruptcy Code, the filing of a petition in bankruptcy by or on behalf of a
lessee results in a stay in bankruptcy against the commencement or
continuation of any state court proceeding for past due rent, for accelerated
rent, for damages or for a summary eviction order with respect to a default
under the lease that occurred prior to the filing of the lessee's petition. In
addition, the Bankruptcy Code generally provides that a trustee or debtor-in-
possession may, subject to approval of the court, (i) assume the lease and
retain it or assign it to a third party or (ii) reject the lease. If the lease
is assumed, the trustee or debtor-in-possession (or assignee, if applicable)
must cure any defaults under the lease, compensate the lessor for its losses
and provide the lessor with "adequate assurance" of future performance. Such
remedies may be insufficient, and any assurances provided to the lessor may,
in fact, be inadequate. If the lease is rejected, the lessor will be treated
as an unsecured creditor with respect to its claim for damages for termination
of the lease. The Bankruptcy Code also limits a lessor's damages for lease
rejection to the rent reserved by the lease (without regard to acceleration)
for the greater of one year, or 15.0%, not to exceed three years, of the
remaining term of the lease.

DEFAULT INTEREST AND LIMITATIONS ON PREPAYMENTS

Notes and mortgages may contain provisions that obligate the borrower to pay
a late charge or additional interest if payments are not timely made, and in
some circumstances, may prohibit prepayments for a specified period and/or
condition prepayments upon the borrower's payment of prepayment fees or yield
maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges that a lender may collect from a borrower
for delinquent payments. Certain states also limit the amounts that a lender
may collect from a borrower as an additional charge if the loan is prepaid. In
addition, the enforceability of provisions that provide for prepayment fees or
penalties upon an involuntary prepayment is unclear under the laws of many
states.

DUE ON SALE AND DUE ON ENCUMBRANCE

Certain of the Mortgage Loans may contain due on sale and due on encumbrance
clauses. These clauses generally provide that the lender may accelerate the
maturity of the loan if the mortgagor sells or otherwise transfers or
encumbers the mortgaged property. The enforceability of due on sale clauses
has been the subject of legislation or litigation in many states and, in some
cases, the enforceability of these clauses has been limited or denied.
However, with respect to certain loans, the Garn-St. Germain Depository
Institutions Act of 1982 pre-empts state constitutional, statutory and case
law that prohibits the enforcement of due on sale clauses and permits lenders
to enforce these clauses in accordance with their terms, subject to certain
limited exceptions.

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SUBORDINATE FINANCING

When a mortgagor encumbers mortgaged property with one or more junior liens,
the senior lender is subjected to additional risk. First, the mortgagor may
have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and
the senior loan does not, a mortgagor may be more likely to repay sums due on
the junior loan than those on the senior loan. Second, acts of the senior
lender that prejudice the junior lender can cause the senior lender to lose
its priority. For example, if the mortgagor and the senior lender agree to
increase the principal amount of or the interest rate payable on the senior
loan, the senior lender may lose its priority to the extent any existing
junior is harmed or the mortgagor is additionally burdened. Third, if the
mortgagor defaults on the senior loan and/or any junior loan or loans, the
existence of junior loans and the action taken by junior lenders can impair
the security available to the senior lender and can interfere with or delay
the taking of action by the senior lender.

ACCELERATION ON DEFAULT

Some of the Mortgage Loans may include "Debt--Acceleration" clauses, which
permit the lender to accelerate the full debt upon a monetary or nonmonetary
default of the mortgagor. The courts of all states will enforce clauses
providing for acceleration in the event of a material payment default after
giving effect to any appropriate notices. Such courts, however, may refuse to
foreclose on a mortgage or deed of trust when an acceleration of the
indebtedness would be inequitable or unjust under the circumstances or would
render the acceleration unconscionable. Furthermore, in some states, the
mortgagor may avoid foreclosure and reinstate an accelerated loan by paying
only the defaulted amounts and the costs and attorneys' fees incurred by the
lender in collecting such defaulted payments.

CERTAIN LAWS AND REGULATIONS; TYPES OF MORTGAGED PROPERTY

The real property securing the Mortgage Loans will be subject to compliance
with various federal, state and local statutes and regulations. Failure to
comply (together with an inability to remedy any such failure) could result in
material diminution in the value of the Mortgaged Properties which could,
together with the possibility of limited alternative uses for a particular
property (e.g., a nursing home or convalescent home or hospital), result in
the failure to realize the full principal amount of the related Mortgage Loan.
Mortgages on properties which are owned by a mortgagor under a condominium
form of ownership are subject to declarations, bylaws and other regulations of
the condominium association. Mortgaged properties which are hotels or motels
may present additional risks in that hotels and motels are typically operated
pursuant to franchise, management and operating agreements which may be
terminated by the operator, and the transferability of the hotel's operating
liquor and other licenses to the entity acquiring the hotel either through
purchases or foreclosure is subject to the peculiarities of local law
requirements. In addition, mortgaged properties which are multifamily
residential properties may be subject to rent control laws, which could impact
the future cash flows of such properties.

FORFEITURES IN DRUG AND RICO PROCEEDINGS

Federal law provides that property owned by persons convicted of drug-
related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984, the
government may seize the property even before conviction. The government must
publish notice of the forfeiture proceeding and may give notice to all parties
"known to have an alleged interest in the property," including the holders of
mortgage loans.

A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at
the time of execution of the mortgage, "reasonably without cause to believe"
that the property was used in, or purchased with the proceeds of, illegal drug
or RICO activities.

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ENVIRONMENTAL RISKS

General. The Company will be subject to environmental risks when taking a
security interest in real property, as well as when it acquires any real
property. Of particular concern may be properties that are or have been used
for industrial, manufacturing, military or disposal activity. Such
environmental risks include the risk of the diminution of the value of a
contaminated property or, as discussed below, liability for the costs of
compliance with environmental regulatory requirements or the costs of clean-up
or other remedial actions. These compliance or clean-up costs could exceed the
value of the property or the amount of the lender's loan. In certain
circumstances, a lender could determine to abandon a contaminated mortgaged
property as collateral for its loan rather than foreclose and risk liability
for compliance or clean-up costs.

CERCLA. The federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), imposes strict liability on
present and past "owners" and "operators" of contaminated real property for
the costs of clean-up. A secured lender may be liable as an "owner" or
"operator" of a contaminated mortgaged property if agents or employees of the
lender have become sufficiently involved in the management of such mortgaged
property or the operations of the borrower. Such liability may exist even if
the lender did not cause or contribute to the contamination and regardless of
whether the lender has actually taken possession of a mortgaged property
through foreclosure, deed in lieu of foreclosure or otherwise. The magnitude
of the CERCLA liability at any given contaminated site is a function of the
actions required to address adequately the risks to human health and the
environment posed by the particular conditions at the site. As a result, such
liability is not constrained by the value of the property or the amount of the
original or unamortized principal balance of any loans secured by the
property. Moreover, under certain circumstances, liability under CERCLA may be
joint and several--i.e., any liable party may be obligated to pay the entire
clean-up costs regardless of its relative contribution to the contamination.

The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996
(the "1996 Lender Liability Act") provides for a safe harbor for secured
lenders from CERCLA liability even though the lender forecloses and sells the
real estate securing the loan, provided the secured lender sells "at the
earliest practicable, commercially reasonable time, at commercially reasonable
terms, taking into account market conditions and legal and regulatory
requirements." Although the 1996 Lender Liability Act provides significant
protection to secured lenders, it has not been construed by the courts and
there are circumstances in which actions taken could expose a secured lender
to CERCLA liability. And, the transferee from the secured lender is not
entitled to the protections enjoyed by a secured lender. Hence, the
marketability of any contaminated real estate continues to be suspect.

Certain Other Federal and State Laws. Many states have environmental clean-
up statutes similar to CERCLA, and not all those statutes provide for a
secured creditor exemption. In addition, underground storage tanks are
commonly found on a wide variety of commercial and industrial properties.
Federal and state laws impose liability on the owners and operators of
underground storage tanks for any clean-up that may be required as a result of
releases from such tanks. These laws also impose certain compliance
obligations on the tank owners and operators, such as regular monitoring for
leaks and upgrading of older tanks. The Company may become a tank owner or
operator and subject to compliance obligations and potential clean-up
liabilities, either as a result of becoming involved in the management of a
site at which a tank is located or, more commonly, by taking title to such a
property. Federal and state laws also obligate property owners and operators
to maintain and, under some circumstances, to remove asbestos-containing
building materials and lead-based paint. As a result, the presence of these
materials can increase the cost of operating a property and thus diminish its
value. In a few states, transfers of some types of properties are conditioned
upon clean-up of contamination prior to transfer. In these cases, a lender
that becomes the owner of a property through foreclosure, deed in lieu of
foreclosure or otherwise, may be required to clean up the contamination before
selling or otherwise transferring the property.

Beyond statute-based environmental liability, there exist common law causes
of action (for example, actions based on nuisance or on toxic tort resulting
in death, personal injury or damage to property) related to hazardous
environmental conditions on a property.

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Superlien Laws. Under the laws of many states, contamination of a property
may give rise to a lien on the property for clean-up costs. In several states,
such a lien has priority over all existing liens, including those of existing
mortgages. In these states, the lien of a mortgage may lose its priority to
such a "superlien."

Additional Considerations. The cost of remediating environmental
contamination at a property can be substantial. To reduce the likelihood of
exposure to such losses, the Company will not acquire title to a Mortgaged
Property or take over its operation unless, based on an environmental site
assessment prepared by a qualified environmental consultant, it has made the
determination that it is appropriate to do so. The Company expects that it
will organize a special purpose subsidiary to acquire any environmentally
contaminated real property.

Environmental Site Assessments. In addition to possibly allowing a lender to
qualify for the innocent landowner defense (see discussion under "--
Environmental Risks"), environmental site assessments can be a valuable tool
in anticipating, managing and minimizing environmental risk. They are commonly
performed in many commercial real estate transactions.

Environmental site assessments vary considerably in their content and
quality. Even when adhering to good professional practices, environmental
consultants will sometimes not detect significant environmental problems
because an exhaustive environmental assessment would be far too costly and
time-consuming to be practical. Nevertheless, it is generally helpful in
assessing and addressing environmental risks in connection with commercial
real estate (including multifamily properties) to have an environmental site
assessment of a property because it enables anticipation of environmental
problems and, if agreements are structured appropriately, can allow a party to
decline to go forward with a transaction.

APPLICABILITY OF USURY LAWS

Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980 ("Title V") provides that state usury limitations shall not apply to
certain types of residential (including multifamily) first mortgage loans
originated by certain lenders after March 31, 1980. Title V authorized any
state to reimpose interest rate limits by adopting, before April 1, 1983, a
law or constitutional provision that expressly rejects application of the
federal law. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V. Certain states have taken action
to reimpose interest rate limits and/or to limit discount points or other
charges.

AMERICANS WITH DISABILITIES ACT

Under Title III of the ADA, in order to protect individuals with
disabilities, public accommodations (such as hotels, restaurants, shopping
centers, hospitals, schools and social service center establishments) must
remove architectural and communication barriers that are structural in nature
from existing places of public accommodation to the extent "readily
achievable." In addition, under the ADA, alterations to a place of public
accommodation or a commercial facility are to be made so that, to the maximum
extent feasible, such altered portions are readily accessible to and usable by
disabled individuals. The "readily achievable" standard takes into account,
among other factors, the financial resources of the affected site, owner,
landlord or other applicable person. In addition to imposing a possible
financial burden on the borrower in its capacity as owner or landlord, the ADA
may also impose such requirements on a foreclosing lender who succeeds to the
interest of the borrower as owner or landlord. Furthermore, since the "readily
achievable" standard may vary depending on the financial condition of the
owner or landlord, a foreclosing lender who is financially more capable than
the borrower of complying with the requirements of the ADA may be subject to
more stringent requirements than those to which the borrower is subject.

SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940

Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a mortgagor who enters military service after the
origination of such mortgagor's mortgage loan (including a mortgagor who is in
reserve status and is called to active duty after origination of the mortgage
loan), may not

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be charged interest (including fees and charges) above an annual rate of 6.0%
during the period of such mortgagor's active duty status, unless a court
orders otherwise upon application of the lender. Because the Relief Act
applies to mortgagors who enter military service after origination of the
related mortgage loan, no information can be provided as to the number of
Mortgage Loans that may be affected by the Relief Act. Application of the
Relief Act would adversely affect, for an indeterminate period of time, the
ability of any servicer to collect full amounts of interest on certain
Mortgage Loans. In addition, the Relief Act imposes limitations that would
impair the ability of a servicer to foreclosure on an affected Mortgage Loan
during the mortgagor's period of active duty status, and, under certain
circumstances, during an additional three month period thereafter.

UNDERWRITING

Subject to the terms and conditions set forth in the Underwriting Agreement,
the Company has agreed to sell to the Underwriter and the Underwriter has
agreed to purchase the 8,750,000 shares of Common Stock offered hereby. Under
the terms and conditions of the Underwriting Agreement, the Underwriter is
committed to purchase all the shares of Common Stock offered hereby if any are
purchased.

The Underwriter proposes initially to offer 8,750,000 shares of Common Stock
directly to the public at the public offering price set forth on the cover
page of this Prospectus and to certain dealers at such offering price less a
concession not to exceed $ per share of Common Stock. The Underwriter
may allow, and such dealers may reallow, a concession not to exceed $ per
share of Common Stock to certain other dealers. After the shares of Common
Stock are released for sale to the public, the offering price and other
selling terms may be changed by the Underwriter.

At the request of the Company, the Underwriter has reserved up to 200,000
shares of Common Stock for sale to certain persons at the initial public
offering price. The number of shares of Common Stock available for sale to the
general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares that are not so purchased will be offered
by the Underwriter to the general public on the same basis as the other shares
offered hereby.

The Company has granted to the Underwriter an option exercisable during the
30-day period beginning with the date hereof to purchase, at the Offering
Price less underwriting discounts and commissions, up to an additional
1,312,500 shares of Common Stock for the sole purpose of covering over-
allotments, if any.

The Company has agreed to indemnify the Underwriter against certain civil
liabilities under the Securities Act, or to contribute to payments the
Underwriter may be required to make in respect thereof.

Prior to the Common Stock Offering, there has been no public market for the
shares of Common Stock. The initial public offering price has been determined
by negotiation between the Company and the Underwriter. Among the factors
considered in making such determination were the history of, and the prospects
for, the industry in which the Company will compete, an assessment of the
skills of the Company and the Company's prospects for future earnings, the
general conditions of the economy and the securities market and the prices of
securities of similar issuers. However, there can be no assurance that the
price at which the shares of Common Stock will sell in the public market after
the Common Stock Offering will not be lower than the price at which they are
sold by the Underwriter.

The Underwriter has informed the Company that the Underwriter does not
intend to confirm sales of the shares offered hereby to any accounts over
which it exercises discretionary authority.

In connection with the Common Stock Offering, the Underwriter may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriter may over-allot the Common Stock
Offering, creating a short position. In addition, the Underwriter may bid for
and purchase Common Stock in the open market to cover short positions or to
stabilize the price of the Common Stock. Any

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of these activities may stabilize or maintain the market price of the Common
Stock above independent market levels. In general, purchases of securities for
the purpose of stabilization or to reduce a short position could cause the
price of the security to be higher than it might be in the absence of such
purchases. The Underwriter is not required to engage in these activities and
may end any of these activities at any time.

Neither the Company nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor the Underwriter makes any representation
that the Underwriter will engage in such transactions or that such
transactions, once commenced, will not be discontinued without notice.

The Company and its officers and directors have agreed not to (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option for the sale of,
other than pursuant to the Stock Option Plan, or otherwise dispose of or
transfer, directly or indirectly, any Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock, or file any
registration statement under the Securities Act with respect to any of the
foregoing or (ii) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or indirectly, the
economic consequence of ownership of the Common Stock, whether any such swap
or transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise;
except any Common Stock issued by the Company upon the exercise of an option
outstanding on the date hereof or upon the exercise of any option granted
pursuant to any stock option or other plan or arrangement described herein or
pursuant to a customary dividend reinvestment plan adopted hereafter without
the prior consent of the Underwriter for a period of 180 days from
consummation of this offering.

PCH has agreed not to offer, sell or contract to sell or otherwise dispose
of the Common Units acquired on the Closing Date without the prior consent of
the Underwriter for a period of two years from the Closing Date.

The Company has agreed to grant to the Underwriter, for nominal
consideration, a warrant to purchase up to 228,024 shares of Common Stock
(247,712 shares if the Underwriter exercises its over-allotment option in
full) at the Offering Price. The warrant to be so acquired by the Underwriter
will be exercisable for a period of five years from the Closing Date of the
Common Stock Offering and will be restricted from sale, transfer, assignment
or hypothecation for a period of one year from the Closing Date of the Common
Stock Offering, except to officers or partners of the Underwriter and members
of the selling group and their officers or partners.

FBR Asset Investment Corporation, an Affiliate of FBR, will purchase from
the Company 1,075,268 shares of Common Stock in the Private Placement. In
addition, FBR Asset Investment Corporation was issued the FBR Warrant as
partial consideration for the establishment of the FBR Credit Facility. The
FBR Warrant enables FBR Asset Investment Corporation to purchase up to 152,016
shares of Common Stock (165,141 shares if the Underwriter exercises its over-
allotment option in full) after the first anniversary of the Closing Date at
the Offering Price net of underwriting discount. The FBR Warrant has a term of
five years from the Closing Date.

LEGAL MATTERS

Certain legal matters will be passed upon for the Company by Winston &
Strawn, Chicago, Illinois, and for the Underwriter by Hunton & Williams,
Richmond, Virginia. Legal matters relating to Maryland law, including the
validity of the issuance of the Shares offered hereby, will be passed upon for
the Company by Miles & Stockbridge, a Professional Corporation, Baltimore,
Maryland.

EXPERTS

The balance sheet of Prime Capital Investment Corp. as of March 31, 1998,
the financial statements of Prime Capital Investment, L.P., as of March 31,
1998 and for the period from March 13, 1998 to March 31, 1998, the
consolidated financial statements of Prime Capital Funding, Inc. as of and for
the three months ended March 31, 1998, the statement of revenue and certain
expenses of 61 Broadway for the year ended December 31, 1997, and the
statement of revenue and certain expenses of Habitat Apartments for the year
ended December

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31, 1997, appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein, and are included in reliance upon
such reports given upon the authority of such firm as experts in accounting
and auditing.

ADDITIONAL INFORMATION

On October 7, 1997, the Company filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement on Form S-11 (the
"Registration Statement") (of which this Prospectus forms a part) under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
shares of Common Stock offered pursuant to this Prospectus. This Prospectus
contains summaries of the material terms of the documents referred to herein
and therein, but does not contain all of the information set forth in the
Registration Statement pursuant to the rules and regulations of the
Commission. For further information, reference is made to such Registration
Statement and the exhibits thereto. The Registration Statement and the
exhibits thereto, as well as reports and other information filed by Prime
Capital, can be inspected without charge and copied at prescribed rates at the
public reference facilities maintained by the Commission at the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, and at its Regional Offices located as follows: Chicago Regional
Office, Citicorp Center, Suite 1400, 500 West Madison Street, Chicago,
Illinois 60661-2511; and New York Regional Office, Seven World Trade Center,
Suite 1300, New York, New York 10048, or by way of the Commission's Internet
address, http://www.sec.gov.

Statements contained in this Prospectus as to the contents of any contract
or other document that is filed as an exhibit to the Registration Statement
are not necessarily complete, and each such statement is qualified in its
entirety by reference to the full text of such contract or document.

The Company will be required to file reports and other information with the
Commission pursuant to the Exchange Act. In addition to applicable legal
requirements, if any, holders of Common Stock will receive annual reports
containing information regarding the business and performance of the Company,
including audited financial statements with a report thereon by the Company's
independent certified public accountants, and quarterly reports containing
unaudited financial information for each of the first three quarters of each
fiscal year.

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GLOSSARY OF TERMS

Except as otherwise specified or as the context may otherwise require, the
following terms used herein shall have the meanings assigned to them below.
All terms in the singular shall have the same meanings when used in the plural
and vice-versa.

"1996 Lender Liability Act" shall mean the Asset Conservation, Lender
Liability and Deposit Insurance Act of 1996.

"ADA" shall mean the Americans with Disabilities Act of 1990, as amended.

"Affiliate" shall mean (i) any person directly or indirectly owning,
controlling, or holding, with power to vote ten percent or more of the
outstanding voting securities of such other person, (ii) any person ten
percent or more of whose outstanding voting securities are directly or
indirectly owned, controlled, or held, with power to vote, by such other
person, (iii) any person directly or indirectly controlling, controlled by, or
under common control with such other person, (iv) any executive officer,
director, trustee or general partner of such other person, and (v) any legal
entity for which such person acts as an executive officer, director, trustee
or general partner. The term "person" means and includes any natural person,
corporation, partnership, association, limited liability company or any other
legal entity. An indirect relationship shall include circumstances in which a
person's spouse, children, parents, siblings or mothers-, fathers-, sisters-
or brothers-in-law is or has been associated with a person.

"Affiliated Transaction" shall mean any material acquisition transaction
between the Company and any Interested Stockholder.

"Average Invested Assets" shall mean the average of the aggregate book value
of the assets of the Company (including all of Prime Capital's direct and
indirect subsidiaries), before reserves for depreciation or bad debts or other
similar noncash reserves, computed by taking the daily average of such values
during such period.

"Bankruptcy Code" shall mean Title 11 of the United States Code, as amended.

"Beneficiary" shall mean the beneficiary of the Trust.

"Board of Directors" shall mean the board of directors of Prime Capital.

"Bridge Loans" shall mean loans secured by real property and used as
temporary financing.

"Bylaws" shall mean the bylaws of Prime Capital, as such bylaws have been
amended or supplemented in accordance with the MGCL.

"Capital Contribution" shall mean the issuance of 1,344,086 Common Units by
the Company to PCH in return for a capital contribution by PCH in the amount
of $25,000,000.

"CERCLA" shall mean the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended.

"Change of Control" shall mean each occurrence of any of the following: (i)
the acquisition, directly or indirectly, by any individual or entity or group
(as such term is used in Section 13(d)(3) of the Exchange Act) of beneficial
ownership (as defined in Rule 13d-3 under the Exchange Act, except that such
individual or entity shall be deemed to have beneficial ownership of all
shares that any such individual or entity has the right to acquire, whether
such right is exercisable immediately or only after passage of time) of more
than 25.0% of the Company's outstanding shares of capital stock with voting
power, under ordinary circumstances, to elect Directors of the Company; (ii)
other than with respect to the election, resignation or replacement of any
Director designated, appointed or elected by the holders of shares of
preferred stock, during any period of two consecutive years, individuals who
at the beginning of such period constituted the Board of Directors of the
Company

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(together with any new Directors whose election by such Board of Directors or
whose nomination for election by the shareholders of the Company was approved
by a vote of 66 2/3% of the Directors of the Company (excluding Preferred
Directors) then still in office who were either Directors at the beginning of
such period, or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors then in office; and (iii) (A) the Company entering into an agreement
to consolidate with or merge into another entity or convey, transfer or lease
all or substantially all of its assets (including, but not limited to, real
property investments) to any individual or entity or (B) any corporation
consolidating with or merging into the Company, which in either event (A) or
(B) is pursuant to a transaction in which the outstanding voting shares of
capital stock of the Company are reclassified or changed into or exchanged for
cash, securities or other property; provided, however, that the events
described in clause (iii) above shall not be deemed to be a Change of Control
(a) if the sole purpose of such event is that the Company is seeking to change
its domicile or to change its form of organization from a corporation to a
trust or (b) if the holders of the exchanged securities of the Company
immediately after such transaction beneficially own at least a majority of the
securities of the merged or consolidated entity normally entitled to vote in
elections of Directors.

"Charter" shall mean the articles of incorporation of Prime Capital as such
articles have been amended or supplemented in accordance with the MGCL.

"Closing" shall mean the date of closing of the Common Stock Offering.

"Closing Date" shall mean the date of the Closing.

"Closing Price" shall mean the average of the high bid and low asked prices
in the over-the-counter market, as reported by The New York Stock Exchange.

"CMBS" shall mean commercial or multifamily MBS.

"CMO or CMO Bonds" shall mean collateralized mortgage obligations.

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

"Commission" shall mean the Securities and Exchange Commission.

"Commitments" shall mean obligations of the Company to purchase mortgage
assets for a specific period of time, in a specific aggregate principal amount
and at a specified price and margin over an index.

"Common Stock" shall mean the common stock, par value $0.01 per share, of
Prime Capital.

"Common Stock Offering" shall mean the offering of Common Stock hereby.

"Common Units" shall mean partnership interests in the common equity in the
Operating Partnership, represented by LP Common Units and GP Common Units,
collectively.

"Company" shall mean Prime Capital Investment Corp., a Maryland corporation,
together with its subsidiaries, unless the context indicates otherwise.

"Company Expenses" shall mean all administrative costs and expenses of the
Company.

"Construction Loans" shall mean loans used to finance construction.

"Control Share Acquisition" shall mean the acquisition of control shares,
subject to certain exceptions.

"Control shares" shall mean voting share of stock which, if aggregated with
all other such shares of stock previously acquired by the acquiror or in
respect of which the acquiror is able to exercise or direct the exercise of
voting power (except solely by virtue of a revocable proxy), would entitle the
acquirer to exercise voting

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power in electing directors within one of the following ranges of voting
power; (1) one-fifth or more but less than one-third, (2) one-third or more
but less than a majority, or (3) a majority or more of all voting power; but
"control shares" shall not include shares the acquiring person is then
entitled to vote as a result of having previously obtained stockholder
approval.

"Conversion Date" shall mean such conversion date as determined by the
Company.

"Directors" means the members of Prime Capital's Board of Directors.

"Distressed Mortgage Loans" shall mean Subperforming Mortgage Loans and
Nonperforming Mortgage Loans.

"Distressed Real Properties" shall mean REO Properties and other
underperforming or otherwise distressed real property.

"DSCR" shall mean debt service coverage ratio, which is, for any period of
time with respect to a Mortgage Loan, the ratio of (i) the net operating
income derived from the Mortgaged Property securing such Mortgage Loan during
that period of time, to (ii) the amount of principal and interest due under
such Mortgage Loan during that period of time.

"DOL" shall mean the Department of Labor.

"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.

"Excess Inclusion" shall have the meaning specified in section 860E(c) of
the Code.

"Excess Shares" shall mean the 65,000,000 excess shares of capital stock,
par value $0.01 per share, of Prime Capital.

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

"Exempt Organizations" shall mean tax-exempt entities, including, but not
limited to, charitable organizations, qualified employee pension and profit
sharing trusts and individual retirement accounts.

"Expiration Time" shall mean the last time tenders or exchanges may be made
pursuant to tender or exchange offers made by the Company or any of its
subsidiaries for all or any portion of the shares of Common Stock.

"FASIT" shall mean a financial asset securitization investment trust.

"FBR" shall mean Friedman, Billings, Ramsey & Co., Inc., one of the
Underwriters.

"FBR Asset Investment Corporation" shall mean FBR Asset Investment
Corporation, a Virginia corporation, an Affiliate of FBR.

"FBR Credit Facility" shall mean a short-term revolving credit facility
established by FBR Asset Investment Corporation in favor of PCH.

"FBR Warrant" shall mean a warrant issued by the Company to FBR Asset
Investment Corporation to purchase one percent of the Common Stock outstanding
immediately after the consummation of the Offering.

"FHLB" shall mean the Federal Home Loan Bank.

"FIRPTA" shall mean the Foreign Investment in Real Property Tax Act of 1980.

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"FLHMC" shall mean the Federal Loan Home Mortgage Corporation, a corporate
instrumentality of the United States created and existing under Title III of
the Emergency Home Finance Act of 1970, as amended, or any successor thereto.

"FMAC" shall mean Franchise Mortgage Acceptance Company, L.L.C.

"FNMA" shall mean the Federal National Mortgage Association, a federally
chartered and privately owned corporation organized and existing under the
Federal National Mortgage Association Charter Act, or any successor thereto.

"Funds From Operations" shall mean, as defined by NAREIT, net income
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation and amortization on
real estate assets, and after adjustments for unconsolidated partnerships and
joint ventures.

"GAAP" shall mean generally accepted accounting principles applied on a
consistent basis.

"Garn Act" shall mean the Garn-St. Germain Depository Institutions Act of
1982.

"GP Common Units" shall mean common units representing the general
partnership interests in the common equity of the Operating Partnership.

"Haircut Amounts" shall mean the portion of the purchase price of any
Mortgage Loan acquired under the PSCC Warehouse Facility that PCF I will be
required to fund.

"HUD" shall mean the Department of Housing and Urban Development.

"Independent Director" shall mean a director who (a) does not own greater
than a de minimus interest in PGI or any of its Affiliates, and (b) within the
last two years, has not (i) directly or indirectly been employed by or any of
its Affiliates, (ii) been an officer or director of PGI or any of its
Affiliates, (iii) performed services for PGI or any of its Affiliates, (iv)
had any material business or professional relationship with PGI or any of its
Affiliates.

"Interested Stockholder" shall mean any person who beneficially owns 10% or
more of the voting power of a corporation's shares or an affiliate of a
corporation who, at any time within the two-year period prior to the date in
question, was the beneficial owner of 10% or more of the voting power of the
then outstanding voting stock of a corporation.

"Inverse IO" shall mean a class of MBS that is entitled to no (or only
nominal) distributions of principal, but is entitled to interest at a floating
rate that varies inversely with a specified index.

"Investment Company Act" shall mean the Investment Company Act of 1940, as
amended.

"Issue Price" shall mean a price equal to the Offering Price net of
underwriting discounts.

"IO" shall mean a class of MBS that is entitled to distributions of interest
and no (or only nominal) distributions of principal.

"IRA" shall mean an individual retirement account.

"IRS" shall mean the Internal Revenue Service.

"Lease" shall mean, with respect to each Mortgaged Property or real
property, the agreement pursuant to which the borrower rents and leases to the
lessee and the lessee rents and leases from the borrower, such Mortgaged
Property or real property.

"LIBOR" shall mean the London Interbank Offering Rate for one-month U.S.
Dollar deposits.

"LP Common Units" shall mean common units representing limited partnership
interests in the common equity of the Operating Partnership.

G-4
<PAGE>

"Market Price" shall mean the average of the Closing Price for the five
consecutive Trading Days ending on such date.

"MBS" shall mean mortgage-backed securities (including RMBS and CMBS).

"Mezzanine Loans" shall mean loans secured by junior liens on real property
or interests in real property.

"MGCL" shall mean the Maryland General Corporation Law.

"Mortgage Collateral" shall mean mortgage pass-through securities or pools
of whole loans securing or backing a series of MBS.

"Mortgage Loan" shall mean commercial and multifamily senior, mezzanine and
subordinate mortgage loans.

"Mortgaged Property" shall mean the real property pledged as security for a
Mortgage Loan.

"NAREIT" shall mean the National Association of Real Estate Investment
Trusts, Inc.

"NASD" shall mean the National Association of Securities Dealers, Inc.

"Net Income" shall mean the income of the Company as reported for federal
income tax purposes, net operating loss deductions arising from losses in
prior periods and the deduction for dividends paid, plus the effects of
adjustments, if any, necessary to record hedging and interest transactions in
accordance with GAAP.

"Non-Compete Agreements" shall mean those certain non-compete agreements
between PGI and its Affiliates and Prime Retail, Inc., Brookdale Living
Communities, Inc. and Prime Group Realty Trust, respectively.

"Non-ERISA Plan" shall mean a plan that does not cover common law employees.

"Nonperforming Mortgage Loans" shall mean Mortgage Loans that are in
default.

"Non-REMIC Residual Interests" shall mean an ownership interest in Mortgage
Loans that are subject to CMO debt.

"Offering" shall mean collectively the Common Stock Offering and the Private
Placement.

"Offering Price" shall mean the initial offering price per share to the
public of the Common Stock offered hereby as set forth on the cover page of
the Company's final prospectus.

"OID" shall mean original issue discount.

"Operating Partnership" shall mean Prime Capital Investment, L.P., a
Delaware limited partnership.

"Options" .

"OTS" shall mean the Office of Thrift Supervision.

"Ownership Limit" shall mean the restriction on ownership (or deemed
ownership by virtue of the attribution provisions of the Code) of (a) more
than 9.9% of the number of outstanding shares of Common Stock by any
stockholder, or (b) more than 9.9% of the number of outstanding shares of any
series of Preferred Stock by any stockholder, other than FBR Asset Investment
Corporation, which may own up to 10.9% of the number of outstanding shares of
Common Stock.

"Pari Passu" shall mean secured equally or in an equal manner; an obligation
which is pari passu to another obligation is neither senior nor subordinated
to such other obligation.

G-5
<PAGE>

"Participants" shall mean the directors, executive officers and other key
employees of the Company eligible for the Stock Option Plan.

"Participating Mortgage Loans" shall mean Mortgage Loans that entitle the
mortgagee to the receipt of contingent interest, in addition to the stated
rate of interest, based on a percentage of the receipt of contingent interest,
in addition to the stated rate of interest, based on a percentage of the
property's gross revenue, and/or gain on sale of the property.

"Partnership Agreement" shall mean the Amended and Restated Limited
Partnership Agreement of the Operating Partnership.

"Pass-Through Certificates" shall mean interests in trusts, the assets of
which are primarily mortgage loans.

"PCC" shall mean Prime Commercial Credit, LLC, a Delaware limited liability
company.

"PCF" shall mean Prime Capital Funding, LLC, a Delaware limited liability
company.

"PCF I" shall mean Prime Capital Funding I, LLC, a Delaware limited
liability company.

"PCH" shall mean Prime Capital Holding, LLC, a Delaware limited liability
company.

"PGI" shall mean The Prime Group, Inc., an Illinois corporation.

"Plan" shall mean certain pension, profit-sharing, employee benefit, or
retirement plans subject to Title I of ERISA or individual retirement
accounts.

"Plan Asset Regulations" shall mean regulations of the Department of Labor
that define "plan assets."

"PO" shall mean a class of MBS that is entitled to no distributions of
interest.

"Preferred Stock" shall mean the preferred stock, par value $0.01 per share,
of Prime Capital.

"Pricing Date" shall mean the date of the pricing of the Common Stock
pursuant to the Common Stock Offering.

"Prime Capital" shall mean Prime Capital Investment Corp., a Maryland
corporation.

"Private Placement" shall mean the offering of 1,075,268 shares of Common
Stock by the Company to FBR Asset Investment Corporation through a private
placement at a price per share equal to the Offering Price net of underwriting
discounts and commissions.

"Prohibited Owner" shall mean the record holder of the shares of Common
Stock or Preferred Stock that are designated as Shares-in-Trust.

"PSCC" shall mean Prudential Securities Credit Corp.

"PSCC Warehouse Facility" shall mean a short-term revolving credit warehouse
facility established by PSCC in favor of PCF I.

"Qualified Hedge" shall mean a bona fide interest rate swap or cap
agreement, option, futures contract, forward rate agreement, or any similar
financial instrument entered into by the Company to hedge against the interest
rate risks with respect to any indebtedness that the Company may incur to
acquire or carry real estate assets.

"Qualifying Interests" shall mean mortgages and other liens on and interests
in real estate.

"Realized Losses" shall mean, generally, the aggregate amount of losses
realized on loans that are liquidated and losses on loans due to fraud,
mortgagor bankruptcy, casualty or special hazards.

"REIT" shall mean a real estate investment trust, as defined in section 856
of the Code.

G-6
<PAGE>

"REIT Termination Event" shall mean the earliest to occur of:

(i) the filing of a federal income tax return by the Company for any
taxable year on which the Company does not compute its income as a REIT;

(ii) the approval by the stockholders of the Company of a proposal for
the Company to cease to qualify as a REIT;

(iii) a determination by the Board of Directors, based on the advice of
counsel, that the Company has ceased to qualify as a REIT; or

(iv) a "determination" within the meaning of Section 1313(a) of the Code,
that the Company has ceased to qualify as a REIT.

"Related Party Tenant" shall mean a tenant of Prime Capital in which Prime
Capital owns 10% or more of the ownership interests, taking into account both
direct ownership and constructive ownership.

"REMIC" shall mean real estate mortgage investment conduit, as defined in
section 860D of the Code.

"REMIC Residual Interest" shall mean a class of MBS that is designated as
the residual interest in one or more REMICs.

"Rent" shall mean rent received by the Company from tenants of real property
owned by the Company.

"REO Property" shall mean real property acquired by a mortgage lender at
foreclosure (or by deed in lieu of foreclosure).

"RICO" shall mean the Racketeer Influenced and Corrupt Organizations
statute, 18 U.S.C.A. (S) 1961, et seq.

"RMBS" shall mean a series of one- to four-family residential MBS.

"Rule 144" shall mean the rule promulgated under the Securities Act that
permits holders of restricted securities as well as Affiliates of an issuer of
the securities, pursuant to certain conditions and subject to certain
restrictions, to sell their securities publicly without registration under the
Securities Act.

"SAIF" shall mean the Savings Association Insurance Fund.

"Securities Act" shall mean the Securities Act of 1933, as amended.

"Share Trust" shall mean a trust which holds shares of Common Stock which
have been designated as Shares-in-Trust.

"Shares" shall mean shares of Common Stock.

"Shares-in-Trust" shall mean shares of Common Stock the purported transfer
of which would result in a violation of the Ownership Limit, result in the
stock of Prime Capital being held by fewer than 100 persons, result in Prime
Capital being "closely held," or cause Prime Capital to own 10% or more of the
ownership interests in a tenant of the Company's real property.

"Small Commercial Loans" shall mean small commercial loans and business
loans secured by real estate with principal loan amounts generally of less
than $2,000,000.

"Special Servicing" shall mean servicing of defaulted mortgage loans,
including oversight and management of the resolution of such mortgage loans by
modification, foreclosure, deed in lieu of foreclosure or otherwise.

"Stock Option Plan" shall mean the Company's non-qualified stock option plan
which provides for options to purchase shares of Common Stock.

G-7
<PAGE>

"Sub IO" shall mean an IO with characteristics of a Subordinated Interest.

"Subordinated Interests" shall mean non-investment grade and unrated MBS.

"Subperforming Mortgage Loans" shall mean Mortgage Loans for which default
is likely or imminent, or for which the borrower is currently making monthly
payments in accordance with a forebearance plan.

"Targeted Portfolio Investments" shall mean the Company's investments in
Mortgage Loans, Preferred Equity, Net Leased Real Estate, MBS and other real
estate related assets.

"Taxable Subsidiary" shall mean Prime Capital Funding, Inc., a Maryland
Corporation.

"Ten-Year U.S. Treasury Rate" shall mean the arithmetic average of the
weekly average yield to maturity for actively traded current coupon U.S.
Treasury fixed interest rate securities (adjusted to constant maturities of
ten years) published by the Federal Reserve Board during a quarter, or, if
such rate is not published by the Federal Reserve Board, any Federal Reserve
Bank or agency or department of the federal government selected by the
Company.

"Title V" shall mean Title V of the Depository Institutions Deregulation and
Monetary Control Act of 1980.

"Trading Day" shall mean any day other than a Saturday, a Sunday or a day on
which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.

"Transaction" shall mean any transaction including, without limitation, a
merger, consolidation, statutory share exchange, self tender offer for all or
substantially all of the shares of Common Stock, sale of all or substantially
all of the Company's assets or recapitalization of the shares of Common Stock.

"Treasury Regulations" shall mean the income tax regulations promulgated
under the Code.

"Trust" shall mean a trust created in the event of an impermissible transfer
of shares of Common Stock.

"Trustee" shall mean a trustee of the Trust.

"UBTI" shall mean unrelated business taxable income.

"UBTI Percentage" shall mean the gross income derived by the Company from an
unrelated trade or business divided by the gross income of the Company for the
year in which the dividends are paid.

"UCC" shall mean the Uniform Commercial Code.

"Underwriters" shall mean the underwriters named in "Underwriting" herein.

"Underwriting Agreement" shall mean the agreement pursuant to which the
Underwriter will purchase and distribute the shares of Common Stock offered
hereby.

G-8
<PAGE>

PRIME CAPITAL INVESTMENT CORP.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Pro Forma (Unaudited):
Prime Capital Investment Corp.:
Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1998..... F-3
Notes to Pro Forma Condensed Consolidated Balance Sheet................. F-4
Pro Forma Condensed Consolidated Statement of Operations for the three
months ended March 31, 1998............................................ F-6
Pro Forma Condensed Consolidated Statement of Operations for the year
ended December 31, 1997................................................ F-7
Notes to Pro Forma Condensed Consolidated Statements of Operations...... F-8
Prime Capital Funding, Inc. ("Taxable Subsidiary"):
Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1998..... F-10
Note to Pro Forma Condensed Consolidated Balance Sheet.................. F-11
Pro Forma Condensed Consolidated Statement of Operations for the three
months ended March 31, 1998............................................ F-12
Pro Forma Condensed Consolidated Statement of Operations for the year
ended December 31, 1997................................................ F-13
Notes to Pro Forma Condensed Consolidated Statements of Operations...... F-14
Historical:
Prime Capital Investment Corp.:
Report of Independent Auditors.......................................... F-15
Balance Sheet as of March 31, 1998...................................... F-16
Notes to Balance Sheet.................................................. F-17
Prime Capital Investment, L.P. ("Operating Partnership"):
Report of Independent Auditors.......................................... F-18
Balance Sheet as of March 31, 1998...................................... F-19
Statement of Operations for the period from March 13, 1998 to March 31,
1998................................................................... F-20
Statement of Partners' Equity for the period from March 13, 1998 to
March 31, 1998......................................................... F-21
Statement of Cash Flows for the period from March 13, 1998 to March 31,
1998................................................................... F-22
Notes to Financial Statements........................................... F-23
Prime Capital Funding, Inc. ("Taxable Subsidiary"):
Report of Independent Auditors.......................................... F-25
Consolidated Balance Sheet as of March 31, 1998......................... F-26
Consolidated Statement of Operations for the three months ended March
31, 1998............................................................... F-27
Consolidated Statement of Changes in Stockholders' Equity for the three
months ended March 31, 1998............................................ F-28
Consolidated Statement of Cash Flows for the three months ended March
31, 1998............................................................... F-29
Notes to Consolidated Financial Statements.............................. F-30
61 Broadway:
Report of Independent Auditors.......................................... F-35
Statements of Revenue and Certain Expenses for the three months ended
March 31, 1998 (unaudited) and the year ended December 31, 1997........ F-36
Notes to Statements of Revenue and Certain Expenses..................... F-37
Habitat Apartments, L.P.:
Report of Independent Auditors.......................................... F-38
Statements of Revenue and Certain Expenses for the three months ended
March 31, 1998 (unaudited) and the year ended December 31, 1997........ F-39
Notes to Statements of Revenue and Certain Expenses..................... F-40
</TABLE>

F-1
<PAGE>

PRIME CAPITAL INVESTMENT CORP.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The unaudited Pro Forma Condensed Consolidated Balance Sheet of the Company
is presented as if, at March 31, 1998, (i) the Company had sold 8.75 million
shares of common stock at a sale price of $20 per share in the Common Stock
Offering, with the contribution of the net proceeds to the Operating
Partnership (ii) the Company had sold 1.075 million shares of common stock at
a sales price of $20 per share in a private placement ("Private Placement") to
FBR Asset Investment Corporation with the contribution of the net proceeds to
the Operating Partnership (iii) the Operating Partnership had received an
additional contribution of $25 million from PCH in exchange for 1,344,086
common limited partnership interests (net of underwriters discount) ("Capital
Contribution") and (iv) the conversion of PCH's 99.9% ownership interest in
the Operating Partnership into 4,032,258 common units concurrent with the
Offering, Private Placement and Capital Contribution. The unaudited Pro Forma
Condensed Consolidated Statements of Operations for the three months ended
March 31, 1998 and the year ended December 31, 1997 are presented as if the
above transactions occurred as of January 1, 1997. The unaudited Pro Forma
Condensed Consolidated Financial Statements should be read in conjunction with
all of the financial statements contained elsewhere in the Prospectus. In
management's opinion, all adjustments necessary to reflect the effects of the
above described transactions have been made.

The unaudited Pro Forma Condensed Consolidated Balance Sheet and Statements
of Operations of the Company are not necessarily indicative of what the actual
financial position or results of operations would have been assuming the
aforementioned transactions had occurred at the dates indicated above, nor do
they purport to represent the future financial position or results of
operations of the Company.

F-2
<PAGE>

PRIME CAPITAL INVESTMENT CORP.

PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

MARCH 31, 1998

(IN THOUSANDS)

UNAUDITED

<TABLE>
<CAPTION>
HISTORICAL HISTORICAL
PRIME OPERATING COMBINED PRO FORMA PRO
CAPITAL PARTNERSHIP HISTORICAL ADJUSTMENTS FORMA
---------- ----------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash.................... $ 1 $ -- $ 1 $206,750 (A) $206,751
Deferred offering costs. 840 -- 840 (840)(B) --
Note receivable from
Taxable Subsidiary..... -- 9,906 9,906 10,094 (C) 20,000
Investment in Taxable
Subsidiary............. -- 3,989 3,989 -- 3,989
Investment in
partnership............ 1 -- 1 (1)(D) --
Other assets............ -- 68 68 -- 68
---- ------- ------- -------- --------
Total assets........ $842 $13,963 $14,805 $216,003 $230,808
==== ======= ======= ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Accrued expenses........ $637 $ -- $ 637 $ (637)(B) $ --
Due to affiliate........ 204 151 355 (204)(B) 151
---- ------- ------- -------- --------
Total liabilities... 841 151 992 (841) 151
Minority interest....... -- -- -- 81,583 (E) 81,583
Partners' equity........ -- 13,812 13,812 (13,812)(F) --
STOCKHOLDERS' EQUITY
Common stock............ -- -- -- 98 (G) 98
Additional paid-in
capital................ 1 -- 1 148,975 (H) 148,976
---- ------- ------- -------- --------
Total stockholders'
equity............. 1 -- 1 149,073 149,074
---- ------- ------- -------- --------
Total liabilities
and stockholders'
equity............. $842 $13,963 $14,805 $216,003 $230,808
==== ======= ======= ======== ========
</TABLE>

See accompanying notes.

F-3
<PAGE>

PRIME CAPITAL INVESTMENT CORP.

NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

(IN THOUSANDS EXCEPT PER SHARE DATA)

(UNAUDITED)

(A) Cash:

<TABLE>
<S> <C>
Proceeds from the sale of 8.75 million shares of the Company's
common stock at $20 per share less underwriting discounts
($12,250).................................................... $162,750
Proceeds from the sale of approximately 1.075 million shares
of the Company's common stock at $20 per share net of
underwriting discounts ($1,505) in a private placement to FBR
Asset Investment Corporation................................. 20,000
--------
Net proceeds from the sale of common stock.................... 182,750
Offering costs................................................ (1,000)
--------
Net proceeds (See Note H)..................................... 181,750
Proceeds from PCH in exchange for approximately 1.344 million
common units of the Operating Partnership at $20 per unit net
of underwriting discounts ($1,882)........................... 25,000
Proceeds from note receivable from PCH (See Note E)........... 10,094
Funding of additional loan under line of credit to Taxable
Subsidiary (See Note C)...................................... (10,094)
--------
$206,750
========

(B) Reflects the payment from offering proceeds of offering costs
accrued by the Company as of March 31, 1998 and the
reclassification of such deferred offering costs to stockholders'
equity.

Additional funding pursuant to commitment under $20 million
revolving line of credit with Taxable Subsidiary (See Note
A)........................................................... $ 10,094
========

(D) Investment in Partnership:
Elimination of investment in Operating Partnership in
consolidation by the Company................................. $ (1)
========
</TABLE>

(E) Minority Interest:

<TABLE>
<S> <C> <C> <C>
Proceeds from PCH
in exchange for
approximately
1.344 million
common units of
the Operating
Partnership at $20
per unit net of
underwriting
discounts
($1,882).......... $25,000
Reclassification of
partnership equity
to minority
interest in
consolidation (See
Note F) .......... 13,812
Receipt of proceeds
from note
receivable with
PCH (which had
been reported net
of minority
interest in the
financial
statements) and
reclassification
from partnership
equity to minority
interest.......... 10,094
Adjustment to
reflect estimated
minority interest
of the Limited
Partners in the
Operating
Partnership as
computed below.... 32,677
-------
$81,583
=======
Pro forma total
assets............ $ 230,808
Pro forma total
liabilities....... (151)
--------- ---------
Pro forma net book
value of Operating
Partnership....... $ 230,657
========= =========
Minority interest
of the limited
partners in the
Operating
Partnership
(35.37%) ......... $ 81,583
Less: Pro forma
minority interest
before this
adjustment ....... (48,906)
--------- ---------
$ 32,677
========= =========
</TABLE>

F-4
<PAGE>

PRIME CAPITAL INVESTMENT CORP.

NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET--CONTINUED

(IN THOUSANDS EXCEPT PER SHARE DATA)

(UNAUDITED)

<TABLE>
<S> <C>
(E) Minority Interest--continued
Concurrent with the Offering, PCH's 99.9% ownership interest in the
Operating Partnership is converted into 4,032 million Common Units
(F) Reclassification of partnership equity to minority interest upon
consolidation of the Operating Partnership by the Company....... $(13,812)
========
</TABLE>

<TABLE>
<S> <C> <C>
(G)Issuance
of 9.8
million
shares of
common stock
with $0.01
par value... $98
===
</TABLE>

(H) Additional Paid-In Capital:

<TABLE>
<S> <C>
Net proceeds from the sale of 9.825 million shares of common
stock at $20 per share less underwriters discount and
offering costs (See Note A).................................. $181,750
Less: par value of 9.825 million shares of common stock at
$0.01 par value (See Note G)................................. (98)
Adjustment to reflect estimated minority interest of limited
partners in the Operating Partnership (See Note E)........... (32,677)
--------
$148,975
========
</TABLE>

F-5
<PAGE>

PRIME CAPITAL INVESTMENT CORP.

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 1998

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

UNAUDITED

<TABLE>
<CAPTION>
COMBINED PRO FORMA
HISTORICAL (A) ADJUSTMENT PRO FORMA
-------------- ---------- ---------
<S> <C> <C> <C>
EXPENSES
Salaries & benefits..................... $ 46 $ 565 (B) $ 611
Professional fees....................... 78 110 (B) 188
General & administrative................ 27 194 (B) 221
----- ------- ---------
Total expenses.......................... 151 869 1,020
----- ------- ---------
Loss before share of loss of Taxable
Subsidiary and minority interest....... (151) (869) (1,020)
Share of loss of Taxable Subsidiary..... (60) (556)(C) (616)
----- ------- ---------
Loss before minority interest........... (211) (1,425) (1,636)
Minority interest....................... -- 579 (D) 579
----- ------- ---------
Net loss................................ $(211) $ (846) $ (1,057)
===== ======= =========
</TABLE>

<TABLE>
<S> <C>
Net loss per share of common stock--basic and diluted.......... $ (0.11)(E)
==========
Weighted average shares of common stock outstanding............ 9,825,269
==========
</TABLE>

See accompanying notes.

F-6
<PAGE>

PRIME CAPITAL INVESTMENT CORP.

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 1997

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

<TABLE>
<CAPTION>
COMBINED PRO FORMA
HISTORICAL (A) ADJUSTMENT PRO FORMA
-------------- ---------- ---------
<S> <C> <C> <C>
EXPENSES
Salaries & benefits.................. $-- $ 2,098 (B) $ 2,098
Professional fees.................... -- 899 (B) 899
General & administrative............. -- 868 (B) 868
---- ------- ---------
Total expenses....................... -- 3,865 3,865
---- ------- ---------
Loss before share of loss of Taxable
Subsidiary and minority
interest............................ -- (3,865) (3,865)
Share of loss of Taxable Subsidiary.. -- (2,487)(C) (2,487)
---- ------- ---------
Loss before minority interest........ -- (6,352) (6,352)
Minority interest.................... -- 2,247 (D) 2,247
---- ------- ---------
Net loss............................. $-- $(4,105) $ (4,105)
==== ======= =========
Net loss per share of common stock--basic and diluted.......... $ (0.42)(E)
=========
Weighted average shares of common stock outstanding............ 9,825,269
=========
</TABLE>

See accompanying notes.

F-7
<PAGE>

PRIME CAPITAL INVESTMENT CORP.

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(A) The historical results of operations represent the combined results of
Prime Capital and the Operating Partnership. No results of operations for
the year ended December 31, 1997 have been presented as Prime Capital had
not commenced operations and the Operating Partnership's results of
operations were not significant. Results of operations for the three month
period exclude Prime Capital as it had not yet commenced operations but
include the results of operations for the Operating Partnership from March
13, 1998 (commencement of operations) through March 31, 1998. The
condensed consolidated statements of operations do not include any
earnings from the cash balances of the Company.

(B) Reflects management's estimate of salaries and benefits based on employees
hired and programs in place and professional fees, depreciation and
amortization, and general and administrative expenses expected to be
incurred pursuant to its business plan.

(C) Adjustment represents the Company's share (95.0%) of the results of
operations of the Taxable Subsidiary net of interest income on the note
receivable from the Taxable Subsidiary. The interest rate on the note
receivable equals 10% per annum. Interest income earned on the note
receivable for the year ended December 31, 1997 and the three months ended
March 31, 1998 equals $2.0 million and $0.5 million, respectively.

(D) Represents income allocated to the Limited Partners (35.37%).

(E) Weighted average shares outstanding consist of the 8.75 million shares
issued pursuant to the Common Stock Offering and the 1.08 million shares
of Common Stock issued pursuant to the Private Placement to FBR Asset
Investment Corporation.

F-8
<PAGE>

PRIME CAPITAL FUNDING, INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The unaudited Pro Forma Condensed Consolidated Balance Sheet of Prime
Capital Funding, Inc. (the Taxable Subsidiary) is presented as if, at March
31, 1998, the additional borrowing of $10.1 million under the line of credit
between the Taxable Subsidiary and the Operating Partnership had been made.
The unaudited Pro Forma Condensed Consolidated Statements of Operations for
the three months ended March 31, 1998 and the year ended December 31, 1997 are
presented as if the contribution by PCH of its equity interests in PCF and
PCFI to the Taxable Subsidiary for common and preferred stock and a note
receivable occurred as of January 1, 1997. The unaudited Pro Forma Condensed
Consolidated Financial Statements should be read in conjunction with all of
the financial statements contained elsewhere in the Prospectus. In
management's opinion, all adjustments necessary to reflect the effects of the
aforementioned transactions have been made.

The unaudited Pro Forma Condensed Consolidated Balance Sheet and Statements
of Operations of the Taxable Subsidiary are not necessarily indicative of what
the actual financial position or results of operations would have been
assuming the aforementioned transactions had occurred at the dates indicated
above, nor do they purport to represent the future financial position or
results of operations of the Taxable Subsidiary.

F-9
<PAGE>

PRIME CAPITAL FUNDING, INC.

PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

MARCH 31, 1998

(IN THOUSANDS)

UNAUDITED

<TABLE>
<CAPTION>
PRO FORMA PRO
HISTORICAL ADJUSTMENTS FORMA
---------- ----------- -------
<S> <C> <C> <C>
ASSETS
Cash.......................................... $ 404 $10,094(A) $10,498
Restricted cash............................... 2,286 -- 2,286
Mortgage loans receivable..................... 73,882 -- 73,882
Other assets.................................. 344 -- 344
------- ------- -------
Total assets.............................. $76,916 $10,094 $87,010
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses......... $ 127 $ -- $ 127
Due to affiliate.............................. 698 -- 698
Refundable loan deposits and escrow payable... 2,286 -- 2,286
Note payable to affiliate..................... 9,906 10,094(A) 20,000
Warehouse loan payable........................ 59,844 -- 59,844
------- ------- -------
Total liabilities......................... 72,861 10,094 82,955
Preferred stock............................... -- -- --
Common stock.................................. -- -- --
Additional paid-in capital.................... 5,000 -- 5,000
Retained deficit.............................. (945) -- (945)
------- ------- -------
Total stockholders' equity................ 4,055 -- 4,055
------- ------- -------
Total liabilities and stockholders'
equity................................... $76,916 $10,094 $87,010
======= ======= =======
</TABLE>

See accompanying note.

F-10
<PAGE>

PRIME CAPITAL FUNDING, INC.

NOTE TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

(IN THOUSANDS)

(UNAUDITED)

Cash and Note Payable to Affiliate.

(A) Additional borrowing by the Taxable Subsidiary under a $20 million
line of credit with the Operating Partnership.

F-11
<PAGE>

PRIME CAPITAL FUNDING, INC.

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 1998

(IN THOUSANDS)

UNAUDITED

<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO
(A) ADJUSTMENT FORMA
---------- ---------- -------
<S> <C> <C> <C>
REVENUE
Interest income .............................. $1,157 $ 319 (B) $ 1,476
------ ----- -------
EXPENSES
Interest expense.............................. 872 129 (C) 1,001
Salaries and benefits......................... 460 371 (D) 831
Depreciation and amortization................. 285 -- (D) 285
General and administrative.................... 205 329 (D) 534
------ ----- -------
Total expenses............................ 1,822 829 2,651
------ ----- -------
Net loss.................................. $ (665) $(510)(E) $(1,175)
====== ===== =======
Company's share of net loss (F)............... $(1,116)
=======
</TABLE>

See accompanying notes.

F-12
<PAGE>

PRIME CAPITAL FUNDING, INC.

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1997

(IN THOUSANDS)

UNAUDITED

<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO
(A) ADJUSTMENT FORMA
---------- ---------- -------
<S> <C> <C> <C>
REVENUE
Interest income ............................. $ -- $ 5,863 (B) $ 5,863
----- ------- -------
EXPENSES
Interest expense............................. -- 4,003 (C) 4,003
Salaries and benefits........................ -- 3,322 (D) 3,322
Professional fees............................ -- 860 (D) 860
Depreciation and amortization................ -- 1,125 (D) 1,125
General and administrative................... -- 1,276 (D) 1,276
----- ------- -------
Total expenses........................... -- 10,586 10,586
----- ------- -------
Net loss................................. $ -- $(4,723)(E) $(4,723)
===== ======= =======
Company's share of net loss (F).............. $(4,487)
=======
</TABLE>

See accompanying notes.

F-13
<PAGE>

PRIME CAPITAL FUNDING, INC.

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(A) The historical results of operations for the three months ended March 31,
1998 have been presented in a manner consistent with that of a pooling of
interests assuming the contribution of PCF and PCF I by PCH in exchange
for common and preferred stock and a note receivable had occurred January
1, 1998. Historical results of operations for the Taxable Subsidiary and
PCF and PCF I prior to December 31, 1997 are not significant.

(B) Interest income reflects interest income (including amortization of net
deferred loan origination fees) on the portfolio of mortgage loans
existing at March 31, 1998 and assumes no change in the index rate of
variable interest rate loans from those rates existing at May 1, 1998.

(C) Reflects interest on the Taxable Subsidiary's warehouse line of credit of
one-month LIBOR plus 1%. At May 1, 1998, one-month LIBOR approximated
5.6875%.

(D) Reflects management's estimate of salaries and benefits based on employees
hired and programs in place, and professional fees, depreciation and
amortization, and general and administrative expenses expected to be
incurred pursuant to its business plan.

(E) Assumes no net income tax benefit for operating losses due to uncertainty
of realization.

(F) The Operating Partnership has a non-voting, 95% economic ownership
interest in the Taxable Subsidiary through its holding of preferred stock
in the Taxable Subsidiary.

F-14
<PAGE>

REPORT OF INDEPENDENT AUDITORS

To the Stockholder

Prime Capital Investment Corp.

We have audited the accompanying balance sheet of Prime Capital Investment
Corp. (the Company) as of March 31, 1998. This balance sheet is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this balance sheet based on our audit.

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

In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Prime Capital Investment Corp. at
March 31, 1998, in conformity with generally accepted accounting principles.

/s/ Ernst & Young LLP

Chicago, Illinois

May 1, 1998

F- 15
<PAGE>

PRIME CAPITAL INVESTMENT CORP.

BALANCE SHEET

MARCH 31, 1998

(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)

<TABLE>
<S> <C>
ASSETS
Cash...................................................................... $ 1
Deferred offering costs................................................... 840
Investment in partnership................................................. 1
----
Total assets.......................................................... $842
====
LIABILITIES AND STOCKHOLDER'S EQUITY
Accrued expenses.......................................................... $637
Due to affiliate.......................................................... 204
----
Total liabilities..................................................... 841
STOCKHOLDER'S EQUITY
Preferred stock, $0.01 par value per share, 30,000,000 shares authorized,
none issued and outstanding.............................................. --
Common stock, $0.01 par value per share, 200,000,000 shares authorized,
100 issued and outstanding............................................... --
Additional paid-in capital................................................ 1
----
Total stockholder's equity............................................ 1
----
Total liabilities and stockholder's equity............................ $842
====
</TABLE>

See accompanying notes.

F-16
<PAGE>

PRIME CAPITAL INVESTMENT CORP.

NOTES TO BALANCE SHEET

MARCH 31, 1998

1. ORGANIZATION

Prime Capital Investment Corp. (the "Company") was organized as a Maryland
Corporation on September 19, 1997. The Company intends to file a Registration
Statement on Form S-11 with the Securities and Exchange Commission with
respect to a proposed public offering of 8.75 million shares of common stock,
and the private placement sale of 1.08 million shares of common stock to FBR
Asset Investment Corporation (the offerings are collectively referred to as
"Offering"). The Company intends to invest primarily in commercial mortgage
loans, preferred equity in real estate and real estate operating companies,
net leased real estate, and mortgage-backed securities and other real estate
related assets and anticipates conducting substantially all of its operations
through, Prime Capital Investment, L.P. ("Operating Partnership.") The Company
serves as the general partner of the Operating Partnership. At March 31, 1998,
the Company owned .1% of the Operating Partnership. The Company's primary
activity through March 31, 1998 consisted of the organization of the Company.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Deferred Offering Costs

In connection with the Offering, the Company has and will incur legal,
accounting and related costs. These costs will be deducted from the gross
proceeds of the Offering.

Investment in Partnership

The investment in Partnership represents a general partner interest in the
Operating Partnership, an affiliated entity. The investment is recorded under
the equity method of accounting.

Income Taxes

It is the intent of the Company to qualify as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended. As a REIT, the
Company generally will not be subject to federal income tax to the extent that
it distributes at least 95.0% of its REIT taxable income to its shareholders.
REITs are subject to a number of organizational and operations requirements.
If the Company fails to qualify as a REIT in any taxable year, the Company
will be subject to federal income tax (including any applicable alternative
minimum) on its taxable income at regular corporate tax rates.

Use of Estimates

The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

3. DUE TO AFFILIATE

The Company has received advances from an affiliate which are non-interest
bearing and are anticipated to be repaid from the proceeds of the Offering
(see Note 1).

F-17
<PAGE>

REPORT OF INDEPENDENT AUDITORS

To the Partners

Prime Capital Investment, L.P.

We have audited the accompanying balance sheet of Prime Capital Investment,
L.P. (the Partnership) as of March 31, 1998, and the related statements of
operations, partners' equity and cash flows for the period from March 13, 1998
(commencement of operations) to March 31, 1998. These financial statements are
the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audit.

We conducted our audit 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 audit provides a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Prime Capital Investment,
L.P. at March 31, 1998, and the results of its operations and its cash flows
for the period from March 13, 1998 to March 31, 1998, in conformity with
generally accepted accounting principles.

/s/ Ernst & Young LLP

Chicago, Illinois

May 1, 1998

F-18
<PAGE>

PRIME CAPITAL INVESTMENT, L.P.

BALANCE SHEET

MARCH 31, 1998

(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<S> <C>
ASSETS
Note receivable from Taxable Subsidiary................................ $ 9,906
Investment in Taxable Subsidiary....................................... 3,989
Other assets........................................................... 68
-------
Total assets....................................................... $13,963
=======
LIABILITIES AND PARTNERS' EQUITY
Due to affiliate....................................................... $ 151
-------
Total liabilities.................................................. 151
Partners' equity, 1,344,086 interests issued and outstanding........... 13,812
-------
Total liabilities and partners' equity............................. $13,963
=======
</TABLE>

See accompanying notes.

F-19
<PAGE>

PRIME CAPITAL INVESTMENT, L.P.

STATEMENT OF OPERATIONS

FOR THE PERIOD FROM MARCH 13, 1998 (COMMENCEMENT OF OPERATIONS) TO MARCH 31,
1998

(IN THOUSANDS)

<TABLE>
<S> <C>
EXPENSES
Compensation and benefits............................................... $ 46
Professional fees....................................................... 78
General and administrative.............................................. 27
-----
Loss from operations.................................................. (151)
-----
Loss from investment in Taxable Subsidiary............................ (60)
-----
Net loss.............................................................. $(211)
=====
</TABLE>

See accompanying notes.

F-20
<PAGE>

PRIME CAPITAL INVESTMENT, L.P.

STATEMENT OF PARTNERS' EQUITY

FOR THE PERIOD FROM MARCH 13, 1998 (COMMENCEMENT OF OPERATIONS) TO MARCH 31,
1998

(IN THOUSANDS)

<TABLE>
<CAPTION>
TOTAL
GENERAL LIMITED PARTNERS'
PARTNER PARTNER EQUITY
------- ------- ---------
<S> <C> <C> <C>
Balance at March 13, 1998........................... $ 1 $ -- $ 1
Interests issued.................................... -- 24,116 24,116
Note receivable from Limited Partner................ -- (10,094) (10,094)
Net loss for the period from March 13, 1998
(commencement of operations) through March 31,
1998............................................... -- (211) (211)
--- ------- -------
Balance at March 31, 1998........................... $ 1 $13,811 $13,812
=== ======= =======
</TABLE>

See accompanying notes.

F-21
<PAGE>

PRIME CAPITAL INVESTMENT, L.P.

STATEMENT OF CASH FLOWS

FOR THE PERIOD FROM MARCH 13, 1998 (COMMENCEMENT OF OPERATIONS) TO MARCH 31,
1998

(IN THOUSANDS)

OPERATING ACTIVITIES
<TABLE>
<S> <C>
Net loss............................................................... $(211)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Loss from investment in Taxable Subsidiary........................... 60
Changes in operating liability:
Due to affiliate....................................................... 151
-----
Net cash provided by operating activities.............................. --
Cash at beginning of period............................................ --
-----
Cash at end of period.................................................. $ --
=====
</TABLE>

See accompanying notes.

F-22
<PAGE>

PRIME CAPITAL INVESTMENT, L.P.

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 1998

1. ORGANIZATION

Prime Capital Investment, L.P. (the "Partnership") was organized as a
Delaware Partnership on September 30, 1997 by Prime Capital Investment Corp.
(the "General Partner" of the Partnership with a 0.1% interest) and Prime
Capital Holding, LLC (the "Limited Partner" of the Partnership with a 99.9%
interest). The General Partner intends to file a Registration Statement on
Form S-11 with the Securities and Exchange Commission with respect to a
proposed public offering of common stock (the "Offering"). The General Partner
intends to invest primarily in commercial mortgage loans, preferred equity in
real estate and real estate operating companies, net leased real estate, and
mortgage-backed securities and other real estate related assets and
anticipates conducting substantially all of its operations through the
Partnership. The Partnership's sole activity prior to March 13, 1998 consisted
of the organization of the Partnership.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Investment in Taxable Subsidiary

The Investment in Taxable Subsidiary represents a preferred stock ownership
interest in Prime Capital Funding, Inc. ("Taxable Subsidiary"), an affiliated
entity. As the Partnership has the ability to exert influence despite its lack
of voting rights over the Taxable Subsidiary, the investment is recorded under
the equity method of accounting.

Income Taxes

The results of the Partnership's operations are included in the income tax
returns of the partners.

Use of Estimates

3. DUE TO AFFILIATE

The Partnership has received advances from an affiliate which are non-
interest bearing and are anticipated to be repaid from the proceeds of the
Offering (see Note 1).

4. TRANSACTIONS WITH AFFILIATES

On March 13, 1998, the Limited Partner contributed (the "Contribution") 100%
of its equity interest in Prime Capital Funding, LLC and Prime Capital Funding
I, LLC (representing substantially all of its assets and businesses) to the
Taxable Subsidiary. The Limited Partner in return received all of the
preferred stock of the Taxable Subsidiary (representing 95% of its economic
value), all of the common stock of the Taxable Subsidiary (representing 5% of
its economic value), and a promissory note ("Promissory Note") with an
outstanding balance of $9.9 million (under a $20 million line of credit
arrangement with the Limited Partner). The Contribution was accounted for in a
manner similar to a pooling of interests due to common ownership. The
historical value of the net assets contributed of $14,168 was allocated to the
preferred and common stock and the Promissory Note based on their relative
fair values at March 13, 1998.

Concurrent with the Contribution, the preferred stock of the Taxable
Subsidiary, the outstanding balance of the Promissory Note and a note
receivable from the Limited Partner ("PCH Note") of $10.01 million (reflected
as a reduction of minority interest in the statement of partners' equity for
financial reporting purposes only), were contributed by the Limited Partner to
the Partnership for all of its limited partnership interests. The contributed
assets were recorded at their historical cost due to the common ownership by
the Limited Partner.

F-23
<PAGE>

PRIME CAPITAL INVESTMENT, L.P.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The Promissory Note bears interest at 10% per annum and is unsecured.
Interest is payable quarterly and is reflected as a component of loss from
investment in taxable subsidiary on the statement of operations. Principal
advances or repayments under the Promissory Note are made upon the mutual
consent of both parties to the Promissory Note. It matures March 12, 1999 but
is subject to automatic renewal for successive annual periods assuming no
events of default exist at the respective renewal date. The Promissory Note
evidences a $20 million line of credit and obligates the Partnership to fund
up to $20 million. The remaining unfunded commitment equals $10.01 million at
March 31, 1998. Funding under this commitment is subject to certain
restrictions including the ability of the Limited Partner to perform under the
terms of the PCH Note discussed below.

The PCH Note represents an unsecured, non-interest bearing, receivable from
the Limited Partner which equals $10.01 million at March 31, 1998. Payments
under the PCH Note are due as funding commitments are required under the
Promissory Note described above, but no later than the completion of an
initial public offering by the General Partner.

The Partnership has provided an additional $20 million unsecured line of
credit ("Additional Line") to the Taxable Subsidiary to fund loan
originations. Interest equals 10% per annum. No amounts are outstanding under
the Additional Line at March 31, 1998. The Additional Line matures at the
completion of an initial public offering of the General Partner.

The Partnership has also obtained a $20 million unsecured line of credit
from the Limited Partner to meet its funding obligations under the Additional
Line. Terms of this line of credit are identical to those of the Additional
Line. No amounts are outstanding under this line of credit.

F-24
<PAGE>

REPORT OF INDEPENDENT AUDITORS

To the Stockholders

Prime Capital Funding, Inc.

We have audited the accompanying consolidated balance sheet of Prime Capital
Funding, Inc. (the Company) as of March 31, 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for the three
months then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

We conducted our audit 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 audit provides a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Prime Capital
Funding, Inc. at March 31, 1998, and the consolidated results of its
operations and its cash flows for the three months then ended, in conformity
with generally accepted accounting principles.

/s/ Ernst & Young LLP

Chicago, Illinois

May 1, 1998

F-25
<PAGE>

PRIME CAPITAL FUNDING, INC.

CONSOLIDATED BALANCE SHEET

MARCH 31, 1998

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<S> <C>
ASSETS
Cash.................................................................. $ 404
Restricted cash....................................................... 2,286
Mortgage loans receivable............................................. 73,882
Other assets.......................................................... 344
-------
Total assets...................................................... $76,916
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses................................. $ 127
Due to affiliate...................................................... 698
Refundable loan deposits and escrow payable........................... 2,286
Notes payable to affiliate............................................ 9,906
Warehouse loan payable................................................ 59,844
-------
Total liabilities................................................. 72,861
Preferred Stock $0.01 per share, 50 shares authorized, 50 issued and
outstanding.......................................................... --
Common Stock $0.01 per share, 1,000 shares authorized, 1,000 issued
and outstanding...................................................... --
Additional paid-in capital............................................ 5,000
Retained deficit...................................................... (945)
-------
Total stockholders' equity........................................ 4,055
-------
Total liabilities and stockholders' equity........................ $76,916
=======
</TABLE>

See accompanying notes.

F-26
<PAGE>

PRIME CAPITAL FUNDING, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 1998

(IN THOUSANDS)

<TABLE>
<S> <C>
REVENUES
Interest income........................................................ $1,157
------
EXPENSES
Interest............................................................... 872
Depreciation and amortization.......................................... 285
Salaries and benefits.................................................. 460
General and administrative............................................. 205
------
Total expenses..................................................... 1,822
------
Net loss............................................................... $ (665)
======
</TABLE>

See accompanying notes.

F-27
<PAGE>

PRIME CAPITAL FUNDING, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 1998

(IN THOUSANDS)

<TABLE>
<CAPTION>
ADDITIONAL
COMMON PREFERRED RETAINED PAID-IN
STOCK STOCK DEFICIT CAPITAL TOTAL
------ --------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
Stockholders' equity at January 1,
1998............................. $-- $-- $(280) $9,501 $9,221
Contributions..................... -- -- -- 5,405 5,405
Exchange for note payable......... -- -- -- (9,906) (9,906)
Net loss for the period........... -- -- (665) -- (665)
---- ---- ----- ------ ------
Stockholders' equity as of March
31, 1998......................... $-- $-- $(945) $5,000 $4,055
==== ==== ===== ====== ======
</TABLE>

See accompanying notes.

F-28
<PAGE>

PRIME CAPITAL FUNDING, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 1998

(IN THOUSANDS)

<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss............................................................ $ (665)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization..................................... 285
Changes in operating assets and liabilities
Restricted cash................................................. (384)
Due from affiliate.............................................. 102
Other assets.................................................... (119)
Accounts payable and accrued expenses........................... (54)
Refundable loan deposits and escrow payable..................... 414
Due to affiliate................................................ 401
--------
Net cash used in operating activities............................... (20)
INVESTING ACTIVITIES
Origination of mortgage loans receivable............................ (29,001)
FINANCING ACTIVITIES
Capital contributions............................................... 5,405
Proceeds from warehouse loan payable................................ 23,844
--------
Cash provided by financing activities............................... 29,249
--------
Net increase in cash................................................ 228
Cash at the beginning of the period................................. 176
--------
Cash at the end of the period....................................... $ 404
========
</TABLE>

See accompanying notes.

F-29
<PAGE>

PRIME CAPITAL FUNDING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 1998

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

1. ORGANIZATION

Prime Capital Funding, Inc. (the "Taxable Subsidiary"), was formed on
October 1, 1997, as a Maryland corporation but had no operations prior to
March 13, 1998. On March 13, 1998, Prime Capital Holding ("PCH"), an affiliate
through common ownership, contributed 100% of the members' interests in Prime
Capital Funding, LLC ("PCF") and Prime Capital Funding I, LLC ("PCFI")
(collectively referred to as the "Contribution") to the Taxable Subsidiary in
return for 1,000 shares of its common stock, 50 shares of its preferred stock
and a note receivable under a line of credit of $20 million of which $9,906
was outstanding.

The assets acquired and liabilities assumed by the Taxable Subsidiary as a
result of the Contribution are reflected at PCH's historical cost, due to
common ownership. The results of operations of the Taxable Subsidiary for the
three month period ended March 31, 1998, have been presented in a manner
consistent with that of a pooling of interests assuming the Contribution was
effective January 1, 1998. The results of operations prior to January 1, 1998
are not significant.

The consolidated financial statements at March 31, 1998, include the
accounts of the Taxable Subsidiary and its wholly owned subsidiaries, PCF and
PCFI. Significant intercompany accounts and transactions have been eliminated
in consolidation.

The Taxable Subsidiary is in the business of originating, purchasing,
holding and selling various forms of commercial and multi-family real estate
mortgage loans. At March 31, 1998, there are no loans held for sale.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Mortgage Loans Receivable

Mortgage loans receivable are stated at the unpaid principal balance net of
net deferred origination fees. Net deferred origination fees are comprised of
loan fees collected from the borrower net of certain direct origination costs.
Net deferred origination fees are amortized over the contractual life of the
loan using the interest method. Interest income on the loans receivable is
recorded as earned.

Allowance for Loan Losses

Management's determination of the adequacy of the allowance is based on an
evaluation of the risk characteristics concerning the mortgage loan portfolio.
An allowance may be necessary based on changes in economic conditions,
inability of the borrower to meet debt requirements, substantial decline in
the value of the collateral of other factors. To the extent the recorded
investment of an impaired loan exceeds the present value of the loan's
expected future cash flows or other measures of value, a valuation allowance
is established for the difference. At March 31, 1998, the Taxable Subsidiary
has not established an allowance for loan losses.

Restricted Cash

Restricted cash represents amounts held by the Taxable Subsidiary relating
to (1) renovation, repair, leasing and interest escrows established as a
requirement of certain loan originations and (2) certain refundable loan
application deposits held for prospective borrowers.

Deferred Financing Costs

Deferred financing costs include costs incurred to obtain financing and are
included in other assets net of accumulated amortization of $305. Such costs
are being amortized over the term of the financing on a straight-line basis.

F-30
<PAGE>

PRIME CAPITAL FUNDING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1998

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)

Organization Costs

Organization costs relate to the formation of the Taxable Subsidiary and are
expensed as incurred. Such costs are included in general and administrative
expenses in the statement of operations.

Income Taxes

The Taxable Subsidiary provides for income taxes under the liability method.
Future benefits arising from operating loss carry forwards are recognized to
the extent that realization of such benefits through future taxable earnings
or alternative strategies are more likely than not. At March 31, 1998,
management has established a tax valuation allowance equal to its deferred tax
asset due to the uncertainty of realization.

Use of Estimates

Fair Value of Financial Instruments

Statement of Financial Accounting Standards No. 107 ("FAS 107"), Disclosures
About Fair Value of Financial Instruments," requires entities to disclose the
fair value of all financial assets and liabilities for which it is practicable
to estimate. Fair value is defined in FAS 107 as the amount at which the
instrument could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. The Taxable Subsidiary
believes the carrying amount of its financial instruments approximates fair
value at March 31, 1998 based upon (i) the variable interest rates on the
mortgage loans receivable and comparable rates on loans of similar risk
profiles and, (ii) comparable variable interest rates on notes payable of
similar risk characteristics. The Taxable Subsidiary has no other financial
instruments.

F-31
<PAGE>

PRIME CAPITAL FUNDING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1998

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

3. MORTGAGE LOANS RECEIVABLE

Mortgage loans receivable at March 31, 1998 consist of the following:

<TABLE>
<CAPTION>
PRINCIPAL
BORROWER INTEREST PERIODIC PRIOR FACE CARRYING DUE AT MONTHLY
PRINCIPAL(A) RATE(B) MATURITY PAYMENT LIEN AMOUNT AMOUNT(C) MATURITY PAYMENT
- ------------ -------------- -------- ----------- ------ ------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FIRST MORTGAGE LIEN:
OFFICE/RETAIL
Crown Broadway, LLC Monthly
61 Broadway Building One month Interest
New York, NY Libor + 2.10% 1/1/08 Only N/A $45,000 $44,883 $45,000 $292
Convention Plaza, LLC
Convention Plaza Office Monthly
Bldg One month Interest
St. Louis, MO Libor + 2.50% 8/1/99 Only N/A 4,750 4,687 4,750 32
Jennifer Mall, LTD Monthly
Office/Retail Building P & I
Washington, D.C. 7.22% 3/1/08 25 Yr Amort N/A 7,600 7,559 6,014 34
Sutphin Blvd Assoc, LLC Monthly
Office Building One month Interest
Queens, NY Libor + 3.00% 9/1/00 Only N/A 4,650 4,564 4,650 55
Jennifer Mall, LTD Monthly
Office/Retail Bldg One month Interest
Washington, D.C. Libor + 11.00% 9/1/99 Only $7,600 500 496 500 7
APARTMENT
Habitat Apartments, LTD Monthly
Habitat Apartments P & I
Boulder, CO 6.78% 2/1/08 30 Yr Amort N/A 7,500 7,499 6,406 42
GARAGE
Convention Plaza Garage,
LLC
Convention Plaza Parking Monthly
Garage P & I
St. Louis, MO 7.61% 2/1/05 25 Yr Amort N/A 2,800 2,763 2,465 21
11th Street Garage, LLC
11th Street Parking Ga- Monthly
rage One month Interest
St. Louis, MO Libor + 2.50% 8/1/99 Only N/A 1,450 1,431 1,450 10
------- ------- ------- ----
Totals $74,250 $73,882 $71,235 $493
======= ======= ======= ====
</TABLE>

(a) As of March 31, 1998 all borrowers are current with respect to their
principal and interest payments on the aforementioned loans. There have been
no valuation allowances recorded against the carrying value of these loans.

(b) As of March 31, 1998, one-month LIBOR was 5.69%.

(c) The carrying amount of the loans for federal tax purposes is $74,267. The
carrying amount at March 31, 1998 is recorded net of unamortized deferred loan
origination fees of $354.

<TABLE>
<S> <C> <C>
Balance at beginning of period $44,878
Additions during period:
New mortgage loans 29,250
-------
74,128
Deductions during period:
Collections of principal 13
Amortization of loan fees and costs 233
-------
246
-------
Balance at close of period $73,882
=======
</TABLE>

F-32
<PAGE>

PRIME CAPITAL FUNDING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1998

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

4. DUE TO AFFILIATE

Due to affiliate represents advances received from PCH. Advances are made
under a $1,000 unsecured line of credit with PCH, which is evidenced by a
promissory note. The advance bears interest at 12% per annum, payable
quarterly in arrears. Advances and unpaid interest are due December 31, 2002.

5. NOTES PAYABLE TO AFFILIATE

The notes payable to affiliate represents two unsecured revolving lines of
credit from an affiliate for $20 million each. Interest is payable quarterly
for both lines at a rate of 10% per annum. The outstanding balance under one
note ("Promissory Note") equals $9.9 million at March 31, 1998. Principal
advances or repayments under the Promissory Note are made upon the mutual
consent of both parties to the Promissory Note. It matures March 12, 1999 but
is subject to automatic renewal for successive annual periods assuming no
events of default exist at the respective renewal date. The Promissory Note
evidences a $20 million line of credit and obligates the Partnership to fund
up to $20 million. The remaining unfunded commitment equals $10.01 million at
March 31, 1998. Availability to borrow under this line of credit is subject to
certain restrictions including the ability of the affiliate to obtain funds to
honor its commitment.

The Taxable Subsidiary has also obtained a second $20 million line of credit
from an affiliate to fund loan originations. No amounts are outstanding under
this line at March 31, 1998. The line matures at the completion of an initial
public offering by Prime Capital Investment Corp., an affiliate.

6. WAREHOUSE LOAN PAYABLE

Pursuant to a Master Interim Financing and Security Agreement ("Agreement")
between Prudential Securities Credit Corp. ("Lender") and a subsidiary of the
Taxable Subsidiary, the Lender has agreed to provide interim funding to
finance the origination of first lien commercial mortgage loans. The Lender
has the right to reject a request for funding based on its review of each
prospective loan. The percentage of the mortgage loan purchase price to be
funded by the Lender varies based upon the terms negotiated with the borrower
by the Taxable Subsidiary and other various characteristics of the underlying
collateral. Each funding under the Agreement (collectively referred to as
Advances) bears interest at a rate per amount equal to one-month LIBOR, as
defined, plus one percent. At March 31, 1998, one month LIBOR equaled
approximately 5.69%. Interest is payable monthly. At March 31, 1998, advances
under the Agreement equaled $59,844. The Company paid $838 of interest for the
three months ended March 31, 1998.

The Lender's obligation to provide financing as described above terminates
May 31, 1998. The lender has the option to extend the maturity date for a
period of up to thirty days at its sole discretion. Advances under the
Agreement are to be repaid on the earlier of (a) the receipt of the proceeds
of an initial public offering of shares by Prime Capital Investment Corp., a
related party, or (b) May 31, 1998 unless extended. Advances are
collateralized by the mortgage loans funded under the Agreement and are
limited to no more than $200 million. The Agreement contains certain
restrictive covenants including the prohibition of dividends or distributions
by the subsidiary in certain circumstances.

The Taxable Subsidiary is currently in negotiations to extend the May 31,
1998 maturity date. The financial statements do not reflect any adjustment
relating to the ultimate outcome of this uncertainty.

7. PREFERRED STOCK

The Taxable Subsidiary has issued 50 shares of preferred stock valued at
$95,000 per share. Under the terms of the preferred stock, the Taxable
Subsidiary is contractually obligated to pay preferred stockholders a

F-33
<PAGE>

PRIME CAPITAL FUNDING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1998

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

cumulative preferred dividend of 8% per annum on the total issuance of
preferred stock and an additional preferred dividend in each fiscal year, that
when added to the 8% cumulative preferred dividend, will equal 95% of the
funds legally available for payment during such period. The cumulative
preferred dividend obligation per the certificate of designation to preferred
stockholders becomes effective April 1, 1998 with an initial dividend date of
June 30, 1998.

8. SUBSEQUENT EVENT

On May 1, 1998 the Taxable Subsidiary originated a loan commitment with a
face value of $35 million collateralized by limited service hotels to be
constructed by the borrower. The loan bears interest at one-month LIBOR plus
3.50%, requires monthly payments of principal and interest, and matures on
November 1, 2000. No amounts were funded upon origination.

9. CONTINGENCY

The Taxable Subsidiary is a co-borrower with PCH under a $20 million line of
credit. While the Taxable Subsidiary has no borrowing capacity under the line,
its assets collateralize all borrowings under it. The line of credit had an
outstanding balance of $4.8 million at March 31, 1998.

F-34
<PAGE>

REPORT OF INDEPENDENT AUDITORS

Board of Directors

Prime Capital Investment Corp.

We have audited the accompanying statement of revenue and certain expenses
of 61 Broadway (the Property) for the year ended December 31, 1997. The
statement of revenue and certain expenses is the responsibility of the
Property's management. Our responsibility is to express an opinion on the
statement of revenue and certain expenses based on our audit.

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

The accompanying statement of revenue and certain expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-11
of Prime Capital Investment Corp. as described in Note 2 and is not intended
to be a complete presentation of the Property's revenue and expenses.

In our opinion, the statement of revenue and certain expenses referred to
above presents fairly, in all material respects, the revenue and certain
expenses described in Note 2 of the Property for the year ended December 31,
1997, in conformity with generally accepted accounting principles.

/s/ Ernst & Young LLP

Chicago, Illinois

April 15, 1998

F-35
<PAGE>

61 BROADWAY

STATEMENTS OF REVENUE AND CERTAIN EXPENSES

(IN THOUSANDS)

<TABLE>
<CAPTION>
THREE
MONTHS
ENDED YEAR
MARCH 31, ENDED
1998 DECEMBER 31,
(UNAUDITED) 1997
----------- ------------
<S> <C> <C>
Revenue
Rental............................................... $2,748 $11,405
Tenant reimbursements................................ 266 1,810
------ -------
Total revenue...................................... 3,014 13,215
Expenses
Cleaning............................................. 326 1,487
Utilities............................................ 352 1,974
Other property operating............................. 341 2,035
Real estate taxes.................................... 497 2,566
------ -------
Total expenses..................................... 1,516 8,062
------ -------
Revenue in excess of certain expenses.................. $1,498 $ 5,153
====== =======
</TABLE>

See accompanying notes.

F-36
<PAGE>

61 BROADWAY

NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES

(IN THOUSANDS)

1. BUSINESS

The accompanying statements of revenue and certain expenses relate to the
operations of 61 Broadway, an office building located in New York, New York
(the Property). As of December 31, 1997, and March 31, 1998 (unaudited) the
Property had ninety tenants.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying statements of revenue and certain expenses were prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in the Registration Statement on Form S-
11 of Prime Capital Investment Corp. The statements are not representative of
the actual operations of the Property for the periods presented nor indicative
of future operations as certain expenses, primarily depreciation, amortization
and interest, have been excluded.

Revenue and Expense Recognition

Revenue is recognized in the period in which it is earned. Expenses are
recognized in the period incurred.

Certain leases of the Property provide for tenant occupancy during periods
for which no rent is due or where minimum rent payments increase during the
term of the lease. The Property records rental income for the full term of
each lease on a straight-line basis.

Use of Estimates

The preparation of the statements of revenue and certain expenses in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of revenue
and certain expenses during the reporting period. Actual results could differ
from these estimates.

3. INTERIM PERIOD

The unaudited statement of revenue and certain expenses for the three months
ended March 31, 1998 has been prepared in accordance with generally accepted
accounting principles for interim financial information. In the opinion of
management, all adjustments of a normal recurring nature considered necessary
for a fair presentation have been included. Operating results for the period
from January 1, 1998 to March 31, 1998, are not necessarily indicative of
future operating results.

4. RENTALS

The Property has lease agreements with lease terms ranging from one year to
fifteen years. The leases generally provide for tenants to share in increases
in operating expenses and real estate taxes in excess of specified base
amounts. The total future minimum rentals to be received under such
noncancelable operating leases as of March 31, 1998, exclusive of tenant
reimbursements and contingent rentals, are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 AMOUNT
---------------------- -------
<S> <C>
1998............................. $ 9,451
1999............................. 8,159
2000............................. 7,406
2001............................. 6,502
2002............................. 5,419
Thereafter....................... 13,248
-------
$50,185
=======
</TABLE>

F-37
<PAGE>

REPORT OF INDEPENDENT AUDITORS

Board of Directors

Prime Capital Investment Corp.

We have audited the statement of revenue and certain expenses of Habitat
Apartments for the year ended December 31, 1997. This statement of revenue and
certain expenses is the responsibility of Habitat Apartment's management. Our
responsibility is to express an opinion on the statement of revenue and
certain expenses based on our audit.

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

In our opinion, the statement of revenue and certain expenses referred to
above presents fairly, in all material respects, the revenue and certain
expenses described in Note 2 of Habitat Apartments for the year ended December
31, 1997, in conformity with generally accepted accounting principles.

/s/ Ernst & Young LLP

Chicago, Illinois

January 21, 1998

F-38
<PAGE>

HABITAT APARTMENTS

STATEMENTS OF REVENUE AND CERTAIN EXPENSES

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
MARCH 31, YEAR ENDED
1998 DECEMBER 31,
(UNAUDITED) 1997
----------- ------------
<S> <C> <C>
Revenue:
Rental............................................... $473 $1,848
Other................................................ 26 47
---- ------
Total revenue...................................... 499 1,895
Expenses:
Property operating and maintenance................... 42 123
Payroll.............................................. 30 121
Utilities............................................ 22 94
Management fees...................................... 21 79
Real estate taxes.................................... 16 69
Insurance............................................ 4 17
Other operations..................................... 14 68
---- ------
Total expenses..................................... 149 571
---- ------
Revenue in excess of certain expenses.................. $350 $1,324
==== ======
</TABLE>

See accompanying notes.

F-39
<PAGE>

HABITAT APARTMENTS

NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES

1. BUSINESS

The accompanying statements of revenue and certain expenses represents the
operations of Habitat Apartments, a 200-unit apartment project in Boulder,
Colorado (the Property). At December 31, 1997, approximately 97% of the
apartment units were occupied. Prime Capital Investment Corp. intends to
provide a mortgage loan, collateralized by the Property.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying statements of revenue and certain expenses were prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in the registration statement on Form S-
11 of Prime Capital Investment Corp. The statements are not representative of
the actual operations of the Property for the periods presented nor indicative
of future operations, as certain expenses, primarily depreciation,
amortization and interest, have been excluded.

Revenue Recognition

Rental income is recognized as income in the period earned.

Use of Estimates

The preparation of the statements of revenue and certain expenses in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect amounts reported in the
financial statement and accompanying notes. Actual results could differ from
these estimates.

3. MANAGEMENT FEES

The Property is subject to management fees based on 4% of operating revenue
(20% of this fee was paid to an affiliate of the current owner).

4. INTERIM PERIOD

F-40
<PAGE>

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

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 THE UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECU-
RITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE
SHARES OF COMMON STOCK 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 UNLAW-
FUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPEC-
TUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IM-
PLICATION THAT ANY INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUB-
SEQUENT TO THE DATE HEREOF.
------------
SUMMARY TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 1
Summary Financial Data.................................................... 13
Risk Factors.............................................................. 14
The Company............................................................... 30
Management of Operations.................................................. 52
Use of Proceeds........................................................... 60
Distribution Policy....................................................... 60
Dilution.................................................................. 61
Management's Discussion and Analysis of Results of Operations............. 63
Capitalization............................................................ 64
Principal Stockholders of the Company..................................... 65
Description of Capital Stock.............................................. 66
Certain Provisions of Maryland Law and of PGI Capital's Articles of
Incorporation and Bylaws................................................. 70
Common Stock Available for Future Sale.................................... 73
Partnership Agreement..................................................... 74
Federal Income Tax Considerations......................................... 78
ERISA Considerations...................................................... 97
Certain Legal Aspects of Mortgage Loans and Real Property Investments..... 100
Underwriting.............................................................. 109
Legal Matters............................................................. 110
Experts................................................................... 110
Additional Information.................................................... 111
Glossary of Terms......................................................... G-1
Index of Financial Statements............................................. F-1
</TABLE>

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

UNTIL [ ], (25 DAYS AFTER COMMENCEMENT OF THE COMMON STOCK OFFERING)
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPEC-
TUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

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

8,750,000 SHARES

PRIME CAPITAL INVESTMENT CORP.

COMMON STOCK

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

PROSPECTUS
-----------------

FRIEDMAN, BILLINGS,
RAMSEY & CO., INC.

MAY , 1998

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 30. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

Set forth below is an estimate of the approximate amount of the fees and
expenses (other than sales commissions) payable by the Registrant in
connection with the issuance and distribution of the Common Stock.

<TABLE>
<S> <C>
SEC Registration Fee.......................................... $ 107,200
Blue Sky Fees and Expenses.................................... 2,000
NASD Filing Fee............................................... 30,500
The New York Stock Exchange Filing Fee........................ 96,900
Printing and Mailing Fees..................................... 375,000
Counsel Fees and Expenses..................................... 450,000
Accounting Fees and Expenses.................................. 150,000
Miscellaneous................................................. 75,000
----------
Total..................................................... $1,286,600
==========
</TABLE>

ITEM 32. SALES TO SPECIAL PARTIES

Not Applicable.

ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES

The following sets forth certain information as to all securities sold by
the Company within the last three years that were not registered under the
Securities Act of 1933, as amended (the "Securities Act"). As to all such
transactions, an exemption is claimed under Section 4(2) of the Securities
Act.

On September 24, 1997, Michael W. Reschke purchased 100 shares of Common
Stock at a purchase price of $10.00 per share pursuant to a Subscription
Agreement dated September 24, 1997 (the "Subscription Agreement") executed by
Michael W. Reschke in favor of the Company. Pursuant to the terms of the
Subscription Agreement, the Company has the option to repurchase any or all of
the shares issued to Michael W. Reschke under the Subscription Agreement at
any time at a purchase price of $10.00 per share.

Concurrently with the Offering, PCH is expected to make an additional
contribution of capital in the amount of $25,000,000 to the Operating
Partnership, in return for which it will receive 1,334,086 units of
partnership interests in the Operating Partnership. Concurrently with the
completion of the Common Stock Offering, the Company will complete an offering
of 1,075,268 shares of its Common Stock in a private placement to FBR Asset
Investment Corporation at a price per share equal to the Offering Price net of
underwriting discounts.

ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Prime Capital's Charter limits the liability of its directors and officers
to Prime Capital and its stockholders to the fullest extent permitted from
time to time by Maryland law. Maryland law presently permits the liability of
directors and officers to a corporation or its stockholders for money damages
to be limited, except (i) to the

II-1
<PAGE>

extent that it is proved that the director or officer actually received an
improper benefit or profit in money, property or services for the amount of
the benefit or profit in money, property or services actually received, or
(ii) if a judgment or other final adjudication is entered in a proceeding
based on a finding that the director's or officer's action, or failure to act,
was the result of active and deliberate dishonesty and was material to the
cause of action adjudicated in the proceeding.

The Charter and Bylaws require Prime Capital to indemnify and hold harmless
its present and former directors and officers and certain other parties to the
fullest extent permitted from time to time by Maryland law. The Maryland
General Corporation Law ("MGCL") permits a corporation to indemnify its
directors, officers and certain other parties against judgments, penalties,
fines, settlements and reasonable expenses incurred by them in connection with
any proceeding to which they may be made a party by reason of their service to
or at the request of the corporation, unless it is established that (i) the
act or omission of the indemnified party was material to the matter giving
rise to the proceeding and (x) was committed in bad faith or (y) was the
result of active and deliberate dishonesty, (ii) the indemnified party
actually received an improper personal benefit in money, property or services
or (iii) in the case of any criminal proceeding, the indemnified party had
reasonable cause to believe that the act or omission was unlawful.
Indemnification may be made against judgments, penalties, fines, settlements
and reasonable expenses actually incurred by the director or officer in
connection with the proceeding. However, if the proceeding is one by or in the
right of the corporation, idemnification may not be made in respect of any
proceeding in which the director or officer is adjudged to be liable to the
corporation. The termination of any proceeding by conviction, or upon a plea
of nolo contendere or its equivalent, or an entry of any order of probation
prior to judgment, creates a rebuttal presumption that the director or officer
did not meet the requisite standard of conduct required for indemnification to
be permitted. The MGCL requires a corporation (unless its charter provides
otherwise, which Prime Capital's Charter does not) to indemnify a director or
officer who has been successful, on the merits or otherwise, in the defense of
any proceeding to which he is made a party by reason of his service in that
capacity. It is the position of the Securities and Exchange Commission that
indemnification of directors and officers for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"), is against public
policy and is unenforceable pursuant to Section 14 of the Securities Act.

The Registrant will carry an insurance policy providing directors' and
officers' liability insurance for any liability its directors or officers or
the directors or officers of any of its subsidiaries may incur in their
capacities as such.

The Registrant will indemnify its officers and directors from any action or
claim brought or asserted by any party by reason of any allegation that one or
more of its officers or directors otherwise is accountable or liable for the
debts or obligations of the Registrant or its affiliates.

The form of Underwriting Agreement, filed as Exhibit 1.1 hereto, provides
for the reciprocal indemnification by the Underwriters of the Registrant and
its directors, officers and controlling persons, and by the Registrant of the
Underwriters and its directors, officers and controlling persons, against
certain liabilities under the Securities Act.

ITEM 35. TREATMENT OF PROCEEDS FROM SHARES BEING REGISTERED

Not Applicable.

ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS

(a) INDEX TO FINANCIAL STATEMENTS.

<TABLE>
<S> <C>
Pro Forma (Unaudited):
Prime Capital Investment Corp.:
Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1998...... F-3
Notes to Pro Forma Condensed Consolidated Balance Sheet.................. F-4
Pro Forma Condensed Consolidated Statement of Operations for the three
months ended March 31, 1998............................................. F-6
Pro Forma Condensed Consolidated Statement of Operations for the year
ended December 31, 1997................................................. F-7
Notes to Pro Forma Condensed Consolidated Statements of Operations....... F-8
</TABLE>

II-2
<PAGE>

<TABLE>
<S> <C>
Prime Capital Funding, Inc. ("Taxable Subsidiary"):
Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1998..... F-10
Note to Pro Forma Condensed Consolidated Balance Sheet.................. F-11
Pro Forma Condensed Consolidated Statement of Operations for the three
months ended March 31, 1998............................................ F-12
Pro Forma Condensed Consolidated Statement of Operations for the year
ended December 31, 1997................................................ F-13
Notes to Pro Forma Condensed Consolidated Statements of Operations...... F-14
Historical:
Prime Capital Investment Corp.:
Report of Independent Auditors.......................................... F-15
Balance Sheet as of March 31, 1998...................................... F-16
Notes to Balance Sheet.................................................. F-17
Prime Capital Investment, L.P. ("Operating Partnership"):
Report of Independent Auditors.......................................... F-18
Balance Sheet as of March 31, 1998...................................... F-19
Statement of Operations for the period from March 13, 1998 to March 31,
1998................................................................... F-20
Statement of Partners' Equity for the period from March 13, 1998 to
March 31, 1998......................................................... F-21
Statement of Cash Flows for the period from March 13, 1998 to March 31,
1998................................................................... F-22
Notes to Financial Statements........................................... F-23
Prime Capital Funding, Inc. ("Taxable Subsidiary"):
Report of Independent Auditors.......................................... F-25
Consolidated Balance Sheet as of March 31, 1998......................... F-26
Consolidated Statement of Operations for the three months ended March
31, 1998............................................................... F-27
Consolidated Statement of Changes in Stockholders' Equity for the three
months ended March 31, 1998............................................ F-28
Consolidated Statement of Cash Flows for the three months ended March
31, 1998............................................................... F-29
Notes to Consolidated Financial Statements.............................. F-30
61 Broadway:
Report of Independent Auditors.......................................... F-35
Statements of Revenue and Certain Expenses for the three months ended
March 31, 1998 (unaudited) and the year ended December 31, 1997........ F-36
Notes to Statements of Revenue and Certain Expenses..................... F-37
Habitat Apartments, L.P.:
Report of Independent Auditors.......................................... F-38
Statements of Revenue and Certain Expenses for the three months ended
March 31, 1998 (unaudited) and the year ended December 31, 1997........ F-39
Notes to Statements of Revenue and Certain Expenses..................... F-40
</TABLE>

(b) EXHIBITS.

<TABLE>
<C> <S> <C> <C>
1.1* Form of Underwriting Agreement.........................
3.1* Amended and Restated Articles of Incorporation of the
Registrant.............................................
3.2* Form of Amended and Restated Bylaws of the Registrant..
4.1* Form of Common Stock Certificate.......................
5.1* Opinion of Miles & Stockbridge P.C. regarding the va-
lidity of the Common Stock being registered............
8.1* Opinion of Winston & Strawn regarding tax matters......
10.1* Form of Amended and Restated Partnership Agreement of
the Operating Partnership..............................
10.2* Form of Registration Rights Agreement between the Com-
pany and the persons named therein.....................
</TABLE>

II-3
<PAGE>

<TABLE>
<C> <S> <C>
10.3* Form of Indemnification Agreement..........................
10.4* Stock Incentive Plan.......................................
10.5* Warrant Agreement between the Company and FBR Asset Invest-
ment Corporation...........................................
10.6* The Non-Compete Agreements.................................
10.7* Operating Agreement between the Operating Partnership and
the Taxable Subsidiary.....................................
10.8* FBR Warehouse Loan Agreement...............................
10.9* PSCC Warehouse Loan Agreement..............................
10.10* Contribution Agreement dated as of March 13, 1998..........
10.11* Promissory Note dated as of March 13, 1998 from PCH to the
Operating Partnership in the amount of $10,900,000.........
10.12* Unsecured Note from the Operating Partnership to PCH in the
amount of $20,000,000......................................
10.13* Unsecured Subordinated Note from the Taxable Subsidiary to
PCH (as assigned to the Operating Partnership) in the
amount of $20,000,000......................................
10.14* Unsecured Subordinated Note from the Taxable Subsidiary to
the Operating Partnership in the amount of $20,000,000.....
10.15* Warehouse Loan Agreement between the Operating Partnership
and the Taxable
Subsidiary.................................................
10.16* Form of Employment Agreements..............................
21.1* List of Subsidiaries of the Registrant.....................
23.1* Consent of Miles & Stockbridge P.C. (included in Exhibit
5.1).......................................................
23.2* Consent of Winston & Strawn (included in Exhibit 8.1)......
23.3 Consent of Ernst & Young LLP...............................
24.1** Powers of Attorney (included on signature page in Part II
of the initial filing).....................................
27.1** Financial Data Schedule....................................
</TABLE>
- ---------------------

* To be filed by amendment.

** Previously filed.

ITEM 37. UNDERTAKINGS

Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions 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 against the
Registrant 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 issues.

The undersigned Registrant hereby undertakes to provide to 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.

The undersigned registrant hereby undertakes that:

(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 a 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 this
registration statement as of the time it was declared effective.

(2) For the purposes 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-4
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS
ALL OF THE REQUIREMENTS FOR FILING ON FORM S-11 AND HAS DULY CAUSED THIS
AMENDMENT NO. 1 TO REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF CHICAGO, STATE OF
ILLINOIS, ON THE 19TH DAY OF MAY, 1998.

Prime Capital Investment Corp.,
a Maryland corporation
(Registrant)

/s/ James W. Roiter
By: _________________________________
James W. Roiter
President and Chief Executive
Officer

/s/ Brenda J. Mixson

By: ____________________________

Brenda J. Mixson

Chief Financial and Investment
Officer

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 1 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS ON THE 19TH DAY OF MAY, 1998, IN THE CAPACITIES INDICATED.

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----

<S> <C>
*/s/ Michael W. Reschke Chairman of the Board, Director
___________________________________________
Michael W. Reschke

*/s/ James W. Roiter President, Chief Executive Officer,
___________________________________________ Director
James W. Roiter

</TABLE>

/s/ James W. Roiter
*By _________________________________
James W. Roiter
as attorney in fact

II-5

<PAGE>

EXHIBIT 23.3

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated May 1, 1998, with respect to the balance sheet of
Prime Capital Investment Corp., the financial statements of Prime Capital
Investment, L.P., and the consolidated financial statements of Prime Capital
Funding, Inc., April 15, 1998, with respect to the statement of revenue and
certain expenses of 61 Broadway, and January 21, 1998 with respect to the
statement of revenue and certain expenses of Habitat Apartments in Amendment
No. 1 to the Registration Statement (Form S-11 No. 333-37343) and related
Prospectus of Prime Capital Investment Corp. for the registration of 8,750,000
shares of its common stock.

/s/ Ernst & Young LLP

Chicago, Illinois

May 18, 1998